Kirschner v. KPMG LLP

United States Court of Appeals for the Second Circuit · 2010 · Corporations

626 F.3d 673 (2010)

Updated August 22, 2026

Corporationsbankruptcy trustee standingimputationadverse interest exceptionstandingtrusteecorporate insidersfraud

Facts

The trustee sued on behalf of Refco entities, alleging that Refco insiders and outside professionals participated in a scheme that concealed trading losses and misappropriated customer assets. According to the allegations recounted by the court, the scheme maintained the illusion that Refco was fast-growing, profitable, and financially secure, which helped attract and retain capital through transactions including the LBO and IPO. The complaint alleged that illicit cash flow and fraudulent reporting were used to sustain Refco's operations and apparent financial health. The trustee argued that the insiders had totally abandoned Refco's interests, so their misconduct should not be imputed to the corporation.

Issue

Under New York law, were the Refco insiders' fraudulent acts imputed to Refco so that, under the Wagoner rule, the trustee lacked standing to sue third parties? More specifically, did the adverse interest exception apply merely because insiders intended to benefit themselves, or only if their misconduct harmed the corporation and constituted total abandonment of its interests?

Rule

Under New York law, the adverse interest exception to imputation is narrow and applies only when the corporate agent has totally abandoned the corporation's interests and is acting entirely for his own or another's purposes. The exception is not satisfied merely by showing that insiders intended to benefit themselves; it is available only where the insiders' misconduct harmed the corporation rather than benefitting it, and the relevant inquiry looks to the short-term benefit or detriment to the corporation, not later harm from exposure of the fraud.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Buffalo, New York, the chief executive and chief financial officer of Lakefront Metals, Inc. secretly overstate inventory and hide losses so the company can obtain a new revolving credit line from North Harbor Finance Group. The officers also expect the inflated results to trigger large personal bonuses. After Lakefront enters bankruptcy, its litigation trustee sues the outside accounting firm that allegedly helped prepare the statements.

Under New York law as applied to trustee standing, which is the strongest argument against the trustee's standing?

Explanation. The adverse interest exception is narrow. It does not apply merely because insiders intended to enrich themselves. If the misconduct also brought a short-term corporate benefit—here, obtaining financing—the insiders have not totally abandoned the corporation's interests, so their acts are imputed to the corporation and the trustee lacks standing under Wagoner.