No Place for Innocents: Alleged Innocence in Professional Liability Litigation Involving Imputation Defenses

Abstract

This short article explores different types of alleged 'innocence' in professional liability cases involving imputation-based defenses. Typically, such litigation scenarios unfold where a corporation (or its receiver or trustee) asserts claims against some of its own officers and or directors, along with some or all of the corporation's outside professionals such as accountants or lawyers. An 'imputation-based defense' is a defense premised on the alleged wrongdoing of the defendant officers or directors being imputed to the plaintiff corporation itself, such that the corporation is held to be a participant in the very wrongdoing it alleges. Pursuant to the doctrine of in pari delicto, the corporation cannot recover from any other alleged participants in the wrongdoing. In such cases, described in more detail below, four sorts of 'innocence' are often alleged to have legal significance: (1) the innocence of one or more non-defendant corporate officers or directors who were not, or may not have been, involved in the fraud and therefore 'could have' or 'would have' stopped the alleged wrongdoing if they had known about it; (2) the innocence of a corporate receiver or bankruptcy trustee who steps into the shoes of the corporation which would otherwise be guilty by way of imputation of the actions and knowledge of the defendant officers or directors; (3) the innocence of creditors or others who would receive or at least share in any recovery by the corporation, especially when the corporation is in receivership or bankruptcy; and (4) the innocence of outside professionals, which some have argued must be shown in order for such defendants to avail themselves of equitable bars to the claims of a guilty corporation with which they were allegedly, even admittedly, in pari delicto. Each form of innocence is aimed at defeating otherwise well-established rules of imputation and equitable doctrines that do not allow one guilty party (i.e., the plaintiff corporation itself, if the wrongdoing of its own officers or directors is imputed to the corporation) from recovering against another guilty party (i.e., an outside professional defendant that allegedly participated in the same wrongdoing). This article takes a dim view of the role of such innocence, agreeing with the better reasoned cases in the area.