MCA FINANCIAL CORP V GRANT THORNTON LLP
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STATE OF MICHIGAN
COURT OF APPEALS
MCA FINANCIAL CORPORATION, MCA
MORTGAGE CORPORATION, MORTGAGE
CORPORATION OF AMERICA and RIMCO
REALTY AND MORTGAGE COMPANY,
FOR PUBLICATION
July 29, 2004
9:00 a.m.
Plaintiffs-Appellants,
v
No. 244972
Oakland Circuit Court
LC No. 2000-027189-NM
GRANT THORNTON, L.L.P., and DOEREN
MAYHEW & COMPANY, P.C.,
Defendants-Appellees.
Official Reported Version
Before: Sawyer, P.J., and Gage and Owens, JJ.
SAWYER, P.J.
In this case, we are asked to address the question whether a corporation may recover
damages from its auditors where the auditors certified what proved to be false financial
statements and the corporation subsequently went into bankruptcy. We agree with the trial court
that the wrongful conduct of individual corporate officers may be imputed to the corporations,
thus precluding the corporations from maintaining an action against the auditors. Because it is
undisputed that various corporate officers engaged in such wrongdoing and plaintiffs present no
evidence to establish a genuine issue of material fact to support application of the adverse
interests exception to the imputation rule, we affirm the trial court's grant of summary
disposition in favor of defendants.
Plaintiff MCA Mortgage Corporation, a mortgage bank, was founded in the mid-1980s.
In the 1990s, plaintiff MCA Financial Corporation was created to serve as the holding company
of MCA Financial and subsidiaries, including plaintiffs Mortgage Corporation of American and
RIMCO Realty and Mortgage. Although started as a traditional mortgage banking business, the
MCA group expanded into subprime mortgage lending, land contract syndication, loan servicing,
and real estate sales. According to plaintiffs, by the end of 1998, the MCA group had over 900
employees and branch offices in ten states, and was the largest owner of residential real estate in
Detroit other than the city itself.
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In addition to investments by shareholders, MCA formed investment "pools" for
investments in land contracts. Investment certificates were sold through securities dealers that
sold interests in a group of land contracts and made quarterly distributions to the investors as the
land contract payments were received. According to plaintiffs, over 150 such pools, most with
an initial value of $1 million, had been organized by the time of the corporation's collapse.
The MCA group ceased operations on January 22, 1999, and terminated its employees
and officers. The following week, the Financial Institutions Bureau seized plaintiffs and
appointed a conservator. Thereafter, MCA filed voluntary petitions in bankruptcy court. The
instant action was instituted by the liquidating agent. According to plaintiffs' brief, the losses of
the investors and lenders approach $200 million.
Both state and federal law enforcement officials brought criminal charges against various
officers of plaintiffs, alleging various securities fraud and other charges arising out of plaintiffs'
operations. Some, but not all, of MCA's board members have been implicated in the
wrongdoing. These investigations have resulted in criminal convictions.
At the risk of oversimplifying the factual background, the improprieties in this case arise
out of how transactions between MCA and its subsidiaries were reflected on the financial
statements, resulting in a misstatement of plaintiffs' financial condition. At the heart of plaintiffs'
allegations against defendants is the claim that defendants were aware of, or should have
discovered, the accounting irregularities in the financial statements and should have disclosed
these irregularities to MCA's board of directors. Plaintiffs further argue that, had the
irregularities been exposed earlier by defendants, MCA's insolvency would have been detected
no later than 1994, which would have reduced the magnitude of the financial losses suffered by
MCA's collapse.
Given the procedural posture of this case, we shall assume, without deciding, that
plaintiffs can, in fact, factually establish that there were accounting irregularities, that defendants
knew of (or could have detected) those irregularities, and that, had defendants disclosed these
irregularities upon discovery, the financial losses suffered by the MCA insolvency would have
been less. But even with these assumptions, we are not persuaded that the trial court erred in
granting summary disposition in favor of defendants.
The trial court's grant of summary disposition is based on two principles. First, that the
wrongful conduct of some of MCA's officers can be imputed to the corporation and, second, that
the corporation cannot recover based on its own wrongful conduct. We agree with the trial court
that the officers' conduct may be imputed to the corporation and, therefore, defendants may
successfully raise the wrongful conduct defense.
-2-
As the Supreme Court explained in Orzel v Scott Drug Co,1 Michigan follows the
wrongful-conduct rule, which precludes a plaintiff from recovering on a claim that is based on
the plaintiff 's own wrongdoing:
When a plaintiff 's action is based, in whole or in part, on his own illegal
conduct, a fundamental common-law maxim generally applies to bar the
plaintiff 's claim:
"[A] person cannot maintain an action if, in order to establish his cause of
action, he must rely, in whole or in part, on an illegal or immoral act or
transactions to which he is a party. [1A CJS, Actions, § 29, p 386. See also 1 Am
Jur 2d, Actions, § 45, p 752.]"
When a plaintiff 's action is based on his own illegal conduct, and the
defendant has participated equally in the illegal activity, a similar common-law
maxim, known as the "doctrine of in pari delicto" generally applies to also bar the
plaintiff 's claim:
"[A]s between parties in pari delicto, that is equally in the wrong, the law
will not lend itself to afford relief to one as against the other, but will leave them
as it finds them. [1A CJS, Actions, § 29, p 388. See also 1 Am Jur 2d, Actions, §
46, p 753.]"
Orzel2 went on to explain the rationale behind the wrongful-conduct rule:
The rationale that Michigan courts have used to support the wrongfulconduct rule are [sic] rooted in the public policy that courts should not lend their
aid to a plaintiff who founded his cause of action on his own illegal conduct.
Manning [v Bishop of Marquette, 345 Mich 130, 133; 76 NW2d 75 (1956)].
Glazier [v Lee, 171 Mich App 216, 220; 429 NW2d 857 (1988)]. If courts chose
to regularly give their aid under such circumstances, several unacceptable
consequences would result. First, by making relief potentially available for
wrongdoers, courts in effect would condone and encourage illegal conduct.
[Miller v] Radikopf [394 Mich 83, 89; 228 NW2d 386 (1975)]. Second, some
wrongdoers would be able to receive a profit or compensation as a result of their
illegal acts. Third, and related to the two previously mentioned results, the public
would view the legal system as a mockery of justice. Fourth, and finally,
wrongdoers would be able to shift much of the responsibility for their illegal acts
to other parties.
1
449 Mich 550, 558; 537 NW2d 208 (1995).
2
Id. at 559-560.
-3-
See also Ameriwood Industries Int'l Corp v Arthur Andersen & Co3 (applying the in pari delicto
doctrine under Michigan law in an accounting malpractice case).
In the case at bar, plaintiffs' claims are based on the wrongful conduct of certain officers
of the corporation. Indeed, that conduct has resulted in criminal convictions. Therefore, if that
illegal conduct of the officers can be imputed to the corporation itself, then the wrongful-conduct
rule could apply to bar recovery by plaintiffs against defendants. Before reaching the question
whether that illegal conduct can be imputed to the corporation, plaintiffs offer other arguments
why the wrongful-conduct rule should not be applied.
First, plaintiffs argue that this case differs from Orzel with respect to the nature of the
conduct of the defendants in the two cases. In Orzel, the defendant acted negligently in filling
otherwise valid prescriptions; that is, that the defendant's pharmacist should have recognized that
the plaintiff was abusing a drug that had been prescribed and should have either refused to fill
the prescription or at least alerted the plaintiff 's family to the situation. In the case at bar,
plaintiffs argue that defendants affirmatively told plaintiffs' management that it was proper to
report, as plaintiffs' brief describes it, "sham assets" and "bogus revenues" in the financial
statements. That is, plaintiffs argue that defendants in this case affirmatively engaged in
wrongdoing, while in Orzel the defendant was merely negligent in failing to act. We disagree
with plaintiffs' argument for two reasons.
Initially, we note that, while plaintiffs' brief argues that defendants affirmatively told
plaintiffs' management that it was proper to report the transactions with the subsidiaries as they
did, that is not how the matter was pleaded in the complaint. That is, while plaintiffs now argue
a theory of liability based on what defendants allegedly did, the complaint speaks in terms of
what defendants failed to do. The failure to act theory contained in the complaint is essentially
the same theory of liability as in Orzel that liability is premised on the failure to do something.
Thus, while plaintiffs correctly note that it was not alleged in Orzel that the defendant had
affirmatively urged the plaintiff to use the prescribed drug, or even reported to the plaintiff 's
family that all was well, the same can be said of the allegations in the case at bar. Plaintiffs'
complaint does not allege that defendants affirmatively counseled plaintiffs to report the
transactions in the financial statements in the manner in which they were reported or even, upon
a request for advice, counseled plaintiffs that all was well with the manner in which the
transactions were reported. At most, the complaint alleges that defendants failed to detect the
defects in the financial statements and, therefore, erroneously put their seal of approval on the
financial statements as being acceptable. We fail to see a meaningful distinction between this set
of facts and that of a pharmacist filling a prescription (an affirmative act in and of itself) after
failing to detect that there was something wrong with the customer's use of a prescribed drug.
3
961 F Supp 1078 (WD MI, 1997).
-4-
But, even if we view defendants' certifying of the financial statements as an affirmative
act distinguishable from the passive act in Orzel, this leads us to our second point, that
defendants' misconduct is, at most, on par with plaintiffs, and therefore the in pari delicto rule
applies to preclude recovery. That is, perhaps plaintiffs could potentially prevail if they could
show that the wrongdoers within their organizations believed, based on defendants' affirmative
advice, that the manner in which the transactions were structured and reported on the financial
statements were proper. But plaintiffs make no such showing, nor even such an allegation.
Because plaintiffs cannot show that the wrongdoing occurred at defendants' urging or affirmative
advice, plaintiffs stand in pari delicto with defendants. In short, to prevail, plaintiffs would have
to show more than that defendants turned a blind eye to plaintiffs' wrongdoing, but that
defendants' active wrongdoing was greater than was plaintiffs' wrongdoing. But that is not the
case here; there is no showing that the scheme originated with defendants rather than with
plaintiffs.
Next, plaintiffs argue that the wrongful-conduct rule should not apply because none of
the "unacceptable consequences" listed in Orzel4 would occur here if the wrongful-conduct rule
was not applied. We disagree. We begin by noting that the Orzel Court was explaining the
rationale behind the wrongful-conduct rule and was not establishing a requirement that at least
one of the four listed public policy concerns must be present in order to apply the rule. But even
so, we believe that at least three of the four public policy concerns listed in Orzel would be
present here if we failed to apply the wrongful-conduct rule. First, granting relief to plaintiffs
would in effect condone the wrongdoing. While it is true, as plaintiffs point out, that the
individual wrongdoers are facing criminal sanctions for the actions, we would nevertheless be
condoning the corporations' involvement by allowing plaintiffs to recover losses generated by
their agents' own illegal conduct. We would, in essence, be sending the message that companies
can safely ignore their employees' behavior as we will allow them to shift the burden to the
auditors for not detecting it. Second, if plaintiffs did not profit from their own illegal acts, they
certainly would be compensated for the wrongdoing if we allowed the losses to be recovered
from defendants. Indeed, this overlaps with the first concern as we would, in essence, encourage
the wrongdoing. And third (the fourth concern listed in Orzel), plaintiffs will be able to shift
responsibility for their wrongdoing to defendants. For that matter, even the remaining concern
under Orzel, whether the public would view the legal system as a mockery of justice if plaintiffs
are allowed to prevail, is at best a neutral one. While it may be, as plaintiffs suggest, that the
public would view it as a mockery to allow defendants to escape the consequences of their
involvement in this matter, it is at least equally possible that the public would view it as a
mockery that we would allow the active fraudfeasors (plaintiffs) to prevail against defendants
who merely committed malfeasance.
Plaintiffs do raise an interesting point that the actual individual wrongdoers would not be
benefiting from any recovery from defendants, but that the liquidating agent would disburse any
4
449 Mich at 559-560.
-5-
recovery among plaintiffs' innocent investors. This is not an inconsequential point; indeed, it has
served a role in many of the decisions cited by plaintiffs. Ultimately, however, we are not
persuaded that it is one that should affect the application of the wrongful-conduct rule if the
actions of the individual wrongdoers are imputed to plaintiffs. That is, while innocent investors
may have been harmed, that would not change the fact that the corporation is treated as having
engaged in wrongdoing and, therefore, its investors should not profit from that wrongdoing. In
making an investment, an investor makes a judgment on whether the company can make a profit
and share that profit with its investors. And when a company goes bankrupt, the investor loses
his investment. That is true regardless the reason for the company's failure. While an innocent
company that is harmed by others' wrongdoing may be able to recover damages and recoup its
investors' losses, we see no basis for guaranteeing the recoupment of losses by investors whose
company engaged in wrongdoing. Ultimately, by making an investment in a company, an
investor is casting a vote of confidence in the management of that company.
Furthermore, this action is brought in the name of the corporations, not the individual
investors. So the question before this Court is not whether the individual investors are entitled to
recover, but whether the corporations are so entitled. And we hold that, under the wrongfulconduct rule, they are not. Although we need not and do not decide whether defendants owed a
duty to the individual investors, and whether defendants are liable to those individual investors
for breaching that duty, it may well be that they are so liable. But, if that is the case, then the
action would have to be brought by the individual investors themselves, not by the corporations.
Because the individual innocent investors themselves are free of wrongdoing, the wrongfulconduct rule would not bar recovery by them in an action brought in their own names. Again,
we are not holding that such an action would be viable, only that for such an action to be viable
it would have to be brought by the innocent investors themselves, not by the corporations.
Next, plaintiffs argue that defendants had a duty to ensure, through the audit process, that
the financial statements were free of material misstatements. That may well be true, but that
does not affect the application of the wrongful-conduct rule. That is, the wrongful-conduct rule
is not limited to situations where the defendant is innocent of wrongdoing, either intentional or
negligent. Rather, its premise is that, while the defendant engaged in negligence or intentionally
wrongful conduct, because the plaintiff also engaged in wrongful conduct, recovery is precluded.
Again, the true question is whether, on the basis of any failures by defendants, the individual
investors would be able to maintain the action directly.5 And that question is not before us.
Plaintiffs do raise an interesting analogy to Longstreth v Gensel.6 In Longstreth, the
plaintiffs' underage son was served alcohol and was subsequently killed in a motor vehicle
5
We do note that defendant Grant Thornton points out in its brief that, under MCL 600.2962, the
individual investors could not maintain such an action. We need not determine whether that
observation is correct.
6
423 Mich 675; 377 NW2d 804 (1985).
-6-
accident. Despite the obvious wrongdoing by the plaintiffs' decedent, recovery was allowed
against the social host who provided the alcohol. While Orzel7 does point to Longstreth as an
example of a case in which the plaintiff 's conduct does not preclude recovery, a closer
examination of Longstreth discloses some important distinctions. First, the liability in
Longstreth was premised on statutory and even constitutional violations that were designed to
protect a certain class of citizens, specifically minors who presumably cannot make sound
judgments with respect to the consumption of alcohol. That is, the restrictions on underage
drinking are premised on the idea that the minor must be protected from his own foibles by those
who control the supply of alcohol. We do not see a similar analogy that corporations are
inclined by immaturity to engage in accounting fraud and auditors have a statutory duty to
prevent corporations from producing fraudulent financial statements. Second, and more
importantly, Longstreth8 specifically noted that an adult consumer of alcohol, generally, is
precluded from recovery for his own injuries after extensive consumption of alcohol, and that the
decision in Longstreth was specifically limited to cases in which minors are furnished alcohol.
Therefore, at best, we could conclude from Longstreth that the exception to the wrongfulconduct rule should apply to minors and that is not the case here.
For the above reasons, we conclude that the wrongful-conduct rule does operate to bar
recovery in this case provided that the wrongful conduct of the individual corporate officers may
be imputed to the corporations themselves. For the reasons discussed below, we conclude that
the trial court correctly determined that such an interpretation can be made.
The parties agree that the fraudulent acts of a corporate officer may be imputed to a
corporation where those acts (1) are in the course of employment and (2) are for the benefit of
the corporation. Official Committee of Unsecured Creditors v R F Lafferty & Co, PC.9 As
Unsecured Creditors10 explains, the second part of the test is often analyzed in light of the
"adverse interest" exception. Under this exception, the corporate officer's actions will not be
deemed to have been done for the benefit of the corporation if the actions were adverse to the
corporation's interests. That is, the acts were done for the actor's own benefit. Hoekzema v Van
Haften;11 see also Nat'l Turners Bldg & Loan Ass'n v Schreitmueller.12 Furthermore, it is
generally recognized that the adverse interest exception does not apply where an agent is acting
7
Id. at 561.
8
Id. at 685-686.
9
267 F3d 340, 358 (CA 3, 2001).
10
Id. at 359.
11
313 Mich 417, 426; 21 NW2d 183 (1946).
12
288 Mich 580, 586; 285 NW 497 (1939).
-7-
even in part on behalf of the principal; for the exception to apply, the agent must be acting solely
in his own interest and against the interest of his principal. Allard v Arthur Andersen & Co.13
In Allard, the parties disagreed over whether Michigan or New York law should apply to
the dispute. The court made the following observation:
Under New York law, the "adverse interest" exception does not apply
"when the agent acts both for himself and the principal, though his primary
interest is inimical to the principal." In re Crazy Eddie [Securities Litigation, 802
F Supp 804, 817 (ED NY, 1992)]; [Center v] Hampton Affiliates, 66 NY2d [782,
785; 497 NYS2d 898, 900; 488 NE2d 828 (1985)]. It does not appear that any
Michigan court has specifically considered this question, but there is no reason to
believe that a Michigan court would depart from the New York and Restatement
rule that the adverse interest exception is not triggered if the agent is acting at
least in part to further the principal's interest. Restatement (Second) of Agency §
282 cmt c (1957); Matthew G. Dore, Presumed Innocent? Financial Institutions,
Professional Malpractice Claims, and Defenses Based on Management
Misconduct, 1995 Colum Bus L Rev 127, 161 (1995) ("The courts appear to
agree that adverse interest should be determined by a corporate agent's motives,
rather than the outcome of his activities, and that if the agent acts for the benefit
of the corporation at least in part, the adverse interest exception does not apply").
[Allard, supra at 495.]
There still does not appear to be any published Michigan opinion that would disagree with the
general rule.14 Accordingly, the question becomes whether plaintiffs can show that the corporate
wrongdoers were acting solely in their own self-interest and contrary to the interests of the
corporations. Further, it must be kept in mind that it is the wrongdoers' motives, not results, that
are determinative. In this respect, plaintiffs' arguments focus on the results, not the motivations.
That is, plaintiffs point to the fact that the fraudfeasors' conduct ultimately resulted in the
collapse of MCA and its subsidiaries. But the fact that the wrongdoers' conduct proved harmful
to the corporations does not settle the question. The "adverse interest" exception will not apply
if the wrongdoers' motivation was not entirely for personal gain at the expense of the
corporations, but was, even in part, a misguided belief that their wrongdoing would benefit the
corporations. While plaintiffs are correct that the issue of motivation is one of fact, they must
nevertheless present some evidence to create a genuine issue of fact on this point. In this regard,
they point to no evidence that would establish that the individual wrongdoers were not acting, at
13
924 F Supp 488, 495 (SD NY, 1996).
14
This Court did recently, in an unpublished opinion, apply the general rule. See Transnation
Title Ins Co v Livingston, unpublished opinion per curiam, issued February 3, 2004 (Docket No.
243509).
-8-
least in part, out of a motivation of keeping the corporations afloat, and thus provide a benefit to
the corporations.
Indeed, this is why plaintiffs' reliance on the "deepening insolvency" theory is ultimately
of no benefit to plaintiffs. The deepening insolvency theory recognizes that prolonging a
corporation's operations may increase its insolvency and thereby further deplete the value of the
corporation. Courts have recognized this as a viable theory of liability on which to base an
action for harm against a corporation. See Unsecured Creditors, supra. But that merely
recognizes that the corporation's interests were, in fact, harmed. It does not establish that the
wrongdoer's motive was to harm the corporation. Thus, in the case at bar, while the deepening
insolvency theory might provide a basis for recovery by plaintiffs if they can get past the
wrongful conduct rule, it does not provide a basis to invoke the adverse interest exception
because it does not provide a basis for determining the wrongdoers' motivations.
Plaintiffs also argue that they should be permitted to avoid the imputation doctrine
because this action was brought by the liquidating agent following a bankruptcy filing rather
than by a corporation that was not in bankruptcy. We disagree. Plaintiffs point to the decisions
in FDIC v O'Melveny & Myers, but we do not find those decisions persuasive. First, the Ninth
Circuit Court of Appeals decided, applying federal law, that the wrongdoing of corporate
officers would not be imputed to the plaintiff, as receiver for a failed savings and loan
association, in its suit against a law firm for legal malpractice. FDIC v O'Melveny & Myers.15
Thereafter, the Supreme Court reversed, concluding that state law controlled whether the
corporate officers' actions would be imputed to the FDIC as receiver. FDIC v O'Melveny &
Myers.16 On remand, the Ninth Circuit, this time applying California law, concluded that
corporate wrongdoing would not be imputed to a trustee, receiver, or other innocent entity that
steps into a corporation's position pursuant to a court order. FDIC v O'Melveny & Myers.17
While that may be the case under California law, it is not, as discussed above, the case under
Michigan law.
Plaintiffs also rely on the federal court's decision in Scholes v Lehmann.18 We find that
decision unpersuasive for two reasons. First, it applies Illinois law, not Michigan law. Second,
it involves recovering a fraudulent conveyance, not maintaining a tort action. That is, if the
defendants were not fraudfeasors themselves, they directly profited from the fraud. This is
15
969 F2d 744 (CA 9, 1992).
16
512 US 79, 85-89; 114 S Ct 2048; 129 L Ed 2d 67 (1994).
17
61 F3d 17, 19 (CA 9, 1995).
18
56 F3d 750 (CA 7, 1995).
-9-
similar to the situation in In re Latin Investment Corp,19 which also sought to recover monies
transferred to the defendant.
Moreover, plaintiffs' reliance on In re Jack Greenberg20 is misplaced. The Bankruptcy
Court in that case recognized that it must apply state law and reached its conclusion on the basis
of its determination of what would be the correct result under Pennsylvania law.21 Indeed, if
anything, the Greenberg case reaffirms our conclusion in this case—that all indications are that
Michigan law would apply the imputation doctrine, as discussed above. In this respect, the case
that is most on point is Allard. That case was brought by a bankruptcy trustee (Mr. Allard was
the bankruptcy trustee for the DeLorean Motor Company) against the bankrupt's former auditors
in a securities fraud action and the court endeavored to apply Michigan law. As discussed
above, the court determined that Michigan law would apply the imputation doctrine and that the
"adverse interest" exception would be recognized only if the corporate wrongdoers acted solely
in their own interest and entirely against the interests of the corporation. Thus, Allard, not
Scholes or Greenberg, provides the best guidance in this case.
Additionally, plaintiffs' reliance on Comeau v Rupp22 is misplaced because that case
determined that, because the action was brought by the FDIC, federal law applied and the result
was specific to the fact that that action was brought by the FDIC. Similarly, the decision in
Schact v Brown23 is inapplicable because that was based on application of federal law under the
Racketeer Influenced and Corrupt Organizations Act.24
Another decision relied on by plaintiffs, Phar-Mor, Inc v Coopers & Lybrand,25 provides
little benefit to plaintiffs' position. First, the decision was based primarily on the determination
that there existed a genuine issue of material fact regarding whether the corporate wrongdoers
acted solely in their own interest and, therefore, whether the "adverse interest" exception should
apply.26 Second, the part of the opinion relied on by plaintiffs is more of an observation than a
holding, with the court noting that it would be the creditors of the corporation, not the
wrongdoers, who would benefit from any recovery. Moreover, in making this observation, the
court relied on the subsequently reversed decision by the Ninth Circuit in O'Melveny, supra.
19
168 BR 1 (DC, 1993).
20
240 BR 486 (ED PA, 1999).
21
Id. at 501.
22
810 F Supp 1127 (D Kan, 1992).
23
711 F2d 1343 (CA 7, 1983).
24
18 USC 1961 et seq.
25
900 F Supp 784 (WD PA, 1995).
26
Id. at 786-787.
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Finally, plaintiffs look to the decision in In re Sharp Int'l Corp27 for the proposition that a
corporate officer's fraud will not be imputed to the corporation, thus allowing the bankruptcy
trustee to proceed with his claim, where there exists at least one innocent decision maker who, if
he had been alerted to the fraud, could have stopped it. Plaintiffs' reliance on this case is
misplaced. First, Sharp relied on New York law, not Michigan law. Second, we read Sharp as
recognizing an exception to the sole actor rule, rather than as establishing a general principle
(and plaintiffs already argued in their brief that the sole actor rule does not apply).
The sole actor rule is an exception to the adverse interest exception, which as discussed
above, is an exception to the rule of imputing the wrongful conduct of a corporate officer to the
corporation. The sole actor rule comes into play where the wrongdoer is, in essence, the
corporation (the "sole actor"). Indeed, it has its roots in cases where the agent and the principal
are literally the same person (literally a "sole actor") and thus information obtained by a person
in his role as an agent is treated as also being obtained in his role as principal, even if his
activities as agent are contrary to his interests as a principal. See In re Mediators, Inc.28
Therefore, where the wrongdoer acts contrary to the interests of the corporation, under the
adverse interest exception the wrongdoer's conduct would not ordinarily be imputed to the
corporation. But where the wrongdoer is a sole actor, the adverse interest exception is not
applied and his wrongdoing is nevertheless imputed to the corporation. For example where a
sole shareholder loots the corporation of its assets the adverse interest exception will not apply.
See In re Mediators.29 The decision in Sharp recognizes, in essence, that where there is an
innocent decision maker, the wrongdoer cannot be a sole actor and, therefore, the adverse
interest exception will apply.
In short, even if we were to follow the Sharp decision, that would only mean that we
would not apply the sole actor rule to impute the wrongdoers' actions to the corporations. But
we have not applied the sole actor rule in our analysis, therefore we need not consider whether to
apply the Sharp exception to the sole actor rule.
In sum, we conclude that the wrongful-conduct rule will apply to preclude plaintiffs from
recovery against defendants if the actions of the corporate wrongdoers may be imputed to the
corporations. Because it is undisputed that various corporate officers did engage in wrongful
conduct, in order for plaintiffs to prevail they must show that that conduct should not be imputed
to the corporations. To be able to avoid the imputation of that conduct to the corporations,
plaintiffs must show that the wrongdoers were acting adversely to the interests of the
corporations. And that determination will be measured by the motives of the wrongdoers, not
27
278 BR 28 (ED NY, 2002).
28
105 F3d 822, 827 (CA 2, 1997), citing Harold Gill Renschlein & William A. Gregory, The
Law of Agency and Partnership, § 64, at p 121 (2d, 1990).
29
Id. at 827.
-11-
whether their actions in fact resulted in harm to the corporations. Accordingly, summary
disposition in favor of defendants is appropriate if there is no available evidence, when viewed in
the light most favorable to plaintiffs, to create a genuine issue of material fact on this point. J &
J Farmer Leasing, Inc v Citizens Ins Co of America.30 While there is evidence to suggest that
the wrongdoers were acting under the belief, perhaps misguided, that their actions were
benefiting the corporations by keeping them afloat, plaintiffs point to no evidence that the
wrongdoers were motivated by self-interest to the exclusion and knowing detriment of the
interests of the corporations. Defendants argue that the wrongdoers enjoyed no benefit from
prolonging the existence of the corporations beyond their own continued employment, a benefit
that was shared by nine hundred other employees who were not involved in the wrongdoing; and
plaintiffs point to no evidence to dispute this conclusion.
Affirmed. Defendants may tax costs.
Owens, J., concurred.
/s/ David H. Sawyer
/s/ Donald S. Owens
Gage, J., I concur in the result only.
/s/ Hilda R. Gage
30
260 Mich App 607, 610; 680 NW2d 423 (2004).
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