Otto Candies, LLC v. KPMG, LLP

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

OTTO CANDIES, LLC, et al., )
)
Plaintiffs, )
)
v. ) C.A. No. 2018-0435-MTZ
)
KPMG, LLP, et al., )
)
Defendants. )

MEMORANDUM OPINION
Date Submitted: June 16, 2020
Date Decided: August 21, 2020

David E. Ross, ROSS, ARONSTAM & MORITZ LLP, Wilmington, Delaware; Terry
L. Wit, Juan P. Morillo, Derek L. Shaffer, Lauren H. Dickie, and David H. Needham,
QUINN EMANUEL URQUHART & SULLIVAN, LLP, San Francisco, California
and Washington, D.C., Attorneys for Plaintiffs

Kevin R. Shannon, Matthew F. Davis, and Christopher N. Kelly, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Gregory G. Ballard and
Jose F. Sanchez, SIDLEY AUSTIN LLP, New York, New York; Attorneys for
Defendant KPMG Cárdenas Dosal, S.C.

Todd Schiltz, DRINKER BIDDLE & REATH LLP, Wilmington, Delaware; Robert
A. Scher and Jonathan H. Friedman, FOLEY & LARDNER LLP, New York, New
York; Attorneys for Defendant KPMG, LLP

Timothy Jay Houseal, Jennifer M. Kinkus, William E. Gamgort, YOUNG
CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Ana C.
Reyes, WILLIAMS & CONNOLLY, LLP, Washington, D.C.; Attorneys for
Defendant KPMG International Cooperative

ZURN, Vice Chancellor.
 Oceanografía S.A. de C.V. (“OSA”) used to be the largest offshore oil services

company in Latin America, until it succumbed to the consequences of a massive

financial fraud it perpetuated with its bank. OSA creditors, bondholders, and

business counterparts (“Plaintiffs”) claim OSA’s auditor, KPMG Cardenas Dosal,

S.C. (“KPMG Mexico”), committed negligent misrepresentations in auditing OSA,

and failed to detect OSA’s fraud. The fraud sent OSA into bankruptcy and has

inspired a wide array of litigation.

In this action, Plaintiffs presently seek to hold KPMG LLP (“KPMG US”)

liable as KPMG Mexico’s direct agent and via a sub-agency relationship with

KPMG International Cooperative (“KPMG International,” and together with KPMG

Mexico and KPMG US, “Defendants”). Plaintiffs also seek to hold KPMG US liable

as part of a joint venture with KPMG Mexico and KPMG International. Defendants

moved to dismiss on several theories, including that Plaintiffs have failed to plead a

route for holding KPMG US vicariously liable for any shortcomings in KPMG

Mexico’s OSA audits. In this opinion, I conclude Plaintiffs fail to plead vicarious

liability through any theory of agency or joint venture. Plaintiffs’ claim against

KPMG US is dismissed with prejudice.

1
 I. BACKGROUND

In considering Defendants’ second motion to dismiss, I draw the relevant facts

from the allegations in, and those documents incorporated by reference into, the

Amended Complaint.1 I refer readers to the background section of the first motion

to dismiss opinion (the “First Opinion”) for a full recitation of the facts.2 Here, I

provide only the background relevant to this decision.

OSA had a banking relationship with Citigroup, Inc. (“Citigroup”) and

Citigroup’s Mexican subsidiaries, Grupo Financiero Banamex S.A. de C.V. and

Banco National de Mexico, S.A. (together, “Banamex”). In 2008, Citigroup

established a credit facility within Banamex for Petroleos Mexicanos (“Pemex”)

contractors, including OSA.3 Pemex is Mexico’s state-owned oil and gas company

and OSA’s largest client.4 OSA began participating in Citigroup’s cash advance

facility shortly after it was established.5 The advances started in 2009 with limits of

$70 million, but by 2014, the advances ballooned to over $500 million.6

1
Docket Item (“D.I.”) 102 [hereinafter the “Amended Complaint” or “Am. Compl.”].
2
Otto Candies, LLC v. KPMG LLP, 2019 WL 994050, at *2–6 (Del. Ch. Feb. 28, 2019).
3
Am. Compl. ¶ 189.
4
Id. ¶¶ 8, 11.
5
Id. ¶ 189.
6
Id. ¶ 179.

2
 Perhaps as early as 2010, but certainly from August 2013 through February

2014, OSA provided Citigroup with forged and fraudulent invoices for work OSA

had not yet performed to continue receiving cash from the line of credit.7 During

this time period, OSA received millions of dollars from Citigroup as a result of the

fraudulent scheme.8 Citigroup and OSA employees who participated in the fraud

exploited weak internal accounting controls to perpetuate the scheme. Citigroup and

the Mexican government exposed the fraud in February 2013, after which Citigroup

withdrew the credit line and OSA crumbled into bankruptcy.

Between 2010 and 2013, KPMG US audited Citigroup, and KPMG Mexico

audited OSA and Banamex. KPMG US, a Delaware entity headquartered in New

York, and KPMG Mexico, a Mexican entity, are both member firms of KPMG

International, a Swiss cooperative that did not directly conduct any relevant audits.

Relevant to this decision, KPMG Mexico issued OSA audit opinions for fiscal years

2010, 2011, and 2012 (the “OSA Audit Opinions”).9 Plaintiffs claim KPMG Mexico

7
In the First Opinion, I determined that although Plaintiffs “advance their allegations that
the fraud may have begun ‘as early as 2010,’ . . . Plaintiffs fail to explain how they
detrimentally relied on any Audits or related materials issued during a period in which they
only speculate that fraud may have been occurring.” Otto Candies, 2019 WL 994050, at
*23. The Amended Complaint’s allegations of fraud during the pre-August 2013 period
appear tentative, speculative, and conclusory. Am. Compl. ¶¶ 229, 278, 281 n.9, 283. But
for purposes of this opinion, I need not reach whether Plaintiffs satisfy Rule 9(b) in alleging
fraud commenced prior to August 2013.
8
Am. Compl. ¶¶ 2, 179, 229−235.
9
Id. ¶¶ 167, 298, 345−351, Ex. A−C.

3
should have exposed OSA’s controls as deficient, and that if KPMG Mexico had

complied with certain audit standards, the cash advance fraud would have been

detected and prevented.10 Plaintiffs contend that KPMG US is vicariously liable for

KPMG Mexico’s negligent misrepresentations in the OSA Audit Opinions.11

A. Procedural History

Plaintiffs began their endeavor to hold KPMG US liable for KPMG Mexico’s

alleged negligent misrepresentations in auditing OSA on February 26, 2016, when

they filed a complaint in Superior Court.12 The complaint asserted one count of

negligent misrepresentation in audits for each of Citigroup, Banamex, and OSA; all

three of those counts were brought against all three Defendants.13 In that complaint,

Plaintiffs allege[d] that the KPMG entities operated through a complex
series of agency relationships, and specifically as a joint venture for the
Audits. They allege[d] that KPMG International was the principal to
KPMG Mexico and that KPMG US, as the leading revenue generator
for the entire KPMG network, was the principal to agent KPMG
International. Plaintiffs also allege[d] that KPMG US was responsible
for all or virtually all of the work KPMG Mexico performed on . . . the
OSA Audits, by virtue of its principal relationship over KPMG
Mexico.14

10
Id. ¶¶ 3, 252, 292−344.
11
Id. ¶¶ 507−518, 526−533.
12
N16C-02-260 PRW CCLD D.I. (“CCLD D.I.”) 1.
13
Id. ¶¶ 467−520.
14
Otto Candies, 2019 WL 994050, at *3 (internal citations omitted).
4
 On April 25, 2018, the Superior Court ruled that it lacked subject matter

jurisdiction to hear negligent misrepresentation claims, and permitted Plaintiffs the

opportunity to transfer venue to this Court under 10 Del. C. § 1902.15 On June 13,

Plaintiffs re-filed their complaint in this Court and transferred a fully briefed motion

to dismiss all counts against all Defendants from Superior Court to this Court.16 The

parties jointly requested that this Court “rule on the motion to dismiss issues that

remain outstanding.”17

I heard argument in November and issued the First Opinion on February 28,

2019, granting the motion to dismiss under Rules 9(b), 12(b)(2), and 12(b)(6).18 I

held Plaintiffs failed to establish personal jurisdiction over KPMG International and

KPMG Mexico under 10 Del. C. § 3104, and dismissed those defendants under Rule

12(b)(2).19 As for KPMG US, I also held Plaintiffs failed to state a claim of negligent

misrepresentation under Rule 9(b) and 12(b)(6) because, as pled, KPMG US owed

no duty to Plaintiffs, and Plaintiffs failed to plead their reliance on any

misrepresentation by KPMG US.20 The claims involving foreign entities and

15
Otto Candies, LLC v. KPMG LLP, 2017 WL 3175619, at *5 (Del. Super. July 26, 2017).
16
D.I. 1.
17
D.I. 2 at 2.
18
Otto Candies, 2019 WL 994050, at *30.
19
Id. at *8−13; id. at *14−16 (dismissing claims against KPMG Mexico on forum non
conveniens grounds as well).
20
Id. at *17−23.

5
conduct occurring abroad also presented a choice of law issue. I determined the

claims for negligent misrepresentation failed under Mexico, New York, and

Delaware law, and thus, since there was no conflict of laws, I dismissed the claims

pursuant to Delaware law.21 I did not reach the issue of KPMG US’ vicarious

liability in the First Opinion.22 And I requested either a stipulated implementing

order or letter briefing from the parties regarding whether Court of Chancery Rule

15(aaa) applied to the Rule 12(b)(6) motion briefed in Superior Court, but

transferred here.23

On March 22, the parties filed their supplemental submissions addressing

Rule 15(aaa).24 On April 25, I issued a decision concluding that Rule 15(aaa) applies

when a complaint is transferred to this Court subject to a fully briefed motion seeking

dismissal under Rules 12(b)(6) or 23.1, but determined that in the interest of justice,

21
Id. at *17.
22
Id. at *8 n.82 (“The parties vigorously dispute the nuances of Plaintiffs’ joint venture
and agency theories, as well as which law—Delaware, New York, or Mexico—applies to
the issue. Because I find that Plaintiffs failed to establish contacts under the long-arm
statute, I need not reach these questions.”); id. at *21 (“Plaintiffs seek to hold KPMG US
vicariously liable for KPMG Mexico’s audit of OSA under a joint venture or agency theory.
I do not evaluate such an imputation because Plaintiffs have also failed to allege KPMG
Mexico owed any duty to OSA’s creditors and bondholders.”).
23
Id. at *30 n.275.
24
D.I. 77, 78.

6
Plaintiffs here should have the opportunity to amend their complaint since the

decision resolved an issue of first impression.25

B. The Amended Complaint and Motion to Dismiss

On September 16, Plaintiffs filed their Amended Complaint. The Amended

Complaint alleges three counts of negligent misrepresentation against all

Defendants: Count I in connection with the OSA Audit Opinions, Count II in

connection with the Banamex audit opinions, and Count III in connection with the

Citigroup audit opinions.26 Plaintiffs seek $1.1 billion in damages.27 The Amended

Complaint focuses on strengthening the misrepresentation and reliance elements of

the negligent misrepresentation claims.28 The Amended Complaint also adds details

regarding an SEC investigation that penalized Citigroup for deficient internal

accounting controls.29

25
Otto Candies, LLC v. KPMG, LLP, 2019 WL 1856766, at *1 (Del. Ch. Apr. 25, 2019).
26
Am. Compl. ¶¶ 574−627.
27
Id. ¶¶ 1, 28, 40.
28
The new allegations set forth purported misrepresentations in each audit opinion in the
form of block quotes from the opinions themselves. Id. ¶¶ 345−369. The Amended
Complaint also adds more detail as to how, when, and why each Plaintiff relied on a
specific audit opinion. Id. ¶¶ 370−436. These allegations provide the reason, time, and
location where each Plaintiff relied on a specific audit opinion. Id.
29
See, e.g., id. ¶ 278 (“In addition, the SEC found that ‘Banamex’s internal accounting
controls were insufficient to appropriately evaluate numerous red flags, specifically signs
that indicated the loans should have been characterized as seller centric,’ including: (a)
Pemex’s refusal in 2010 to pay Banamex on certain invoices Oceanografía had submitted
with Banamex . . . .”). These allegations are offered to support Plaintiffs’ argument that
fraud commenced at OSA in 2010, before the audits at issue were performed.

7
 Finally, the Amended Complaint elaborates on Plaintiffs’ theories of vicarious

liability. These new allegations describe KPMG International’s oversight and

discipline of KPMG South Africa as an illustration of KPMG International’s ability

to exercise control over a member firm.30 The Amended Complaint does not allege

a similar exercise of control over KPMG Mexico. The new allegations also add that

the letterhead of the audit opinions made explicit that KPMG Mexico is a member

firm of KPMG International.31

Defendants moved to dismiss the Amended Complaint pursuant to Rule

12(b)(6) on November 15 (the “Motion”).32 Plaintiffs concede in their answering

brief that Counts II and III need not be relitigated today and that those counts are

simply being preserved for appeal.33 The First Opinion continues to govern the

dismissal of Counts II and III, and the dismissal of KPMG International and KPMG

Mexico. This opinion addresses Count I, which asserts negligent misrepresentation

in connection with the OSA Audit Opinions, against KPMG US. On June 16, 2020,

I heard argument on the Motion and took the decision under advisement.34

30
Id. ¶¶ 460−468.
31
Id. ¶ 497.
32
D.I. 108.
33
D.I. 110 at 33.
34
The argument was rescheduled multiple times due to the COVID-19 pandemic, the
Court’s March 6, 2020, Standing Order, and the parties’ preference for an in-person
hearing. See D.I. 115, 116, 117, 118. In the end, the hearing was held via videoconference.
See D.I. 118.

8
 Defendants argue that Plaintiffs have failed to adequately plead all elements

of a negligent misrepresentation claim with respect to KPMG Mexico’s OSA Audit

Opinions.35 To sustain a negligent misrepresentation claim, Delaware law requires

that Plaintiffs “must adequately plead that (1) the defendant had a pecuniary duty to

provide accurate information, (2) the defendant supplied false information, (3) the

defendant failed to exercise reasonable care in obtaining or communicating the

information, and (4) the plaintiff[s] suffered a pecuniary loss caused by justifiable

reliance upon the false information.”36 Defendants strike at each element, but I do

not reach those arguments here, as the Motion turns on Plaintiffs’ attempt to hold

KPMG US vicariously liable for KPMG Mexico’s alleged failures.

Defendants attack Plaintiffs’ theories of vicarious liability, arguing Plaintiffs

fail to plead any basis under which this Court could reasonably conceive that KPMG

US is vicariously liable for KPMG Mexico’s actions in relation to the OSA Audit

Opinions.37 Defendants assert that allegations regarding a purported agency

relationship must be connected to the underlying conduct at issue, and that Plaintiffs

fail to plead any non-conclusory and non-generalized allegations drawing a

connection between KPMG International, or KPMG US, and KPMG Mexico’s OSA

35
See D.I. 108 at 2−4, 15−48.
36
Steinman v. Levine, 2002 WL 31761252, at *15 (Del. Ch. Nov. 27, 2002), aff’d, 822
A.2d 397 (Del. 2003).
37
D.I. 108 at 48−56.

9
Audit Opinions.38 Defendants further argue that Plaintiffs fail to establish that

KPMG International, KPMG US, and KPMG Mexico are part of a joint venture in

providing professional services to Citigroup, Banamex, and OSA.39

As to choice of law, Defendants and Plaintiffs agree that the options are

Mexico, Delaware, and New York law; that there is no conflict between those laws;

and that Delaware law should apply.40 But each side believes each jurisdiction

favors their position. If a conflict of laws is identified, Defendants argue the most

significant relationship test points to Mexico law, while Plaintiffs argue the most

significant relationship test points to Delaware.41

I have determined Plaintiffs failed to adequately plead a theory of vicarious

liability under each offered jurisdiction. Accordingly, since no actual conflict of

laws exists, I apply Delaware law to dismiss Count I.

II. ANALYSIS

“The standards governing a motion to dismiss for failure to state a claim are

well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even

vague allegations are ‘well-pleaded’ if they give the opposing party notice of the

claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving

38
Id. at 48−56.
39
Id. at 56−58.
40
Id. at 11−12; D.I. 110 at 56−57.
41
D.I. 108 at 11−15; D.I. 110 at 57−60.

10
party; and (iii) dismissal is inappropriate unless the ‘plaintiff would not be entitled

to recover under any reasonably conceivable set of circumstances susceptible of

proof.’”42 On a motion to dismiss, Delaware courts do not “blindly accept

conclusory allegations unsupported by specific facts, nor do [they]

draw unreasonable inferences in the plaintiffs’ favor.”43

Plaintiffs’ claim against KPMG US in connection with KPMG Mexico’s OSA

Audit Opinions only survives if they adequately plead vicarious liability. While

negligent misrepresentation claims are assessed under the more stringent Rule 9(b)

standard of particularity,44 vicarious liability allegations are assessed under the

notice pleading standard.45 Under that standard, Plaintiffs’ theories of vicarious

liability are inadequately pled.

Where, as here, the choice of law is an issue, “Delaware courts use a two-part

test to determine which sovereign’s law to apply when there is a conflict: first, the

court determines whether there is an actual conflict of law between the proposed

jurisdictions.”46 “Where the ultimate result would be the same under either proposed

42
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896−97 (Del. 2002) (quoting Kofron v. Amoco
Chems. Corp., 441 A.2d 226, 227 (Del. 1982)).
43
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010).
44
PR Acqs., LLC v. Midland Funding LLC, 2018 WL 2041521, at *13 (Del. Ch.
Apr. 30, 2018).
45
Eisenmann Corp. v. Gen. Motors Corp., 2000 WL 140781, at *13 (Del. Super.
Jan. 28, 2000).
46
Bell Helicopter Textron, Inc. v. Arteaga, 113 A.3d 1045, 1050 (Del. 2015).

11
jurisdiction, there is no actual conflict.”47 “If the proposed jurisdictions would

render the same result on a particular claim, differences in the path getting there

present only ‘false conflicts’ that, for choice of law purposes, are not conflicts at

all.”48 “In cases where there is a ‘false conflict’—meaning there is no material

difference between the laws of competing jurisdictions—the court ‘should avoid the

choice of law analysis altogether.’”49 “If there is a conflict, the court determines

which jurisdiction has the ‘most significant relationship to the occurrence and the

parties’ based on the factors (termed ‘contacts’) listed in the Restatement (Second)

of Conflict of Laws.”50 “In cases where foreign law may be applicable, the party

seeking the application of foreign law,” in this case KPMG US, has “the burden of

adequately proving the substance of the foreign law.”51 Here, Plaintiffs’ theories fail

under each choice of law.52 Accordingly, there is no actual conflict of laws.

47
Otto Candies, 2019 WL 994050, at *16.
48
Id. at *17.
49
In re Bay Hills Emerging P’rs I, L.P., 2018 WL 3217650, at *5 (Del. Ch. July 2, 2018)
(quoting Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1161 (Del. 2010)).
50
Bell Helicopter, 113 A.3d at 1050.
51
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 765 (internal quotation marks
omitted) (quoting Republic of Panama v. Am. Tobacco Co., 2006 WL 1933740, at *4 (Del.
Super. June 23, 2006), aff’d sub nom. State of Sao Paulo of Federative Republic of Brazil
v. Am. Tobacco Co., 919 A.2d 1116 (Del. 2007)).
52
In Otto Candies, LLC v. KPMG LLP, C.A. No. N16C-02-260 PRW CCLD (Del.
Super.) [hereinafter “Superior Court Action”], the Superior Court issued a protective order
rejecting jurisdictional discovery into, among other things, “KPMG Delaware Entities,
including connections between the entities and the audits at issue here[.]” CCLD D.I. 69
[hereinafter “Protective Order”] ¶ 2 (citing CCLD D.I. 59 at 23, n.34). The Protective
12
Plaintiffs’ claim against KPMG US for negligent misrepresentation in the OSA

Audit Opinions is dismissed with prejudice pursuant to Delaware law.

A. Plaintiffs Have Not Adequately Alleged Vicarious Liability Under Any
Theory of Agency.

Plaintiffs press both a direct agency and sub-agency theory to hold KPMG US

vicariously liable for KPMG Mexico’s negligent misrepresentations in the OSA

Audit Opinions. Plaintiffs fail to plead either theory under Mexico, Delaware, and

New York law.

Order also narrowed the scope of discovery to requests supporting a claim for jurisdiction
over KPMG International and KPMG Mexico as to their role, if any, in the Banamex audits.
Protective Order ¶ 3.
The parties agreed that former Chancellor Chandler would serve as Special
Discovery Master for the dispute over those discovery requests related to the Banamex
Audits. The Special Master denied jurisdictional discovery on the grounds that there was
“no Banamex-related conduct occur[ing] in Delaware” to impute to foreign entities, and so
“it is moot to grant additional jurisdictional discovery to support a joint venture/agency
theory of jurisdiction.” CCLD D.I. 78 [hereinafter “Final Report”] at 19−27. The Superior
Court, in adopting the Final Report, stated that Plaintiffs “ha[d] failed to establish the
requisite nexus between the Defendants to show why this Court should exercise personal
jurisdiction over the two foreign entities.” Otto Candies, LLC v. KPMG LLP, 2017 WL
3175619, at *5 (Del. Super. July 26, 2017).
The Superior Court’s denial of jurisdictional discovery into Plaintiffs’ agency and
joint venture theories color my analysis today. The standard for jurisdictional discovery is
low: “[o]nly where the facts alleged in the complaint make any claim of personal
jurisdiction over defendant frivolous, might the trial court, in the exercise of its
discretionary control over the discovery process, preclude reasonable discovery in aid of
establishing personal jurisdiction.” Hart Hldg. Co. Inc. v. Drexel Burnham Lambert
Inc., 593 A.2d 535, 539 (Del. Ch. 1991) (emphasis added). The Amended Complaint has
done little to cure the deficiencies in the original complaint that led the Superior Court and
Special Master to deny jurisdictional discovery into Plaintiffs’ frivolous theories of
vicarious liability. Although not dispositive, the Superior Court and Special Master’s
rulings foreshadow my decision here.

13
 1. Plaintiffs’ Allegations of Sub-Agency and Direct Agency

Plaintiffs contend that KPMG Mexico is a sub-agent of KPMG US in an

arrangement by which KPMG US is a principal to KPMG International, which in

turn is a principal to KPMG Mexico. Under this theory, Plaintiffs must plead two

agency relationships to hold KPMG vicariously liable for KPMG Mexico’s OSA

Audit Opinions.

In attempting to plead that KPMG International is KPMG US’ agent,

Plaintiffs allege that: KPMG US is a founding member of KPMG International;53

KPMG US’ revenues constitute nearly one-third of KPMG’s global revenues;54 and

40% of the KPMG International Global Management Team are KPMG US

personnel, including KPMG International’s Chairman and Global Head of Audit.55

As for KPMG International’s control over KPMG Mexico, Plaintiffs allege

that KPMG International has the right to periodically review, investigate, and

discipline a member firm.56 Plaintiffs also allege that KPMG International provides

manuals, software, audit standards, and audit procedures to KPMG Mexico.57

Plaintiffs allege KPMG Mexico acted with KPMG International’s implied authority

53
Am. Compl. ¶¶ 442, 516.
54
Id. ¶ 443.
55
Id. ¶¶ 510−14.
56
Id. ¶¶ 469−75.
57
Id. ¶¶ 452, 455, 458, 501−02.

14
because KPMG International enforced audit policies and procedures for KPMG

Mexico, monitored KPMG Mexico’s use of intellectual property, administered

mandated reviews on KPMG Mexico, and had the ability to impose disciplinary

measures on KPMG Mexico.58 Plaintiffs provide detailed allegations of KPMG

International wielding control over KPMG South Africa, but the allegations

regarding KPMG International’s oversight and implied authority over of KPMG

Mexico are more general.59 Plaintiffs do not allege that KPMG International

contributed to or controlled the OSA Audit Opinions.

Lastly and more generally, Plaintiffs allege that the KPMG entities present as

a unified global organization through KPMG International’s objectives;60 the KPMG

International secondment program whereby personnel from one KPMG firm work

in other member offices;61 the use of the KPMG name, which is solely licensed

through KPMG International;62 and the member firms’ required compliance with

KPMG International’s membership criteria, policies, and regulations.63

58
D.I. 110 at 48−49 (citing Am. Compl. ¶¶ 445−59, 469−75, 498−99).
59
Am. Compl. ¶¶ 460−68. Additionally, the allegations of KPMG Mexico’s coordination
with KPMG Singapore for work regarding OSA are irrelevant to an agency relationship
between KPMG International, KPMG US, and KPMG Mexico. See Id. ¶¶ 476−80.
60
Id. ¶¶ 445−47.
61
Id. ¶ 448.
62
Id. ¶¶ 449−51.
63
Id. ¶¶ 452−59.

15
 Plaintiffs’ allegations of a direct agency relationship between KPMG US and

KPMG Mexico are more sparse.64 Plaintiffs allege that KPMG US is a principal to

KPMG Mexico “directly through the Citigroup audit” and that KPMG US is

“culpable for the knowledge and conduct of KPMG Mexico’s personnel in their

audits of Oceanografía . . . given the audit clients’ extensive business dealings and

overlapping audit issues between the two engagements.”65 Plaintiffs emphasize that

Citigroup, Banamex, and OSA have extensive business dealings together and that

because of the line of credit, KPMG US’ engagement with Citigroup overlaps with

KPMG Mexico’s engagement with OSA and Banamex.66 Plaintiffs also state that

KPMG Mexico is a registered accounting firm with the Public Company Accounting

Oversight Board (“PCAOB”), that PCAOB lists KPMG Mexico “as an affiliated

entity of KPMG US, and vice versa,” and that according to PCAOB’s information,

“KPMG Mexico audited, or played a substantial role in the audits of, at least 50 U.S.

companies” including coordinating with KPMG US to audit Citigroup and

64
During argument, Defendants asserted that Plaintiffs seemed to “walk away” from the
direct agency theory and were no longer pursuing it. See D.I. 121 [hereinafter “Hearing
Transcript” or “Hrg. Tr.”] at 37−38. Plaintiffs countered that they continue to assert a
direct agency theory and addressed it in their answering brief. See id. at 93−94 (citing D.I.
110 at 50 n.101). For completeness, I consider both the direct agency and sub-agency
theories of liability.
65
Am. Compl. ¶ 530.
66
See Id. ¶ 530.

16
Banamex.67 Plaintiffs do not allege that KPMG US was directly involved in KPMG

Mexico’s audits of OSA.

2. Plaintiffs Fail To Plead A Written Agreement As Required
Under Mexico Law.

In cases where foreign law may be applicable, “the party seeking the

application of foreign law has the burden of not only raising the issue that foreign

law applies, but also the burden of adequately proving the substance of the foreign

law.”68 To assist in my review of Mexico law, each side provided expert affidavits.

Defendants’ principal expert is Carlos Loperena (“Loperena,” who submitted the

“Loperena Declaration”),69 and Plaintiffs’ is Francisco González de Cossio

(“González,” who submitted the “González Declaration”).70 Both experts are well-

established Mexican lawyers. I rely on the experts’ interpretations of Mexico law,

but also turn to relevant authorities to address some of the experts’ stalemates on

interpretative questions.

Mexico operates on a civil law system, as distinguished from Delaware’s or

New York’s common law system. Its authority is generally codified into various

rules and statutes, the interpretation of which relies only on a narrow subset of case

67
Am. Compl. ¶¶ 531–33.
68
Vichi, 85 A.3d at 765 (quotation omitted).
69
CCLD D.I. 34 [hereinafter “Loperena Decl.”].
70
CCLD D.I. 99 [hereinafter “González Decl.”].

17
law.71 Under Mexico law, principal-agent liability cannot exist without an

agreement expressly creating such a relationship.72 Article 2546 of the Mexican

Federal Civil Code (“C.C.D.F.”) states, “Agency is a contract by which the agent

obligates himself to execute for account of the principal the juridical acts which the

latter confides to him.”73 The agency contract must be ratified in writing when the

amount involved is more than approximately $200.74

Plaintiffs argue that these principles are inapplicable because the Articles

address power of attorney instruments, and assert that a power of attorney is a

distinct agency relationship with explicit duties and powers not applicable here.75

Plaintiffs have failed to prove this is so. In the United States, a power of attorney is

a specific agency relationship with established duties and powers. In Mexico, a

power of attorney is a far more generalized agency relationship used in a variety of

settings including commercial transactions and corporate structures.76

71
Loperena Decl. ¶ 10; González Decl. ¶¶ 11−13.
72
Id. ¶¶ 44−51.
73
Id. ¶ 46 (quoting C.C.D.F. art. 2546).
74
Id. ¶ 48 (quoting C.C.D.F. arts. 2555−2556).
75
D.I. 110 at 50.
76
See Wilcox v. Pepsico, Inc., 174 F. Supp. 2d 265 (E.D. Pa. 2001); Humberto Gayoua &
Robert G. Gilbert, Legal Building Blocks for Structuring Sales in the Mexican Market, 25
St. Mary’s L. J. 1115 (1994).

18
 Other authorities have explained that Mexico’s requirement that an agency

relationship be reduced to writing is not limited as Plaintiffs suggest. The United

States District Court for the Eastern District of Pennsylvania, quoting C.C.D.F.

Article 2546, has stated,

In Mexico, commercial matters, such as whether a commercial contract
created an agency relationship are governed by Mexico Commercial
Code and the Civil Code for the Federal District . . . The Civil Code of
the Federal District states that, “Agency is a contract whereby an agent
obligates himself to act on behalf of a principal and perform those
juridical activities he is directed to do.”77

When dealing with commercial transactions in Mexico, “[a] United States vendor

must be aware that Mexico law is much more formalistic. Authority of an agent,

even if that agent happens to be an attorney, is never assumed but, rather, must be

specifically granted through a formal document (power of attorney).”78

It appears to me that in Mexico, a power of attorney is not limited to a distinct

agency relationship within the trusts and estates context. The power of attorney

articles appear to apply broadly to common law agency as we think of it in the United

States. I conclude C.C.D.F. Articles 2546, 2555, and 2256 apply here and require a

written agreement establishing an agency relationship.

77
Wilcox, 174 F. Supp. 2d at 267 (quoting C.C.D.F. art. 2546).
78
Gayoua, Legal Building Blocks, 25 St. Mary’s L. J. at 1136 (citing C.C.D.F. art. 2546).

19
 Plaintiffs do not allege a written agreement establishing a direct agency

relationship between KPMG US and KPMG Mexico. Nor do Plaintiffs allege any

written agreements between, first, KPMG US and KPMG International, and second,

KPMG International and KPMG Mexico. Plaintiffs’ direct agency theory and sub-

agency theory both fail under Mexico law as pled.

In the absence of a written agreement, Plaintiffs rely on implied and apparent

agency to establish vicarious liability. But I do not believe those concepts exist

under Mexico law as they do in the United States, precisely because under Mexico

law, an express agreement is generally required to establish an agency relationship.79

Plaintiffs cite to a case they contend demonstrates the concept of apparent authority

under Mexico law, but this case is distinguishable because it relies on a specific

public policy rationale to hold a hospital liable for services provided on its

premises.80 The court determined apparent authority may be applicable because to

determine otherwise would “undermin[e] the values and principles that prevail in

the human right to health and the rights of users.”81 Those policy considerations are

absent from the matter at hand.

79
Loperena Decl. ¶ 45.
80
González Decl., Ex. B at 54−55.
81
Id.

20
 The second case Plaintiffs cite is also inapplicable. It describes the concept

of apparent authority as when “someone appears to represent[] a mercantile

company, claiming to be a necessary or contractual representative, administrator,

official, agent or general manager, and with this, a third party generates a conviction

that the person has a sufficient representation with a semblance of legitimacy[.]”82

Here, no such claims have been alleged. And, even if I accepted that Mexico law

provides for narrow implied or apparent authority, the allegations set forth in the

Amended Complaint fail to adequately allege that the conduct of the relevant KPMG

entities evidences that KPMG Mexico generated belief in a third party that it was an

agent of KPMG US.83

I conclude Mexico law requires a written agreement to hold one entity liable

as the agent of another. Plaintiffs have not pled any such agreement. Mexico law

favors dismissal of the OSA audit claim against KPMG US.

82
Id. at 53−54.
83
Id. at 53−55.

21
 3. Plaintiffs Fail To Plead KPMG US Or KPMG International
Had Control Over The OSA Audit Opinions As Required Under
Delaware Law.

Defendants also seek dismissal of Plaintiffs’ claims under Delaware law for

failure to plead control specifically with regard to the OSA Audit Opinions.84

Plaintiffs contend no such specific control need be pled. The parties’ briefing on

this point was sparse. I have come to the conclusion, informed by numerous

Delaware cases, that to hold one entity vicariously liable for the tort of another via

agency principles, the plaintiff must plead the principal had control over the

wrongdoing at issue. Plaintiffs here have not done so.

As an initial matter, while Delaware courts have noted that “[w]hether an

agency relationship exists is normally a question of fact,”85 Delaware courts have

also dismissed claims on the grounds of vicarious liability when only conclusory and

insufficient allegations were pled.86 “[I]f the facts are undisputed, or if there is no

84
D.I. 108 at 51–56; D.I. 112 at 32 (“Under New York and Delaware law, control of the
specific underlying audit is the most significant requirement for a principal-agent
relationship.”).
Jack J. Morris Assocs. v. Mispillion St. P’rs, LLC, 2008 WL 3906755, *4 (Del. Super.
85

Aug. 26, 2008); see also Fisher v. Townsends, Inc., 695 A.2d 53, 59 (Del. 1997).
86
See, e.g., Skye Mineral Inv’rs, LLC v. DXS Capital (U.S.) Ltd., 2020 WL 881544, at
*23−24 (Del. Ch. Feb. 24, 2020) (citation omitted) (dismissing agency allegations for
failing to adequately pled the right to control agent’s conduct); Baccellieri v. HDM
Furniture Indus., Inc., 2013 WL 1088338, at *3 (Del. Super. Feb. 28, 2013) (dismissing
some agency allegations because they were “devoid of any factual allegations . . .
conclusory allegation[s] [are] insufficient to withstand a motion to dismiss”), aff’d, 74
A.3d 653 (Del. 2013); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *10
22
genuine issue of material fact, agency can be decided as a matter of law.” 87

Furthermore, when the agency question is potentially dispositive, “permitting the

action to proceed to a trial on the merits without solving the agency relationship

question could result in needless expenditure of time and effort.”88 “The interest of

judicial economy” is best served “by [an immediate] decision on the question of

agency relationship.”89

And so, my analysis begins with the fundamental premise that under ordinary

circumstances, one entity will not be held responsible for the actions of another.90

Delaware law presents two paths to vicarious liability: first, via veil-piercing,

instrumentality, or alter-ego theories, which focus on setting aside the corporate

form due to the complete domination and control of one entity over another;91 and

(Del. Ch. Aug. 26, 2005) (dismissing agency liability for failure to plead sufficient facts
supporting control).
87
Baccellieri, 2013 WL 1088338, at *3.
88
Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F. Supp. 831, 838 (D. Del.
1978) (acknowledging the parties raised the agency question on a motion to dismiss and
that the Court permitted discovery on the issue; treating the motions as cross-motions for
summary judgment).
89
Id.
90
Id. at 838.
91
Wallace ex rel. Cencom Cable Income P’rs II, Inc., L.P. v. Wood, 752 A.2d 1175, 1184
(Del. Ch. 1999) (“The degree of control required to pierce the veil is
exclusive domination and control to the point that the [dominated entity] no longer has
legal or independent significance of its own.”) (internal quotation and original alterations
omitted); Alliance Data Sys. Corp. v. Blackstone Capital P’rs V L.P., 963 A.2d 746, 769
(Del. Ch. 2009), aff’d 976 A.2d 170 (Del. 2009) (“Delaware law respects corporate
formalities, absent a basis for veil-piercing, recognizing that the wealth-generating
23
second, via agency theory, which respects the corporate form and instead focuses on

wrongdoing authorized by one entity, but conducted by another.92 Vicarious

liability through agency does not overlook the distinctions between the entities

involved, but instead creates a narrow path to liability focused on the principal’s

authority and control over the agent’s wrongdoing.93 “Under the doctrine of

vicarious liability, a principal may be liable for torts committed by an agent acting

within the scope of the agency relationship, i.e., where the agent’s tortious conduct

is undertaken pursuant to the agency relationship.”94 “[T]he existence of

an agency relationship is determined by analyzing several factors used to weigh the

amount of authority and control retained by the purported principal.”95 “A defining

potential of corporate and other limited liability entities would be stymied if it did
otherwise.”).
92
Skye Mineral, 2020 WL 881544, at *23 (Providing that an agency relationship “is a
fiduciary relationship . . . that arises when one person (a ‘principal’) manifests assent to
another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to
the principal’s control, and the agent manifests assent or otherwise consents so to act.”)
(citation omitted).
93
See Stinnes, 1983 WL 21115, at *2; see also Albert, 2005 WL 2130607, at *10
(distinguishing theories of agency and piercing the veil).
94
Wenske v. Blue Bell Creameries, Inc., 2018 WL 5994971, at *3 (Del. Ch. Nov. 13, 2018).
95
Wavedivision Hldgs., LLC v. Highland Capital Mgmt. L.P., 2011 WL 5314507, at *15
(Del. Super. Nov. 2, 2011) (“As the amount of authority and control exerted by the
purported principal increase, so does the likelihood that an agency relationship
existed.”), aff’d, 49 A.3d 1168 (Del. 2012).

24
feature of the principal-agent relationship is the principal’s right to control the

agent’s conduct.”96

As the United States Court of Appeals for the Third Circuit explained in

Phoenix Canada Oil Co. Ltd. v. Texaco, Inc.:

One corporation whose shares are owned by a second corporation does
not, by that fact alone, become the agent of the second company.
However, one corporation—completely independent of a second
corporation—may assume the role of the second corporation’s agent in
the course of one or more specific transactions. This restricted agency
relationship may develop whether the two separate corporations are
parent and subsidiary or are completely unrelated outside the limited
agency setting . . . . Under this second theory, total domination or
general alter ego criteria need not be proven. . . . Unlike the alter
ego/piercing the corporate veil theory, when customary agency is
alleged the proponent must demonstrate a relationship between the
corporations and the cause of action. Not only must an arrangement
exist between the two corporations so that one acts on behalf of the
other and within usual agency principles, but the arrangement must be
relevant to the plaintiff’s claim of wrongdoing.97

96
Skye Mineral, 2020 WL 881544, at *23 (emphasis in original).
97
842 F.2d 1466, 1477 (3d Cir. 1988) (emphasis added) (citing Restatement (Second) of
Agency § 14M, Reporter’s Notes (1958) (“It is useful to distinguish situations in which
liability is imposed on a parent because of the existence of the agency relation, in our
common-law understanding of that relation, from cases in which the corporate veil of the
subsidiary is pierced for other reasons of policy. Unfortunately, however, the courts have
not always observed the distinction between these two separate bases for parent’s liability.
When liability is fastened upon the parent it is said that the subsidiary is a ‘mere agent’.
The result has been a weakening and muddying of the term ‘agent’ and a failure by courts
to state the real reasons for their decisions.”)).

25
And as the Superior Court explained:

When legal liability is predicated on principles of agency, the existence
and entity of the agent are not ignored or set aside but affirmed, and the
principal held precisely because the agent did act in the course of his
employment and within the scope of his authority. The very opposite
is true when the subsidiary’s corporate entity is set aside and ignored
and the parent held liable.98

Requiring the principal’s authority and control to be linked to the underlying conduct

in dispute complements the concept that a principal is only “liable for torts

committed by an agent acting within the scope of the agency relationship, i.e., where

the agent’s tortious conduct is undertaken pursuant to the agency relationship.”99

Accordingly, in assessing an agency theory, “the focus must be directed to the

pertinent cause of action.”100

98
Stinnes Interoil, Inc. v. Petrokey Corp., 1983 WL 21115, at *2 (Del. Super. Aug. 24,
1983) (quoting Lowendahl v. Baltimore & O.R. Co., 287 N.Y.S. 62, 74 (N.Y. App. Div.
1936), aff’d, 6 N.E.2d 56 (N.Y. 1936)); id. (“There is a fatal flaw in plaintiff’s agency
theory as applied to the facts in this case. Even if there was an agency relationship, there is
no evidence that the plaintiff was aware of it at the time it made the contracts in question,
or that it made the contracts under the belief that Petrokey was acting as the authorized
agent of Diamond.”).
99
B&B Fin. Servs., LLC v. RFGV Festivals, LLC, 2019 WL 5849770, at *3 (Del. Super.
Nov. 7, 2019) (citing Wenske, 2018 WL 5994971, at *3).
100
Phoenix Canada, 842 F.2d at 1478 (“The evidence of relationship between the parents
and subsidiaries as it bears on that breach of contract [at issue] is the proper subject of our
inquiry.”); see also C.R. Bard, Inc. v. Guidant Corp., 997 F. Supp. 556, 560 (D. Del. 1998)
(“[U]nder the agency theory ‘only the precise conduct shown to be instigated by the parent
is attributed to the parent.’” (quoting Applied Biosystems, Inc. v. Cruachem, Ltd., 772 F.
Supp. 1458, 1464 (D. Del. 1991))).

26
 Numerous Delaware cases have reinforced that in an agency analysis, the

focus must be on authority or control over the specific wrongdoing at issue. In Mobil

Oil Corporation v. Linear Films, Inc., the United States District Court for the District

of Delaware emphasized that the “vital prerequisite to imposing liability based upon

customary agency principles is finding a close connection between the relationship

of the two corporations and the cause of action,” i.e., the underlying tort.”101 In that

case, “[t]he relevant question [was] whether the alleged principal . . . directed the

specific actions of the alleged agent . . . which resulted in infringement of [the

plaintiff’s] patents.”102

In E.I. DuPont de Nemours & Co. v. Rhodia Fiber & Resin Intermediates,

S.A.S., the District Court dismissed an agency claim seeking to bind a parent to a

contract made by its subsidiary. “Defendants assert that ‘[Parent] was so intimately

involved in the [subject] project that [Subsidiary] frequently acted on its

behalf[.]’”103 But, despite this allegation, the Court concluded it was “not willing to

101
Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 271 (D. Del. 1989).
102
Id. at 271–72; see also Jurimex Kommerz Transit G.M.B.H. v. Case Corp., 2007 WL
2153278, at *2 (3d Cir. July 27, 2007) (“In other words, the relevant inquiry for
determining whether Case’s European subsidiaries were acting as its agents necessarily
must focus on the ‘specific transaction’ that gave rise to the alleged liability-in this case,
the Golden Grain transaction.”).
103
E.I. duPont de Nemours & Co. v. Rhodia Fiber & Resin Intermediates, S.A.S., 197
F.R.D. 112, 127 (D. Del. 2000), aff’d in part, appeal dismissed in part sub nom. E.I.
DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269
F.3d 187, 198 (3d Cir. 2001) (affirming agency holding, stating “appellants argue that
DuPont’s intimate involvement with the Sanlong project renders it liable under traditional
27
use ‘traditional principles of contract and agency law’ to circumvent the protections

of the corporate form[.]”104 The Third Circuit affirmed this dismissal, citing Phoenix

Canada Oil: “To bind a principal by its agent’s acts, the plaintiff must demonstrate

that the agent was acting on behalf of the principal and that the cause of action arises

out of that relationship.”105

The District Court has also concluded that “[u]nder Delaware law, proof of

agency within the context of a parent-subsidiary relationship requires that the

plaintiff ‘demonstrate that the agent was acting on behalf of the principal and that

the cause of action arises out of that relationship.’”106 For this agency theory,

“complete domination by the parents in the general conduct of the subsidiaries’

affairs is not a prerequisite. The parents and subsidiaries may fully maintain their

separate corporate existences; yet, as any two unrelated companies, they might

[enter] into a limited agency relationship for a specific transaction.”107

agency principles because DPC acted as DuPont’s disclosed agent . . . [t]he District Court
correctly rejected this argument”).
104
Id.; id. at 128 (“DuPont China signed the Joint Venture Contract and DuPont, as a
shareholder of DuPont China, stood to benefit from the profits of that contract, but
defendants have not shown that DuPont China acted specifically as DuPont’s agent.”)
(emphasis added).
105
Id. at 198 (citing Phoenix Canada Oil, 842 F.2d at 1477).
106
Trevino v. Merscorp, Inc., 583 F. Supp. 2d 521, 531 (D. Del. 2008) (quotation omitted).
107
Phoenix Canada Oil, 842 F.2d at 1478; accord Applied Biosystems, 772 F. Supp. at
1463 (citing Phoenix Canada Oil, 842 F.2d at 1477) (“[T]wo otherwise independent
corporations may develop a restricted agency relationship covering only certain specific
transactions.”); see also Trevino, 583 F. Supp. 2d at 531–32 (“[T]he Court concludes that
28
 The Delaware Superior Court has embraced the Third Circuit and District

Court’s reasoning in Mobil Oil and Phoenix Canada Oil. “When applying an agency

theory, the Court should focus its inquiry on the arrangement between the

corporations, the authority given in the arrangement, and the relevance of that

arrangement to the Plaintiffs’ claim.”108 “Even under the notice pleading rules, it

remains incumbent on the pleader to allege some factual predicate to support the

agency allegations as to the particular contract.”109 The Court delineated between

allegations sufficient to sustain an agency claim on a motion to dismiss, and those

that are inadequately pled because they failed to state the circumstances as to how

the purported principal caused the purported agent to issue the wrongful purchase

orders.110 “[Plaintiff] merely allege[d] an agency relationship with no factual

predicate whatsoever.”111

The Court of Chancery recently dismissed an agency claim in Wenske v. Blue

Bell Creameries, determining in denying a motion for reargument that “for liability

to attach under customary agency, ‘an arrangement [must] exist[ ] between the two

Plaintiffs have not sufficiently alleged that an arrangement existed under which MERS
acted as an agent of the Shareholder Defendants when MERS engaged in the wrongdoing
alleged in the Amended Complaint.”).
108
Eisenmann Corp. v. Gen. Motors Corp., 2000 WL 140781, at *12 (Del. Super.
Jan. 28, 2000) (emphasis added).
109
Id. at *13.
110
Id. at *12−13.
111
Id. at *13.

29
corporations so that one acts on behalf of the other and within usual agency

principles, [and] the arrangement must be relevant to the plaintiff’s claim of

wrongdoing.’”112 Dismissal was warranted because, “[s]imply stated, the Complaint

pleads no facts that support a reasonable inference that [the alleged principal]

directed [the alleged agent] to enter into the [agreement] on its behalf[.]”113

In Hospitalists of Delaware, LLC v. Lutz, two Chancery decisions—one on a

motion to dismiss and the second on a motion for summary judgment—addressed

agency liability by considering day-to-day control. But, even through that broader

lens, the Court still looked to control regarding the subject transaction in sustaining

the agency theory of liability. At the motion to dismiss stage, the Court dismissed

the veil-piercing theory of liability, but sustained the agency theory of liability based

on the alleged principal’s day-to-day control of the alleged agent, and the principal’s

specific directions.114

112
Wenske, 2018 WL 5994971, at *4−5 (emphasis added) (quoting O’Leary, 2011 WL
379300 at *7 (distinguishing between a piercing the veil theory of liability and an agency
theory of liability)); see also Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531
(Del. Ch. July 6, 2018) (dismissing agency claims).
113
Wenske, 2018 WL 5994971, at *5; see also Albert, 2005 WL 2130607 (dismissing an
agency claim and concluding that there “is simply no allegation in the complaints that [the
alleged principal] expressly gave [the alleged agent] the authority to bind it as its agent[,]”
and that “plaintiffs have not alleged any facts showing that [the alleged principal] held out
[the alleged agent] as its agent”).
114
Hospitalists of Delaware, LLC v. Lutz, 2012 WL 3679219, at *16−17 (Del. Ch. Aug.
28, 2012); id. at *16 (“the existence of an agency relationship may be inferred from, among
other things, the principal’s day-to-day control over the agent’s business” and noting facts
supporting such control); id. at *17 (“Assuming Plaintiffs can prove that [the agent], in
30
 Then, on summary judgment, the plaintiff sought a declaration that based on

a principal-agent relationship, the principal was jointly and severally liable with the

agent. The Court denied summary judgment on the grounds that it appeared that a

significant degree of control [] was being exercised – certainly in the
context of the [Master Services] agreement, and perhaps beyond the
MSA agreement in certain areas – by [the principal], but as I indicated
a moment ago, I think there are . . . issues of material fact as to whether
there’s a basis here for holding that [the agent] acted as the agent of [the
principal] when it committed the alleged wrongful acts that give rise to
the tort liability.115

Thus, an issue of material fact as to the purported principal’s control specifically

with respect to the underlying tortious acts required the Court to deny summary

judgment.

In view of these principles, Delaware law requires plaintiffs seeking to hold a

purported principal liable for wrongful acts of the agent to plead control over that

specific wrongful act. In this case, Plaintiffs’ direct agency theory fails because

Plaintiffs do not plead that KPMG US wielded control over the OSA Audit Opinions

as KPMG Mexico’s principal. Plaintiffs’ allegations that the PCAOB lists KPMG

Mexico “as an affiliated entity of KPMG US, and vice versa” and that KPMG

Mexico worked on audits of U.S. companies, including Citigroup, are unrelated to

fact, acted at [the principal’s] express direction regarding any of the challenged transactions
in this case, it is conceivable that the legal consequences of [the agent’s] actions could be
attributed to [the principal].”).
Hospitalists of Delaware, LLC v. Lutz, C.A. 6221-VCP at 61−62 (Del. Ch. Aug. 6, 2013)
115

(TRANSCRIPT).

31
the OSA Audit Opinions.116 Plaintiffs also allege that KPMG US is a principal to

KPMG Mexico “directly through the Citigroup audit” and “culpable for the

knowledge and conduct of [KPMGM] . . . in their audits of Oceanografía . . . given

the audit clients’ extensive business dealings and overlapping audit issues between

the two engagements.”117 The allegations that the Citigroup and OSA audits overlap

are conclusory. Even if the two audits presented overlapping business dealings and

issues, that overlap alone does not adequately establish that KPMG US, which was

only directly involved in the Citigroup audit, wielded the necessary control over the

content of the OSA Audit Opinions.118 Plaintiffs in no way allege KPMG US

directly had authority or control over the OSA Audit Opinions.119 Their allegations

fall short of adequately pleading agency liability under Delaware law.

116
Am. Compl. ¶¶ 531–533.
117
Id. ¶ 530.
118
See id. ¶ 530. Any theory of agency relying wholly on similarities between the Citigroup
audit and OSA Audit Opinions is unreasonable. See Nemec, 991 A.2d at 1125 (stating
Delaware courts do not “blindly accept conclusory allegations unsupported by specific
facts, nor do [they] draw unreasonable inferences in the plaintiffs’ favor” on a motion to
dismiss).
119
These allegations also do not plead the day-to-day control that was plead in Hospitalists
of Delaware to sustain an agency claim on a motion to dismiss. See 2012 WL 3679219, at
*16 (alleging “that a majority of Cubit’s three directors also were Integra directors . . . that
Integra and Cubit shared the same: ‘management, officers, and employees’; address and
physical office space; phone systems, ‘hardware, software, and data services’; and a credit
card account . . . and payroll”).

32
 Plaintiffs’ allegations of sub-agency also fail to adequately plead that KPMG

US is a principal to KPMG International, and that KPMG International is a principal

to KPMG Mexico. Turning first to the relationship between KPMG US and KPMG

International, the allegations include that KPMG US is a founding member of

KPMG International;120 that KPMG US’ revenues constitute nearly one-third of

KPMG’s global revenues;121 and that 40% of the KPMG International Global

Management Team are KPMG US personnel, including the Chairman and Global

Head of Audit for KPMG International.122 The last allegation comes closest to

alleging that KPMG US has general control over KPMG International, but without

further assertions that KPMG US personnel used their positions to control KPMG

International in relation to KPMG Mexico or the OSA Audit Opinions, the

allegations lack a crucial connection.

Plaintiffs’ allegations that KPMG International controls KPMG Mexico

similarly miss a piece of the puzzle. Plaintiffs allege that KPMG International may

have the right to control KPMG Mexico, but do not allege that KPMG International

has yet to do so in any sense, much less specifically with respect to the OSA Audit

Opinions. Plaintiffs allege KPMG International may periodically review,

120
Am. Compl. ¶¶ 442, 516−17.
121
Id. ¶ 443.
122
Id. ¶¶ 510−14.

33
investigate, and discipline a member firm.123 But these allegations fall short of

alleging KPMG International has investigated or disciplined KPMG Mexico with

respect to the OSA Audit Opinions, much less controlled the content of those

audits.124 The allegations regarding KPMG South Africa serve to emphasize this

distinction;125 Plaintiffs allege no such similar execution of control over KPMG

Mexico. While Plaintiffs do allege that KPMG International provides manuals,

software, audit standards, and audit procedures to KPMG Mexico, they fail to

connect these standards or procedures directly to the OSA Audit Opinions.126

Plaintiffs’ general allegations that the KPMG entities present as a unified

global organization through KPMG International’s objectives;127 the KPMG

International secondment program;128 the use of the KPMG name;129 and KPMG

International’s membership criteria, policies, and regulations also fail to adequately

plead that KPMG US or KPMG International had control over KPMG Mexico’s

123
Id. ¶¶ 469−75.
124
Id. ¶¶ 469−75.
125
Id. ¶¶ 460−68.
126
Id. ¶¶ 455, 458, 501−02.
127
Id. ¶¶ 445−47.
128
Id. ¶ 448.
129
Id. ¶¶ 449−53.

34
conduct with respect to the OSA Audit Opinion. Plaintiffs’ failure to adequately

plead this element of agency points to dismissal under Delaware law.130

Finally, Plaintiffs contend their sub-agency theory is based on “implied actual

authority” in an attempt to avoid having to plead a direct link to the OSA Audit

Opinions. Plaintiffs assert,

KPMG [Mexico] acted with KPMG [International’s] implied actual
authority because KPMG [International]: (i) promulgated and
enforced policies and procedures with respect to KPMG [Mexico’s]
audits (¶¶449-52, 454-59, 498-99); (ii) monitored and encouraged
KPMG [Mexico’s] use of intellectual property (¶¶445-52); (iii)
administered regular and specially mandated firm reviews to ensure
compliance with its policies and procedures (¶¶453, 456, 469-75); and
(iv) could impose disciplinary measures for noncompliance (¶¶453,
472-75) . . . Plaintiffs further allege that Defendants understood they
were creating an agency relationship.131

Plaintiffs allege that even though KPMG International may not have communicated

with KPMG Mexico about the OSA Audit Opinions, that deficit is not dispositive

because they have alleged KPMG Mexico acted with implied actual authority. 132

Plaintiffs point to two implied authority cases in support.133

130
These allegations also do not plead the day-to-day control that was plead in Hospitalists
of Delaware to sustain an agency claim on a motion to dismiss. See supra note 119.
131
D.I. 110 at 48−49 (emphasis in original).
132
D.I. 110 49.
133
Id. at 49 n.100.

35
 I conclude Plaintiffs’ cases do not excuse their failure to plead that the

principal’s authority, of whatever sort, was tied to the specific act of wrongdoing.134

In both cases, the parties asserting agency tied their allegations of implied authority

to an arrangement relevant to the cause of action. The first case, Jack J. Morris

Associates v. Mispillion Street Partners, LLC, involved allegations that a former

general manager of a limited liability company had the authority to enter into an

agreement on the company’s behalf. 135 The alleged agent testified that the limited

liability company “was aware of Plaintiff’s involvement in the project and [the

former general manager’s] actions concerning the Agreement [at issue].”136 The

second case, Wilson v. Active Crane Rentals, Inc., involved allegations that an

independent contractor hired to build a new franchise location had the authority to

enter into an agreement on a franchisee’s behalf.137 The alleged agent submitted an

affidavit that he had authority to enter into contracts on the principal’s behalf.138

134
See Albert, 2005 WL 2130607, at *10 (noting that various brands of authority fall under
the rubric of agency liability, and must be tethered to the wrongdoing at issue).
Jack J. Morris Assocs. v. Mispillion Street P’rs, LLC, 2008 WL 3906755 (Del. Super.
135

Aug. 26, 2008).
136
Id. at *3 (emphasis added) (sustaining agency claim on summary judgment and
determining that “[w]hether [alleged agent] reasonably believed that he had Defendant’s
authority to enter into a contract with Plaintiff based on his relationship with Defendant is
for the jury to decide”).
137
Wilson v. Active Crane Rentals, Inc., 2004 WL 1732275 (Del. Super. July 8, 2004).
138
Id. at *2 (sustaining agency claim on summary judgment where alleged principal
“testified that he did not give [alleged agent] the authority to enter into contracts on [alleged
principal’s] behalf, [but alleged agent’s] affidavit refutes that” and emphasizing that “the
36
Thus, the evaluation of the agent’s authority was still within the context of the

agent’s questioned actions.

Pleading implied authority does not obviate the need to review an agency

relationship as tethered to the wrongdoing. “The determination of implied authority

depends on the relationship between the principal and agent, not what a third party

believes about the relationship. That is, implied authority is authority that the agent

reasonably believes he has as a result of the principal’s actions.”139 Regardless of

whether express, implied, or apparent authority is adequately pled, the authority at

issue must be tied to the specific act of wrongdoing.

Here, Plaintiffs fail to plead an arrangement between KPMG US and KPMG

International, and one between KPMG International and KPMG Mexico, let alone

an arrangement granting authority in relation to the OSA Audit Opinions. To hold

one entity vicariously liable for the tort of another via agency principles, Delaware

law requires a plaintiff to plead the principal had control over the wrongdoing at

issue. Plaintiffs have not done so here; their agency theories are inadequately pled

under Delaware law.140

Court is not concluding that implied authority actually existed, but merely that it is possible
for the jury to find that the prior course of dealing between [the alleged principal and agent]
gave rise to an implication of actual authority given the state of the record”).
139
Id.
140
I construe Plaintiffs’ arguments to be asserting an agency theory of liability. If the
claims asserted an alter-ego, instrumentality, or veil piercing theory, they would still fail.
Plaintiffs have not pled complete domination or control, nor fraud. See, e.g., Mobil Oil,
37
 4. Plaintiffs Fail To Plead KPMG US Or KPMG International
Had Control Over The OSA Audit Opinions As Required Under
New York Law.

New York law requires three elements to establish a principal-agent

relationship: (1) a “manifestation by the principal that the agent shall act for him;

(2) acceptance of the undertaking by the agent; and (3) an understanding between

the parties that the principal is to be in control of the undertaking.”141 “The element

of control often is deemed the essential characteristic of the principal-agent

relationship.”142 Under New York law, as under Delaware law, Plaintiffs must plead

that the principal had control over the underlying conduct at issue.143 In Star Energy

Corp. v. RSM Top-Audit, the United States District Court for the Southern District

of New York determined that plaintiffs failed to allege “that RSM International was

718 F. Supp. At 271 n.15 (“As stated above, agency in this sense of complete domination
and control is synonymous with ‘alter ego,’ ‘instrumentality,’ ‘piercing the corporate veil,’
and ‘disregarding the corporate entity.’”); Geyer v. Ingersoll Publications Co., 621 A.2d
784, 793 (Del. Ch. 1992) (“As to the sufficiency of plaintiff’s alter ego claim, I note that a
court can pierce the corporate veil of an entity where there is fraud or where a subsidiary
is in fact a mere instrumentality or alter ego of its owner.”); Stinnes, 1983 WL 21115, at
*1 (“As to the instrumentality theory, which is applied when the subsidiary is determined
to be controlled or dominated by the parent to the point that the subsidiary is a mere
instrumentality or department of the parent . . . it results in the disregard of the corporate
entity of the subsidiary which is the same as piercing the corporate veil.”).
141
Star Energy Corp. v. RSM Top-Audit, 2008 WL 5110919, at *2 (S.D.N.Y.
Nov. 26, 2008) (quotation omitted).
142
In re Parmalat Sec. Litig., 375 F. Supp. 2d 278, 290 (S.D.N.Y. 2005).
143
See Star Energy, 2008 WL 5110919, at *2.

38
in control of RSM Top-Audit in its business dealings with Star Energy,” the conduct

at issue.144

In lieu of claiming that RSM International controlled RSM Top-Audit’s
audits of Volga-Neft, plaintiff alleges that RSM International exercised
control because it, among other things, ‘controlled RSM Top-audit’s
eligibility for membership and ability to use the RSM brand name,’ and
‘promulgat[ed] the audit manual and policies that enabled RSM Top-
Audit’ to provide services to U.S. companies.145

The court found that plaintiffs’ failure to allege “that RSM International had any

control over RSM Top-Audit in its dealing with Star Energy” meant that “the

essential element of control [was] lacking.”146

The Southern District of New York confirmed the importance of this pleading

requirement in Anwar v. Fairfield Greenwich Ltd., finding the allegation that the

principal merely possesses “the general right to control any aspect of its affiliated

entities’ conduct” was inadequate.147 Instead, a plaintiff must plead control over the

specific audit at issue. “[A] theory of general control is not supported by the case

law. A principal auditor’s control of its agent auditor must come in a more focused

form.”148 In dismissing the vicarious liability claims against the international

144
Id. at *3 (citations omitted).
145
Id.
146
Id. at *4 (citations omitted).
147
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 460 (S.D.N.Y. 2010).
148
Id. at 459 (citing Star Energy, 2008 WL 5110919, at *3).

39
accounting firm with respect to its member firms’ deficient audits, the court

confirmed that “[a]llegations of generalized control are insufficient to state a

plausible claim of coordinating-entity control over its member firms in the auditing

context.”149

Similarly here, Plaintiffs fail to allege that KPMG US or KPMG International

had control over KPMG Mexico’s conduct with respect to the OSA Audit Opinions.

Plaintiffs strive to analogize their pleadings here to those against auditors in two

cases inspired by the collapse of Parmalat Finanziaria, S.p.A. and Parmalat S.p.A.,

due to the discovery of a massive fraud, both styled In re Parmalat Sec. Litig.

(“Parmalat I” and “Parmalat II”).150 The plaintiffs in those cases stated adequate

claims against the Parmalat entities’ network of accounting firms.151 But here,

Plaintiffs’ pleading falls short.

In Parmalat I, the plaintiffs alleged the member firm partner in charge of the

subject audit received concerns from auditors that the audit could not be issued

cleanly.152 The partner then allegedly “sought direction and help from [the

international umbrella firm], from which it could be inferred that [the international

149
Id. at 461.
150
In re Parmalat Sec. Litig. (Parmalat I), 375 F. Supp. 2d 278 (S.D.N.Y. 2005); In re
Parmalat Sec. Litig. (Parmalat II), 598 F. Supp. 2d 569 (S.D.N.Y. 2009).
151
Parmalat I, 375 F. Supp. 2d at 282; Parmalat II, 598 F. Supp. 2d at 570.
152
Parmalat I, 375 F. Supp. 2d at 293.

40
umbrella firm] was in ultimate control of the audit.”153 When an auditor threatened

to withhold certification from the financial statements, the international firm

removed the auditor from the audit.154 The international firm allegedly “confronted

the auditors who had detected the fraud [and raised questions] and told them to keep

quiet.”155 The court determined plaintiffs adequately alleged an agency relationship

between the international firm and member firm, such that the international firm

could be vicariously liable for the underlying wrongdoing.156 Thus, the international

firm was directly involved with the audit at issue.

In Parmalat II, the plaintiff presented significant evidence that Grant

Thornton International (“GTI”) controlled GT Italy’s ability to conduct audits. The

court therefore denied a motion for summary judgment, refusing to dismiss a claim

that GTI was liable for GTI Italy’s securities fraud.157 For example, GTI provided

GT Italy with the “tools prescrib[ing] the ‘manner and method’ by which member

firms conducted audits.”158 The court explained that these “went beyond mere

153
Id. at 294.
154
Id.
155
Id. (quotation omitted).
156
Id. at 293−296.
157
Parmalat II, 598 F. Supp. 2d at 580−82. Although Parmalat II considers the control
issue under the summary judgment standard, the identification of control as a material issue
in evaluating a sub-agency relationship is useful in assessing whether the Amended
Complaint sufficiently pled vicarious liability under the motion to dismiss standard.
158
Id. at 576.

41
‘guidelines’” and instead “dictat[ed] step-by-step instructions for auditors.”159

Additionally, the court determined “GT Italy’s tailoring of the audit methodology

was limited,” with a GT Italy partner testifying that “‘adapting’ GTI audit to the

‘Italian situation’ meant translating it into Italian and using only those procedures

applicable to a specific client.”160 Most importantly, in compliance with Star Energy

and Anwar, the plaintiffs presented evidence that GTI expressly intervened in the

very audit at issue in Parmalat.161

As for the relationship between the U.S. firm and the international firm, the

Parmalat II court noted that GTI relied heavily on Grant Thornton U.S. (“GT US”)

to function. GT US “provided GTI with funding, office space[,] and employees.”162

Indeed, “GTI operated out of GT US’[] Chicago offices.”163 Also, “there [was]

evidence that GT US controlled significant GTI decisions through its role in the

159
Id.
160
Id. at 577.
161
Id. at 575 (“Additionally, in the wake of the Parmalat collapse, GTI threatened GT Italy
with expulsion unless managing partner Lorenzo Penca resigned from that position
immediately whereupon GT Italy suspended Penca and a second partner and Parmalat
auditor.”); see Anwar, 728 F. Supp. 2d at 460 (“[T]he plaintiffs in Parmalat—unlike
Plaintiffs in the present suit—sufficiently alleged the control of the auditor member firms
at issue by principal because they assert facts from which the court could infer sufficient
involvement by the principal in the preparation of the audits at issue, as opposed to, as in
this case, the principal merely possessing the general right to control any aspect of its
affiliated entities’ conduct, or having actually exercised some control over the member
firms’ operations and audits generally.”).
162
Parmalat II, 598 F. Supp. 2d at 578.
163
Id. at 579.

42
Executive Partners Group.”164 In determining “[t]he evidence suggests that GTI is

disproportionately dependent upon and influenced by a single member firm: GT–

US[,],” the court emphasized that GT US has the “power to veto significant decisions

related to GTI governance and structure.”165 The plaintiffs in Parmalat II pled that

the international membership firm expressly intervened in the audit at issue and that

the American member firm had sufficient control over the international entity.

Here, Plaintiffs’ sub-agency allegations fail to demonstrate the level of control

by the umbrella entity evidenced in the Parmalat opinions. Plaintiffs fail to plead

that KPMG International was involved with KPMG Mexico’s audit of OSA.166

Instead, they allege only that KPMG International conducts internal and external

inspections of its member firms to maintain quality audit services. Moreover,

Plaintiffs’ general allegations that the KPMG entities present as a unified global

organization fail to adequately plead that KPMG US or KPMG International had

control over KPMG Mexico’s conduct with respect to the OSA Audit Opinion.167

Plaintiffs’ failure to adequately plead this element of agency compels dismissal

under New York law.

164
Id.
165
Id. at 578.
166
Plaintiffs contend they should be permitted to conduct discovery on this point. Hrg. Tr.
at 96−97. The sub-agency pleadings are entirely too sparse to pass muster under the notice
pleading standard. Plaintiffs’ request is denied.
167
Am. Compl. ¶¶ 445−53.

43
 Additionally, Plaintiffs do not plead that KPMG International, KPMG US or

KPMG Mexico commingled personnel or resources to the extent that the GTI firms

did in Parmalat II. Rather, they allege that KPMG US and KPMG International

share personnel on a Global Management Team and that former KPMG International

Global Heads of Audit previously worked for KPMG US. Plaintiffs’ sub-agency

theory fails under New York law.

As for the direct agency allegations, the PCAOB assertions are generally

limited to that regulatory body, and fail to demonstrate KPMG US controlled KPMG

Mexico with respect to the OSA Audit Opinions. Additionally, the allegations of

overlapping issues between the Citigroup and OSA audits are conclusory and fail to

adequately plead KPMG US contributed to, or controlled, any content in the OSA

Audit Opinions. Without more factual support, the jump from KPMG US’ work on

the Citigroup audits to its liability for the OSA Audit Opinions is an unfounded

leap.168 Plaintiffs fail to plead KPMG US is KPMG Mexico’s principal for purposes

of the OSA Audit Opinions under New York law.

Thus, Plaintiffs have failed to allege that KPMG US had control over the OSA

Audit Opinions as necessary to allege direct agency, and that KPMG International

had that control as necessary to allege sub-agency. Plaintiffs also fall short of

168
See id. ¶ 530; supra note 118.

44
pleading KPMG US controls KPMG International. Plaintiffs’ agency theories are

inadequately pled under New York law.

*****

Plaintiffs have failed to meet the standards set by the law of Mexico,

Delaware, and New York to plead that KPMG Mexico was KPMG US’ direct agent

for purposes of the OSA Audit Opinions, or that KPMG Mexico was KPMG US’

sub-agent through KPMG International. Plaintiffs have failed to plead the written

agreement required under Mexico law, and the control over the wrongdoing at issue

required under Delaware and New York law. Since there is no actual conflict of

laws, I hold Plaintiffs have failed to plead vicarious liability through an agency

theory.169

B. Plaintiffs Have Not Adequately Alleged Vicarious Liability Under A
Joint Venture Theory.

Plaintiffs also assert that KPMG US is vicariously liable for KPMG Mexico’s

negligent misrepresentations in the OSA Audit Opinions under a joint venture

theory. Plaintiffs allege that KPMG International, KPMG US, and KPMG Mexico

acted as joint venturers to provide professional services to Citigroup, Banamex, and

OSA.170 Plaintiffs point to the KPMG International governing statutes’ statement

169
See supra notes 46–49.
170
Am. Compl. ¶¶ 534−550.

45
that each member firm “shall comply with membership criteria,” including the

ability to “share resources (incoming and outgoing),” and characterize that statement

as a commitment to share profits and losses.171 Plaintiffs also characterize the

governing statutes’ statement that each member firm “shall comply with

membership criteria,” including the ability to “manage risk,” as a commitment to

share risks.172 As for joint contributions, Plaintiffs allege simply that “KPMG

International, KPMG US[,] and KPMG Mexico contributed both funds and

significant personnel that were used to carry out the specific provision of services to

Citigroup, Banamex and Oceanografía.”173

Plaintiffs’ allegations of control mirror their agency allegations, focusing on

KPMG International’s ability to review member firms every three years.174 The joint

venture allegations regarding sharing of personnel also mirror the agency

allegations, focusing on the secondment program.175 Lastly, the allegations that

KPMG International, KPMG US, and KPMG Mexico operate as one firm are based

on the entities’ “view that they were acting as one global enterprise in providing their

171
Id. ¶ 537.
172
Id. ¶¶ 539−540.
173
Id. ¶ 541.
174
Id. ¶ 544.
175
Id. ¶¶ 546−547.

46
audit[s] . . . to Citigroup, Banamex, and Oceanografía.”176 Plaintiffs allege that

KPMG’s publicly available materials emphasize the organization is unified,

providing services worldwide; and that the use of the KPMG name is strictly

regulated once a member firm joins KPMG International.177

Plaintiffs’ joint venture theory fails under each choice of law. Accordingly,

there is no actual conflict of laws; and I hold Plaintiffs’ joint venture theory fails to

state a claim pursuant to Delaware law.178

1. Plaintiffs Fail To Plead A Written Agreement As Required
Under Mexico Law.

Defendants argue that under Mexico law, an express written agreement or

statute is necessary to create a joint venture.179 Defendants cite as their primary

authority C.C.D.F. Article 1988, which states in part, “Solidarity [joint liability] is

not presumed; it results from the law or from the will of the parties.” 180 Plaintiffs

claim that Mexico law recognizes other theories of joint venture liability that do not

require a written agreement and are applicable here.181 I reject Plaintiffs’ other

176
Id. ¶¶ 548−550.
177
Id. ¶¶ 548−550.
178
See supra notes 46–49.
179
Loperena Decl. ¶¶52-56 (quoting C.C.D.F. art. 1988).
180
Id. ¶52 (quoting C.C.D.F. art. 1988 (providing that vicarious or joint liability is very
limited and available only where explicitly provided for by statute or contract)).
181
D.I. 110 at 51−52.

47
theories; believe Mexico law requires a written agreement to establish a joint venture

between KPMG International, KPMG US, and KPMG Mexico; and conclude no

such agreement was pled.182

First, Plaintiffs allege Article Two of the Corporations General Statute

“recognizes vicarious liability for members of de facto entities not established in

writing, but through several individuals or entities acting as a single enterprise.”183

The relevant portions of Article Two state: (i) “The corporations not inscribed in

the [Public Registry of Commerce] . . . with or without formal incorporation, will

have legal personality,”184 and (ii) “The shareholders/partners not responsible of the

irregularity, may request damages to the responsible ones, and those who act as

representatives and agents of the irregular corporation.”185 Plaintiffs allege that

“[u]nder Mexico law, a de facto entity exists when, even though it is not established

through a written contract and is not formally incorporated, several parties

(individuals or entities) have acted as a single entity in a public way” 186 and that

“[d]e facto entities operate as a form of de facto joint ventures in that they are

182
Loperena Decl. ¶¶52-56; see generally Rona R. Mears, Joint Ventures in Mexico: A
Current Perspective, 23 St. Mary’s L. J. 611 (1992).
183
D.I. 110 at 51.
184
González Decl. ¶ 130, n.68 (internal quotation marks omitted) (quoting Corporations
General Statute art. 2).
185
Id. ¶ 130, n.69 (internal quotation marks omitted) (quoting Corporations General Statute
art. 2).
186
Id. ¶ 130 (emphasis in original).

48
established without express written agreements but each member conducts itself as

a joint venturer as a practical matter and is therefore liable for the acts of the

others.”187

Plaintiffs misapply the concept of a de facto entity. Under Mexico law, a de

facto entity is one that has failed to register with the Public Registry of Commerce.188

“Companies not recorded in the Public Registry of Commerce that have exteriorized

their status to third parties, whether or not they have formalized it with a notarial

deed [escritura pública] shall enjoy a legal personality.”189 Representatives of these

entities can be held liable because the entities themselves do not formally exist under

Mexico law.190

Plaintiffs have not alleged that the KPMG entities have failed to file the proper

paperwork with the Public Registry of Commerce. And the concept that the KPMG

entities acted as a single entity such that they were required to register with the Public

187
Id. ¶ 131 (emphasis in original).
188
Corporations General Statute art. 2; Boris Kozolchyk & Cristina Castañeda,
Invigorating Micro and Small Business Through Secured Commercial Credit in Latin
America: The Need For Legal And Institutional Reform, 28 Ariz. J. Int’l & Comp. L. 43,
94 (Spring 2011).
189
Kozolchyk, Invigorating Micro and Small Business, 28 Ariz. J. Int’l & Comp. L. at 94
(quoting Corporations General Statute art. 2).
190
Id. at 94−95 (quoting Corporations General Statute, Art. 2) (“Those who carry out
juristic acts as representatives or agents of an irregular company, shall be responsible to
third parties for their performance in a subsidiary, joint, several and unlimited manner,
aside from the criminal liability in which they may have incurred if third parties were
injured.”).

49
Registry misconstrues Mexico law on de facto entities. This law is meant to create

a source of liability for entities flying under the legal radar, not to merge separate

legally recognized entities.191 KPMG US, KPMG International, and KPMG Mexico

did not act as a de facto joint venture.

Second, Plaintiffs contend Article 1917 of the Mexican Federal Civil Code

“recognizes joint liability where persons or entities ‘cause in common’ injury,

regardless of each party’s level of involvement,” without a written agreement.192

The only case Plaintiffs cite to support this theory is distinguishable. The Mexican

Supreme Court determined that the leader of a union had “joint liability with the

union to answer for the damages caused by their wrongful acts.” 193 This case does

not conflate separate entities into one joint venture.

Plaintiffs do not allege a written agreement establishing a joint venture

between KPMG International, KPMG US, and KPMG Mexico. In the absence of a

written agreement, Plaintiffs have failed to adequately demonstrate that the KPMG

191
Id.
192
D.I. 110 at 51 (citing González Decl. ¶¶ 122-25; D.I. 110 [hereinafter “González Resp.
Decl.”] ¶¶63-66); González Decl. ¶122 (quoting C.C.D.F. art. 1917) (“all the parties that
cause a common injury are jointly liable for [all the damages]”).
193
González Resp. ¶ 66 n.54, Ex. C. at 26−27.

50
entities to “cause in common injury” in a manner recognized by Mexico law.194

Accordingly, Mexico law precludes a joint venture theory of vicarious liability.

2. Plaintiffs Fail To Plead the Five Elements of Joint Venture As
Required Under Delaware Law.

Under Delaware law, joint venture liability requires “(1) a community of

interest in the performance of a common purpose, (2) joint control or right of control,

(3) a joint proprietary interest in the subject matter, (4) a right to share in the profits,

(5) a duty to share in the losses which may be sustained.”195 A joint venture

may be implied or proven by facts and circumstances showing that (a
relationship of joint venture) was in fact entered into . . . [it] has been
broadly defined as an enterprise undertaken by several persons jointly
to carry out a single business enterprise, not amounting to a partnership,
for their mutual benefit, in which they combine their property, money,
effects, skill and knowledge.196

194
D.I. 110 at 51 (citing González Decl. ¶¶ 122-25; González Resp. ¶¶63-66); González
Decl. ¶122 (quoting C.C.D.F. art. 1917) (“all the parties that cause a common injury are
jointly liable for [all the damages]”).
195
Warren v. Goldinger Bros., 414 A.2d 507, 509 (Del. 1980) (quoting Kilgore Seed Co.
v. Lewin, 141 So. 2d 809 (Fla. Dist. Ct. App. 1962)).
196
J. Leo Johnson, Inc. v. Carmer, 156 A.2d 499, 502 (Del. 1959).

51
As then-Vice Chancellor Strine put it, “joint venture status is established only where

an express or implied contract is created.”197 The existence of a joint venture may

be determined on a motion to dismiss; it is not a precluded question of fact. 198

Fundamentally, Plaintiffs fail to allege that KPMG International, KPMG US,

and KPMG Mexico had a relationship or agreement, express or implied, to perform

a common purpose as required under Delaware law.199 Plaintiffs have failed to plead

every element, from joint control to a right to share in the profits. Instead, they plead

conclusory allegations that lack any factual support. Plaintiffs’ allegations that the

KPMG International governing statutes provide a clear statement of a commitment

of the KPMG entities to share profits, losses, and risks are inadequate.200 Plaintiffs

plead no further allegations describing the profit and loss sharing structure between

the entities. The allegations of joint contributions, a joint right to control, sharing of

personnel, and an intent to form a joint venture are also insufficient.201 Plaintiffs fail

197
Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, 2010 WL 975581, at *2 (Del.
Ch. Mar. 4, 2010) (citing 46 Am. Jur. 2d Joint Ventures § 9 (2009), aff’d, 7 A.3d 485 (Del.
2010).
198
See Wenske, 2018 WL 5994971, at *8 (dismissing a joint venture claim, stating
“Plaintiffs are correct that facts and circumstances may demonstrate the existence of a joint
venture, even if an agreement expresses a contrary intent. The facts and circumstances as
pled here, however, do not support a reasonable inference that BB GP and BB USA formed
a joint venture to manage BB LP.” (emphasis in original) (citations omitted)).
199
Sunrise Ventures, 2010 WL 975581, at *2 (citing 46 Am. Jur. 2d Joint Ventures § 9
(2009)).
200
Am. Compl. ¶¶ 537, 539−540.
201
Id. ¶¶ 541−542, 544, 546−550.

52
to adequately allege that KPMG US controls KPMG International and that KPMG

International in turn controls KPMG Mexico. Plaintiffs have failed to plead a joint

venture theory of vicarious liability under Delaware law.

3. Plaintiffs Fail To Plead the Four Elements of Joint Venture As
Required Under New York Law.

Under New York law,

A joint venture is a special combination of two or more persons where
in some specific venture a profit is jointly sought . . . The indicia of the
existence of a joint venture are: (i) acts manifesting the intent of the
parties to be associated as joint ventures; (ii) mutual contribution to the
joint undertaking through a combination of property, financial
resources, effort, skill or knowledge; (iii) a measure of joint
proprietorship and control over the enterprise; and (iv) a provision for
sharing of profits and losses.202

“The ultimate inquiry is whether the parties have so joined their property, interests,

skills and risks that for the purpose of the particular adventure their respective

contributions have become as one . . . .”203 Specifically, a successfully pled joint

venture theory in the context of an audit by one firm within a network requires

allegations that raise “an inference that ‘each firm had an equal right to direct the

policies of another firm’” with regard to the audits at issue.204 For example, in the

202
Decker, Decker & Assocs., Inc. v. Ass’n of Nat’l Advertisers, Inc., 2007 WL 1053881,
at *5 (N.Y. Sup. Ct. Apr. 10, 2007) (quotations omitted).
203
In re Parmalat Sec. Litig., 501 F. Supp. 2d 560, 590 (S.D.N.Y. 2007) (emphasis added)
(quoting Decker, 2007 WL 1053881, at *7), aff’d sub nom. Pappas v. Bank of Am. Corp.,
309 Fed. Appx. 536 (2d Cir. 2009).
204
In re Parmalat Sec. Litig., 421 F. Supp. 2d 703, 718 (S.D.N.Y. 2006).

53
Parmalat litigation, the Southern District of New York found that the plaintiffs’

failure to sufficiently allege a “mutual right to exercise control over the enterprise”

resulted in dismissal of their joint venture theory against auditors.205 “The mutual

right to exercise control over the enterprise refers to ‘the right to direct and govern

the conduct of each other in connection with the joint venture.’”206 The court opined:

Bondi argues that DTT and its member firms, including Deloitte USA,
are a unified, integrated firm. But this oft-repeated mantra does not
address the key issue of mutual right to exercise control over sister
firms relating to the Parmalat audit. Bondi again emphasizes the
unified dispute resolution and auditing standards, but remains unable to
inflate those allegations into an inference that “each firm had an equal
right to direct the policies of another firm” with regard to the Parmalat
audit.207

In another example, the court dismissed a plaintiff’s joint venture claim

because he made “no express allegation . . . that [the plaintiff] agreed to share the

losses of the venture with [the defendants].”208 “Rather, plaintiff, in the complaint,

merely state[d] that he and [the defendant] agreed to share in the equity and income

from the venture.”209 The court noted that “an agreement to share the losses of a

joint venture is an indispensable element of finding the existence of a joint venture,”

205
Id. at 717−718.
206
Id. at 717.
207
Id. at 718.
208
Mawere v. Landau, 2013 WL 2217757 at *6 (N.Y. Sup. Ct. May 15, 2013).
209
Id.

54
and that a joint venture cause of action is not stated “‘if the plaintiff does not allege

a mutual promise or undertaking to share the burden of the losses of the alleged

enterprise[.]’”210

Thus, New York law narrowly defines a joint venture to include acts

manifesting intent, mutual contribution, joint proprietorship and control, and a

provision for the sharing of profits and losses. Each category must be pled with

sufficient factual allegations. Here, Plaintiffs have failed to do just that; instead,

they plead solely conclusory allegations that lack any factual support. They have

failed to plead every element, from joint control to a right to share in the profits.211

Plaintiffs also fail to allege, as required, that KPMG International, KPMG US, and

KPMG Mexico intended to form a joint venture or entered into any agreement to do

so. Nor do Plaintiffs allege that the joint venture was established to provide services

regarding the OSA Audit Opinions. New York law precludes a joint venture theory

of vicarious liability.

*****

Plaintiffs have failed to demonstrate that joint venture liability exists under

Mexico law. They have also failed to adequately plead the elements of a joint

venture under Delaware and New York law. Because there is no actual conflict of

210
Id.
211
See also supra 51–53.

55
laws, the claim that KPMG US is liable for KPMG Mexico’s OSA Audit Opinions

as part of a joint venture is dismissed pursuant to Delaware law.212

III. CONCLUSION

For the foregoing reasons, the Motion is granted. Count I of the Amended

Complaint is dismissed with prejudice. The First Opinion continues to govern

dismissal of Counts II and III, and Defendants KPMG International and KPMPG

Mexico. The parties shall submit a stipulated implementing order within twenty

days.

212
See supra notes 46–49.

56