Page 1
Bad Acts of Ousted Founder Justify Vacating $1 Million Verdict Favoring Company—C.A.
Opinion Says Fraud by Former Executive Is Attributable to Corporation in Malpractice Suit Against Accountants, Even Though Wrongdoer Was Not Sole Officer, Owner
By a MetNews Staff Writer
Div. Five of this district’s Court of Appeal has held that a trial judge did not err in finding that unclean hands barred a corporation from recovering against its former accounting firm for malpractice where the ousted founder of the company had forged financial records before handing them over to the defendant for certification.
In an unpublished opinion filed Wednesday, written by Presiding Justice Brian M. Hoffstadt and joined in by Justice Dorothy Kim and Santa Clara Superior Court Judge Helen E. Williams, sitting by assignment, the court found that the disgraced executive—who had embezzled millions from the company—was the sole decision-maker at the time even though another officer signed off on the records and other shareholders held partial ownership in the corporation.
The decision came after a jury awarded the company in question over $1 million in damages, based on payouts it had to make to investors and other parties after the fraud was discovered.
Only Officer
In 2014, Kristian Finstad was the only officer and sole full-time employee of Content Checked Holdings Inc., a technology company boasting an app that allows users to discover potential allergens in food simply by scanning the label. After RBSM LLP was hired to certify the accuracy of the company’s March 2015 financial statements, Finstad provided the firm with a forged bank statement indicating that Content Checked had a balance of more than $1.2 million
The actual balance in the account was $17,613.59; Finstad had embezzled $991,453.49 between April 2014 and March 2015.
Finstad was forced out of management in July 2017. Content Checked then became MobilityPay Holdings Inc.
In September 2018, Mobility Pay sued RBSM for negligence in certifying Content Checked’s financial records in 2015 and 2016. A jury found that the firm had negligently performed its audit and awarded the plaintiff damages of $1.1 million.
After the trial, then-Los Angeles Superior Court Judge Douglas W. Stern (now retired) construed a defense motion for nonsuit, seeking to bar recovery based on the doctrine of unclean hands, as a request to have the court try the equitable defense using the evidence presented at trial.
In November 2023, Stern vacated the jury verdict based on the unclean hands doctrine, finding that Finstad’s misdeeds should be attributed to the company due to the fact that he was the only true decision maker for the corporation.
More Nuanced
Hoffstadt remarked that “[t]he application of the unclean hands defense is more nuanced when the party to be barred from recovering…is a corporation,” and noted:
“Although the conduct of a corporation’s agent is generally imputed to the corporation….the fraudulent conduct of a corporate agent constituting unclean hands will generally not be attributed to the corporation itself.”
However, he said that there is an exception to this rule—if the corporate agent is the “sole actor” in the company, the unclean hands of the officer are attributable to the business.
In analyzing whether a corporate agent is a “sole actor,” courts look to whether the company is controlled and owned by the officer. Turning to the first question, the jurist wrote:
“Substantial evidence supports the trial court’s factual finding that Finstad was the sole actor in the corporation: The evidence supported the court’s findings that only Finstad exercised any decision-making authority for Content Checked, that Finstad owned nearly all of the stock, and that Finstad excluded the other shareholders from any involvement and deprived their stock of any value.”
Rejecting Content Checked’s argument that the fact that the company employed a chief financial officer precluded a finding that Finstad was the “sole actor,” he opined:
“[T]o the extent Content Checked is asking us to hold that appointing a single person to a corporate position but denying them any decision-making power or access to information precludes the application of the sole actor doctrine, we decline to do so; such a person’s power to stop wrongdoing is wholly theoretical and not actual, and our task is to examine the realities of the situation. We will not pretend that a corporate insider has decision-making power when he does not, merely because, in theory, he should have that power.”
Complete Ownership
Hoffstadt acknowledged language in some jurisprudence suggesting that complete ownership is a prerequisite to finding that an agent is a “sole actor,” but pointed out that “other California cases have not so required.” Under those circumstances, he declared:
“[W]e reject Content Checked’s argument that the case law already requires a rigid requirement of 100 percent ownership by the agent, and we decline to create such a requirement in a situation—like the one here—where the other shareholders own valueless stock and have no involvement whatsoever in any corporate decisions (and thus no opportunity to acquire the information on which a derivative suit to protect the corporation might be brought).”
Adding that “precluding the sole actor doctrine in this case would grant scheming actors a blueprint for keeping the corporation’s hands clean,” he said the court declined to create a public-policy exception to the unclean hands defense for corporate auditors. The jurist said:
“Content Checked points to no California statute that embodies our Legislature’s intent to allow individuals who defraud public accountants to recover despite their misconduct. Without such Legislative direction, we decline to fashion a new exception to the unclean hands defense.” The case is Mobility Pay Holdings Inc. v. RBSM LLP, B337159.
After his malfeasance was discovered, Finstad fled to Norway, his country of origin.
Acting for RBSM were Rowena Penelope Lizin, Sima Jonoobi, and Jonathan S. Ziss of the Los Angeles office of Goldberg Segalla, LLP. Asim Mahendraku Bhansali, Nicholas A. Roethlisberger, and Elizabeth H. Dinh of the San Francisco firm Kwun Bhansali Lazarus, LLP represented the plaintiff on appeal.
Copyright 2025, Metropolitan News Company