Supreme Judicial Court limits use of in pari delicto defense

In the recent case of Merrimack College v. KPMG, LLP (SJC-12434), the Massachusetts Supreme Judicial Court cut back on the application of in pari delicto, the equitable defense applicable when the plaintiff itself has intentionally acted improperly.  The Court ruled that for plaintiff entities, only the conduct of “senior management” can be imputed to the plaintiff in applying in pari delicto.

In this case, Merrimack College claimed that KPMG, as its auditor, was negligent for failing to unearth fraud by its financial aid director.  In the Superior Court, KPMG successfully raised the defense of in pari delicto based on the argument that the financial aid director was an employee of Merrimack College acting in that capacity, for the college’s benefit, so her conduct could be imputed upon the school.  This is the usual analysis for determining liability to third parties.   The SJC reversed, ruling that only the conduct of “senior management” could be imputed to a plaintiff entity in this context, acknowledging that this was a different standard from imputing liability to third parties.  The Court reasoned that under common law, the standard for imputing liability to third parties arose from the context of the allocation of risk.   In pari delicto, however, arose from an equitable law and seeks to determine blame rather than risk.  Accordingly, the conduct that can be imputed to an organization is limited to that done by management who make decisions for the entity, “senior management.”

Although this case arose in an accounting malpractice action, it would not be a surprise if Massachusetts courts applied it equally to the legal malpractice context.  We have successfully used the in pari delicto  defense in legal malpractice cases against plaintiffs who were individuals who engaged in misconduct themselves.   This SJC decision should not affect the application of the doctrine where the plaintiff is an individual, which is most often the case in legal malpractice action.  Where the plaintiff is an entity, however, the use of the in pari delicto defense must include argument that the plaintiff’s misconduct was committed by “senior management”, including an analysis of the actor’s role and responsibilities in the plaintiff entity’s usual business.

Attorneys with corporate clients should be aware of this ruling, particularly where they are engaged to conduct reviews in the nature of audits.  Just as accountants can no longer automatically raise the in pari delicto defense if it does not unearth deliberate misconduct by their client’s employees, lawyers may find themselves on the hook under similar circumstances.