In pari delicto' preempted by statute.


Byline: Eric T. Berkman

The "in pari delicto" defense to negligence actions against accountants and auditors for failing to detect fraud was preempted by statute, the Supreme Judicial Court has found.

Under the common-law in pari delicto doctrine, plaintiffs who participate in wrongdoing cannot recover damages for losses that result. Historically, accountants could raise the doctrine as a defense when sued for negligently failing to detect fraud committed by a client's employee, officer or shareholder.

The SJC narrowed the doctrine last year, holding in Merrimack College v. KPMG LLP that the defense shielded accounting firms from liability only when the fraud in question was committed by a member of the plaintiff's senior management.

Because the facts giving rise to Merrimack occurred before the Legislature's 2003 enactment of G.L.c. 112, 87A 3/4, which instituted proportional liability for cases involving accountants' negligent failure to detect client fraud, Merrimack did not address whether the statute impliedly repealed in pari delicto altogether.

But now the SJC has addressed the question in a lawsuit against outside accountants whose alleged failure to detect misconduct by the Chelsea Housing Authority's executive director caused significant losses for CHA, reversing the Superior Court judge's summary judgment for the defendants on in pari delicto grounds.

"After careful examination of the language of [87A 3/4], viewed in the context of its legislative history, we conclude that the Legislature intended that, where a plaintiff sues an accountant for negligently failing to detect the fraudulent conduct of the plaintiff, the plaintiff may recover damages from the accountant, but only for the percentage of fault attributed to the accountant," Chief Justice Ralph D. Gants wrote for the court. "In so doing, by necessary implication, the Legislature has preempted the common-law doctrine of in pari delicto doctrine as it applies to the negligent conduct of accountants and auditors in failing to detect fraud."

The 29-page decision is Chelsea Housing Authority v. McLaughlin, et al., Lawyers Weekly No. 10-113-19. The full text of the ruling can be found here.

No longer absolute death knell

Boston attorney Ronaldo Rauseo-Ricupero, who represented the plaintiff housing authority, declined to comment.

But Elizabeth N. Mulvey of Boston, who represented the plaintiff in Merrimack, said Chelsea Housing Authority may allow cases to be brought that...

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