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Merrimack College v. KPMG, LLP

Superior Court of Massachusetts, Suffolk, Business Litigation Session

May 15, 2017

Merrimack College
KPMG, LLP No. 136804

          Filed May 16, 2017


          Kenneth W. Salinger, Justice

         Merrimack College incurred substantial financial losses because its former financial aid director, Christine Mordach, deliberately approved fake Perkins loans for many students without their knowledge.[1] For years Mordach awarded far more financial aid than she was authorized to spend. She made the college's financial aid budget appear balanced by replacing grants and scholarships with fake Perkins loans, the proceeds of which were used to pay tuition owed to Merrimack. Ms. Mordach pleaded guilty to federal criminal charges of mail and wire fraud.

         Merrimack seeks to recover its losses from its former auditor, KPMG, LLP. Merrimack claims that KPMG noticed but did not follow up on discrepancies in some student loan accounting and deficiencies in internal controls for such loans, and as a result failed to discover Mordach's fraud. Merrimack asserts that KPMG was negligent, breached its contract, and violated G.L.c. 93A.

         KPMG has moved for summary judgment on several grounds, including that Merrimack's claims are barred under the equitable doctrine known as in pari delicto because Mordach committed fraud to benefit her employer and her deliberate wrongdoing on behalf of Merrimack was far worse than KPMG's alleged negligence.

         The Court agrees that, in light of the undisputed material facts, Merrimack's claims are barred by the in pari delicto doctrine. Under these circumstances, Merrimack is legally responsible for Mordach's misconduct. Merrimack is also bound by the allegations in its complaint that Mordach engaged in intentional fraud. That deliberate misconduct by Merrimack's employee was far more serious than KPMG's purported negligence. Finally, the Court is not persuaded that Massachusetts should recognize, on public policy grounds, an exception to this doctrine for claims against an allegedly negligent outside auditor. The Court will therefore allow KPMG's motion and dismiss this action.

         1. Legal Background

          " The doctrine of in pari delicto bars a plaintiff who has participated in wrongdoing from recovering damages for any loss resulting from the wrongdoing." Choquette v. Isacoff, 65 Mass.App.Ct. 1, 3, 836 N.E.2d 329 (2005). It reflects an equitable and policy judgment that courts should " not lend aid to parties who base their cause of action on their own immoral or illegal acts." Id. at 4. This doctrine does not create an absolute bar to recovery. If both sides may have engaged in misconduct, the " less guilty" party may be able to recover damages or obtain equitable relief, notwithstanding its own misconduct. Id., quoting Council v. Cohen, 303 Mass. 348, 354, 21 N.E.2d 967 (1939), and Berman v. Coakley, 243 Mass. 348, 350, 137 N.E. 667 (1923).

          " In pari delicto " is a phrase of legal Latin that " means 'in equal fault.'" Baena v. KPMG, LLP, 453 F.3d 1, 6 (1st Cir. 2006), quoting Black's Law Dictionary 791 (6th ed. 1990). It comes from a long-standing equitable maxim, in pari delicto potior est conditio defendentis, " that can be translated as " [i]n a case of equal or mutual fault, the position of the [defending party] is the better one." Id., n.5, quoting Black's Law Dictionary .

         The practical import of this principle, where it applies, " is simply that the law leaves the parties exactly where they stand; not that it prefers the defendant to the plaintiff, but that it will not recognize a right of action" based on inequitable conduct. Atwood v. Fisk, 101 Mass. 363, 364 (1869).

         This principle was developed and originally applied to bar a plaintiff who engaged in wrongdoing from obtaining purely equitable relief (such as an order that someone specifically perform a contract or some other injunctive relief) to remedy its own misconduct (such as entering into an illegal contract or engaging in fraud). Choquette, 65 Mass.App.Ct. at 4.

          More recently, this doctrine has also been applied to bar a plaintiff from asserting legal claims seeking monetary compensation for an injury that was in part self-inflicted. In Choquette, for example, the plaintiff filed a bankruptcy petition and was then sued by the bankruptcy trustee for fraudulently conveying property and filing a false statement of his assets. The plaintiff turned around and sued his attorney for legal malpractice on the theory that the lawyer had prepared the false schedule of assets. The Appeals Court affirmed summary judgment in favor of the defendant lawyer on the ground that the in pari delicto doctrine barred all claims because the plaintiff had knowingly signed the false asset schedule and then lied about it under oath during his bankruptcy hearing. Id. at 3-8.

          The in pari delicto doctrine applies with full force against a corporation or other legal entity, such as Merrimack College, that has been injured as a result of misconduct by an employee or other agent acting on its behalf and then seeks compensation from some third party for that injury. Arcidi v. National Association of Government Employees, Inc., 447 Mass. 616, 621-622, 856 N.E.2d 167 (2006).

         2. Application to the Undisputed Facts

          Whether particular claims are barred because the plaintiff is at least as culpable as, and thus in pari delicto with, the defendant can be resolved on a motion for summary judgment where the material facts are not in dispute. See Choquette, 65 Mass.App.Ct. at 2-8.

         2.1. Imputing ...

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