Heard: March 5, 2019.
case was heard by Timothy Q. Feeley, J., on motions
for summary judgment, and entry of separate and final
judgment was ordered by him.
Supreme Judicial Court granted an application for direct
Ronaldo Rauseo-Ricupero (Richard C. Pedone also present) for
William L. Boesch for Martin J. Scafidi, P.C. Nancy M. Reimer
(Eric A. Martignetti also present) for John Marotto.
Healey, Attorney General, & Roberta L. Rubin, Special
Assistant Attorney General, for Department of Housing and
Community Development, amicus curiae, submitted a brief.
Matthew P. Bosher & Matthew S. Brooker, of the District
of Columbia, & Nicholas D. Stellakis, for American
Institute of Certified Public Accountants & another,
amici curiae, submitted a brief.
Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher,
& Kafker, JJ.
the equitable common-law doctrine of in pari delicto, a
plaintiff who has committed fraud cannot recover damages
resulting from the negligence of an accountant in failing to
detect the plaintiff's fraud, unless such relief is
required as a matter of public policy. See Merrimack
College v. KPMG LLP, 480 Mass. 614, 625 (2018). In
Merrimack College, we held that, where the plaintiff
is a corporation, it is barred under the doctrine from
recovering damages for the negligence of its accounting firm
in failing to detect the corporation's fraudulent conduct
only if the fraud was committed by someone in its
"senior management -- that is, the officers primarily
responsible for managing the corporation, the directors, and
the controlling shareholders." Id. at 628. But
because the parties did not raise the issue, we did not
decide in that case whether the Legislature by enacting G. L.
c. 112, § 87A 3/4 -- which applies to conduct occurring
after February 23, 2003, see St. 2001, c. 147, § 2 --
replaced the common-law doctrine of in pari delicto "in
cases where an accounting firm is sued for its failure to
detect fraud by a client's employee, with a statutory
allocation of damages akin to, but different from,
comparative negligence." Merrimack College,
supra at 631.
the plaintiff, the Chelsea Housing Authority (CHA), has
commenced this suit in the Superior Court against, among
others, its former accountants, John Marotto and Martin J.
Scafidi, P.C. (collectively, accountants), seeking to recover
the losses it incurred from their alleged negligent failure
to detect the fraudulent conduct of its former executive
director, Michael E. McLaughlin,  and former finance
director, Vitus Shum, among others. A Superior Court judge
granted the accountants' motions for summary judgment
solely on the ground that CHA's claim of negligence
against them is barred by the common-law doctrine of in pari
delicto -- due to the intentional misconduct of McLaughlin
and Shum -- without addressing the applicability of §
87A 3/4. Because the accountants' alleged negligent
conduct occurred after the effective date of § 87A 3/4,
CHA's appeal from that judgment now requires us to decide
the issue left unanswered in Merrimack College:
whether the Legislature intended to preempt the common-law
doctrine of in pari delicto in cases where an accountant is
sued for failing to detect fraud committed by a client.
careful examination of the language of that statute, 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 (as compared to the fault of all
others whose fraudulent conduct contributed to causing the
plaintiff's damages). 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. We therefore vacate the grant of summary
judgment and remand the case to the Superior Court for
further proceedings consistent with this
summarize the relevant facts recited by the judge in granting
the accountants' motions for summary judgment. Ng
Bros. Constr., Inc. v. Cranney, 436 Mass. 638,
639 (2002) . From 2000 until 2011, McLaughlin served as the
executive director of CHA, which is the agency responsible
for the administration of Chelsea's low income housing
programs. His employment agreements -- which were executed
between McLaughlin and CHA's five-member board of
commissioners (board) -- established his annual salary, which
began at $107, 000 for the 2001 fiscal year. CHA was required
to submit annual budget reports to the Department of Housing
and Community Development (DHCD) for approval, subject to
regulatory limits on the amount by which a housing authority
could increase administrative salaries.
McLaughlin quickly sought and obtained board approval for
salary increases vastly higher than those permitted by the
regulatory limits imposed by DHCD. By 2004, McLaughlin's
board-approved salary had risen to $180, 000; in 2008, he
earned $267, 199; and in 2011, his final year at CHA, the
board approved a salary of $291, 975. In order to avoid
scrutiny from DHCD for these raises, McLaughlin stopped
submitting his employment agreements to DHCD, and instead
prepared and filed budget reports with deliberately falsified
salary figures that fell within State regulatory guidelines.
For example, McLaughlin incorrectly reported salaries of
$135, 000 in 2004, $151, 945 in 2008, and $160, 415 in 2011.
These budget reports were submitted to DHCD with the
knowledge and approval of the CHA board.
McLaughlin's direction, CHA "misallocated and
misused" Federal funds granted to CHA by the United
States Department of Housing and Urban Development (HUD)
under its capital funds program. Some of these Federal funds
were diverted to pay McLaughlin the difference between his
actual salary and the falsified figures reported to DHCD.
Eventually, HUD investigators uncovered McLaughlin's
excessive compensation and the misuse of Federal funds. HUD
has since demanded the recapture from CHA of $2.7 million:
$500, 000 of excessive compensation paid to McLaughlin and
$2.2 million of misused capital funds program monies.
2013, McLaughlin pleaded guilty in the United States District
Court for the District of Massachusetts to four counts of
falsifying a record in a matter pertaining to a Federal
agency, in violation of 18 U.S.C. § 1519. Each count
pertained to a different fiscal year and charged McLaughlin
with knowingly and falsely understating the amount of his
budgeted annual salary in CHA budgets that HUD required to be
submitted to State regulatory authorities.'
Superior Court action, CHA moved for summary judgment against
the accountants, claiming that, based on the undisputed
facts, they committed professional malpractice by failing to
detect the fraud perpetrated by McLaughlin and Shum, and
their negligence caused CHA to suffer substantial losses. The
accountants opposed CHA's motion, asserting that there is
a material dispute of fact whether they were negligent in the
performance of their duties. They also cross-moved for
summary judgment, claiming that -- even if they were
negligent -- they are entitled to judgment under the doctrine
of in pari delicto because the fraudulent conduct of
McLaughlin and Shum is imputed to CHA, and an entity that
committed fraud cannot recover judgment against its
accountants for failing to detect that fraud.
noted, the motion judge granted the accountants' motions
for summary judgment, concluding that the doctrine of in pari
delicto barred CHA from recovering damages against them even
if they were negligent. The judge found that CHA was "by
far the greater wrongdoer" based on the intentional
misconduct of McLaughlin and Shum, whose actions, the judge
held, must be imputed to CHA because those actions were
committed within the scope of their employment. The judge
further noted that, if CHA's claims were not barred by
the doctrine of in pari delicto, he would have denied the
motions for summary judgment because the other arguments
raised were "more appropriately dealt with at
trial." The judge did not cite or make reference to G.
L. c. 112, § 87A 3/4.
timely appealed from the grant of summary judgment, and we
allowed an application for direct appellate review.
appeal, CHA contends that, where, as here, the alleged
negligence of the accountants occurred after February 23,
2003, the common-law doctrine of in pari delicto is preempted
by the statutory allocation of damages for an
accountant's liability established by G. L. c. 112,
§ 87A 3/4. In Merrimack College, 480 Mass. at
631, we noted that "the Legislature appears to have
replaced the common-law doctrine of in pari delicto in cases
where an accounting firm is sued for its failure to detect
fraud by a client's employee, with a statutory allocation
of damages akin to, but different from, comparative