125 N.E.3d 711
Mass.2019Background
- Chelsea Housing Authority (CHA) sued its former accountants for professional negligence for failing to detect fraud by CHA's executive director (McLaughlin) and finance director (Shum), which led to HUD demanding recapture of $2.7 million.
- McLaughlin pleaded guilty in federal court to falsifying records related to understating his budgeted salary; CHA obtained summary judgment on liability against McLaughlin in the Superior Court.
- The Superior Court granted summary judgment for the accountants solely on the ground that CHA's claim was barred by the common-law doctrine of in pari delicto because McLaughlin's and Shum's fraudulent acts were imputed to CHA. The judge did not address G. L. c. 112, § 87A 3/4.
- CHA appealed, arguing that § 87A 3/4 (effective for conduct after Feb. 23, 2003) preempts the in pari delicto doctrine for suits against accountants who negligently failed to detect client fraud and requires proportional allocation of damages.
- The Supreme Judicial Court examined the statute's text and legislative history (including bills and gubernatorial amendments surrounding enactment) and concluded the Legislature intended proportional liability for accountants where a plaintiff (or another relevant party) committed fraud.
- The court held § 87A 3/4, by necessary implication, preempts the in pari delicto doctrine as applied to accountants’ negligent failure to detect client fraud, vacated the accountants’ summary judgment, and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CHA waived the argument that § 87A 3/4 preempts in pari delicto by not raising it below | CHA: issue preserved for appeal because § 87A 3/4 was squarely in play and Merrimack College prompted the argument | Accountants: CHA failed to raise preemption in the motion judge and therefore waived it | Court: no waiver; issue may be raised on appeal because parties and judge were on notice and Merrimack raised the statute post-judgment |
| Whether § 87A 3/4 repeals or preempts the common-law doctrine of in pari delicto for accountants | CHA: statute requires allocation of damages and thus supplants in pari delicto where accountant negligently failed to detect fraud | Accountants: common-law in pari delicto bars recovery by a plaintiff who committed fraud; statute does not expressly repeal it | Court: § 87A 3/4 preempts in pari delicto by necessary implication in cases involving accountants’ negligent failure to detect client fraud |
| Proper interpretation of § 87A 3/4 — scope and purpose | CHA: statute mandates trier of fact allocate total damages and percentages of fault, including plaintiff’s fraud, so plaintiff can recover proportional damages from accountant | Accountants: statute should not be read to allow plaintiff who committed fraud to recover against accountant; in pari delicto should control | Court: statute’s text and history show Legislature intended proportional liability where fraud is found; in pari delicto would render statutory provisions superfluous |
| Whether outcome creates anomalous results versus comparative negligence law | Accountants: absurdity results if a fraudulent plaintiff can recover proportionally while a negligent plaintiff cannot under comparative negligence | CHA: legislative focus on fraud detection justifies distinct treatment | Court: not absurd; Legislature reasonably targeted fraud to incentivize accountants to detect/report it; result consistent with legislative purpose |
Key Cases Cited
- Merrimack College v. KPMG LLP, 480 Mass. 614 (2018) (discussed limits of in pari delicto for corporate plaintiffs and noted § 87A 3/4 may supplant the common law)
- Passatempo v. McMenimen, 461 Mass. 279 (2012) (statutory repeal of common law not lightly inferred)
- Lipsitt v. Plaud, 466 Mass. 240 (2013) (statute may displace common law by necessary implication; examine legislative history and purpose)
- Eyssi v. Lawrence, 416 Mass. 194 (1993) (existing common-law remedy not taken away except by direct enactment or necessary implication)
- Connors v. Annino, 460 Mass. 790 (2011) (statutory interpretation requires giving effect to all provisions to avoid superfluity)
- George v. National Water Main Cleaning Co., 477 Mass. 371 (2017) (implied repeal clear where subsequent legislation comprehensively addresses subject and frustrates common law)