108 N.E.3d 430
Mass.2018Background
- Merrimack College engaged KPMG as its auditor from 1998–2004; KPMG issued unqualified financial and A-133 audit opinions each year.
- Christine Mordach, Merrimack's financial aid director, secretly issued fraudulent Perkins loans (creating false paperwork and borrower identities), which benefited Merrimack's reported finances and harmed students; fraud discovered in 2011. Mordach pleaded guilty in 2014. Merrimack later wrote off losses and paid students, claiming over $6 million in damages.
- Merrimack sued KPMG for malpractice, negligence, negligent misrepresentation, breach of contract, and c. 93A violations. KPMG moved for summary judgment, arguing among other things that Merrimack’s claims were barred by in pari delicto and moved to amend its answer to assert a release defense.
- The Superior Court granted summary judgment for KPMG, applying traditional agency imputation to attribute Mordach’s intentional fraud to Merrimack and concluding in pari delicto barred recovery; the court also allowed KPMG to amend its answer to add a release defense.
- The SJC granted direct review and addressed whether traditional agency imputation should be used to measure moral blame for in pari delicto when the plaintiff is an organization acting through agents.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an agent’s intentional misconduct should be imputed to a corporate plaintiff for application of in pari delicto | Imputation to principal should not automatically apply to bar recovery; Merrimack argues only senior management misconduct should count | Traditional agency rules should be applied; agent’s wrongful acts (if within scope) are imputed and can trigger in pari delicto | Only intentional misconduct of senior management (officers, directors, controlling shareholders) may be imputed for in pari delicto purposes; lower-level employees' fraud is not automatically imputed |
| Whether Mordach was senior management whose fraud can be imputed to Merrimack | Mordach’s role as financial aid director does not make her a member of senior management | Her responsibilities justify imputation under respondeat superior | Mordach was not senior management; her intentional fraud cannot be imputed to Merrimack to bar its suit |
| Whether in pari delicto bars Merrimack’s claims against KPMG based on alleged auditor negligence | Merrimack: at most negligence in retention/supervision — comparative negligence applies, not in pari delicto | KPMG: plaintiff’s agent committed intentional fraud, so in pari delicto bars recovery | In pari delicto did not bar Merrimack because senior-management misconduct was not established; summary judgment vacated and case remanded for other grounds to be considered |
| Whether the trial court abused discretion in allowing KPMG to amend its answer to add a release defense | Merrimack: amendment was delayed and prejudicial; should be denied | KPMG: amendment was timely enough and not futile; release is an affirmative defense that can be pleaded | Granting leave to amend was not an abuse of discretion; amendment affirmed |
Key Cases Cited
- Choquette v. Isacoff, 65 Mass. App. Ct. 1 (2005) (describing in pari delicto doctrine and equitable exceptions)
- Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) (federal test limiting in pari delicto where plaintiff’s fault is not substantially equal and public enforcement concerns weigh against preclusion)
- Baena v. KPMG LLP, 453 F.3d 1 (1st Cir. 2006) (applied traditional imputation to bar trustee’s claims where senior officers orchestrated fraud)
- Arcidi v. Nat’l Ass’n of Gov’t Employees, Inc., 447 Mass. 616 (2006) (imputed president’s misconduct to union to bar recovery under illegal contract theory)
- Kansallis Fin. Ltd. v. Fern, 421 Mass. 659 (1996) (explains imputation rationale: allocating risk to principal to protect innocent third parties)