Summary
The Massachusetts Supreme Judicial Court held that G. L. c. 112, § 87A 3/4, preempts the common-law in pari delicto doctrine in claims against accountants for negligently failing to detect fraud by a client. Under the statute, liability is allocated according to the accountant's percentage of fault compared with the fault attributable to fraudulent actors, unless the accountant's conduct was willful and knowing. The court vacated summary judgment for the accountants and remanded for further proceedings.
Topics
Practice areas
Questions Presented
- Whether CHA waived its argument that G. L. c. 112, § 87A 3/4 preempted the common-law doctrine of in pari delicto.
- Whether G. L. c. 112, § 87A 3/4 preempts the common-law doctrine of in pari delicto when an accountant is sued for negligently failing to detect a client's fraudulent conduct.
- Whether the Superior Court properly granted summary judgment to the accountants solely under the in pari delicto doctrine.
Holdings
- CHA did not waive its argument that G. L. c. 112, § 87A 3/4 preempts in pari delicto because the applicability of the statute was before the Superior Court and the preemption issue arose after the Supreme Judicial Court's intervening decision in Merrimack College.
- For conduct occurring after February 23, 2003, G. L. c. 112, § 87A 3/4 preempts the common-law doctrine of in pari delicto in cases where an accountant or auditor is alleged to have negligently failed to detect or reveal a client's fraudulent conduct.
- Summary judgment for the accountants was improper because it rested solely on in pari delicto, which was preempted by § 87A 3/4 for the alleged post-February 23, 2003 conduct.
Key quotations
“We therefore vacate the grant of summary judgment and remand the case to the Superior Court for further proceedings consistent with this opinion.” (at 714)
“The doctrine must yield, because if we held otherwise, the statute's express intent to govern circumstances where "a plaintiff ... [has] acted fraudulently" would be rendered superfluous.” (at 723)
“By limiting proportional liability to cases where fraud is found and by including the plaintiff's fraud in the calculation of proportional liability, the Legislature, by necessary implication, has preempted the common-law doctrine of in pari delicto in cases where an accountant is found liable for failing to detect and reveal a plaintiff's fraud.” (at 724)
Factual background
From 2000 to 2011, Michael McLaughlin served as executive director of the Chelsea Housing Authority and obtained compensation exceeding regulatory limits. He and others submitted falsified salary figures to state authorities and misused federal capital-fund monies; HUD later demanded that CHA repay approximately $2.7 million. CHA alleged that its accountants negligently failed to detect the fraud and sought recovery of its resulting losses.
Procedural history
CHA sued its former accountants for negligently failing to detect fraudulent conduct by CHA executives. The Superior Court granted the accountants summary judgment solely because the common-law doctrine of in pari delicto barred CHA's claim, without addressing G. L. c. 112, § 87A 3/4. The Supreme Judicial Court vacated that judgment and remanded.
Remand instructions
Vacate the grant of summary judgment to the accountants and remand to the Superior Court for further proceedings consistent with the opinion, including consideration of issues not reached by the motion judge.