Unsec. Creditors v. Pricewaterhousecoopers
Decision Date | 16 February 2010 |
Docket Number | No. 38 WAP 2008.,38 WAP 2008. |
Citation | 989 A.2d 313 |
Parties | OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF ALLEGHENY HEALTH EDUCATION AND RESEARCH FOUNDATION, Appellant, v. PRICEWATERHOUSECOOPERS, LLP, Appellee. |
Court | Pennsylvania Supreme Court |
Melanie Leigh Katsur, Gibson, Dunn & Crutcher, L.L.P., for Amicus Curiae Center for Audit Quality.
Alan F. Curley, Robinson Curley & Clayton, P.C., for Amicus Curiae International Association of Insurance Receivers.
Juliet M. Sarkessian, Robert C. Heim, Dechert LLP, Philadelphia, for Amicus Curiae National Association of Bankruptcy Trustees.
Jeffrey T. McGuire, Caldwell & Kearns, P.C., Harrisburg, for Amicus Curiae PA Institute of CPA's and American Institute of CPA's.
Joseph F. McDonough, Manion McDonough & Lucas, P.C., Pittsburgh, Thomas G. Rafferty, Antony L. Ryan, Cravath Swaine & Moore, L.L.P., for PriceWaterhouseCoopers, LLP.
Marcia Mary Waldron, U.S. Court of Appeals, 3rd Circuit, for United States Court of Appeals for the Third Circuit.
CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.
This case presents issues of Pennsylvania law on certification from the United States Court of Appeals for the Third Circuit, with the questions of first impression centering on the availability of an imputation-based in pari delicto defense in an auditor-liability scenario.
The background is set forth in the Third Circuit's certification petition. See Official Comm. of Unsecured Creditors of AHERF v. PriceWaterhouseCoopers, LLP, [hereinafter AHERF Creditors' Comm. v. PwC], No. 07-1397, slip op., 2008 WL 3895559, at *1 (3d Cir. July 1, 2008). Briefly, Allegheny Health, Education, and Research Foundation ("AHERF"), presently a debtor in liquidation under the United States Bankruptcy Code, is a Pennsylvania nonprofit corporation which operated hospitals, medical schools, and physicians' practices. From the late-1980s through the mid-1990s, AHERF management aggressively pursued acquisitions in furtherance of an integrated-delivery-system business model. Ultimately, this plan failed, precipitating the bankruptcy filing. Subsequently, a committee of creditors with authority conferred by federal bankruptcy law (the "Committee") commenced various causes of action against officers, insiders, and PriceWaterhouseCoopers, LLP ("PwC"), as successor to AHERF's auditor, Coopers and Lybrand ("C & L").2
The present action entails claims against PwC for C & L's alleged collusion with high-level AHERF officers, including its chief executive and financial officers, to fraudulently misstate AHERF's finances between 1996 and 1997. For example, the Committee contends that management overstated net income by more than $150 million and net unrestricted assets by more than $240 million in 1997.3 According to the Committee, the objective was to create the impression that management strategy was effective, thus concealing the corporation's deepening insolvency and facilitating management's continuation of a ruinous business strategy while thwarting essential, remedial intervention by the board of trustees. See Committee Brief at 14 ().4 The claims were predicated on theories, asserted under Pennsylvania law, of breach of contract, professional negligence, and aiding and abetting a breach of fiduciary duty. The Committee sought damages equal to the "full extent of [AHERF's] insolvency," or over one-billion dollars.
PwC moved for summary judgment. The core factual basis for its defense was the participation of AHERF officers in the asserted fraud, since they provided C & L with false financial statements in the first instance. According to PwC's theory, such fraud is properly imputed to the officers' principal, AHERF. PwC then asserted that, regardless of whether or not C & L's own agents knew that the financial statements were false, where the culpability of the plaintiff (the Committee, standing in AHERF's shoes) is at least as great as that of the defendant (PwC, standing in C & L's shoes), the action is barred by in pari delicto potior est conditio defendentis (meaning in a case of equal or mutual fault the position of the defending party is the stronger one). See generally Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306-07, 105 S.Ct. 2622, 2626-27, 86 L.Ed.2d 215 (1985) ( ).
The district court found such theory to be a valid application of Pennsylvania law and awarded summary judgment. In so ruling, the court relied in the first instance on a general rule, deriving from agency-law principles, that fraudulent conduct of a corporate officer is imputed to the corporation if committed in the course of the officer's employment and for the benefit of the corporation. See AHERF Creditors' Comm. v. PwC, No. 2:00cv684, slip op. at 14, 2007 WL 141059 (W.D.Pa. Jan. 17, 2007) (citing Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 358-59 (3d Cir.2001)). See generally Gordon v. Continental Casualty Co., 319 Pa. 555, 565, 181 A. 574, 577-78 (1935) ( . The court reasoned that the preparation and presentation of financial statements, albeit false ones, to an auditor was within the course of the employment of AHERF's senior management. Further, it determined that the corporation benefitted, at least in the short term, from the fraudulent conduct of its officers. See AHERF Creditors' Comm. v. PwC, No. 2:00cv684, slip op. at 20 () .
In response to the Committee's argument that the officers' interests were in fact adverse to the corporation, thus triggering an "adverse-interest exception" to the general rule of imputation, the district court reasoned that such exception applies only if the corporation "received no benefit" from the officers' improper conduct. AHERF Creditors' Comm. v. PwC, No. 2:00cv684, slip op. at 16 ( ). Referencing a decision of a federal intermediate appellate court, the district court also determined that short-term benefit to the corporation associated with the acquisition of hospitals, physician practices and/or educational facilities accrued to the corporation, thereby preventing the application of the adverse-interest exception to imputation. See id. at 18-19 ( ).
The district court also was not persuaded by the Committee's attempt to invoke an "innocent decision-maker" exception to imputation on the ground that, if members of AHERF's board of trustees had been made aware of the corporation's actual financial condition, they could have taken corrective measures. The court reasoned that such a limitation deviates from traditional agency doctrine and Pennsylvania agency law. See AHERF Creditors' Comm. v. PwC, No. 2:00cv684, slip op. at 23 (citing, inter alia, Am. Soc'y of Mech. Eng'rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 570-74, 102 S.Ct. 1935, 1944-47, 72 L.Ed.2d 330 (1982)). In this regard, and in summary, the court stated:
Despite the averments of the Committee regarding the decade long business strategy consisting of ill-conceived, ill-advised mergers and acquisitions, and despite the intentional accounting misstatements by AHERF management, the Committee lays AHERF's entire bankruptcy at the feet of its outside auditors. The very harm allegedly suffered at the hands of PwC, however, presupposes the Board approved business strategy, as well as the imputable wrongdoing of AHERF's management. The Court, therefore, finds no equitable bar to either the imputation of the misdeeds of AHERF management to AHERF or to the application of the doctrine of in pari delicto.
Id. at 24. An appeal to the Third Circuit followed, in which context the federal intermediate appellate court lodged the present certification request.
In its certification petition, the Third Circuit framed the issues by explaining that AHERF's chief financial officer is alleged to have knowingly falsified corporate finances, assisted by agents of C & L who issued a "clean" audit statement despite their own knowledge of the fraud, thus deceiving AHERF's board of trustees to the ultimate detriment of the non-profit corporation. See AHERF Creditors' Comm. v. PwC, No....
To continue reading
Request your trial-
Dana Holding Corp. v. Workers' Comp. Appeal Bd., No. 44 MAP 2019
...by litigants before the Court in a highly directed fashion," Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research Found. v. PriceWaterhouseCoopers, LLP , 605 Pa. 269, 301, 989 A.2d 313, 333 (2010), and that the holding of a judicial opinion is to be interpreted with re......
-
Merrimack Coll. v. KPMG LLP, SJC-12434
...15 N.Y.3d 446, 476-477, 912 N.Y.S.2d 508, 938 N.E.2d 941 (2010) ; Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research Found. v. PriceWaterhouseCoopers, LLP, 605 Pa. 269, 305, 989 A.2d 313 (2010).Having concluded that Merrimack's claims were barred under the in pari de......
-
Spear v. Fenkell
...aiding and abetting a fiduciary duty as a cause of action. OfficialComm. Of Unsecured Creditors of Allegheny Health Educ. & Research Fund v. Price Waterhouse Coopers LLP, 989 A.2d 313, 327 n. 14 (Pa. 2010); Stonehenge Mem. at 164 n. 64. The Alliance Parties argue that the facts surrounding ......
-
In re Nat'l Century Financial Enterprises Inc.
...the third party secretly acts in bad faith with the agent.8 Official Comm. of Unsecured Creditors of Allegheny Health, Educ. and Research Found. v. PricewaterhouseCoopers, LLP (“ Allegheny II ”), 989 A.2d 313, 339 (Pa.2010). The facts of this case do not match the facts of Allegheny II or t......
-
CHAPTER 10 The In Pari Delicto Defense
...2001).[479] See, e.g., Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research Found. v. PricewaterhouseCoopers LLP, 989 A.2d 313, 339 (Pa. 2010); see also Lewis v. Brobeck (In re Brobeck), 2008 Bankr. LEXIS 3871, at *12 (Bankr. E.D. Tenn. Nov. 6, 2008) (finding that if p......