Merrimack College v. KPMG LLP (Lawyers Weekly No. 12-054-17)
COMMONWEALTH OF MASSACHUSETTS SUFFOLK, ss. SUPERIOR COURT. 1484CV02098-BLS2 ____________________ MERRIMACK COLLEGE v. KPMG LLP ____________________ MEMORANDUM AND ORDER ALLOWING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT Merrimack College incurred substantial financial losses because its former financial aid director, Christine Mordach, deliberately approved fake Perkins loans for many students without their knowledge.1 For years Mordach awarded far more financial aid than she was authorized to spend. She made the college’s financial aid budget appear balanced by replacing grants and scholarships with fake Perkins loans, the proceeds of which were used to pay tuition owed to Merrimack. Ms. Mordach pleaded guilty to federal criminal charges of mail and wire fraud. Merrimack seeks to recover its losses from its former auditor, KPMG LLP. Merrimack claims that KPMG noticed but did not follow up on discrepancies in some student loan accounting and deficiencies in internal controls for such loans, and as a result failed to discover Mordach’s fraud. Merrimack asserts that KPMG was negligent, breached its contract, and violated G.L. c. 93A. KPMG has moved for summary judgment on several grounds, including that Merrimack’s claims are barred under the equitable doctrine known as in pari delicto because Mordach committed fraud to benefit her employer and her deliberate wrongdoing on behalf of Merrimack was far worse than KPMG’s alleged negligence. The Court agrees that, in light of the undisputed material facts, Merrimack’s claims are barred by the in pari delicto doctrine. Under these circumstances, Merrimack is legally responsible for Mordach’s misconduct. Merrimack is also 1 The Perkins Loan program provides “low-interest loans to financially needy students” at institutions of higher education that are funded with federal monies, matching contributions by each participating school, and repayment of prior loans. De La Mota v. United States Dept. of Educ., 412 F.3d 71, 74 (2d Cir. 2005). “The schools independently determine eligibility, advance funds, collect payments[,] and make decisions concerning loan forgiveness.” Id.; see also 20 U.S.C. §§ 1070 et seq. – 2 – bound by the allegations in its complaint that Mordach engaged in intentional fraud. That deliberate misconduct by Merrimack’s employee was far more serious than KPMG’s purported negligence. Finally, the Court is not persuaded that Massachusetts should recognize, on public policy grounds, an exception to this doctrine for claims against an allegedly negligent outside auditor. The Court will therefore allow KPMG’s motion and dismiss this action. 1. Legal Background. “The doctrine of in pari delicto bars a plaintiff who has participated in wrongdoing from recovering damages for any loss resulting from the wrongdoing.” Choquette v. Isacoff, 65 Mass. App. Ct. 1, 3 (2005). It reflects an equitable and policy judgment that courts should “not lend aid to parties who base their cause of action on their own […]
Merrimack College v. KPMG LLP (Lawyers Weekly No. 11-002-16)
NOTICE: All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us 15-P-122 Appeals Court MERRIMACK COLLEGE vs. KPMG LLP. No. 15-P-122. Suffolk. November 2, 2015. – January 6, 2016. Present: Milkey, Carhart, & Massing, JJ. Accountant. Negligence, Accountant. Arbitration, Arbitrable question, Appropriateness of judicial proceedings. Contract, Arbitration. Civil action commenced in the Superior Court Department on June 30, 2014. A motion to compel arbitration was heard by Janet L. Sanders, J. Ira M. Feinberg, of New York (Christopher H. Lindstrom with him) for the defendant. T. Christopher Donnelly (Kelly A. Hoffman with him) for the plaintiff. MILKEY, J. The defendant, KPMG LLP (KPMG), is an accounting firm that performed annual audits for the plaintiff, Merrimack College (Merrimack). In the underlying action, Merrimack alleges that KPMG committed malpractice when it failed to detect serious financial irregularities that occurred in Merrimack’s financial aid office during fiscal years 1998 through 2004. Based on a dispute resolution provision included in a contract the parties executed for fiscal year 2005, KPMG argues that Merrimack waived its right to sue KPMG regarding services it had provided in prior years and was required to arbitrate those claims. In addition, KPMG maintains that whether Merrimack’s pre-2005 claims are subject to compulsory arbitration must be resolved by arbitration. In a thoughtful decision, a Superior Court judge rejected such arguments and denied KPMG’s motion to compel arbitration. We affirm. Background. The essential facts are undisputed. For the fiscal years at issue in the malpractice action, Merrimack had hired KPMG through a succession of separate annual service agreements. Each such agreement took the form of a letter that KPMG sent to Merrimack that was then countersigned by Merrimack. None of the annual agreements from 1998 through 2004, referred to by the parties as “engagement letters,” makes any mention of arbitration as an available (much less mandatory) means for the parties to resolve disputes that might arise between them. In claiming that Merrimack’s malpractice action nevertheless is subject to binding arbitration, KPMG is relying on the engagement letter that the parties executed for fiscal year 2005. The 2005 agreement spelled out specific auditing services that KPMG would provide to Merrimack during that year. Unsurprisingly, in laying out KPMG’s affirmative obligations, the 2005 engagement letter is a forward-looking document, referring, for example, to the audit report that KPMG “will issue” in […]
Askenazy, et al. v. KPMG LLP, et al. (Lawyers Weekly No. 11-066-13)
NOTICE: All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us 12‑P‑863 Appeals Court DOROTHY ASKENAZY & others[1] vs. KPMG LLP & others.[2] No. 12‑P‑863. Suffolk. December 6, 2012. ‑ May 23, 2013. Present: Berry, Fecteau, & Carhart, JJ. Auditor. Fraud. Negligence, Misrepresentation. Arbitration, Arbitrable question, Appeal of order compelling arbitration. Federal Arbitration Act. Contract, Arbitration. Civil action commenced in the Superior Court Department on December 10, 2010. A motion to compel arbitration was heard by Janet L. Sanders, J. Gary F. Bendinger, of New York (Gregory G. Ballard, of New York, & Lisa C. Wood with him) for KPMG LLP. Jeff Ross, of Minnesota, for the plaintiffs. FECTEAU, J. KPMG LLP (KPMG) appeals from the denial, by a judge of the Superior Court, of its motion to compel arbitration, pursuant to G. L. c. 251, § 18(a)(1). KPMG claims error in the judge’s order on the ground that the plaintiffs’ claims are derivative, and thus the plaintiffs ought to be bound by KPMG’s engagement letters with Tremont Partners, Inc. (Tremont Partners), and Tremont Capital Management, Inc. (Tremont Capital), which provided arbitration as the sole method of dispute resolution. In a lengthy and well-reasoned memorandum, the judge allowed most of the plaintiffs’ claims against KPMG to proceed on the basis that the claims were direct and not derivative. We affirm. Background. This matter relates to the fraudulent Ponzi investment scheme run by Bernard L. Madoff. The plaintiffs here were limited partners of the Rye Select Broad Market Prime Fund, L.P.; and the Rye Select Broad Market XL Fund, L.P. (collectively, Rye Funds), two hedge funds serving as so-called “feeder” funds to Madoff’s company, and being managed by Tremont Partners as the Rye Funds’ general partner. In 2008, after Madoff admitted his fraud and was arrested, the Rye Funds were discovered to be valueless and the plaintiffs’ investments unrecoverable. The plaintiffs brought suit in 2010 against Tremont Partners; its upstream corporate parent, Tremont Capital; KPMG; and various other entities. The specific remaining claims against KPMG sound in tort: fraud in the inducement, negligent misrepresentation, G. L. c. 93A violations, aiding and abetting fraud, and professional malpractice. Over a period of years, KPMG performed various audit and tax services for the Rye Funds. In general, the plaintiffs allege that KPMG did not adequately perform its auditing and tax functions and, essentially, by certifying its […]