May auditors who help a company's officers disguise their cooking of its books avoid liability to the company (now insolvent) by imputing the officers' knowledge of the fraud to the company?
By saying the officers' fraud conferred at least a "peppercorn" of benefit to the company?
The Third Circuit this week held that its previous yes responses must give way to a new decision by the Supreme Court of Pennsylvania -- a decision that the federal court requested by certifying questions. Keystone State law, the Court concluded, bars imputation and the in pari delicto (equally at fault) defense if the auditors failed to act materially in good faith towards the company. Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers LLP, 989 A.2d 313 (Pa. 2010).
Accepting the Court's answers, the Third Circuit reversed summary judgment in favor of the auditing firm. Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers, LLP, No. 07-1397 (3d Cir. May 28, 2010) (overruling Lafferty Official Committee of Unsecured Creditors v. R. F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001) (applying Pennsylvania law)).
Blawgletter wonders if Allegheny will breathe new life into the "deepening insolvency" theory of liability, which theory posits that prolonging the life of a firm wastes what little assets it has available to pay its obligations and therefore increases the losses of creditors.
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