Pari Delicto Research Articles

Auditor’s Duty to Ensure Clients are Using Accounting Practices in Compliance with Generally Accepted Accounting Principles: A Case Study of Infinity Business Group, Inc.

Infinity Business Group, Inc. (IBG), a company specializing in the collection of bad checks, was incorporated in 2003. IBG recorded its collection fees as Accounts Receivable even before the Not-Sufficient-Funds checks were collected, a method not in compliance with Generally Accepted Accounting Principles; accordingly, IBG’s auditor should not have issued unqualified opinions on the financial statements during 2003-2008. A $23 million write-off of Accounts Receivable in 2009 had a devastating effect on the company and it declared bankruptcy in 2010. In 2019, the Bankruptcy Court ruled: (a) the auditor’s unqualified opinions violated the U.S. Securities Exchange Act, and the auditor was forced to plead guilty to one felony count of securities fraud; (b) IBG’s CFO was dishonest when he responded to an inquiry from a lender about the Accounts Receivable; (c) Morgan Keegan & Company, Inc. (MK), a brokerage and investment banking firm contractually affiliated with IBG, encouraged IBG to discontinue using the improper accounting method; (d) IBG’s President Cordell made a misrepresentation to MK in 2007 when he stated that all of the questionable Accounts Receivable had been written off; (e) in 2008, MK became aware that IBG might change the accounting method; (f) MK never encouraged IBG managers to breach fiduciary duties to IBG; (g) MK did not owe IBG fiduciary duties, but even if it did, there is no evidence of a breach because MK encouraged discontinuance of the improper accounting practice; (h) some of the managers and directors of IBG were innocent, they did not participate in daily operations of the company, and they did not have control of the company; and (i) notwithstanding the fact they did not commit securities fraud, some of the “innocent” managers and directors failed to discharge their duties to IBG by advocating for the continued use of the improper accounting method. On appeal in 2021, the District Court affirmed the Bankruptcy Court, holding that: it did not make any legal errors; the Bankruptcy Trustee did not adequately prove damages caused by MK; and the Bankruptcy Trustee’s claims were barred by the Doctrine of in Pari Delicto.

In pari delicto doctrine applied in pharmacy lawsuit

When a medication has caused harm, everyone involved with the distribution and use of that medication is potentially accountable for the harm, including any person who abused the medication resulting in that person’s death. A recent case from Pennsylvania applied the legal doctrine of in pari delicto (in equal fault) to absolve a pharmacy from liability following the death of a person who fraudulently acquired an opioid medication from the pharmacy. A lawsuit against the pharmacy was filed by the estate of a deceased college student. The decedent’s mother suffered from multiple myeloma and had on file at the defendant pharmacy a prescription for fentanyl patches that could be dispensed at her request. A friend of the decedent called the pharmacy pretending to be the mother, and the friend requested the fentanyl patches be dispensed pursuant to the prescription. The decedent drove the friend to the pharmacy, where the friend picked up the fentanyl patches. The friend and the decedent then each ingested the contents of a fentanyl patch. The decedent fell asleep and could not be awakened, and was pronounced dead after being transported to a hospital. The lawsuit against the pharmacy alleged negligence in allowing a person who was not a family member to acquire the medication with no questions asked. The pharmacy moved the court for dismissal of the lawsuit based on in pari delicto. The pharmacy’s motion was granted and the estate appealed. The appellate court first noted that the in pari delicto defense applies “when the plaintiff is an active, voluntary participant in the wrongful conduct or transaction for which he seeks redress and bears substantially equal or greater responsibility for the underlying illegality as compared to the defendant.” The plaintiff contended the doctrine was inapplicable in this case “because [the decedent] did not engage in anything that was immoral or illegal.” Rather, it was the friend who had engaged in immoral and illegal conduct. The friend was named as a codefendant in the lawsuit, but only the pharmacy had moved for dismissal of the case. The appellate court disagreed with the plaintiff’s contention. The court concluded that “by participating in the scheme to obtain fentanyl and by illegally possessing the fentanyl at [the friend’s] house, the decedent was an active, voluntary participant in the wrongful conduct for which the plaintiff seeks redress, and bears substantially equal or greater responsibility for the underlying illegality as compared to [the pharmacy].” The court affirmed dismissal of the case against the pharmacy. Pharmacists have a responsibility to provide medications to those who need them for medical treatment, and to prevent acquisition of medications by those who would divert and/or misuse them. It is not uncommon for a person other than the patient to pick up a controlled substance medication at a pharmacy. This is particularly true when the patient has a cancer diagnosis. If pharmacists routinely refused controlled substances under these circumstances, many patients who need medications would not get them. On the other hand, DEA has advised that it can be considered a “red flag” when “a patient presents prescriptions written in the names of other people.” A cancer diagnosis does not by itself justify ignoring indicators of controlled substance diversion. The plaintiff in the Pennsylvania case argued that the defendant pharmacy could have called the patient to verify her request for the fentanyl, and the medication would not have been dispensed if that call had been made. The court in this case engaged in a balancing of illegality, as courts often do. The court held that the decedent’s illegal conduct tipped the balance away from the pharmacy. This ruling raises the question: How illegal must the conduct of a person with substance use disorder be to offset the alleged illegality of a pharmacy defendant?

In Pari Delicto Deconstructed: Dismantling the Doctrine that Protects the Business Entity's Lawyer from Malpractice Liability

The equitable doctrine in pari delicto provides that a plaintiff who participated equally with a defendant in wrongdoing cannot pursue a claim against the defendant. Courts often describe dual policies underlying the in pari delicto defense: deterrence of illegal conduct and protection of the sanctity of the courts. Lawyers invoke in pari delicto when sued for malpractice for failing to protect a client from legal liability. A common scenario involves a lawyer advising a client to lie under oath; the client follows the advice and suffers damage as a result. When the client sues the lawyer for legal malpractice based on the lawyer’s negligent advice, the lawyer can have the case dismissed based on in pari delicto. Courts reason that the client understood that it was wrong to lie under oath and that both client and lawyer are equally at fault for the client’s resulting damages, justifying dismissal on the basis of in pari delicto.The in pari delicto defense also can be invoked when the client is a business that (through its agents) engaged in fraudulent or criminal conduct that ultimately damaged the company. In this context, the legal malpractice case is filed against a business entity’s attorney who failed to advise against the conduct, failed to inform other agents within the organization about the misconduct so that they could intervene, or participated in the misconduct. Often the business has filed for bankruptcy and the trustee is bringing the malpractice claim against the company’s former lawyers. In other cases, suit is filed by the company itself, an assignee of the company’s rights, a court-appointed receiver, or its shareholders (as a derivative suit).Courts have applied in pari delicto to dismiss these claims against the company’s lawyers. The plaintiffs in these cases stand in the shoes of the wrongdoing company and cannot escape the company’s misconduct. And there is indeed “company misconduct” because - applying basic agency principles - management’s knowledge or misconduct must be imputed to the company. While there is an exception to imputation when the agents acted adverse to the company’s interests, that exception is a narrow one inapplicable when agents engaged in misconduct for the company’s benefit. Courts reason that applying in pari delicto in such cases deters illegal conduct and allows courts to avoid being parties to the misconduct.This Article deconstructs these principles that seemingly favor the in pari delicto doctrine barring claims against an organization’s lawyer. In examining in pari delicto in these cases, it becomes apparent that the doctrine is inconsistent with an attorney’s fiduciary duty to organizational clients. By barring or substantially limiting claims against business lawyers in this context, in pari delicto has effectively immunized lawyers from liability when they fail to perform one of their most important functions: acting competently to protect their organizational clients from legal liability. This Article explains how two bodies of law – in pari delicto and attorney fiduciary duty - should be reconciled to better protect the interests of organizational clients and to give attorneys incentives to competently represent their organizational clients.

The In Pari Delicto Defense for Auditors in Professional Negligence Cases: Imputation of Managers’ Unlawful Acts to the Client Firm

Abstract The Enron scandal, the Sarbanes-Oxley Act and the 2008 financial crisis have resulted in new laws and regulations regarding auditor liability and an evolution of some of the old ones. One of the older laws is the in pari delicto defense: in a lawsuit brought by a corporation alleging that its auditor was negligent in failing to detect a manager’s fraud, the auditor may be able to use that defense if the manager’s fraud is imputable to the company. Since a bankruptcy trustee or a receiver steps into the shoes of the bankrupt company it represents, a similar defense (the Wagoner Rule) may also be applicable if a trustee or a receiver files a negligence lawsuit against the company’s auditor. However, in pari delicto is inapplicable when: (1) the wrongful acts of the manager are so adverse to the corporate client that the manager is deemed to have totally abandoned the corporation for its, or a third party’s, sole benefit (unless the manager is also the sole shareholder, or the company has incurred a short-term benefit because of the fraud); (2) the corporate client had at least one innocent manager or shareholder who could have prevented or stopped the fraud if he had known about it; (3) the auditor does not deal with the corporate client in good faith and engages in unlawful conduct; or (4) the plaintiffs are totally innocent shareholders (but in this case, the in pari delicto defense is still applicable with respect to culpable shareholders). The State of New York has been on the cutting edge in the evolution of the in pari delicto defense, and this defense is strongest there. Other states recognizing the defense include New Jersey, Pennsylvania, and (in dicta) Delaware (only if the company has engaged in actual wrongdoing). Finally, these are examples of recent evolution of in pari delicto: (a) the Sarbanes-Oxley Act’s prohibition of management from interfering with or deceiving the auditor; such statutory violations of management could be used by the auditor at trial in proving the applicability of the in pari delicto defense and (b) the new constraints on off-balance sheet leases, expected to be released shortly by the Financial Accounting Standards Board, may decrease management’s ability to deceive the auditor in the first place.

The Collapse of the in Pari Delicto Defense to Bankruptcy Trustee Claims: How the Fifth Circuit Has Opened a New Door for Trustee Litigation

The following Article is organized in five parts: (1) part I places the in pari delicto issue in context by describing a hypothetical scenario in which in pari delicto typically arises; (2) part II describes the in pari delicto doctrine and its purposes; (3) part III summarizes the circuit court opinions applying in pari delicto to dismiss trustee claims; (4) part IV explains the Fifth Circuit's application of in pari delicto; and (5) part V argues that the Fifth Circuit application is most consistent with § 541's plain-language, Supreme Court precedent, and the purposes of the in pari delicto doctrine.

Law of Equity

In this paper I focus on three equitable principles in the common law jurisdictions of England and Sri Lanka and the treatment of those principles in Tinsley v. Milligan (1993) 3 ALL ER 65 (HL) my conclusion is that the UK House of Lords creates the judicial trend of unifying the Law of Restitution with respect to claims to property as relief before the court where the parties admit that there have been previous illegal transactions concerning the use of the property. My remark in this paper is that the development of equitable principles in both Law and Equity in England needed a change in judicial trend, and, for the House of Lords in Tinsley v. Milligan there is justification to make more flexible rules of equity and law under the cover of these progressive judicial trends which appeared in judgments before Tinsley v. Milligan and which are explored in this paper. Therefore the conclusion in this paper is that trends are the influencing factors for the House of Lords in cases like Tinsley v. Milligan with respect to evolving equitable principles in both law and equity which depart from the traditional application of those rules which existed before in the courts in England. I argue in my paper with historical evidence that the three equitable principles of Law and equity ex turpi causa, in pari delicto and the clean hands principle are connected by cannon law and this justifies the approach of The House of Lords to unify the Law of remedies relating to equitable relief so as to avoid departing from judicial precedent such as the Bowmaker rule which the House of Lords imports in Tinsley v. Milligan to make the clean hands principle more flexible in law of equity.

Ending the Nonsense: The <i>In Pari Delicto</i> Doctrine Has Nothing to Do with What is 541 Property of the Bankruptcy Estate

Ending the Nonsense: The <i>In Pari Delicto</i> Doctrine Has Nothing to Do with What is 541 Property of the Bankruptcy Estate

Accounting scholars in the groves of academe In Pari Delicto

Accounting scholars in the groves of academe In Pari Delicto

Accounting scholars in the groves of academe In Pari Delicto

This paper provides an overview of the emergence of Critical Perspectives on Accounting and of some of its achievements. The journal was originally created to provide a forum to question some of the notions that were systematically taken for granted in accounting practice and research, to explore the ideological underpinnings of the discipline, and reveal its role in processes of domination and social reproduction. The aim was also to encourage community-building around other important issues such as critical accounting interventions and their potential, or ways to bring out more emancipatory perspectives on accounting. We review three streams with a critical approach to accounting that were developed in the journal over 25 years: promoting a radical reflexivity to challenge mainstream views on accounting, questioning the normative claims of the profession to reveal its role in social reproduction, and highlighting the role of accounting in major socio-political trends.

No Place for Innocents: Alleged Innocence in Professional Liability Litigation Involving Imputation Defenses

This short article explores different types of alleged 'innocence' in professional liability cases involving imputation-based defenses. Typically, such litigation scenarios unfold where a corporation (or its receiver or trustee) asserts claims against some of its own officers and or directors, along with some or all of the corporation's outside professionals such as accountants or lawyers. An 'imputation-based defense' is a defense premised on the alleged wrongdoing of the defendant officers or directors being imputed to the plaintiff corporation itself, such that the corporation is held to be a participant in the very wrongdoing it alleges. Pursuant to the doctrine of in pari delicto, the corporation cannot recover from any other alleged participants in the wrongdoing. In such cases, described in more detail below, four sorts of 'innocence' are often alleged to have legal significance: (1) the innocence of one or more non-defendant corporate officers or directors who were not, or may not have been, involved in the fraud and therefore 'could have' or 'would have' stopped the alleged wrongdoing if they had known about it; (2) the innocence of a corporate receiver or bankruptcy trustee who steps into the shoes of the corporation which would otherwise be guilty by way of imputation of the actions and knowledge of the defendant officers or directors; (3) the innocence of creditors or others who would receive or at least share in any recovery by the corporation, especially when the corporation is in receivership or bankruptcy; and (4) the innocence of outside professionals, which some have argued must be shown in order for such defendants to avail themselves of equitable bars to the claims of a guilty corporation with which they were allegedly, even admittedly, in pari delicto. Each form of innocence is aimed at defeating otherwise well-established rules of imputation and equitable doctrines that do not allow one guilty party (i.e., the plaintiff corporation itself, if the wrongdoing of its own officers or directors is imputed to the corporation) from recovering against another guilty party (i.e., an outside professional defendant that allegedly participated in the same wrongdoing). This article takes a dim view of the role of such innocence, agreeing with the better reasoned cases in the area.

The Recovery of Property Transferred for Illegal Purposes

For many years it was thought to be a principle of public policy that, in a property dispute between two parties in pari delicto, equity must let the loss lie where it falls ('the non-recovery principle').' In Tinsley v Milligan,2 the House of Lords substantially qualified this principle, ruling that it does not prevent persons from reclaiming property transferred for an illegal purpose where they can establish their legal or equitable interest without relying on the illegality ('the non-reliance rule'). In particular, a person who could demonstrate an interest in the transferred property by way of a resulting trust could recover that interest because there was no need to rely on the illegal purpose underlying the transaction. Since then, the Court of Appeal, in Tribe v Tribe,3 has confirmed a further limit on the non-recovery principle, namely an exception where the transferor makes a timely withdrawal from the illegal scheme. More recently, the High Court of Australia has eroded the scope of the principle even further in its decision in Nelson v Nelson.4 In his concurring judgment in that case, Dawson J applied a significantly wider interpretation of the non-reliance rule than that adopted in both Tinsley and Tribe. More importantly, the majority of the court mounted a sustained attack on both the non-recovery principle and its refinement in Tinsley, and introduced a new approach which is likely to reduce even further the significance of illegality as a defence to a proprietary claim.

Illegal Associations in English Law

One cannot overemphasize the basic rule that the maxims ex turpi causa and in pari delicto operate negatively, that is to say, only so as to bring about the rejection of actions tainted with illegality in its widest sense; but they never operate so as to outlaw culprits or deprive even habitual offenders of their civil rights.Some doubt may, however, arise whether the same rule applies to illegal associations. After all, associations are not natural human beings, whose rights as such are regarded as fundamental human rights or safeguarded by Bills of Rights. Associations and corporations, of all kinds, owe their very existence to a legal concept which regards them as something additional, sometimes even entirely different from their members.It is not self-evident then, that illegal associations should or should not be recognized for any civil law purpose, and it is not surprising, therefore, that there has been a diversity of legal opinion on that point.

Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, in Pari Delicto, Indemnification, and Contribution

Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, in Pari Delicto, Indemnification, and Contribution

The Demise of In Pari Delicto in Private Actions Pursuant to Regulatory Schemes

The Demise of In Pari Delicto in Private Actions Pursuant to Regulatory Schemes

The Demise of in Pari Delicto in Private Actions Pursuant to Regulatory Schemes

The Demise of in Pari Delicto in Private Actions Pursuant to Regulatory Schemes

Rule 10b-5: The in Pari Delicto and Unclean Hands Defenses

Rule 10b-5: The in Pari Delicto and Unclean Hands Defenses

Securities Regulation: Doctrines of In Pari Delicto and Unclean Hands Held to Bar 10b-5 Recovery by Tippee against Corporate Insider

Securities Regulation: Doctrines of In Pari Delicto and Unclean Hands Held to Bar 10b-5 Recovery by Tippee against Corporate Insider

In Pari Delicto and Consent as Defenses in Private Antitrust Suits

In Pari Delicto and Consent as Defenses in Private Antitrust Suits

Res Judicata. What Judgments Are Conclusive. Prior Adjudication That Plaintiff's Grantor Was in Pari Delicto with Defendant Does Not Estop Plaintiff to Assert Invalidity of Privately Foreclosed Trust Deeds Given to Secure Illegal Debt. Morrissey v. Bologna (Miss. 1960)

Res Judicata. What Judgments Are Conclusive. Prior Adjudication That Plaintiff's Grantor Was in Pari Delicto with Defendant Does Not Estop Plaintiff to Assert Invalidity of Privately Foreclosed Trust Deeds Given to Secure Illegal Debt. Morrissey v. Bologna (Miss. 1960)

The Unknown Quantity in Private Antitrust Suits. The Defense of in Pari Delicto

The Unknown Quantity in Private Antitrust Suits. The Defense of in Pari Delicto