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                 OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF ALLEGHENY
                   HEALTH EDUCATION AND RESEARCH FOUNDATION, Appellant v.
                           PRICEWATERHOUSECOOPERS, LLP, Appellee

                                                  No. 38 WAP 2008

                                     SUPREME COURT OF PENNSYLVANIA

                                   605 Pa. 269; 989 A.2d 313; 2010 Pa. LEXIS 159

                                           November 10, 2008, Submitted
                                            February 16, 2010, Decided

SUBSEQUENT HISTORY: Answer conformed to,                     asserting that the action was barred by in pari delicto,
Remanded by Official Comm. of Unsecured Creditors of         meaning in a case of equal or mutual fault, the position of
Allegheny Health v. PricewaterhouseCoopers, LLP, 607         the defending party was the stronger one. The federal
F.3d 346, 2010 U.S. App. LEXIS 10920 (3d Cir. Pa., May       district court awarded the auditors summary judgment,
28, 2010)                                                    and the underlying appeal to the Third Circuit followed.
                                                             In response to the certified questions, the court held that
PRIOR HISTORY: [***1]                                        the proper test to determine the availability of defensive
  Appeal allowed August 26, 2008 at 49 WM 2008.              imputation in scenarios involving non-innocents
Official Comm. of Unsecured Creditors of Allegheny           depended on whether or not the defendant dealt with the
Health,     Educ.      &      Research  Found.   v.          principal in good faith and that the in pari delicto defense
PricewaterhouseCoopers, LLP, 2008 U.S. App. LEXIS            may be available in its classic form in the auditor-liability
18823 (3d Cir. Pa., July 1, 2008)                            setting. However, imputation was unavailable relative to
                                                             an auditor which had not dealt materially in good faith
CASE SUMMARY:                                                with the client-principal, which effectively foreclosed an
                                                             in pari delicto defense for scenarios involving secretive
                                                             collusion between officers and auditors to misstate
PROCEDURAL POSTURE: Petitioner, the United                   corporate finances to the corporation's ultimate detriment.
States Court of Appeals for the Third Circuit, presented
two certified questions to the court in the suit between     OUTCOME: The court answered the certified questions
appellant unsecured creditors against appellee auditors.     and returned the matter to the Third Circuit.
The unsecured creditors' claims against were predicated
on theories, asserted under Pennsylvania law, of breach      LexisNexis(R) Headnotes
of contract, professional negligence, and aiding and
abetting a breach of fiduciary duty. The debtor
corporation had filed bankruptcy.

OVERVIEW: The suit involved the unsecured creditors'         Business & Corporate Law > Agency Relationships >
claims that the auditors colluded with high-level officers   Duties & Liabilities > Authorized Acts of Agents >
of the debtor to fraudulently misstate the debtor's          Liability of Principal
finances. The auditors moved for summary judgment,           Business & Corporate Law > Agency Relationships >
                                                                                                                      Page 2
                                             605 Pa. 269, *; 989 A.2d 313, **;
                                                2010 Pa. LEXIS 159, ***1


Duties & Liabilities > Unlawful Acts of Agents > Fraud          Civil Procedure > Equity > Maxims > Clean Hands
& Misrepresentation                                             Principle
Business & Corporate Law > Corporations > Directors             Civil Procedure > Pleading & Practice > Defenses,
& Officers > Management Duties & Liabilities > Causes           Demurrers & Objections > Affirmative Defenses >
of Action > Fraud                                               General Overview
[HN1] Fraudulent conduct of a corporate officer is              [HN5] Unlike the cognate clean-hands maxim, however,
imputed to the corporation if committed in the course of        in pari delicto in Pennsylvania, as in many other
the officer's employment and for the benefit of the             jurisdictions, has surmounted its moorings in strict equity
corporation. A corporation shall be held responsible for        jurisprudence and transitioned into a defense in actions at
the knowledge which is possessed by those whom it               law. The common law makes that which is fraudulent in
appoints to represent it. From the nature of its                fact void; but in all cases of confederate fraud, its maxim
constitution it can have no other knowledge than that of        is in pari delicto, potior est condition defendentis. Neither
its officers, and, in dealing with such officers, as with the   party will be aided or relieved against a contract executed
corporation itself, third parties have a right to consider      by him.
that what they know it knows.

                                                                Civil Procedure > Equity > Maxims > Clean Hands
Civil Procedure > Appeals > Appellate Jurisdiction >            Principle
Certified Questions                                             Civil Procedure > Pleading & Practice > Defenses,
Civil Procedure > Appeals > Standards of Review > De            Demurrers & Objections > Affirmative Defenses >
Novo Review                                                     General Overview
[HN2] The Supreme Court of Pennsylvania's review of             Contracts Law > Defenses > General Overview
questions of law certified by the federal courts is plenary.    [HN6] As one Pennsylvania court has noted, in pari
                                                                delicto, as an at-law defense, has been applied principally
                                                                in situations in which one party seeks to enforce an
Torts > Intentional Torts > Breach of Fiduciary Duty >          unlawful contract and where a participant in illegal
Elements                                                        conduct seeks an accounting for related activity. The
Torts > Procedure > Multiple Defendants > Concerted             cases dealing with those situations have made sweeping
Action > Civil Aiding & Abetting                                statements which suggest broader applicability of the
[HN3] Under Pennsylvania law, aiding and abetting a             doctrine of in pari delicto. Certainly, in light of the stance
breach of fiduciary duty is a recognized cause of action.       of Pennsylvania courts, including the Supreme Court of
                                                                Pennsylvania, parties are on ample notice that the
Civil Procedure > Appeals > Appellate Jurisdiction >            judiciary is not tolerant of fraud and illegality, and those
Certified Questions                                             who come before it seeking common-law redress relative
[HN4] The resolution of certified issues by the Supreme         to matters in which they bear sufficient culpability may
Court of Pennsylvania is an unusual practice through            suffer disadvantage as a consequence of their own
which, for the sake of comity, it undertakes to address         wrongdoing.
legal issues outside the familiar setting of a case over
which the Court maintains conventional jurisdiction. In         Governments > Legislation > Statutory Remedies &
such a landscape, proceeding beyond the matters the             Rights
Court is expressly asked to address raises both                 Torts > Negligence > Defenses > Comparative
jurisdictional and prudential concerns which would              Negligence > Imputed Comparative Negligence
immeasurably compound the difficulties already                  Torts > Negligence > Defenses > Contributory
associated with deciding multiple issues within a single        Negligence > Imputed Contributory Negligence
case in a Court of seven members. Therefore, it will be         [HN7] In pari delicto has also been referenced by courts
the Court's practice to confine itself as closely as possible   in the negligence setting, for example, in cases involving
to the certified questions, including in the Court's            personal injury or property damage. In that class of cases
treatment only subsidiary legal matters fairly subsumed         at least, however, the comparative negligence and
within those certified issues.                                  contribution statutes serve to cover much of the ground
                                                                formerly traveled by reference to the common-law
                                                                                                                    Page 3
                                            605 Pa. 269, *; 989 A.2d 313, **;
                                               2010 Pa. LEXIS 159, ***1


maxim. 42 Pa.C.S. § 7102(a) prescribes, in such                some courts apparently have dispensed with the
scenarios, that contributory negligence shall not bar a        requirement that the relative degrees of fault, as between
recovery by the plaintiff or his legal representative where    the plaintiff and defendant, must be indistinguishable. or
such negligence was not greater than the causal                the plaintiff's responsibility is clearly greater.
negligence of the defendant or defendants against whom
recovery is sought, but any damages sustained by the
                                                               Business & Corporate Law > Corporations > Directors
plaintiff shall be diminished in proportion to the amount
                                                               & Officers > Management Duties & Liabilities > Causes
of negligence attributed to the plaintiff. 42 Pa.C.S. §
                                                               of Action > General Overview
8324(a) provides the right of contribution exists among
                                                               Business & Corporate Law > Corporations > Directors
joint-tortfeasors. Thus, where those statutes are
                                                               & Officers > Management Duties & Liabilities >
applicable, it is only in unusual cases involving
                                                               Fiduciary Responsibilities > General Overview
intentional wrongdoing on the part of a plaintiff in which
                                                               Torts > Procedure > Multiple Defendants > Concerted
in pari delicto may retain relevance. The inquiry takes on
                                                               Action > Civil Aiding & Abetting
another dimension when addressing statutory causes of
                                                               [HN10] A federal court has described some downsides of
action, since the specific legislative objectives of the
                                                               departing from a traditional and relatively strong
enactment controlling the parties' legal rights must be
                                                               approach to the recognition of the in pari delicto defense,
considered.
                                                               including: dampening the incentive for law compliance
                                                               by preserving the hope that the costs of an exposed
Civil Procedure > Equity > Maxims > Clean Hands                conspiracy might be shifted to the corporation's partners
Principle                                                      in crime. Such a departure would also require that a court
Torts > Negligence > Defenses > Comparative                    engage in an extremely complex economic and
Negligence > Imputed Comparative Negligence                    fault-finding inquiry involving speculation about the
Torts > Negligence > Defenses > Contributory                   extent to which each participant was a net winner or loser
Negligence > Imputed Contributory Negligence                   as a result of its illegal conduct. The Supreme Court of
[HN8] Pennsylvania requires the plaintiff be an active,        Pennsylvania is in full accord with such perspective as it
voluntary participant in the wrongful conduct or               applies to instances in which a corporate plaintiff can be
transaction for which it seeks redress, and bear               said to be at least equally culpable relative to the subject
substantially equal or greater responsibility for the          of its lawsuit. Determining the culpability of the
underlying illegality as compared to the defendant. In the     corporation, of course, is complicated by the fact that
Commonwealth of Pennsylvania, as elsewhere, in pari            such bodies must act through their agents. Thus, in the in
delicto serves the public interest by relieving courts from    pari delicto arena, where corporate plaintiffs are
lending their offices to mediating disputes among              involved, the subject of imputation is a key focus.
wrongdoers, as well as by deterring illegal conduct. One
of the purposes of the venerable in pari delicto doctrine is
                                                               Civil Procedure > Pleading & Practice > Defenses,
to prevent courts from having to engage in inefficient and
                                                               Demurrers & Objections > Affirmative Defenses >
socially unproductive accountings between wrongdoers.
                                                               General Overview
                                                               Contracts Law > Defenses > Public Policy Violations
Civil Procedure > Equity > Maxims > Clean Hands                [HN11] The doctrine of in pari delicto is subject to
Principle                                                      appropriate and necessary limits. As the United States
Torts > Negligence > Defenses > Comparative                    Supreme Court has observed, the traditional or classic
Negligence > Imputed Comparative Negligence                    treatment of in pari delicto permits matters of public
Torts > Negligence > Defenses > Contributory                   policy to be taken into consideration in determining the
Negligence > Imputed Contributory Negligence                   defense's availability in any given set of circumstances.
[HN9] Although the precise standard for invoking in pari       Unless is an important word in the in pari delicto context
delicto varies across jurisdictions, courts invariably focus   because the doctrine is subject to the exception when
on two aspects of the plaintiff's conduct: (1) the extent of   another policy is perceived to trump the policy basis for
the plaintiff's responsibility for the wrongdoing vis-a-vis    the doctrine itself. While the Supreme Court of
the defendant; and (2) the connection between the              Pennsylvania is aware of the admonition that public
plaintiff's wrongdoing and the claims asserted. Notably,       policy can be a very unruly horse, the recognition of a
                                                                                                                   Page 4
                                            605 Pa. 269, *; 989 A.2d 313, **;
                                               2010 Pa. LEXIS 159, ***1


common-law in pari delicto defense is, in the first            schemes governing liability in contract and in tort,
instance, a refection of the judicial implementation of        including fair compensation and deterrence of
social policy. The rule preventing enforcement of              wrongdoing. Thus, to the extent the Third Circuit's
prohibited contracts is one of policy and only to be           decision in Official Comm. of Unsecured Creditors v.
vindicated on that ground. The Court, therefore, believes      R.F. Lafferty & Co., 267 F.3d 340, 358-59 (3d Cir. 2001)
the judicious consideration of competing policies which        incorporates the aspect of Cenco Inc. v. Seidman &
may be implicated in the extension of the defense to           Seidman, 686 F.2d 449 (7th Cir. 1982) as a prediction of
novel settings remains within the appropriate purview of       Pennsylvania law, the Third Circuit may now consider it
our courts.                                                    disapproved. In that regard, the Court is cognizant of the
                                                               special and crucial role assumed by independent auditors
                                                               as a check against potential management abuses. There
Contracts Law > Defenses > Illegal Bargains                    are multiple levels of auditor review, and the specific
Contracts Law > Defenses > Public Policy Violations            responsibility of the auditor in any given undertaking
[HN12] It should be observed that the defense of               generally will depend on the terms of the retention. Such
illegality is allowed from motives of public policy, rather    complexities must be taken into account as a factor in a
than from a regard for the interests of the objecting party.   responsible policy-setting decision.
The objection comes in appearance from the individual
litigant, but in reality from society, the state speaking
through the courts. Whenever public policy is considered       Business & Corporate Law > Agency Relationships >
as advanced by allowing either party to sue for relief         Duties & Liabilities > Authorized Acts of Agents >
against the transaction, then relief is given to him.          Liability of Principal
                                                               Business & Corporate Law > Agency Relationships >
                                                               Duties & Liabilities > Authorized Acts of Agents >
Civil Procedure > Trials > Jury Trials > Province of           Scope of Authority
Court & Jury                                                   [HN15] The imputation doctrine recognizes that
Torts > Negligence > Duty > Foreseeability of Injury           principals generally are responsible for the acts of agents
Torts > Negligence > Proof > Evidence > Province of            committed within the scope of their authority. That is, in
Court & Jury                                                   part, because it is the principal who has selected and
[HN13] In a negligence context, the existence of a duty is     delegated responsibility to those agents; accordingly, the
a question of law for the court to decide. The legal           doctrine creates incentives for the principal to do so
concept of duty of care is necessarily rooted in often         carefully and responsibly. Imputation also serves to
amorphous public policy considerations.                        protect those who transact business with a corporation
                                                               through its agents believing the agent's conduct is with
Business & Corporate Law > Corporations > Directors            the authority of his principal. Imputation creates
& Officers > Management Duties & Liabilities >                 incentives for a principal to choose agents carefully and
Defenses > General Overview                                    to use care in delegating functions to them. Imputation is
Securities Law > Liability > Securities Exchange Act of        founded on the duty of the agent to communicate all
1934 Actions > Implied Private Rights of Action >              material information to his principal, and the assumption
Elements of Proof > Scienter > Accountants & Auditors          that he has done so.
Torts > Negligence > Defenses > Comparative
Negligence > Imputed Comparative Negligence                    Business & Corporate Law > Agency Relationships >
[HN14] The Supreme Court of Pennsylvania agrees with           Duties & Liabilities > Authorized Acts of Agents >
the Seventh Circuit to the extent it has held that in pari     Liability of Principal
delicto may be available as a defense in some cases            Business & Corporate Law > Agency Relationships >
arising in the corporate auditing context. Nevertheless,       Duties & Liabilities > Authorized Acts of Agents >
the Court also finds that Pennsylvania law does not            Unauthorized Acts
accord with Seventh Circuit case law in terms of the           [HN16] Where an agent acts in his own interest, and to
degree to which the decision, in an auditor-liability          the corporation's detriment, imputation generally will not
context, prioritizes the policy of incentivizing internal      apply. Adverse interest is widely acknowledged as an
corporate monitoring over the objectives of the traditional    exception to the general rule of imputation.
                                                                                                                     Page 5
                                             605 Pa. 269, *; 989 A.2d 313, **;
                                                2010 Pa. LEXIS 159, ***1


Business & Corporate Law > Agency Relationships >               continues to function as a complete bar to recovery under
Duties & Liabilities > Authorized Acts of Agents >              negligence theory. That stands in stark contrast with the
Unauthorized Acts                                               more flexible comparative negligence regime established
Business & Corporate Law > Corporations > Directors             by the Pennsylvania Legislature to govern claims
& Officers > Management Duties & Liabilities >                  involving personal injury or property damage. Permitting
Defenses > General Overview                                     the use of imputation to support an in pari delicto defense
Torts > Malpractice & Professional Liability >                  in the negligent-auditor scenario relative to those who
Professional Services                                           have proceeded in good faith, by way of comparison,
[HN17] The appropriate approach to benefit and                  represents a relatively modest allowance, particularly
self-interest are best related back to the underlying           given the supporting requirement of at least equal fault.
purposes of imputation, which is fair risk-allocation,
including the affordance of appropriate protection to
                                                                Business & Corporate Law > Agency Relationships >
those who transact business with corporations. In that
                                                                Duties & Liabilities > Authorized Acts of Agents >
regard, the Supreme Court of Pennsylvania draws a sharp
                                                                Liability of Principal
distinction between those who deal in good faith with the
                                                                Business & Corporate Law > Corporations > Directors
principal-corporation in material matters and those who
                                                                & Officers > Management Duties & Liabilities > Causes
do not. As to the former category, those who proceed in
                                                                of Action > General Overview
good faith, including those who may bear a degree of
                                                                Torts > Negligence > Defenses > Comparative
culpability, such as instances in which an auditor's
                                                                Negligence > Imputed Comparative Negligence
malpractice is limited to negligence.
                                                                [HN20] The Supreme Court of Pennsylvania does not
                                                                believe it undermines the objectives of Pennsylvania's
Business & Corporate Law > Agency Relationships >               tort and contract schemes to deny recovery to one whose
Duties & Liabilities > Authorized Acts of Agents >              agents have acted for the benefit of the corporation with
Liability of Principal                                          culpability exceeding that of the defendant. 42 Pa.C.S. §
Torts > Malpractice & Professional Liability >                  7102(a) recognizes the availability of recovery on a
Professional Services                                           comparative negligence basis in personal-injury and
Torts > Negligence > Defenses > Comparative                     property-damage cases, where the plaintiff's own
Negligence > Imputed Comparative Negligence                     negligence was not greater than the causal negligence of
[HN18] The Supreme Court of Pennsylvania believes that          the defendant. Similarly, the Court concludes that the
the best course is for Pennsylvania common law to               traditional, liberal test for corporate benefit should apply
continue to recognize the availability of the in pari delcito   in such scenarios.
defense, upon appropriate and sufficient pleadings and
proffers, via the necessary imputation, in the
                                                                Business & Corporate Law > Agency Relationships >
negligent-auditor context. That gives appropriate
                                                                Duties & Liabilities > Authorized Acts of Agents >
recognition to the fact that it is the principal who has
                                                                Unauthorized Acts
empowered the agent and dovetails with other defenses
                                                                Business & Corporate Law > Corporations > Directors
which may be available to a negligent auditor under
                                                                & Officers > Management Duties & Liabilities > Causes
prevailing Pennsylvania law, in particular, those related
                                                                of Action > Fraud
to audit interference.
                                                                Torts > Malpractice & Professional Liability >
                                                                Professional Services
Torts > Malpractice & Professional Liability >                  [HN21] With regard to the issue of auditor collusion, the
Professional Services                                           Supreme Court of Pennsylvania takes a much different
Torts > Negligence > Defenses > Comparative                     view of fraudulent activity. In that regard, the ordinary
Negligence > Imputed Comparative Negligence                     rationale supporting imputation breaks down completely
Torts > Negligence > Defenses > Contributory                    in scenarios involving secretive, collusive conduct
Negligence > Imputed Contributory Negligence                    between corporate agents and third parties. That is so
[HN19] Under prevailing Pennsylvania law as presently           because imputation rules justly operate to protect third
established by the Pennsylvania Superior Court,                 parties on account of their reliance on an agent's actual or
contributory negligence in the accounting context               apparent authority. Accordingly, such principles do not
                                                                                                                  Page 6
                                           605 Pa. 269, *; 989 A.2d 313, **;
                                              2010 Pa. LEXIS 159, ***1


and should not apply in circumstances in which the           Business & Corporate Law > Agency Relationships >
agent's authority is neither actual nor apparent, as where   Duties & Liabilities > Authorized Acts of Agents >
both the agent and the third party know very well that the   Liability of Principal
agent's conduct goes unsanctioned by one or more of the      Business & Corporate Law > Agency Relationships >
tiers of corporate governance.                               Duties & Liabilities > Unlawful Acts of Agents > Fraud
                                                             & Misrepresentation
                                                             Torts > Malpractice & Professional Liability >
Business & Corporate Law > Agency Relationships >            Professional Services
Duties & Liabilities > Authorized Acts of Agents >           [HN25] The justification for imputation has also been
Liability of Principal                                       stated in terms of the recognition that it is the principal
Business & Corporate Law > Agency Relationships >            which has empowered the agent; accordingly, the
Duties & Liabilities > Authorized Acts of Agents >           principal rightly bears the risk of agent malfeasance. That
Unauthorized Acts                                            rationale, however, also does not support imputation in
Torts > Business Torts > Fraud & Misrepresentation >         the collusive-auditor scenario. The underlying
Actual Fraud > Defenses                                      assumption that an agent will communicate all material
[HN22] The imputation doctrine exists to protect third       information to his principal, does not logically pertain to
parties from being sued by corporations whose agents         instances in which there is collusion to withhold
have engaged in malfeasant behavior against those third      information from corporate governance. The rule that
parties, but when the agent is in collusion with a third     knowledge or notice on the part of the agent is to be
person to defraud the principal, the latter will not be      treated as notice to the principal is founded on the duty of
responsible for the knowledge of the agent in relation to    the agent to communicate all material information to his
such fraud.                                                  principal, and the presumption that he has done so. But
                                                             the legal presumptions ought to be logical inferences
Business & Corporate Law > Agency Relationships >            from the natural and usual conduct of men under the
Authority to Act > Apparent Authority > Elements             circumstances. But no agent who is acting in his own
Business & Corporate Law > Agency Relationships >            antagonistic interest, or who is about to commit a fraud
Authority to Act > Apparent Authority > Third Party          by which his principal will be affected, does in fact
Knowledge                                                    inform the latter, and any conclusion drawn from a
[HN23] An agent acts with actual authority when the          presumption that he has done so is contrary to all
agent reasonably believes the principal wishes the agent     experience of human nature.
so to act. Apparent authority is defined as the power held
by an agent to affect a principal's legal relations with a   Business & Corporate Law > Corporations > Directors
third party when a third party reasonably believes the       & Officers > Management Duties & Liabilities >
action has authority.                                        Defenses > General Overview
                                                             Securities Law > Liability > Securities Exchange Act of
Business & Corporate Law > Agency Relationships >            1934 Actions > Implied Private Rights of Action >
Duties & Liabilities > Authorized Acts of Agents >           Elements of Proof > Scienter > Accountants & Auditors
Liability of Principal                                       Torts > Malpractice & Professional Liability >
Business & Corporate Law > Agency Relationships >            Professional Services
Duties & Liabilities > Authorized Acts of Agents >           [HN26] Fundamentally, imputation is not justified in
Unauthorized Acts                                            scenarios involving secretive, collusive activity on the
Business & Corporate Law > Agency Relationships >            part of an auditor to misstate and/or sanction
Duties & Liabilities > Third Parties                         management's misstatement of corporate financial
[HN24] Liability of the principal is based upon the fact     information. When a party to a transaction acts in
that the agent's position facilitates the consummation of    collusion with an officer of a bank, or knows or should
the fraud, in that, from the point of view of the third      know that the officer is acting beyond his authority and
person, the transaction seems regular on its face and the    contrary to the best interests of the bank, the knowledge
agent appears to be acting in the ordinary course of the     of the bank officer in such regard cannot be imputed to
business confided to him.                                    the bank.
                                                                                                                    Page 7
                                            605 Pa. 269, *; 989 A.2d 313, **;
                                               2010 Pa. LEXIS 159, ***1


Business & Corporate Law > Corporations > Directors            Duties & Liabilities > Authorized Acts of Agents >
& Officers > Management Duties & Liabilities >                 Liability of Principal
Defenses > General Overview                                    Business & Corporate Law > Agency Relationships >
Business & Corporate Law > Corporations > Finance >            Duties & Liabilities > Third Parties
General Overview                                               [HN29] Imputation does not protect those who know or
Torts > Malpractice & Professional Liability >                 have reason to know that an agent is not likely to transmit
Professional Services                                          material information to the principal.
[HN27] In close cases, adverse interest and the associated
inquiry into benefit may be questions steeped in fact and
                                                               Business & Corporate Law > Agency Relationships >
open to legitimate differences among reasonable minds.
                                                               Authority to Act > Apparent Authority > Third Party
Deciding whether to permit an auditor to utilize
                                                               Knowledge
imputation requires a detailed factual analysis of the
                                                               Business & Corporate Law > Agency Relationships >
dispute. Nevertheless, in the collusion scenario, as a
                                                               Duties & Liabilities > Authorized Acts of Agents >
matter of law, the Supreme Court of Pennsylvania
                                                               Liability of Principal
regards it to be in the best interests of a corporation for
                                                               Business & Corporate Law > Agency Relationships >
the governing structure to have accurate, or at the very
                                                               Duties & Liabilities > Third Parties
least honest, financial information. Thus, like other
                                                               [HN30] It is helpful to view questions about imputation
courts, in settings involving auditors who have not
                                                               from the perspective of risk assumption, taking into
proceeded in material good faith relative to a
                                                               account the posture of the third party whose legal
principal-corporation, the Court declines to consider a
                                                               relations with the principal are at issue. A principal
knowing, secretive, fraudulent misstatement of corporate
                                                               assumes the risk that the agents it chooses to interact on
financial information to be of benefit to a company.
                                                               its behalf with third parties will, when actual or apparent
                                                               authority is present, bind the principal to the legal
Business & Corporate Law > Agency Relationships >              consequences of their actions. That is because the
Authority to Act > Apparent Authority > Third Party            principal chooses its agents, has the right to control them,
Knowledge                                                      and determines how to characterize its agents' positions
Business & Corporate Law > Agency Relationships >              and indicia of authority in manifestations made to third
Duties & Liabilities > Authorized Acts of Agents >             parties. A principal's incentive systems and other
Liability of Principal                                         practices may also have the effect of discouraging agents
Business & Corporate Law > Corporations > Directors            from reporting information that, after the fact, it would
& Officers > Management Duties & Liabilities >                 have been advantageous for the principal to have known.
Defenses > General Overview
[HN28] In terms of whether benefit should be assessed
                                                               Business & Corporate Law > Agency Relationships >
according to the subjective intent of the agent, the
                                                               Authority to Act > Apparent Authority > Third Party
Supreme Court of Pennsylvania believes it is most
                                                               Knowledge
consistent with agency principles to evaluate benefit in
                                                               Business & Corporate Law > Agency Relationships >
light of the reasonable perspective of a third party in its
                                                               Duties & Liabilities > Authorized Acts of Agents >
dealings with the agent. That is, the question generally
                                                               Liability of Principal
should be whether there is sufficient lack of benefit, or
                                                               Business & Corporate Law > Agency Relationships >
apparent adversity, such that it is fair to charge the third
                                                               Duties & Liabilities > Third Parties
party with notice that the agent is not acting with the
                                                               [HN31] When the third party whose legal relations with
principal's authority. Notably, such approach dovetails
                                                               the principal are at issue has not dealt with the principal,
with the core concept of apparent authority in the first
                                                               either directly or through an agent, or has not dealt in
instance.
                                                               good faith, the principal does not bear the risk that its
                                                               agent may withhold relevant information to serve the
Business & Corporate Law > Agency Relationships >              agent's own purposes or those of another person. A
Authority to Act > Apparent Authority > Third Party            principal should not be held to assume the risk that an
Knowledge                                                      agent may act wrongfully in dealing with a third party
Business & Corporate Law > Agency Relationships >              who colludes with the agent in an action that is adverse to
                                                                                                                     Page 8
                                             605 Pa. 269, *; 989 A.2d 313, **;
                                                2010 Pa. LEXIS 159, ***1


the principal. That is, the third party should not benefit      Business & Corporate Law > Agency Relationships >
from imputing the agent's knowledge to the principal            Causes of Action & Remedies > Breach of Fiduciary
when the third party has acted wrongfully or otherwise in       Duty > Defenses
bad faith. The circumstances surrounding a transaction,         Business & Corporate Law > Agency Relationships >
including the magnitude of benefit it will confer on the        Duties & Liabilities > Authorized Acts of Agents >
agent who arranges it, may place a reasonable third party       Liability of Principal
on notice that the agent will withhold material                 Business & Corporate Law > Agency Relationships >
information from the principal.                                 Duties & Liabilities > Unlawful Acts of Agents >
                                                                General Overview
                                                                [HN34] The proper test to determine the availability of
Business & Corporate Law > Agency Relationships >               defensive     imputation      in     scenarios    involving
Causes of Action & Remedies > Breach of Fiduciary               non-innocents depends on whether or not the defendant
Duty > Defenses                                                 dealt with the principal in good faith. While one of the
Business & Corporate Law > Agency Relationships >               primary justifications for imputation lies in the protection
Duties & Liabilities > Authorized Acts of Agents >              of innocents, in Pennsylvania, it may extend to scenarios
Liability of Principal                                          involving auditor negligence, subject to an
Business & Corporate Law > Agency Relationships >               adverse-interest exception, as well as other limits arising
Duties & Liabilities > Unlawful Acts of Agents >                out of the underlying justifications supporting imputation.
General Overview                                                Imputation does not apply, however, where the defendant
[HN32] With regard to secretive, collusive conduct of an        materially has not dealt in good faith with the principal.
agent and auditor, Pennsylvania law renders imputation
unavailable, as the auditor has not proceeded in material
good faith.                                                     Business & Corporate Law > Agency Relationships >
                                                                Duties & Liabilities > Authorized Acts of Agents >
                                                                Liability of Principal
Business & Corporate Law > Agency Relationships >               Business & Corporate Law > Agency Relationships >
Causes of Action & Remedies > Breach of Fiduciary               Duties & Liabilities > Unlawful Acts of Agents >
Duty > Defenses                                                 General Overview
Business & Corporate Law > Agency Relationships >               Torts > Malpractice & Professional Liability >
Duties & Liabilities > Authorized Acts of Agents >              Professional Services
Liability of Principal                                          [HN35] The in pari delicto defense may be available in
Business & Corporate Law > Agency Relationships >               its classic form in the auditor-liability setting, subject to
Duties & Liabilities > Unlawful Acts of Agents >                ordinary requirements of pleading and proof, including
General Overview                                                special ones related to averments of fraud where relevant,
[HN33] In scenarios involving mutual fault of agents            and consideration of competing policy concerns.
engaging in unauthorized conduct on both sides of a             However, imputation is unavailable relative to an auditor
transaction, to some extent both the audit firm and the         which has not dealt materially in good faith with the
corporation may be regarded as victims. Sorting through         client-principal. That effectively forecloses an in pari
the respective rights and obligations of the litigants in       delicto defense for scenarios involving secretive collusion
such scenarios is, by its nature, difficult and complex,        between officers and auditors to misstate corporate
which, not by pure coincidence, serves as one of the            finances to the corporation's ultimate detriment.
reasons supporting the extension of in pari delicto in such
settings where there is also mutual fault. Of course, there     COUNSEL: For Official Committee of Unsecured
may be independent grounds, other than mere imputation,         Creditors of Allegheny, APPELLANT: Beth Rochelle
for liability on the part of the principals on either side of   Heifetz, Esq., Patrick F. McCartin, Esq., Richard B.
the transaction, such as when there is proven negligence        Whitney, Esq., James Michael Jones, Esq., Jones Day.
or acquiescence at the supervisory level; and, in such
circumstances, a principal may be regarded in different         For Center for Audit Quality, AMICUS CURIAE:
stead.                                                          Melanie Leigh Katsur, Esq., Gibson, Dunn & Crutcher,
                                                                L.L.P.
                                                                                                                 Page 9
                                            605 Pa. 269, *; 989 A.2d 313, **;
                                               2010 Pa. LEXIS 159, ***1


For International Association of Insurance Receivers,         Health, Education, and Research Foundation ("AHERF"),
AMICUS CURIAE: Alan F. Curley, Esq., Robinson                 presently a debtor in liquidation under the United States
Curley & Clayton, P.C.                                        Bankruptcy Code, is a Pennsylvania nonprofit
                                                              corporation [***2] [*273] which operated hospitals,
For National Association of Bankruptcy Trustees,              medical schools, and physicians' practices. From the
AMICUS CURIAE: Juliet M. Sarkessian, Esq., Dechert            late-1980s through the mid-1990s, AHERF management
LLP, Robert C. Heim, Esq., Dechert LLP.                       aggressively pursued acquisitions in furtherance of an
                                                              integrated-delivery-system business model. Ultimately,
For PA Institute of CPA's and American Institute of           this plan failed, precipitating the bankruptcy filing.
CPA's, AMICUS CURIAE: Jeffrey T. McGuire, Esq.,               Subsequently, a committee of creditors with authority
Caldwell & Kearns, P.C.                                       conferred by federal bankruptcy law (the "Committee")
                                                              commenced various causes of action against officers,
For PricewaterhouseCoopers, LLP, APPELLEE: Joseph
                                                              insiders, and PriceWaterhouseCoopers, LLP ("PwC"), as
F. McDonough, Esq., Manion McDonough & Lucas,
                                                              successor to AHERF's auditor, Coopers and Lybrand
P.C., Thomas G. Rafferty, Esq., Cravath, Swaine &
                                                              ("C&L"). 2
Moore, L.L.P., Antony L. Ryan, Esq., Cravath, Swaine &
Moore, L.L.P.                                                         2      Such claims are generally pursued as
                                                                      "adversary proceedings" under federal bankruptcy
For United States Court of Appeals for the Third Circuit,
                                                                      law. See 28 U.S.C. § 1334(b). As is frequently the
PARTICIPANTS: Marcia Mary Waldron, Esq., U.S.
                                                                      case in such matters, the present one encompasses
Court of Appeals, 3rd Circuit.
                                                                      various applications of state law in a federal
JUDGES: BEFORE: CASTILLE, C.J., SAYLOR,                               bankruptcy setting.
EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN,
                                                                   The present action entails claims against PwC for
JJ. Mr. JUSTICE SAYLOR . Chief Justice Castille,
                                                              C&L's alleged collusion with high-level AHERF officers,
Messrs. Justice Eakin and Baer, Madame Justice Todd,
                                                              including its chief executive and financial officers, to
Mr. Justice McCaffery and Madame Justice Orie Melvin
                                                              fraudulently misstate AHERF's finances between 1996
join the opinion.
                                                              and 1997. For example, the Committee contends that
                                                              management overstated net income by more than $ 150
OPINION BY: SAYLOR
                                                              million and net unrestricted assets by more than $ 240
                                                              million [***3] in 1997. 3 According to the Committee,
OPINION
                                                              the objective was to create the impression that
     [*272] [**314] MR. JUSTICE SAYLOR 1                      management strategy was effective, thus concealing the
                                                              corporation's deepening insolvency and facilitating
         1 This matter was reassigned to this author.         management's continuation of a [*274] ruinous business
                                                              strategy while thwarting essential, remedial intervention
     This case presents issues of Pennsylvania law on         by the board of trustees. See Committee Brief at 14 ("Had
certification from the United [**315] States Court of         Coopers performed its audits in compliance with GAAS,
Appeals for the Third Circuit, with the questions of first    AHERF's trustees and its creditors could and would have
impression centering on the availability of an                intervened and put a halt to a growth strategy that could
imputation-based in pari delicto defense in an                not be afforded."). 4 [**316] The claims were predicated
auditor-liability scenario.                                   on theories, asserted under Pennsylvania law, of breach
                                                              of contract, professional negligence, and aiding and
    I.                                                        abetting a breach of fiduciary duty. The Committee
                                                              sought damages equal to the "full extent of [AHERF's]
     The background is set forth in the Third Circuit's
                                                              insolvency," or over one-billion dollars.
certification petition. See Official Comm. of Unsecured
Creditors of AHERF v. PriceWaterhouseCoopers, LLP,                    3 The following excerpts from the Committee's
[hereinafter AHERF Creditors'Comm. v. PwC], No.                       brief offers some additional flavor of its
07-1397, 2008 U.S. App. LEXIS 18823, 2008 WL                          contentions:
3895559, at *1 (3d Cir. July 1, 2008). Briefly, Allegheny
                                                                                                                Page 10
                                       605 Pa. 269, *274; 989 A.2d 313, **316;
                                             2010 Pa. LEXIS 159, ***3


                                                            properly imputed to the officers' principal, AHERF. PwC
                Forensic accounting and auditing            then asserted that, regardless of whether or not C&L's
              experts retained by the Committee             own agents knew that the financial statements were false,
              have testified that Coopers's audits          where the culpability of the plaintiff (the Committee,
              in 1996 and 1997 were riddled                 standing in AHERF's shoes) is at least as great as that of
              with violations of [generally                 the defendant (PwC, standing in C&L's shoes), the action
              accepted accounting standards                 is barred by in pari delicto potior est condition
              ("GAAS")]. Coopers failed to                  defendentis (meaning in a case of equal or mutual fault
              require    AHERF       to    correct          the position of the defending party is the stronger one).
              non-GAAP accounting and [***4]                See generally Bateman Eichler, Hill Richards, Inc. v.
              failed to make mandatory reports              Berner, 472 U.S. 299, 306-07, 105 S. Ct. 2622, 2626-27,
              to AHERF's Audit Committee.                   86 L. Ed. 2d 215 (1985) (discussing the in pari delicto
              Coopers failed to report patent               defense).
              violations of GAAP accounting
              and other matters that directly                    The district court found such theory to be a valid
              called into question the integrity of         application of Pennsylvania law and awarded summary
              AHERF's financial management.                 judgment. In so ruling, the court relied in the first
              Coopers's failures resulted in                instance on a general rule, deriving from agency-law
              audited financial statements that             principles, that [HN1] fraudulent conduct of a corporate
              grossly      misstated     AHERF's            officer is imputed to the corporation if committed in the
              financial      performance       and          course of the officer's employment and for the [*275]
              condition but carried Coopers's               benefit of the corporation. See AHERF Creditors'Comm.
              clean opinions nonetheless.                   v. PwC, No. 2:00cv684, 2007 U.S. Dist. LEXIS 3331, *31
                                                            (W.D. Pa. Jan. 17, 2007) [***6] (citing Official Comm.
                  ***                                       of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d
                                                            340, 358-59 (3d Cir. 2001)). See generally Gordon v.
                   Coopers's misconduct goes                Continental Casualty Co., 319 Pa. 555, 565, 181 A. 574,
              beyond failure to recognize                   577-78 (1935) ("A corporation shall be held responsible
              inappropriate           accounting            for the knowledge which is possessed by those whom it
              treatments or failure to detect               appoints to represent it. From the nature of its
              intentional    misstatements    or            constitution it can have no other knowledge than that of
              accounting irregularities. Coopers            its officers, and, in dealing with such officers, as with the
              knowingly and actively facilitated            corporation itself, third parties have a right to consider
              the financial misconduct.                     that what they know it knows." (citation omitted)). The
                                                            court reasoned that the preparation and presentation of
       Brief for the Committee at 8 (citations omitted);    financial statements, albeit false ones, to an auditor was
       4 The Committee contends that another effect         within the course of the employment of AHERF's senior
       was to "substantially enhance the bonus-driven       management. Further, it determined that the corporation
       net income-tied compensation of AHERF's CEO,         benefitted, at least in the short term, from the fraudulent
       CFO, and other members of senior management --       conduct of its officers. See AHERF Creditors'Comm. v.
       the same people who were responsible for and         PwC, 2007 U.S. Dist. LEXIS 3331 at *40 ("Clearly, if
       prepared the [financial] statements and who hired    during the periods relevant to the misstated financial
       and retained Coopers to audit them." Committee       statements, AHERF made acquisitions of other hospitals,
       Brief at 3.                                          physician practices and/or educational facilities, then
                                                            over the immediate short term AHERF did indeed
     PwC moved for summary judgment. The core factual       benefit. The benefits [***7] to AHERF include an
basis for its defense was the participation of AHERF        increase of its assets and the addition of income
officers in the asserted fraud, since they provided C&L     streams.").
with false financial [***5] statements in the first
instance. According to PwC's theory, such fraud is              In response to the Committee's argument that the
                                                                                                                    Page 11
                                          605 Pa. 269, *275; 989 A.2d 313, **316;
                                                2010 Pa. LEXIS 159, ***7


officers' interests were in fact adverse to the corporation,            AHERF's entire bankruptcy at the feet of
thus triggering an "adverse-interest exception" to the                  its outside auditors. The very harm
general rule of imputation, the district court reasoned that            allegedly suffered at the hands of PwC,
such exception applies only if the corporation "received                however, presupposes the Board approved
no benefit" from the officers' improper conduct. AHERF                  business strategy, as well as the imputable
Creditors' Comm. v. PwC, 2007 U.S. Dist. LEXIS 3331 at                  wrongdoing of AHERF's management.
*32-33 (citing In re Phar-Mor, Inc. Securities Litig., 900              The Court, therefore, finds no equitable
F. Supp. 784, 786 (W.D. Pa. 1995) ("A corporation is not                bar to either the imputation of the
imputed with 'knowledge of an agent in a transaction in                 misdeeds of AHERF management to
which the [**317] agent secretly is acting adversely to                 AHERF or to the application of the
the [corporation] and entirely for his own or another's                 doctrine of in pari delicto.
purposes'" (citation and emphasis omitted))). Referencing
a decision of a federal intermediate appellate court, the         [*277] 2007 U.S. Dist. LEXIS 3331 at *48. An appeal to
district court also determined that short-term benefit to        the Third Circuit followed, in which context the federal
the corporation [*276] associated with the acquisition of        intermediate appellate court lodged the present
hospitals, physician practices and/or educational facilities     certification request.
accrued to the corporation, thereby preventing the
application of the adverse-interest exception to                      In its certification petition, the Third Circuit framed
imputation. See 2007 U.S. Dist. LEXIS 3331 at *33                the issues by explaining that AHERF's chief financial
(citing Baena v. KMPG LLP, 453 F.3d 1, 7-8 (1st Cir.             officer is alleged to have knowingly falsified corporate
2006) [***8] ("A fraud by top management to overstate            finances, assisted by agents of C&L who issued a "clean"
earnings, and so facilitate stock sales or acquisitions, is      audit statement despite their own knowledge of the fraud,
not in the long-term interest of the company; but, like          thus deceiving AHERF's board of trustees to the ultimate
price-fixing, it profits the company in the first instance       detriment of the non-profit corporation. See AHERF
and the company is still civilly and criminally liable . . .[;   Creditors'Comm. v. PwC, No. 07-1397, 2008 U.S. App.
n]or does it matter that the implicated managers also may        LEXIS 18823, 2008 WL 3895559, at *2. The court then
have seen benefits to themselves -- that alone does not          posed the question of whether imputation should [***10]
make their interests adverse.")).                                apply, followed by an inquiry into the viability of PwC's
                                                                 in pari delicto defense under Pennsylvania state law. See
     The district court also was not persuaded by the            2008 U.S. App. LEXIS 18823, [WL] at *3, *6.
Committee's attempt to invoke an "innocent
decision-maker" exception to imputation on the ground                 Regarding imputation, the court observed that the
that, if members of AHERF's board of trustees had been           question is presented in a factual context in which the
made aware of the corporation's actual financial                 party invoking imputation (PwC, as successor to C&L) is
condition, they could have taken corrective measures.            not an innocent third party; rather, C&L agents
The court reasoned that such a limitation deviates from          purportedly conspired with AHERF officers in bringing
traditional agency doctrine and Pennsylvania agency law.         about the alleged harm to the client-corporation. It noted
See AHERF Creditors'Comm. v. PwC, 2007 U.S. Dist.                that the scenario raises novel questions concerning the
LEXIS 3331 at *45 (citing, inter alia, Am. Soc'y of Mech.        degree to which imputation may be utilized as a shield
Eng'rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 570-74,          benefitting wrongdoers. The Third Circuit found this
102 S. Ct. 1935, 1944-47, 72 L. Ed. 2d 330 (1982)). In           [**318] variation particularly significant, since the
this regard, and in summary, the court stated:                   rationale supporting imputation is grounded, at least in
                                                                 part, on the protection of innocent third parties who do
           Despite the averments of the Committee                business with agents of the principal. See 2008 U.S. App.
        regarding the decade long business                       LEXIS 18823, [WL] at *4 (citing Aiello v. Ed Saxe Real
        strategy consisting of ill-conceived,                    Estate, Inc., 508 Pa. 553, 559, 499 A.2d 282, 285
        ill-advised     [***9]    mergers     and                (1985)). While seemingly the court's own precedent
        acquisitions, and despite the intentional                favored PwC's position, see Lafferty, 267 F.3d at 360
        accounting misstatements by AHERF                        (applying imputation in favor of parties alleged to have
        management, the Committee lays                           participated in wrongdoing), the court recognized that
                                                                                                                    Page 12
                                          605 Pa. 269, *277; 989 A.2d 313, **318;
                                                2010 Pa. LEXIS 159, ***10


some other jurisdictions had taken a more restrictive view              believe that the best course is to request
of imputation-based [***11] defenses, finding their                     that the Pennsylvania Supreme Court
broad application in the corporate auditing setting to be               clarify the contours of in pari delicto
incompatible with the interests of justice. See AHERF                   under Pennsylvania law.
Creditors'Comm. v. PwC, No. 07-1397, 2008 U.S. App.
LEXIS 18823, 2008 WL 3895559, at *4 (citing NCP                  Id.
Litig. Trust v. KPMG, LLP, 187 N.J. 353, 901 A.2d 871,
882 (N.J. 2006) (explaining that "the rationale for                  The Third Circuit's explanation was followed by the
imputation [*278] in a simple principal-agent                    framing of two discrete legal issues as follows:
relationship begins to break down in the context of a
corporate audit where the allocation of risk and liability                  [*279] 1. What is the [***13] proper
among principals, agents, and third parties becomes more                test under Pennsylvania law for
complicated.")); cf. In re Jack Greenberg, Inc., 212 B.R.               determining whether an agent's fraud
76, 90 (Bankr. E.D. Pa. 1997) (recognizing that the                     should be imputed to the principal when it
"framework for an accountant liability case does not fit                is an allegedly non-innocent third-party
squarely into the well developed agency law concerning                  that seeks to invoke the law of imputation
imputation").                                                           in order to shield itself from liability?

     The Third Circuit concluded that resolution of the                      2. Does the doctrine of in pari delicto
many competing concerns flowing from the extension, or                  prevent a corporation from recovering
refusal to extend, a broad imputation rule to the auditor               against its accountants for a breach of
liability setting requires a policy judgment best left to this          contract, professional negligence, or
Court, particularly in light of the magnitude and                       aiding and abetting a breach of fiduciary
importance of the question to the Commonwealth.                         duty, if those accountants conspired with
Therefore, the court asked that we set out the                          officers of the corporation to misstate the
"appropriate test under Pennsylvania law for deciding                   [**319] corporation's finances to the
whether imputation is appropriate [***12] when the                      corporation's ultimate detriment.
party invoking that doctrine is not conceded to be an
innocent third party but an alleged co-conspirator in the        2008 U.S. App. LEXIS 18823, [WL] at *6. We accepted
agent's fraud." AHERF Creditors'Comm. v. PwC, No.                certification of these questions per our operating
07-1397, 2008 U.S. App. LEXIS 18823, 2008 WL                     procedures. See Supreme Court Internal Operating
3895559, at *4                                                   Procedures § 10. 5

     On the broader question of the availability of an in               5 Although the Third Circuit and the parties
pari delicto defense in Pennsylvania in the first instance,             discuss imputation as the threshold issue, and
the Third Circuit characterized in pari delicto as "an                  there is certainly logic supporting such approach,
ill-defined group of doctrines" and "a murky area of the                our preference is to begin with the underlying in
law." 2008 U.S. App. LEXIS 18823, [WL] at *5. The                       pari delicto defense. We have thus reordered the
court recognized the general unavailability of the defense              parties' arguments in our discussion below.
for corporate directors alleged to have breached their
                                                                      In its brief, the Committee couches in pari delicto as
fiduciary duties, and, concomitantly, questioned the
                                                                 an equitable affirmative defense which should not be
degree to which it should be available to benefit those
                                                                 applied to produce an inequitable result. In particular, the
who have aided and abetted this sort of conduct. See id. It
                                                                 Committee derives [***14] support from Universal
concluded:
                                                                 Builders, Inc. v. Moon Motor Lodge, Inc., 430 Pa. 550,
                                                                 555, 244 A.2d 10, 14 (1968) (holding that a bankruptcy
            Given the questions surrounding the
                                                                 trustee was not subject to the equitable "unclean hands"
        Lafferty holding, the need for clarification
                                                                 defense against a party that allegedly defaulted on a
        of the in pari delicto doctrine under
                                                                 contract where, among other considerations, denying
        Pennsylvania law, and the presence of the
                                                                 recovery for the estate would "result in the enrichment of
        aiding and abetting cause of action, we
                                                                 [the breaching party] at the expense of the innocent
                                                                                                                Page 13
                                        605 Pa. 269, *279; 989 A.2d 313, **319;
                                              2010 Pa. LEXIS 159, ***14


creditors of the bankrupt [plaintiff]"). The Committee       officers were motivated by their interest in preserving
posits that no equities could be served by invoking in       their positions and personally profiting from their
pari delicto to favor an auditor who conspires or colludes   extended tenure. Accord Phar-Mor, 900 F. Supp. at
with corporate officers to misstate the corporation's        786-87; Buckley v. Deloitte & Touche USA LLP, No.
financial statements.                                        06-3291, 2007 U.S. Dist. LEXIS 37107, 2007 WL
                                                             1491403, at *5-7 (S.D.N.Y. May 22, 2007). Responding
     In terms of the general, agency-law based rule of       to the district court's position that any benefit [**320] to
imputation, the Committee advocates implementation of        the corporation is sufficient to negate the adverse-interest
exceptions to avoid shielding a wrongdoing auditor from      exception, the Committee suggests such understanding
liability to a company harmed by the auditor's               resulted from a misreading of this Court's decision in
malpractice. In support of such exceptions, and in line      Todd v. Skelly, 384 Pa. 423, 120 A.2d 906 (1956). See id.
with the Third Circuit's comments, the [*280]                at 429, 120 [*281] A.2d at 909 ("Where an agent acts in
Committee stresses the grounding of imputation doctrine      his own interest which is antagonistic to that of the
in the protection of innocents. See Committee Brief at 22    principal, or commits a fraud for his own benefit in a
("[N]o innocents will be protected when a wrongdoing         matter which is beyond the scope of his actual or
auditor seeks to impute to a financially devastated          apparent authority or employment, the principal who has
corporation the bad acts of [***15] the very corporate       received no benefit therefrom will not be liable for the
financial managers that the auditing firm was paid to        agent's tortious act."(emphasis added)). According to the
monitor."). Additionally, the Committee highlights the       Committee, the district court errantly converted a simple,
Third Restatement of Agency and, in particular, the          fact-specific comment from Todd into an overarching
following comment:                                           legal rule, which was never intended by this [***17]
                                                             Court. Furthermore, the Committee criticizes the district
         A principal may retain a service provider           court's finding of a benefit in the perpetuation, through
       on terms or for tasks that make imputation            alleged fraudulent collusion, of a harmful business
       of agents' knowledge irrelevant to                    strategy fostering deepening insolvency. Accord Thabault
       subsequent claims that the principal may              v. Chait, 541 F.3d 512, 529 (3d Cir. 2008) ("Given that
       assert against the service provider. For              [the chief executive officer's] conduct allowed [the
       example, a principal may retain a service             insurance company] to continue past the point of
       provider to assess the accuracy of its                insolvency, his actions cannot be deemed to have
       financial reporting or the adequacy of its            benefited the corporation."); Schacht v. Brown, 711 F.2d
       internal financial controls or other internal         1343, 1348 (7th Cir. 1983) ("We do not believe that such
       processes, such as its processes for                  a Pyrrhic 'benefit' "to the corporation "is sufficient to
       reporting and investigating complaints of             even trigger the . . . analysis which seeks to determine the
       harassment in the workplace. If the service           propriety of imputing to the corporation the directors'
       provider fails to detect or report                    knowledge of fraud."). At the very least, the Committee
       deficiencies, the principal's claim against           asserts, the matter is fact-based and, therefore, unsuited
       the service provider should not be defeated           for resolution at the summary judgment stage. 6
       by imputing to the principal its agents'
       knowledge of deficiencies in the process                     6 See Committee Reply Brief at 9 ("No evidence
       under scrutiny.                                              in the summary judgment record could support
                                                                    the proposition that the wrongdoing was
Restatement (Third) of Agency § 5.03 cmt. b (2006);                 perpetrated for AHERF or that it benefitted
accord id. at § 5.04 cmt. b ("[I]mputation protects                 AHERF. And PwC cites none. . . . The accounting
innocent third parties but not those who know or have               machinations and audit misbehavior here were
reason to know that an agent is not likely to transmit              directed at the principal -- at enabling the officers
material information to the principal.").                           [***18] to maintain their bonus-driven money
                                                                    grab and enabling Coopers's engagement partner
    As to the particular exceptions, [***16] the                    to maintain his valued and largest client.").
Committee first advances the adverse-interest exception
based on its proffer that the misdeeds of AHERF's                The Committee distinguishes the primary authority
                                                                                                                 Page 14
                                        605 Pa. 269, *281; 989 A.2d 313, **320;
                                              2010 Pa. LEXIS 159, ***18


relied upon by the district court, Baena, inter alia, on the   various federal and state decisions lending support to its
ground that it involved a for-profit corporation with          position. 7 In its reply brief, the Committee [*283] also
stockholders; whereas, AHERF, as a nonprofit                   highlights a concession by PwC that an auditor which
corporation, had no trading stock the price of which could     colludes with officers of its audit clients to defraud that
be manipulated and which could then be traded for assets.      client may not invoke imputation.
Thus, the Committee maintains, the Baena court's finding
of such benefit to the corporation deriving from similar              7     See BCCI Holdings (Luxembourg), S.A. v.
misconduct on the part of corporate officers and auditors             Clifford, 964 F. Supp. 468, 480 (D.D.C. 1997)
does not pertain here. Moreover, according to the                     (imputation "may not be invoked" where a
Committee, because many of AHERF's acquisitions                       professional "colludes with the agent in acting
[*282] were of money-losing enterprises -- and the                    adversely to the principal"); In re Sunpoint Sec.,
relevant ones were made in reliance on misstated                      Inc., 377 B.R. 513, 563 (Bankr. E.D. Tex. 2007)
financial statements -- such acquisitions caused AHERF                ("The rule of imputation under Texas law . . . does
only additional financial loss. See, e.g., Committee Reply            not protect those who collude with the agent to
Brief at 11 n.5 ("Indeed, the tens of millions of dollars in          defraud the principal."); In re Jack Greenberg,
cash laid out, debt assumed, and operating losses incurred            Inc., 240 B.R. 486, 508 n.29 (E.D. Pa. 1999)
as a result of these same acquisitions did nothing but help           (collecting auditor-liability cases in which courts
push the company into bankruptcy and form, in                         disapprove "imputation defense" where auditor
significant part, the basis of the Committee's [***19]                "has colluded with the corporation's wrongful
damage         measures."       (citing      JA3211-32212,            agent"); NCP Litig. Trust v. KPMG LLP, 187 N.J.
JA3223-3254)).                                                        353, 901 A.2d 871, 882 (N.J. 2006) [***21]
                                                                      (explaining that the imputation doctrine exists to
     In any event, the Committee contends, the litmus for             protect innocent third parties from being sued by
adverse interest lies in the subjective motivation of the             corporations whose agents have engaged in
agent-actor, not incidental or unintended benefit resulting           malfeasant behavior against those third parties,
from the action. See Committee Brief at 12-13 (citing                 but, "[w]hen the agent is in collusion with a third
Reich v. Compton, 57 F.3d 270, 279 (3d Cir. 1995)                     person to defraud the principal, the latter will not
(reflecting a similar position in the context of an alleged           be responsible for the knowledge of the agent in
party-in-interest transaction under the federal Employee              relation to such fraud" (quoting Hickman v.
Retirement Income Security Act)). The Committee also                  Green, 123 Mo. 165, 27 S.W. 440, 443 (Mo.
maintains that there is no requirement for the agent-actor            1894))); American Int'l Group, Inc. v. Greenberg,
to have proceeded "entirely" out of self-interest. [**321]            965 A.2d 763, 807 (Del. Ch. 2009) ("Delaware
For the latter proposition, the Committee references the              law provides no safe harbor to high-level
language from Todd previously discussed. See Todd, 384                fiduciaries who group together to defraud the
Pa. at 429, 120 A.2d at 909.                                          board."). See generally Restatement (Third) of
                                                                      Agency § 5.03 cmt. b and § 5.04 cmts. b and c,
     Next, the Committee argues that the law recognizes a             illus. 4 and 5.
separate "collusion" exception to the general rule of
imputation, with such exception being particularly                  Finally, the Committee favors adoption of an
appropriate in the context of collusive conduct by an          innocent decision-maker exception to imputation, see,
auditor invested with an independent professional duty to      e.g., In re Adelphia Commc'ns Corp., 365 B.R. 24, 57
report management fraud to a board of directors or             (Bankr. S.D.N.Y. 2007), which was disapproved by the
trustees. See Committee Reply Brief at 2 ("The                 district court in AHERF.
Committee . . . advocates for rules that promote
appropriate corporate oversight of [***20] financial                PwC, on the other hand, portrays the in pari delicto
management and, at the same time, recognize the import         defense as a substantive right of defendants, as
of the obligations assumed by auditors in meaningful,          distinguished from a loose, discretionary, equitable
independent financial statement audits -- audits that are      precept. PwC contends that Pennsylvania law embodies
themselves a critical tool in that corporate oversight and     an exceptionally strong variant of the defense, which
monitoring."). In this regard, the Committee references        [***22] would apply in all instances in which a plaintiff
                                                                                                                   Page 15
                                        605 Pa. 269, *283; 989 A.2d 313, **321;
                                              2010 Pa. LEXIS 159, ***22


can be said to be in equal, or mutual, fault with the          Universal Builders, consideration of the applicability of
defendant, and without any further assessment of               the doctrine [***24] of unclean hands or in pari delicto
equitable matters or considerations of public policy. See      is not a mechanical application of the law of agency, but
Brief for PwC at 34-35 (citing Feld & Sons v. Pechner,         rather involves discretionary attention to the fairness of
Dorfman, Wolfee, Rounick & Cabot, 312 Pa. Super. 125,          applying it to the facts in a given case."); In re Jack
133-38, 458 A.2d 545, 549-52 (1983)). 8                        Greenberg, Inc., 240 B.R. 486, 505-06 (Bankr. E.D. Pa.
                                                               1999). According to PwC, however, such courts
       8 See also id. at 36-37 ("The only cases we have        inappropriately confused the respective defenses and are
       identified in which this Court has declined to          simply mistaken in their prediction of this Court's
       apply in pari delicto are where there is a gross        treatment. See id. (citing In re Adelphia, 365 B.R. at 48).
       inequity of position, and a stronger party
       oppresses or takes advantage of a weaker one. . . .          In its discussion, PwC stresses that this Court has
       These decisions are based not on unbounded              never restricted in pari delicto to particular causes of
       concepts of general equity, but on the legal            action. PWC observes that the defense is employed in the
       conclusion that the defendant is far more at fault      contract setting [*285] to bar breach-of-contract claims
       than the plaintiff." (citing Peyton v. Margiotti,       where the plaintiff bears at least equal fault, see, e.g.,
       398 Pa. 86, 92-93, 156 A.2d 865, 868-69 (1959),         N.Y. & Pa. Co. v. Cunard Coal Co., 286 Pa. 72, 84, 132
       Palmer v. Foley, 305 Pa. 169, 175-76, 157 A. 474,       A. 828, 831 (1926), as it has been employed to bar
       476 (1931), and Thomas v. Shoemaker, 6 Watts &          negligence actions, see, e.g., Pinter v. James Barker, Inc.,
       Serg. 179, 183 (1843))).                                272 Pa. 541, 544, 116 A. 498, 498 (1922) (citing McCool
                                                               v. Lucas Coal Co., 150 Pa. 638, 24 A. 350, 30 Week.
      [**322] [*284] PwC's reasoning, in this respect, is      Notes Cas. 251 (1892)), and claims of fraud, see, e.g.,
based upon its understanding that application of in pari       Jackson v. Thomson, 222 Pa. 232, 240, 70 A. 1095, 1097
delicto lacks the sort of moral dimension associated with      (1908). On these arguments, PwC contends that in pari
the cognate, equitable maxim of unclean hands. 9 PwC           delicto bars all causes of action [***25] asserted against
references the lead opinion in Lucey v. WCAB (VY-Cal           it by the Committee on account of the misconduct of
Plastics PMA Group), 557 Pa. 272, 279, 732 A.2d 1201,          AHERF's officers. See Brief for PwC at 34-35 ("Where a
1204 (1999) [***23] (plurality), as supporting the notion      sophisticated corporate entity with in-house certified
that actions at law concern only the "rights and liabilities   public accountants deliberately misstates its own
of the parties," and as enforcing a sharp divide between       financial statements and withholds material information
law and equity in terms of the advancement of moral            from its outside auditor, the corporation bears at least
ends. See Brief for PwC at 47 ("Because of its origins in      equal fault as the auditor who did not detect the
equity, the 'unclean hands' doctrine has a moral               corporation's fraud (or even is alleged to have aided and
component not present with in pari delicto").                  abetted that fraud)."). It is PwC's position that adoption of
                                                               the Committee's position would represent an effective
       9 As support, PwC cites, inter alia, Reading            elimination of in pari delicto from the auditor-liability
       Indus. Mfg. Co. v. Graeff, 64 Pa. 395, 402 (1870)       setting, and would permit corporations to shift
       (referencing the principle that contracts in            responsibility for their own agents' misconduct to third
       violation of a statute are unenforceable, albeit the    parties (such as PwC) who were less at fault than the
       parties may be in pari delicto, "however                corporation itself. PwC claims such a rule would not only
       ungracious and abhorrent to our sense of justice        be unfair to third parties dealing with corporations, but
       such a defence may be" in the particular case).         unwisely would reduce the incentives for corporations in
                                                               selecting and monitoring their agents.
     It is on this basis that PwC distinguishes Universal
Builders, as the case proceeded in equity as opposed to at          [**323] Particularly in its framing of its arguments
law, and the defendant asserted the equitable defense of       concerning imputation, PwC vigorously denies the
"unclean hands." Id. at 552-54, 244 A.2d at 12-14. PwC
                                                               Committee's allegations of negligence or wrongdoing on
recognizes that some courts have equated Universal             its part; moreover, at least initially, it dismisses such
Builders' analysis of unclean hands with in pari delicto.      [***26] allegations as irrelevant. Instead, PwC points to
See Adelphia, 365 B.R. at 48 ("This Court thus believes        the culpability of AHERF officers in terms of the
that under the law of Pennsylvania, as articulated in
                                                                                                                  Page 16
                                         605 Pa. 269, *285; 989 A.2d 313, **323;
                                               2010 Pa. LEXIS 159, ***26


company's downfall. See, e.g., Brief for PwC at 30             comments relied on by the Committee by suggesting
("AHERF's managers chose to pursue a growth strategy           [***28] that C&L's duties were to "perform only a
for the corporation that was ill-conceived and poorly          regular financial-statement audit, "Brief for PwC at 24,
executed. When the strategy began to fail, they artificially   not to "assess the accuracy of [AHERF's] financial
inflated AHERF's financial results to enable the company       reporting or the adequacy of its internal financial
to continue it's growth strategy."). According to PwC,         controls," Restatement (Third) of Agency § 5.03 cmt. b. In
and in line with the district court's reasoning, the           [*287] this regard, PwC references professional
managers' wrongdoing was perpetrated in the course of          standards distinguishing between these types of
their employment and for AHERF's [*286] benefit, and,          engagements. See Codification of Statements on Auditing
therefore, a straightforward application of longstanding       Standards Numbers 1 to 73, Including Statements on
principles of agency law requires attribution of the           Standards for Attestation Engagements (AICPA 1995), at
conduct to the corporation. In particular, PwC highlights      95, 805. 10
passages from Pennsylvania decisions explaining that a
principal is liable for an agent's actions "even though the           10 PwC does recognize that C&L undertook the
principal did not authorize, justify, participate in or know          obligation to "inform [AHERF] of matters that
of such conduct or even if he forbade the acts or                     come to [C&L's] attention "in the course of the
disapproved of them, as long as they occurred within the              audit "that represent significant deficiencies in the
agent's scope of employment." Travelers Cas. & Sur. Co.               design or operation of the internal control
v. Castegnaro, 565 Pa. 246, 252, 772 A.2d 456, 460                    structure." Brief for PwC at 24-25. Accordingly,
(2001); accord Aiello, 508 Pa. at 559, 499 A.2d at 285.               its arguments to this point remain centered on the
                                                                      perspective of a non-collusive auditor, since it is
     From [***27] this frame of reference, i.e., that of a            difficult to conceptualize a scenario in which an
non-collusive auditor, PwC also invokes various passages              auditor with knowledge of pervasive management
of the Third Restatement of Agency, including the                     fraud in reporting financial information would not
following comment from Section 5.03:                                  be required to disclose such fraud in accordance
                                                                      with the above commitment.
          If a principal's agents fail to disclose or
       misstate material information to a third                       [**324] Although several of PwC's arguments
       party who provides services to the                      hinge on its position that C&L [***29] agents did not
       principal, the agents' conduct may result in            engage in fraudulent conduct, it also argues (as it
       flawed work by the service provider. The                ultimately must in light of the Third Circuit's recitation
       agents' conduct may provide a defense to                and framing of the second certified issue) that imputation
       the service provider, if sued by or on                  applies even if the Committee were to prove its averment
       behalf of the principal, on the basis that              that C&L agents colluded with AHERF officers as
       the agents' knowledge, imputed to the                   alleged. In this regard, PwC recognizes the legitimacy of
       principal, defeats a claim that the principal           a "collusion exception" to the general rule of imputation,
       relied on the accuracy of the work done by              but it contends this exception is limited to circumstances
       the service provider. Subject to § 5.04, the            where an agent and the third party conspire to commit a
       agents' knowledge is imputed to the                     fraud against the principal. 11 PwC substantially relies on
       principal as a matter of basic agency law.              this Court's Gordon decision as supportive of this line of
                                                               its argument. See Gordon, 319 Pa. at 566, 181 A. at 578
Restatement (Third) of Agency § 5.03, cmt. b. According        ("However applicable the dictum that an agent about to
to PwC, "AHERF's officers withheld material                    commit a fraud will not announce his intention may be in
information from C&L and affirmatively gave C&L false          the case of fraud upon his own principal, it has no
information, and as a result C&L's audit did not detect the    application when the agent acting in its behalf or
fraud. C&L may defend against AHERF's claim by                 ostensibly so commits a fraud upon a third person."
imputing those officers' knowledge to AHERF as a               (quoting 3 SEYMORE D. & JOSEPH W. THOMPSON,
matter of law." Brief for PwC at 24.                           COMMENTARIES [*288] ON THE LAW OF
                                                               CORPORATIONS § 1778, at 347 (3d ed. 1927))).
    Moreover, PwC distinguishes the Restatement                Additionally, PwC references a line of cases following
                                                                                                                   Page 17
                                        605 Pa. 269, *288; 989 A.2d 313, **324;
                                              2010 Pa. LEXIS 159, ***29


Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th             imputation where the defendant is to some degree at fault
Cir. 1982), a [***30] groundbreaking decision in the           renders the [***32] doctrine of in pari delicto
auditor-liability setting. See Brief for PwC at 27.            meaningless as to corporate bodies, since [**325]
                                                               corporations can act only through their agents.
       11 Brief for PwC at 26 (citing 2 FLOYD R.
       MECHEM, A TREATISE ON THE LAW OF                             In terms of the mechanics of general imputation
       AGENCY § 1826, at 1412 (2d ed. 1914)                    theory, PwC supports the district court's "any benefit"
       (indicating imputation does not apply in favor of a     approach to the adverse-interest exception, and the
       third party "who has conspired with the agent to        corollary perspective [*289] that an agent must act
       defraud the principal"); Restatement (Third) of         entirely from self-interest for imputation to be avoided. 12
       Agency § 5.04 cmt. c ("A principal should not be        PwC also counters the Committee's position that the
       held to assume the risk that an agent may act           adverse-interest exception turns on the agent's subjective
       wrongfully in dealing with a third party who            intent and motivation, noting the Committee cites no
       colludes with the agent in action that is adverse to    legal authority for such proposition. Furthermore,
       the principal.")). See generally 3 WILLIAM M.           according to PwC, a purely subjective test would
       FLETCHER, CYCLOPEDIA OF THE LAW OF                      undermine essential predictability in relationships
       PRIVATE CORPORATIONS § 829 (2009)                       between third parties and agents. It maintains the
       ("Fraud on behalf of a corporation is not the same      distinction between fraud on, and fraud on behalf of, a
       thing as fraud against it.").                           corporation applies in this setting as well. See, e.g., Brief
                                                               for PwC at 27-28 ("Therefore, the District Court rightly
     In rebutting the Committee's perspective that the         concluded that, just as in Baena, '[m]anagement's scheme
imputation device serves solely to protect innocents, PwC      to misrepresent the financial condition of the company in
references Corn Exchange National Bank & Trust Co. v.          this instance permitted AHERF to grow as a company,
Burkhart, 401 Pa. 535, 544-45, 165 A.2d 612, 616 (1960)        which was a benefit to AHERF.'"(quoting AHERF
(discussing the rule that a principal-plaintiff is charged     Creditors'Comm. v. PwC, 2007 U.S. Dist. LEXIS 3331 at
with the knowledge and conduct of his agents in                *41)).
conducting a transaction within the scope of their
employment, in a context in which the defendant was                   12      In this [***33] regard, PwC cites as
alleged to have known the transaction was [***31]                     instructive: Todd, 384 Pa. at 429, 120 A.2d at
fraudulent), and the Superior Court's in Brickman Group,              909; Aiello, 508 Pa. at 559-60, 499 A.2d at
Ltd. v. CGU Ins. Co., 2004 PA Super 487, 865 A.2d 918,                285-86 (imputing the fraudulent representations
925 (Pa. Super. 2004) (applying in pari delicto in the                of a real estate agent because "his principal cannot
context of an illegal contract, apparently with fault on              benefit of his act and at the same time repudiate
both sides). PwC also suggests the primary justification              his authority" (emphasis added)); Gordon, 319
for imputation actually derives from the notion that a                Pa. at 562, 181 A. at 576 ("A principal is not
principal should bear responsibility for those it has placed          affected by the knowledge of an agent in a
in a position of trust and confidence. See Aiello, 508 Pa.            transaction in which the agent is acting adversely
at 559, 499 A.2d at 285-86. Again, PwC catalogues                     to the principal and entirely for his own or
references to in pari delicto in connection with the                  another's purposes." (quoting Restatement of
application of comparative negligence principles in the               Agency § 282(1) (emphasis added)); and the
tort arena, see, e.g., Smalich v. Westfall, 440 Pa. 409,              Third Circuit's Lafferty decision. See also
416, 269 A.2d 476, 481-82 (1970), and in the contract                 Gordon, 319 Pa. at 562, 181 A. at 577 ("The mere
area in association with the prohibition against                      fact that the agent's primary interests are not
enforcement of an illegal contract, see Brickman Group,               coincident with those of the principal does not
865 A.2d at 925, settings in which opposing parties may               prevent the latter from being affected by the
be at fault. Accord Restatement (Third) of Agency § 5.03              knowledge of the agent if the agent is acting for
cmt. b ("Defenses such as in pari delicto may bar a                   the principal's interests.").
plaintiff from recovering from a defendant whose
conduct was also seriously culpable."). It is PwC's                More broadly, PwC expresses concern that auditors
position that the Committee's approach of curtailing           should not be singled out for an ad hoc "wrongdoing
                                                                                                                 Page 18
                                        605 Pa. 269, *289; 989 A.2d 313, **325;
                                              2010 Pa. LEXIS 159, ***33


auditor" exception to general imputation rules, and thus
uniquely disabled from invoking imputation. PwC                         As the Jack Greenberg bankruptcy court
regards the New Jersey Supreme Court's decision in NCP               observed, following Universal Builders
as applying such an exception, see supra [***34] note 7,             ensures that Pennsylvania's objectives of
but it characterizes NCP as "an outlier case." Brief for             tort liability are served. Jack Greenberg,
PwC at 22. In this regard, PwC highlights the NCP                    240 B.R. at 508. "The primary objectives
dissent's criticism of a legal rule allowing "that simple            of tort liability in Pennsylvania are
negligence and breach of contract claims are sufficient to           compensating the victims of harm and
strip from the third party the right to reasonably rely on           preventing [***36] the occurrence of
representations made by duly appointed and constituted               harm in the future by deterring wrongful
corporate officers in the course and scope of their                  conduct." Id. at 512 (collecting
employment -- a [*290] reasonable reliance strongly                  Pennslvania state cases). In that case, the
engrained in our case law[.]" NCP, 901 A.2d at 896-97                goal of deterrence was served by
(Rivera-Soto, J., dissenting). PwC observes that,                    "subjecting the auditors to potential
according to the dissent, this "eviscerates the doctrine of          liability, thereby encouraging greater
constructive notice." Id. By way of contrast to NCP, PwC             diligence by them in such situations in the
offers decisions from several other courts which have                future." [*291] Id. at 514. And, because
imputed management fraud to plaintiff corporations and               the action had been commenced by a
entered judgments for auditors. 13                                   Chapter 7 trustee for the benefit of
                                                                     innocent creditors, the bankruptcy court
       13 See Brief for PwC at 23 (citing Baena, 453                 was "not concerned that allowing this
       F.3d at 1; Official Comm. of Unsecured Creditors              litigation to proceed on its merits would
       of Color Tile, Inc. v. Coopers & Lybrand, LLP,                allow a wrongdoer to benefit contrary to
       322 F.3d 147 (2d Cir. 2003); FDIC v. Ernst &                  the objective of tort liability that only
       Young, 967 F.2d 166 (5th Cir. 1992); Cenco, 686               victims be compensated." Id. at 517; see
       F.2d at 449; MCA Fin. Corp. v. Grant Thornton,                also id. at 511-12 (citing In re
       LLP, 263 Mich. App. 152, 687 N.W.2d 850 (Mich.                Phar-Mor[], 900 F. Supp. [at 787]
       Ct. App. 2004); Mid-Continent Paper Converters,               (explaining that "the objectives of tort
       Inc. v. Brady, Ware & Schoenfeld, Inc., 715                   liability, to wit, compensation of victims
       N.E.2d 906 (Ind. Ct. App. 1999); [***35] Miller               of wrongdoing and deterrence of future
       v. Ernst & Young, 938 S.W.2d 313 (Mo. Ct. App.                wrongdoing" would be served if the
       1997); and Seidman & Seidman v. Gee, 625 So.                  litigation trust, as successor to the debtor,
       2d 1 (Fla. Dist. Ct. App. 1992)).                             ultimately prevailed on the debtor's claims
                                                                     against its former accounting firm as any
     Finally, PwC argues the Committee cannot be treated             recovery would inure to the benefit of
as an "innocent successor," because it voluntarily stepped           creditors having an interest in the trust)).
into AHERF's shoes to bring its claims.
                                                              Brief for Amicus NABT at 17. NABT notes that neither
      [**326] This matter has drawn amici submissions,
                                                              Lafferty nor the AHERF district court accounted for
which we appreciate, from: the National Association of
                                                              Universal Builders, [***37] discussed Pennsylvania's
Bankruptcy Trustees ("NABT") and the International
                                                              policy against extending equitable doctrines to shield
Association of Insurance Receivers, supporting the
                                                              wrongdoers to the detriment of innocent parties, or
Committee; and the American and Pennsylvania
                                                              mentioned the objectives of Pennsylvania's tort-liability
Institutes of Certified Public Accountants (collectively
                                                              scheme.
the "Accountant Institutes") and the Center for Audit
Quality, supporting PwC. The Committee's amici focus              PwC's amici, on the other hand, supplement the
substantially on the position that actions pursued by         arguments with a discussion of systemic risks faced by
bankruptcy trustees and creditors' committees should not      auditors subject to liability in scenarios involving rogue
be necessarily subject to defenses which would have been      corporate officers, which may affect the insurability and
available against the debtor. For example, NABT argues:       viability of auditing concerns. For example, the
                                                                                                                 Page 19
                                        605 Pa. 269, *291; 989 A.2d 313, **326;
                                              2010 Pa. LEXIS 159, ***37


Accountant Institutes argue:                                        accountants will be forced to be more
                                                                    selective about the clients they serve,
          The deleterious effects to the profession,                choosing only those with "blue ribbon"
       and ultimately to the public, from the                       risk management and oversight systems,
       positions advocated by the Committee and                     and rejecting those with less sophisticated
       its amici are several. First, allowing a                     internal controls to minimize the
       client that perpetrated a fraud to shift its                 accountants's [***39] litigation risk. Yet
       own responsibility for preventing and                        these are the clients that are in the greatest
       detecting fraud to the outside auditor will                  need of quality auditors, and the failure to
       require auditors to expand the scope of                      obtain such services may correspondingly
       audits, looking into every transaction that                  [a]ffect those companies' investors, and
       formed the basis of the client's financial                   ultimately the economy.
       statements, in order not to expose
       themselves to allegations that they                   Brief for Amici Accounting Institutes at 17-18 (citations
       participated in the fraud, if only through            omitted); accord Brief of Amicus Center for Audit
       inadvertence. This would result in                    Quality, at 18 ("Because '[t]he threat of disproportionate,
       prohibitively expensive audits and not be             catastrophic liability is not necessary to preserve or
       acceptable to clients, nor consistent with            enhance audit quality,' and such liability would have the
       the limited nature of an audit described              perverse effect of reducing the incentive of those charged
       above.                                                with the governance of the entity to police or deter fraud,
                                                             the Committee's proposed departure from the agency and
            The litigation [***38] risk generated            in pari delicto doctrines is particularly unwarranted, and
       by these cases, even when traditional                 unjustifiable." (citation omitted)).
       agency and other widely-accepted
       doctrines apply, [*292] is tremendous.                    [HN2] Our review of questions of law certified by
       While accountants are frequently viewed               the federal courts is plenary. Salley v. Option One
       as having deep pockets, that is not true,             Mortgage Corp., 592 Pa. 323, 329, 925 A.2d 115, 118
       particularly in the case [**327] of                   (2007).
       smaller firms and solo practitioners so
       many of which provide service in this                      [*293] II.
       State. And even the few large firms are at
                                                                  As a threshold matter, the parties' arguments traverse
       risk. The demise of one of the large
                                                             some areas beyond the issues expressly certified by the
       accounting       firms    would      have
                                                             Third Circuit, such as the viability in Pennsylvania of a
       repercussions far beyond the accounting
                                                             cause of action for aiding and abetting a breach of
       industry.
                                                             fiduciary duty. 14 The Third Circuit also suggested we
            [H]oldings such as those proposed by             [***40] may wish to address a question which it did not
       the Committee and their amici, which seek             include within its certification request, namely the
       to create "exceptions" or introduce                   validity of an innocent-decision-maker exception to
       ambiguity, to well-settled legal doctrines,           imputation. See AHERF Creditors' Comm. v. PwC, No.
       will exacerbate the litigation explosion.             07-1397, 2008 U.S. App. LEXIS 18823, 2008 WL
       An increase in litigation will result in an           3895559, at *4 n.4
       increase in liability insurance protection
                                                                    14 [HN3] Under present Pennsylvania law as
       for auditors (if such insurance remains
                                                                    established by the Commonwealth Court as the
       available at all); such costs will be passed
                                                                    highest appellate court which has reached the
       on to the clients in the form of increased
                                                                    issue, aiding and abetting a breach of fiduciary
       audit fees.
                                                                    duty is a recognized cause of action. See Koken v.
           Moreover, small clients may have                         Steinberg, 825 A.2d 723, 732 (Pa. Cmwlth. 2003).
       trouble finding auditors at all. That is,                    The Third Circuit has asked us to consider only
                                                                    whether in pari delicto applies in the context of
                                                                                                                   Page 20
                                        605 Pa. 269, *293; 989 A.2d 313, **327;
                                              2010 Pa. LEXIS 159, ***40


       such a claim, see AHERF Creditors' Comm. v.                    confederate fraud, its maxim is in pari delicto,
       PwC, No. 07-1397, 2008 U.S. App. LEXIS 18823,                  potior est condition defendentis. Neither party
       2008 WL 3895559, at *6 ("Whether it would                      will be aided or relieved against a contract
       make sense to allow in pari delicto to shield                  executed by him."); cf. McAdam v. Dean Witter
       persons alleged to have knowingly aided and                    Reynolds, Inc., 896 F.2d 750, 756 (3d Cir. 1990)
       abetted this sort of misconduct . . . remains an               (characterizing the traditional treatment of in pari
       open question."), not the underlying viability of              delicto as a common-law defense functioning as a
       such a claim under Pennsylvania law.                           "legal corollary" to the equitable unclean-hands
                                                                      maxim (citing Rothberg v. Rosenbloom, 808 F.2d
     With respect to all, [HN4] the resolution of certified           252, 256 n.6 (3d Cir. 1986))); Am. Int'l Group,
issues by this Court is an unusual practice through which,            Inc., Consol. Derivative Litig., 976 A.2d 872, 882
for the sake of comity, we undertake to address legal                 (Del. Ch. 2009) (observing that "Delaware, like
issues outside the familiar setting of a case over which we           most American jurisdictions and our federal
maintain conventional [***41] jurisdiction. In such a                 common law . . . embraces to some extent the
landscape, proceeding beyond the matters we are                       venerable in pari delicto [***43] doctrine").
expressly asked to address raises both jurisdictional and             16 We bear in mind throughout our discussion
prudential concerns which would immeasurably [**328]                  that the just application of the broader maxim and
compound the difficulties already associated with                     its derivatives are integrally dependant on the
deciding multiple issues within a single case in a Court of           setting. See Grede v. McGladrey & Pullen LLP,
seven members. Therefore, it will be our practice to                  No. 08 C 2205, 421 B.R. 879, 2008 U.S. Dist.
confine ourselves as closely as possible to the certified             LEXIS 74011, 2009 WL 3094850 (N.D. Ill. Sep.
questions, including in our treatment only subsidiary                 29, 2009) ("The Latin maxim, like nearly all of its
legal matters fairly subsumed within those certified                  fratres, is a concept, not a rule. Standing alone, it
issues.                                                               decides nothing and explains little. The usefulness
                                                                      of the maxim depends on the context in which it
    A. In Pari Delicto                                                is invoked").
     As noted, we will begin our own substantive                           For this reason, the Universal Builders
discussion with the second of the questions framed by the             decision has limited application, since, as PwC
Third Circuit, which seeks clarification of the in pari               develops, it involved the application of the
delicto defense. The Latin derivation and equitable                   unclean hands doctrine in a case brought in
origins of the underlying common-law [*294] maxim                     equity. As such, it cannot fully answer the
have been well traveled and need not be revisited at                  question of how in pari delicto should function
length here. See Hershey v. Weiting, 50 Pa. 240, 244                  with regard to claims substantively grounded at
(1865) (applying the maxim "[i]n pari delicto, melior est             law.
coditio defenditis" together with the clean-hands maxim
in an equity context). [HN5] Unlike the cognate                    [HN6] As one Pennsylvania court has noted, in pari
clean-hands maxim, however, in pari delicto in                delicto, as an at-law defense, has been applied principally
Pennsylvania, as in many other jurisdictions, has             in situations in which one party seeks to enforce an
surmounted its moorings in strict equity jurisprudence        unlawful contract and where a participant in illegal
and transitioned [***42] into a defense in actions at law.    conduct seeks an accounting for related activity. See
15 See generally T. Leigh Anenson, Treating Equity Like       Tarasi v. Pittsburgh Nat'l Bank, 11 Pa. D.&C. 3d 273,
Law: A Post-Merger Justification of Unclean Hands, 45         285 [*295] (C.P. Allegh. 1978). 17 That court also
AM. BUS. L.J. 455, 482-85 (2008) (referencing the in          observed, [**329] however: "The cases dealing with
pari delicto defense in a broader discussion of the partial   [***44] these situations have made sweeping statements
merger between law and equity from a viewpoint that the       which suggest broader applicability of the doctrine of in
merger represents a positive advancement in the law). 16      pari delicto." Id. (citations omitted). Certainly, in light of
                                                              the stance of Pennsylvania courts, including this Court,
       15 See, e.g., Blystone v. Blystone, 51 Pa. 373,        parties are on ample notice that the judiciary is not
       375 (1865) ("The common law makes that which           tolerant of fraud and illegality, and those who come
       is fraudulent in fact void; but in all cases of
                                                                                                                   Page 21
                                        605 Pa. 269, *295; 989 A.2d 313, **329;
                                              2010 Pa. LEXIS 159, ***44


before it seeking common-law redress relative to matters       306-07, 105 S. Ct. at 2626-27 (reviewing the "classic
in which they bear sufficient culpability may suffer           formulation" of in pari delicto). In particular, [HN8]
disadvantage as a consequence of their own wrongdoing.         Pennsylvania [*296] requires the plaintiff be an active,
18                                                             voluntary participant in the wrongful conduct or
                                                               transaction(s) for which it seeks redress, and bear
       17 As PwC develops, [HN7] in pari delicto has           "substantially equal [or greater] responsibility for the
       also been referenced by courts in the negligence        underlying illegality" as compared to the defendant. Id.
       setting, for example, in cases involving personal       (citation omitted). 19 In this Commonwealth, as
       injury or property damage. In this class of cases at    elsewhere, in pari delicto serves the public interest by
       least, however, the comparative negligence and          relieving courts from lending their offices to mediating
       contribution statutes serve to cover much of the        disputes among wrongdoers, as well as by deterring
       ground formerly traveled by reference to the            illegal conduct. See id. at 756 (quoting Bateman, 472
       common-law maxim. See 42 Pa.C.S. § 7102(a)              U.S. at 306, 105 S. Ct. at 2626). See generally Am. Int'l
       (prescribing, in such scenarios, "contributory          Group, Inc., Consol. Derivative Litig. [hereinafter AIG],
       negligence shall not bar a recovery by the plaintiff    976 A.2d 872, 877 (Del. Ch. 2009) (explaining that one of
       or his legal representative where such negligence       the purposes of the "venerable in pari delicto doctrine . . .
       was not greater than the causal negligence of the       is to prevent courts from having to engage in inefficient
       defendant or defendants against whom recovery is        and socially unproductive accountings between
       sought, but any damages sustained by the plaintiff      wrongdoers").
       shall be diminished in proportion [***45] to the
       amount of negligence attributed to the plaintiff"              19      See generally Amelia Toy Rudolph and
       (emphasis added)); 42 Pa.C.S. § 8324(a) ("The                  Elizabeth Vranicar Tanis, Invoking In Pari
       right      of     contribution    exists     among             [***47] Delicto to Bar Accountant Liability
       joint-tortfeasors."). Thus, where these statutes are           Actions Brought by Trustees and Receivers
       applicable, it is only in unusual cases involving              "Where the Fault Springs, There Let Justice Fall,"
       intentional wrongdoing on the part of a plaintiff in           SN073 ALI-ABA 415, 423 (2008) [HN9]
       which in pari delicto may retain relevance.                    ("Although the precise standard for invoking in
       18 The inquiry takes on another dimension when                 pari delicto varies across jurisdictions, courts
       addressing statutory causes of action, since the               invariably focus on two aspects of the plaintiff's
       specific legislative objectives of the enactment               conduct: (1) the extent of the plaintiff's
       controlling the parties' legal rights must be                  responsibility for the wrongdoing vis-a-vis the
       considered. See, e.g., Perma Life Mufflers, Inc. v.            defendant; and (2) the connection between the
       Int'l Parts Corp., 392 U.S. 134, 138, 88 S. Ct.                plaintiff's wrongdoing and the claims asserted.").
       1981, 1984, 20 L. Ed. 2d 982 (1968) (rejecting a
       broadened construction of an in pari delicto                        Notably, some courts apparently have
       defense in a private action arising under federal              dispensed with the requirement that the relative
       antitrust law); see also Pinter v. Dahl, 486 U.S.              degrees of fault, as between the plaintiff and
       622, 632-33, 108 S. Ct. 2063, 2070-71, 100 L. Ed.              defendant, must be indistinguishable (or the
       2d 658 (1988) (elaborating on Perma Life in the                plaintiff's responsibility is clearly greater). See
       context of a private action brought under federal              Bateman, 472 U.S. at 307, 105 S. Ct. at 2627
       securities law).                                               (describing this more liberal approach to the
                                                                      defense, albeit refusing to apply it in the context
     While decisions of this Court addressing the in pari             of private actions under federal securities laws).
delicto defense are not plentiful, we find that its                   Pennsylvania law, however, has not followed a
development in Pennsylvania has followed the traditional              similar path. See, e.g., Peyton, 398 Pa. at 92-93,
common-law route as cogently described by the Third                   156     A.2d     at    868-69    (describing    the
Circuit in McAdam v. Dean Witter Reynolds, Inc., 896                  at-least-equal-fault approach, with reliance on
F.2d 750, 756-57 (3d Cir. 1990) [***46] (discussing the               Berman v. Coakley, 243 Mass. 348, 137 N.E. 667,
"traditional construction" of the in pari delicto defense in          668 (Mass. 1923)).
applying New Jersey law); see also Bateman, 472 U.S. at
                                                                                                                    Page 22
                                         605 Pa. 269, *296; 989 A.2d 313, **329;
                                               2010 Pa. LEXIS 159, ***47


       [**330] [HN10] The AIG court described some              458 A.2d at 550 (quoting Richardson v. Mellish, 130 Eng.
downsides of departing [***48] from a traditional and           Rep. 294, 303 (1824)), [**331] the recognition of a
relatively strong approach to the recognition of the in         common-law in pari delicto defense is, in the first
pari delicto defense, including:                                instance, a refection of the judicial implementation of
                                                                social policy. Cf. Graeff, 64 Pa. at 402 ("The rule
            dampen[ing] the incentive for law                   [preventing [***50] enforcement of prohibited contracts]
       compliance by preserving the hope that the               is one of policy and only to be vindicated on that
       costs of an exposed conspiracy might be                  ground."). We therefore believe the judicious
       shifted to the corporation's partners in                 consideration of competing policies which may be
       crime. Such a departure would also require               implicated in the extension of the defense to novel
       that this court engage in an extremely                   settings remains within the appropriate purview of our
       complex economic and fault-finding                       courts. Accord id. 22
       inquiry involving [*297] speculation
       about the extent to which each participant                      21 Accord AIG, 976 A.2d at 882 n.21 [HN12]
       was a net winner or loser as a result of its                    ("It should be observed that the defense of
       illegal conduct.                                                illegality is allowed from motives of public
                                                                       policy, rather than from a regard for the interests
AIG, 976 A.2d at 877. We are in full accord with such                  of the objecting party. . . . The objection comes in
perspective as it applies to instances in which a corporate            appearance from the individual litigant, but in
plaintiff can be said to be at least equally culpable                  reality from society -- the state speaking through
relative to the subject of its lawsuit. 20                             the courts." (quoting 3 John Norton POMEROY,
                                                                       EQUITY JURISPRUDENCE § 940 n.5 (5th ed.
       20        Determining the culpability of the                    1941))); id. at 883 n.24 ("Whenever public policy
       corporation, of course, is complicated by the fact              is considered as advanced by allowing either party
       that such bodies must act through their agents.                 to sue for relief against the transaction, then relief
       Thus, as reflected in the Third Circuit's petition              is given to him." (quoting 2 POMEROY § 941)).
       and the parties' arguments, in the in pari delicto
       arena, where corporate plaintiffs are involved, the                  In responding to PwC's counterpoint, we
       subject of imputation is a key focus.                           observe that a number of the decisions it
                                                                       references to demonstrate that public policy
     Nevertheless, [HN11] the doctrine is subject to                   should not be taken into account actually lend
appropriate and necessary limits. As the United States                 support to the opposing proposition. For example,
Supreme Court has observed, the traditional or [***49]                 PwC cites Graeff, 64 Pa. at 395, to illustrate that
classic treatment of in pari delicto permits matters of                [***51] this Court "has faithfully applied in pari
public policy to be taken into consideration in                        delicto, 'however ungracious and abhorrent to our
determining the defense's availability in any given set of             sense of justice such a defence may be' in the
circumstances. See Bateman, 472 U.S. at 307, 310, 105 S.               particular case." Brief for PwC at 36 (quoting
Ct. at 2627-28; accord AIG, 976 A.2d at 888 ("'Unless' is              Graeff, 64 Pa. at 402); see also supra note 9. The
an important word in the in pari delicto context because               relevant passage of Graeff, however, is centered
the doctrine is subject to the exception when another                  on the enforcement of contracts in violation of a
policy is perceived to trump the policy basis for the                  statute, and the quoted language concerning the
doctrine itself."). This reflects the roots of the defense in          courts' sense of justice is followed by the
equity jurisprudence and undermines PwC's contention                   following admonition: "The rule is one of policy
that in pari delicto is to be woodenly applied and                     and only to be vindicated on that ground." Graeff,
vindicated in any and all instances in which the                       64 Pa. at 402. In any event, the Graeff Court
culpability of the plaintiff can be said to be at least equal          found it unnecessary to inquire further concerning
to that of the defendant. See Peyton, 398 Pa. at 92, 156               the appropriate application of the particular statute
A.2d at 868 (citing 8 P.L.E. § 109). 21 While we are                   involved to the circumstances, since the matter
aware of [*298] the admonition that public policy can                  under consideration fell outside the purview of the
be "a very unruly horse," Feld, 312 Pa. Super. at 134,                 statute in question. See id. Thus, it is important in
                                                                                                                   Page 23
                                         605 Pa. 269, *298; 989 A.2d 313, **331;
                                               2010 Pa. LEXIS 159, ***51


       all of these cases to contextualize the courts'          judgment about how the spoils and costs of illegal
       comments       before    drawing      broader-scale      conduct should be shared. The social utility of such a
       conclusions.                                             proceeding seems non-existent."). 23
       22     Again, our discussion is centered on the
       questions posed by the Third Circuit, which arise               23 The outrageous misconduct asserted on the
       in the summary-judgment context. For example,                   part of AHERF officers obviously distinguishes
       we have not been asked to clarify how the broader               this type of case from garden-variety contract and
       policy assessment translates into an at-law                     tort claims in which the defense should not be
       defense in terms of the relative responsibilities               available. To prevent abuses, courts obviously
       [***52] of the court and a jury as fact finder.                 must be judicious [***54] in screening cases in
       Here, however, we do take a modest liberty by                   which in pari delicto is asserted.
       commenting that similar broader policy-based
                                                                     We appreciate that the debate concerning the
       decisions generally have been allocated to the
                                                                availability and strength of in pari delcito defenses in the
       courts, with juries being charged to make factual
                                                                corporate auditing context often encompasses a
       determinations and reach specific legal
                                                                discussion of the Seventh Circuit's pioneering decision in
       conclusions having a less direct effect in the
                                                                Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th
       discernment of overarching social policies. See,
                                                                Cir. 1982), which favors a very strong application. See
       e.g., R.W. v. Manzek, 585 Pa. 335, 346, 888 A.2d
                                                                AIG, 965 A.2d at 826 (summarizing Cenco as being
       740, 746 (2005) (explaining, [HN13] in a
                                                                "based on the notion that immunizing auditors from
       negligence context, that "[t]he existence of a duty
                                                                malpractice claims, even in situations where the auditor's
       is a question of law for the court to decide");
                                                                compliance with professional standards might have
       Althaus ex rel. Althaus v. Cohen, 562 Pa. 547,
                                                                helped catch the fraud and limit the harm to the
       553, 756 A.2d 1166, 1168 (2000) (reflecting that
                                                                corporation, is good policy because it incentivizes
       the legal concept of duty of care "is necessarily
                                                                independent directors and even stockholders to be
       rooted in often amorphous public policy
                                                                effective monitors of [**332] managerial behavior"). 24
       considerations").
                                                                Like other groundbreaking opinions, Cenco subsequently
     In considering the application of in pari delicto in the   [*300] has been the subject of much thought and
auditor-liability setting, a fast-developing area of the law    discussion. For example, the decision has been criticized
but apparently one of first impression in this Court, it is     as a "free-wheeling opinion" which "[over-]simplifies the
useful to put aside, for the moment, all imputation             complexity" involved in auditor-liability cases. Id.; see
aspects. Were the [*299] action between a corporation           also id. at 831 n.245 (questioning "how immunizing the
controlled by a single individual and a sole-proprietor         auditors employed to help the independent directors
auditor, there would be a good case to be made that in          monitor will make either stockholders or [***55]
pari delicto should apply to negate all causes of action        independent directors better monitors"). See generally
arising      [***53]     out     of    intentional    auditor   Andrew J. Morris, Some Challenges for Legal
misrepresentations made at the behest of the owner, and         Pragmatism, 28 N. Ill. U.L. Rev. 1, 18-41 (2007)
thus, with full corporate complicity. At the very least, in     (providing an extensive critique of Cenco and its
the absence of some countervailing social policy at stake,      emphasis on relatively loose, pragmatic reasoning). At
the business can be deemed to have exposed itself to a          the very least, Cenco must be read in light of the
just, judicial determination whether or not to simply leave     Seventh's Circuit's subsequent decision in Schacht v.
the equally culpable parties "in the condition in which         Brown, 711 F.2d 1343 (7th Cir. 1983), which
[they are found]." Pittsburg v. Goshorn, 230 Pa. 212,           substantially distinguished, qualified, and, at least
227, 79 A. 505, 510 (1911); cf. AIG, 976 A.2d at 895            arguably, limited Cenco. See id. at 1347-49; cf. Sunpoint,
("AIG and its corporate constituencies must live with the       377 B.R. at 566 (presenting the perspective that "[t]he
consequences of having had a corporate governance               synthesis of [Cenco and Schacht] is essentially that the
structure that permitted managers to enmesh AIG in              imputation rule should be invoked in auditor liability
[false reinsurance and bid-rigging conspiracies]. . . . AIG     cases only under circumstances in which its application
cannot seek to have this court convene a proceeding             would serve the objectives of tort liability -- to
whereby . . . the court renders a normative and economic        compensate the victims of wrongdoing and to deter future
                                                                                                                  Page 24
                                        605 Pa. 269, *300; 989 A.2d 313, **332;
                                              2010 Pa. LEXIS 159, ***55


wrongdoing").                                                 on the profession as a whole, as well as those they serve.
                                                              26
       24 Cf. Dan L. Goldwasser, M. Thomas Arnold,
       and John H. Eickemeyer, Accountants' Liability,               26     One commentator recently portrayed the
       PLIREF-ACCT § 4:3.2 (2009) (observing that "in                current state of affairs in the profession as
       the context of accountants' liability claims, the             follows:
       Cenco defense has become synonymous with the
       in pari delicto defense").                                              In the wake of almost any kind of
                                                                             adverse         financial       news,
           Parenthetically, Cenco also has been credited                     accountants and other persons are
       as a heavy influence for the New York [***56]                         commonly sued. Many times the
       peculiarly strong approach to the in pari delicto                     primary wrongdoers in a financial
       defense a rule of standing. See AIG, 965 A.2d at                      debacle are insolvent, and a lender
       824 (citing Shearson Lehman Hutton, Inc. v.                           or investor must look to other
       Wagoner, 944 F.2d 114 (2d Cir. 1991)).                                parties to recoup losses. Frequently
                                                                             accountants are among the primary
    [HN14] We agree with the Seventh Circuit to the                          targets. The recent environment
extent it has held that in pari delicto may be available as                  after Enron, Worldcom and other
a defense in some cases arising in the corporate auditing                    [***58] well-publicized financial
context, across the broader part of the spectrum of the                      scandals, is a difficult one for
various common-law causes of action which may be                             accountants, as the profession has
asserted. See Cenco, 686 F.2d at 453. Nevertheless, we                       cost itself credibility and jurors are
also find that Pennsylvania law does not accord with                         often hostile as a result.
Cenco in terms of the degree to which the decision, in an
auditor-liability context, prioritizes the policy of                 Richard P. Swanson, Accountants' Liability,
incentivizing internal corporate monitoring over the                 Theories of Liability, SN073 ALI-ABA 23, 26
objectives of the traditional schemes governing liability            (ALI 2008).
in contract and in tort, including fair compensation and
deterrence of wrongdoing. 25                                        [**333] Common-law decision-making is subject to
                                                              inherent limitations, as it is grounded in records of
       25 Thus, to the extent the Third Circuit's Lafferty    individual cases and the advocacy by the parties shaped
       decision incorporates the above aspect of Cenco        by those records. Unlike the legislative process, the
       as a prediction of Pennsylvania law, the Third         adjudicatory process is structured to cast a narrow focus
       Circuit may now consider it disapproved.               on matters framed by litigants before the Court in a
                                                              highly directed fashion. 27 Here, we have not been
      [*301] In this regard, we are cognizant of the
special -- and crucial -- role assumed by independent         [*302] presented with sufficient information concerning
                                                              all relevant factors to lend our support to any general rule
auditors as a check against potential management abuses.
                                                              which would uniquely disable auditors, as a class, from
See [***57] United States v. Arthur Young & Co., 465
                                                              asserting an in pari delicto defense.
U.S. 805, 817-18, 104 S. Ct. 1495, 1503, 79 L. Ed. 2d 826
(1984). Nevertheless, as developed by PwC and its amici,             27 The broader tools available to the legislative
there are multiple levels of auditor review, and the                 branch in making social policy judgments,
specific responsibility of the auditor in any given                  including the availability of comprehensive
undertaking generally will depend on the terms of the                investigations, are discussed in Pegram v.
retention. Such complexities must be taken into account              Herdrich, 530 U.S. 211, 221-22, 120 S. Ct. 2143,
as a factor in a responsible policy-setting decision. The            2150, 147 L. Ed. 2d 164 (2000).
ripple effects of such decisions also merit consideration,
including those developed by PwC's amici: the growing         B. Imputation
prevalence of breathtaking malpractice claims against
auditors in the corporate insolvency setting; the                 As reflected above, at least in the absence of
corresponding litigation burden; and the resultant impact     evidence of volitional wrongdoing on the part of
                                                                                                                 Page 25
                                        605 Pa. 269, *302; 989 A.2d 313, **333;
                                              2010 Pa. LEXIS 159, ***58


AHERF's board of trustees, [***59] attribution of the         self-interest required, or, conversely, the quantum
officers' misdoings to AHERF is a linchpin to PwC's           [***61] of benefit to the corporation necessary to avoid
assertion of an in pari delicto defense. Thus, as is often    the exception's application (where self-interest is
the case, agency law plays a pivotal role in the defense's    evident).
practical availability.
                                                                     29 See generally In re National Century Fin.
    This brings us to the question initially raised in the           Enters., Inc., Inv. Litig., 604 F. Supp. 2d 1128,
Third Circuit's certification petition: whether such                 1143 (S.D. Ohio 2009) (recognizing that adverse
knowledge of the alleged fraud and complicity as was                 interest is "widely acknowledged" as an exception
held by AHERF officers should be imputed to the                      to the general rule of imputation).
corporation, thereby exposing it to an application of the
in pari delicto doctrine and/or other defenses which               As PwC highlights, the Todd decision, by its terms,
might arise, in the first instance, against an active         does lend some support to its position that any benefit
wrongdoer proceeding volitionally.                            will do. See Todd, 384 Pa. at 429, 120 A.2d at 909.
                                                              Nevertheless, the Court, in Todd, ultimately did not apply
     As amply developed in the parties' arguments,            imputation against the principal in the case. See id. at
[HN15] the imputation doctrine recognizes that principals     429-30, 120 A.2d at 909-10. Since the agent's wrongful
generally are responsible for the acts of agents committed    acts were found to have been outside the scope of his
within the scope of their authority. See Todd, 384 Pa. at     authority, see id., the degree of benefit necessary to
428-29, 120 A.2d at 909-10; Gordon, 319 Pa. at 565, 181       support imputation was not sharply in focus in the
A. at 577-78; accord AIG, 976 A.2d at 886-87 ("Having         opinion.
invested its employees with the authority necessary to
engage in the illegal actions at issue, AIG is responsible         Moreover, we agree with the district court that it
for those employees' (mis)use of that power."). This is, in   would be illogical to apply too broad a test for
part, because it is the principal who has selected and        self-interest. See AHERF Creditors' Comm. v. PwC, 2007
delegated responsibility to [***60] those agents;             U.S. Dist. LEXIS 3331 at *41 (reasoning that such a
accordingly, the doctrine creates incentives for the          standard recognizing the mere fact of an officer's
principal to do so carefully and responsibly. 28              compensation as sufficient to demonstrate self-interest
Imputation also serves to protect [*303] those who            "would discharge corporations from liability for the
transact business with a corporation through its agents       misdeeds [***62] of its officers or directors in almost
believing the agent's conduct is with the authority of his    every instance"). For example, in circumstances
principal. See id. at 553, 559, 499 A.2d at 285.              involving colluding corporate entities engaged in false
                                                              reinsurance and bid-rigging conspiracies (but,
       28 Aiello, 508 Pa. at 559, 499 A.2d at 285-86;         significantly, outside the corporate auditing context), the
       accord Restatement (Third) of Agency § 5.03 cmt.       AIG court made an extensive case for strong imputation
       b (2006) ("Imputation creates incentives for a         [*304] rules, including a low threshold for benefit,
       principal to choose agents carefully and to use        supporting a potent form of in pari delicto defense. See
       care in delegating functions to them."); cf. Byrne     AIG, 976 A.2d at 889. Its concern was that weakening the
       v. Dennis, 303 Pa. 72, 76, 154 A. 123, 125 (1931)      defense and associated rules of imputation would
       (explaining that imputation "is founded on the         represent an inappropriate reallocation of risks, as well as
       duty of the agent to communicate all material          eviscerate socially useful defenses which otherwise
       information to his principal, and the assumption       would be available to those who transact with
       that he has done so.").                                corporations. 30

     The first exception highlighted by the parties is that          30 The following passage from the AIG opinion
involving adverse interest -- [HN16] where an agent acts             offers further insight into the development of the
in his own interest, and to the corporation's detriment,             court's reasoning:
imputation generally will not apply. See [**334] Todd,
384 Pa. at 429, 120 A.2d at 909. 29 The primary                                   [T]he plaintiffs argue that
controversy surrounding the appropriate application of                       stockholders should be able to seek
the adverse-interest exception here concerns the degree of                   recovery on behalf of their
                                                                                                                 Page 26
                                       605 Pa. 269, *304; 989 A.2d 313, **334;
                                             2010 Pa. LEXIS 159, ***62


              corporations      when      faithless          particularly [***64] in a paradigm involving alleged
              fiduciaries had some personal                  collusion between the agent and the defendant. Cf.
              interest, or when there was a group            [**335] Adelphia, 365 B.R. at 56 ("This Court is not of a
              of innocent insiders who might                 mind to hold at this point in time, on motion, that even a
              have been able to thwart the illegal           peppercorn of benefit to a corporation from the wrongful
              activities. According to the                   conduct would provide total dispensation to defendants
              plaintiffs, in such situations the             knowingly and substantially assisting insider misconduct
              traditional rule [of in pari delicto]          that is overwhelmingly adverse to the corporation.").
              is unjust because the stockholders
              themselves [***63] did not act                      In light of the competing concerns, [HN17] the
              wrongfully, and therefore the                  appropriate approach to benefit and self-interest are best
              traditional in pari delicto rules              related back to the [*305] underlying purpose of
              should be set aside so that the                imputation, which is fair risk-allocation, including the
              corporation can be made whole                  affordance of appropriate protection to those who transact
              and thus the economic interests of             business with corporations. See generally In re Subpoena
              the innocent stockholders can be               on Judicial Inquiry and Review Bd., 512 Pa. 496, 504,
              protected.                                     517 A.2d 949, 953 (1986) (observing that, where the
                                                             Court is presented with a rule of law developed in the
                   But, the exceptions that the              courts, "we would of course be acting in the best spirit of
              plaintiffs request would eviscerate            the common law tradition in testing the rule against its
              the in pari delicto doctrine and               reason."). In this regard, we draw a sharp distinction
              contravene the policy judgments                between those who deal in good faith with the
              upon which that doctrine rests.                principal-corporation in material matters and those who
              Although one can sympathize with               do not.
              stockholders who lost money due
              to investments in a company that                    As to the former category, those [***65] who
              engaged in illegal activity, public            proceed in good faith, including those who may bear a
              policy is not served by allowing               degree of culpability (such as instances in which an
              corporations to sue their own                  auditor's malpractice is limited to negligence), we find
              co-conspirators. Stockholders like             that the parties' respective arguments raise very difficult
              the plaintiffs already have the                questions. See AIG, 976 A.2d at 890 n.49 (recognizing
              benefit of one very large exception            that the negligent-auditor scenario "is a matter upon
              to the doctrine: the ability to sue            which reasonable minds can differ"). While we read the
              corporate insiders on behalf of the            rationale for the New Jersey Supreme Court's decision in
              company. . . . [C]ontrary to the               NCP as effectively negating imputation (and thus barring
              plaintiffs' assertions, allowing               the in pari delicto defense) relative to comparable claims
              stockholders to expand this                    of negligence against auditors, see NCP, 901 A.2d at 888,
              exception . . . would not be                   890, we previously have noted our concern regarding the
              socially useful. Rather, it would              complexity of doctrine-setting social-policy judgments in
              force courts to engage in                      this arena.
              inefficient accounting inquiries
                                                                 On balance, [HN18] we believe the best course is for
              between       wrongdoers      while
                                                             Pennsylvania common law to continue to recognize the
              diminishing corporate boards'
                                                             availability of the in pari delcito defense (upon
              incentives to supervise their own
                                                             appropriate and sufficient pleadings and proffers), via the
              agents.
                                                             necessary imputation, in the negligent-auditor context.
                                                             This gives appropriate recognition to the fact that it is the
       AIG, 976 A.2d at 889.
                                                             principal who has empowered the agent and dovetails
     On the other hand, we believe there is also as much     with other defenses which may be available to a negligent
difficulty with applying too liberal a litmus for benefit,   auditor under prevailing [***66] Pennsylvania law, in
                                                                                                               Page 27
                                       605 Pa. 269, *305; 989 A.2d 313, **335;
                                             2010 Pa. LEXIS 159, ***66


particular, those related to audit interference. See         breaks down completely in scenarios involving secretive,
Jewelcor Jewelers and Distributors, Inc. v. Corr, 373 Pa.    collusive conduct between corporate agents and third
Super. 536, 550-53, 542 A.2d 72, 79-80 (1988) (citing        parties. [***68] Cf. AIG, 965 A.2d at 807 ("Delaware
National Surety Corp. v. Lybrand, 256 A.D. 226, 9 N.Y.S.     law provides no safe harbor to high-level fiduciaries who
2d 554 (N.Y. App. Div. 1939)). In this regard, we agree      group together to defraud the board."). 32 This is so
with PwC and its amici that the involvement of AHERF's       [*307] because imputation rules justly operate to protect
officers in the course of affairs [*306] surrounding the     third parties on account of their reliance on an agent's
company's demise, in the form of their asserted              actual or apparent authority. See Castegnaro, 565 Pa. at
outrageous misconduct, should have a legitimate place in     252-53, 772 A.2d at 460. Accordingly, such principles do
the negligence case against PwC to the degree C&L can        not (and should not) apply in circumstances in which the
be said to have acted with material good faith. 31           agent's authority is neither actual nor apparent, as where
                                                             both the agent and the third party know very well that the
       31        Indeed, [HN19] under prevailing             agent's conduct goes unsanctioned by one or more of the
       Pennsylvania law as presently established by the      tiers of corporate governance. 33
       Superior Court, contributory negligence in the
       accounting context (as contemplated by Jewelcor,             32 Accord NCP, 901 A.2d at 882 (explaining
       373 Pa. Super. at 550-52, 542 A.2d at 79-80),                that [HN22] the imputation doctrine exists to
       continues to function as a complete bar to                   protect third parties from being sued by
       recovery under negligence theory, see Gorski v.              corporations whose agents have engaged in
       Smith, 2002 PA Super 334, 812 A.2d 683, 702                  malfeasant behavior against those third parties,
       (Pa. Super. 2002). This stands in stark contrast             but, "[w]hen the agent is in collusion with a third
       with the more flexible comparative negligence                person to defraud the principal, the latter will not
       regime established by the Legislature to govern              be responsible for the knowledge of the agent in
       claims involving personal injury or property                 relation to such fraud" (quoting Hickman v.
       damage. See supra note 17.                                   Green, 123 Mo. 165, 27 S.W. 440, 443 (Mo.
                                                                    1894))).
           Permitting the use of imputation to support an
       in pari [***67] delicto defense in the                            As noted, we have departed from the NCP
       negligent-auditor scenario relative to those who             court's approach in the negligent-auditor scenario.
       have proceeded in good faith, by way of                      We observe, however, that [***69] we are in full
       comparison, represents a relatively modest                   agreement with its rationale as pertaining to
       allowance, particularly given the supporting                 collusive ones. Indeed, although there was a sharp
       requirement of at least equal fault.                         divide among New Jersey Justices in the NCP
                                                                    case concerning imputation relative to a negligent
     In terms of other important policy concerns, [HN20]            auditor asserting in pari delicto, all were of a
we do not believe it undermines the [**336] objectives              mind that in pari delicto was unavailable to a
of our tort and contract schemes to deny recovery to one            collusive one. See NCP, 901 A.2d at 881-82; id. at
whose agents have acted for the benefit of the corporation          891 (LaVecchia, J., dissenting) ("We allow a
with culpability exceeding that of the defendant. Cf. 42            carve-out from [imputation] for suits against third
Pa.C.S. § 7102(a) (recognizing the availability of                  parties who were active participants in the
recovery on a comparative negligence basis in                       fraud."); id. at 896 (Rivera-Soto, dissenting)
personal-injury and property-damage cases, where the                ("[T]he reach of the imputation defense is not
plaintiff's own negligence "was not greater than the                without bounds: the party invoking the imputation
causal negligence of the defendant"). Similarly, we                 defense cannot be complicit in the fraud
conclude that the traditional, liberal test for corporate           perpetrated.").
benefit should apply in such scenarios. See supra note 12.          33 See generally Restatement (Third) of Agency
                                                                    §§ 2.01 (explaining that [HN23] an agent acts
     The Third Circuit's certification petition, however,           with actual authority when the agent reasonably
also raises [HN21] the issue of auditor collusion, and we           believes the principal wishes the agent so to act),
take a much different view of fraudulent activity. In this          2.02 (defining apparent authority as the power
regard, the ordinary rationale supporting imputation
                                                                                                                  Page 28
                                         605 Pa. 269, *307; 989 A.2d 313, **336;
                                               2010 Pa. LEXIS 159, ***69


       held by an agent to affect a principal's legal           Byrne, 303 Pa. at 76, 154 A. at 125, does not logically
       relations with a third party "when a third party         pertain to instances in which there is collusion to
       reasonably believes the action has authority . . ..").   withhold information from corporate governance. 35

     AHERF's officers had no actual or apparent authority              35 Along these lines, this Court has explained:
to misrepresent corporate finances or collude with C&L
agents to secure [***70] false audit reporting, as alleged                         The rule that knowledge or
in the Committee's complaint. To the extent this occurred                     notice on the part of the agent is to
with the auditors' knowledge and acquiescence, as the                         be treated as notice to the principal
Committee avers, applying imputation as against AHERF                         is founded on the duty of the agent
would result in the corporation being charged with                            to communicate all material
knowledge as against a third party whose agents actively                      [***72] information to his
and intentionally prevented those in AHERF's governing                        principal, and the presumption that
structure who were non-participants in the fraud from                         he has done so. But the legal
acquiring such knowledge. Such an application of the                          presumptions ought to be logical
imputation doctrine seems ill-advised, if not perverse. 34                    inferences from the natural and
                                                                              usual conduct of men under the
       34 We have previously noted that portions of                           circumstances. But no agent who is
       PwC's       brief    blend    the    negligent-and                     acting in his own antagonistic
       collusive-auditor scenarios. In response to PwC's                      interest, or who is about to commit
       contentions, we observe that many of the                               a fraud by which his principal will
       decisions it references to support a broad                             be affected, does in fact inform the
       imputation rule do not readily extend to situations                    latter, and any conclusion drawn
       entailing collusion. For example, in one decision                      from a presumption that he has
       prominently cited by PwC, Gordon, 319 Pa. at                           done so is contrary to all
       555, 181 A. at 574, the defendant was an                               experience of human nature.
       insurance company which had been defrauded by
       an agent of a corporate insured (a trust company).              National Bank of Shamokin v. Waynesboro
       There was no indication of collusion on the part                Knitting Co., 314 Pa. 365, 371, 172 A. 131, 134
       of the insurance company or its agents in the                   (1934) (quoting Gunster v. Scranton Illuminating
       fraud. Moreover, Gordon repeatedly highlighted                  Heat & Power Co., 181 Pa. 327, 337-338, 37 A.
       the aim, of imputation, to protect [***71] those                550, 552 (1897)). We differ with PwC's
       lacking knowledge of the agent's misdeeds. See,                 suggestion that the adverse-interest exception and
       e.g., id. at 562, 181 A. at 576 [HN24] ("Liability              associated     benefit    assessment      function
       [of the principal] is based upon the fact that the              independently from such logic.
       agent's position facilitates the consummation of
       the fraud, in that, from the point of view of the             This confluence of agency-law principles
       third person, the transaction seems regular on its       demonstrates that, [HN26] fundamentally, imputation is
       face and the agent appears to be acting in the           not justified in scenarios involving secretive, collusive
       ordinary course of the business confided to him."        activity on the part of an auditor to misstate (and/or
       (citation omitted)).                                     sanction management's misstatement of) corporate
                                                                financial information. Cf. Corn, 401 Pa. at 544, 165 A.2d
     [**337] [*308] As noted, [HN25] the justification          at 616 ("[W]hen a party to a transaction acts in collusion
for imputation has also been stated in terms of the             [*309] with an officer [***73] of a bank, or knows or
recognition that it is the principal which has empowered        should know that the officer is acting beyond his
the agent; accordingly, the principal rightly bears the risk    authority and contrary to the best interests of the bank,
of agent malfeasance. This rationale, however, also does        the knowledge of the bank officer in such regard cannot
not support imputation in the collusive-auditor scenario.       be imputed to the bank."). In fact, as noted, both parties
The underlying assumption that an agent will                    accept this general conclusion (in principle at least) by
communicate all material information to his principal, see      recognizing a "collusion" exception to imputation.
                                                                                                                   Page 29
                                          605 Pa. 269, *309; 989 A.2d 313, **337;
                                                2010 Pa. LEXIS 159, ***73


     PwC nonetheless seeks to limit the breadth of this
exception. Principally, it maintains that it applies only in              [HN30] It is helpful to view questions
"circumstances in which the agent and the third party                  about imputation from the perspective of
conspire to commit a fraud against the principal." Brief               risk assumption, taking into account the
for PwC at 26. Thus, PwC's argument circles back to its                posture of the third party whose legal
perspective that the alleged, secretive falsification of               relations with the principal are at issue. A
corporate financial information by rogue officers can be               principal assumes the risk that the agents it
regarded as a benefit to the corporation -- even where the             chooses to interact on its behalf with third
defendant-auditor knows the information is false -- and                parties will, when actual or apparent
any amount of benefit will do to permit imputation.                    authority is present, bind the principal to
                                                                       the legal consequences of their actions.
     [HN27] In close cases, adverse interest and the                   This is because the principal chooses its
associated inquiry into benefit may be questions steeped               agents, has the right to control them, and
in fact and open to legitimate differences among                       determines how to characterize its agents'
reasonable minds. Cf. NCP, 901 A.2d at 878 ("Deciding                  positions and indicia of authority in
whether to permit an auditor to utilize [**338]                        manifestations made to third parties. A
imputation requires a detailed factual analysis [***74] of             principal's incentive systems and other
the dispute." (quoting Maureen Mulligan et al., Recent                 practices may also have the effect of
Developments in the Law Affecting Professionals,                       discouraging agents from reporting
Officers, and Directors, 36 Tort & Ins. L.J. 519, 535                  information that, after [***76] the fact, it
(2001))). Nevertheless, in the collusion scenario -- as a              would have been advantageous for the
matter of law -- we regard it to be in the best interests of a         principal to have known.
corporation for the governing structure to have accurate
(or at the very least honest) financial information. Thus,                   In contrast, [HN31] when the third
like other courts, in settings involving auditors who have             party whose legal relations with the
not proceeded in material good faith relative to a                     principal are at issue has not dealt with the
principal-corporation, we decline to consider a knowing,               principal (either directly or through an
secretive, fraudulent misstatement of corporate financial              agent) or has not dealt in good faith, the
information to be of benefit to a company.                             principal does not bear the risk that its
                                                                       agent may withhold relevant information
     [HN28] In terms of the parties' differences regarding             to serve the agent's own purposes or those
whether benefit should be assessed according to the                    of another person. A principal should not
subjective intent of the agent, we believe it is most                  be held to assume the risk that an agent
consistent with agency principles to evaluate benefit in               may act wrongfully in dealing with a third
light of the reasonable perspective of a third party in its            party who colludes with the agent in an
dealings with the agent. Accord Gordon, 319 Pa. at 562,                action that is adverse to the principal. That
181 A. at 576. That is, the question [*310] generally                  is, the third party should not benefit from
should be whether there is sufficient lack of benefit (or              imputing the agent's knowledge to the
apparent adversity) such that it is fair to charge the third           principal when the third party has acted
party with notice that the agent is not acting [***75]                 wrongfully or otherwise in bad faith. The
with the principal's authority. Notably, such approach                 circumstances surrounding a transaction,
dovetails with the core concept of apparent authority in               including the magnitude of benefit it
the first instance. See supra note 33.                                 [*311] will confer on the agent who
                                                                       arranges it, may place a reasonable third
     Along such lines, the Third Restatement includes a                party on notice that the agent will
caveat that [HN29] imputation does not protect "those                  withhold material information from the
who know or have reason to know that an agent is not                   principal.
likely to transmit material information to the principal."
Restatement (Third) of Agency § 5.04, cmt. b. The                Restatement (Third) of Agency § 5.04, cmt. c (citation
following elaboration is also provided:                          omitted). Our decision here is in full accord with the
                                                                                                                    Page 30
                                         605 Pa. 269, *311; 989 A.2d 313, **338;
                                               2010 Pa. LEXIS 159, ***76


Restatement approach in these material respects.                     In summary, and for the above reasons, we respond
                                                                to the Third Circuit's certification petition as follows:
    Thus, on the factual circumstances detailed [***77]
in the Third Circuit's certification [**339] petition,                      [*312] 1. [HN34] The proper test to
[HN32] entailing secretive, collusive conduct of agent                 determine the availability of defensive
and auditor, Pennsylvania law renders imputation                       imputation      in   scenarios   involving
unavailable, as the auditor has not proceeded in material              non-innocents depends on whether or not
good faith. 36                                                         the defendant dealt with the principal in
                                                                       good faith. While one of the primary
       36    Whether the Committee's proffers in this                  justifications for imputation lies in the
       regard are sufficient to surmount PwC's pending                 protection of innocents, in Pennsylvania, it
       summary-judgment challenge is a matter beyond                   may extend to scenarios involving auditor
       the scope of this opinion. Again, we recognize                  negligence, subject to an adverse-interest
       that PwC denies the averments of wrongful                       exception, as well as other limits arising
       conduct on the part of C&L and its agents.                      out of the underlying justifications
                                                                       supporting imputation. Imputation does
     Finally, in the course of PwC's arguments, it
                                                                       not apply, however, where [***79] the
highlights that the Committee also employs imputation
                                                                       defendant materially has not dealt in good
principles against it by attributing to PwC the conduct of
                                                                       faith with the principal.
C&L's agents who are alleged to have assisted AHERF
officers in the fraud. Our only comment is that, [HN33]                     2. [HN35] The in pari delicto defense
in scenarios involving mutual fault of agents engaging in              may be available in its classic form in the
unauthorized conduct on both sides of a transaction, to                auditor-liability setting, subject to ordinary
some extent both the audit firm and the corporation may                requirements of pleading and proof
be regarded as victims. 37 Sorting through the respective              (including special ones related to
rights and obligations of the litigants in such scenarios is,          averments of fraud where relevant), and
by its nature, difficult and complex (which, not by pure               consideration of competing policy
coincidence, serves as one of the reasons supporting the               concerns. However, as noted, imputation
extension of in pari delicto in such settings where                    is unavailable relative to an auditor which
[***78] there is also mutual fault). Here, we can say only             has not dealt materially in good faith with
that it is outside the scope of these certification                    the client-principal. This effectively
proceedings to address the vicarious aspect of any                     forecloses an in pari delicto defense for
liability borne by PwC or other lines of defense it may be             scenarios involving secretive collusion
asserting in the federal proceedings.                                  between officers and auditors to misstate
                                                                       corporate finances to the corporation's
       37 Of course, there may be independent grounds
       (other than mere imputation) for liability on the               ultimate detriment.
       part of the principals on either side of the
       transaction, such as when there is proven                     Having thus answered the certified questions, we
       negligence or acquiescence at the supervisory            return the matter to the Third Circuit.
       level; and, in such circumstances, a principal may
       be regarded in different stead.                              Mr. Chief Justice Castille, Messrs. Justice Eakin and
                                                                Baer, Madame Justice Todd, Mr. Justice McCaffery and
    III.                                                        Madame Justice Orie Melvin join the opinion.
                                                             102F40
********** Print Completed **********

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