Official Committee of Unsecured Creditors v. PricewaterhouseCoopers, LLP

Allegheny Health, Education, and Research Foundation (AHERF) (debtor) was a Pennsylvania corporation that acquired multiple hospitals and physician practices to build an integrated-delivery-system healthcare network. AHERF was suffering significant operating losses by 1996, but in 1996 and 1997, AHERF officers misstated AHERF’s finances to AHERF’s auditor, PricewaterhouseCoopers, LLP (PwC) (defendant), to conceal AHERF’s true financial position. Following PwC’s audits, PwC issued clean opinions to AHERF’s board, indicating that the financial statements were accurate. AHERF’s board thus believed that AHERF was doing well. By early 1998, the board realized AHERF’s poor financial condition. AHERF subsequently filed for Chapter 11 bankruptcy, and AHERF’s unsecured-creditors’ committee (the committee) (plaintiff), acting on AHERF’s behalf, brought an adversary proceeding against PwC for breach of contract, professional negligence, and aiding and abetting breach of fiduciary duty. The court granted summary judgment for PwC, finding that the in pari delicto doctrine barred the committee’s claims because the officers’ misconduct was imputed to AHERF, and AHERF and PwC were mutually at fault for the wrongdoing. On appeal, the Third Circuit certified two questions to the Pennsylvania Supreme Court: (1) what test Pennsylvania used to determine whether an agent’s fraud should be imputed to the principal if an allegedly non-innocent third party was asserting imputation defensively to shield itself from liability, and (2) whether the in pari delicto doctrine prevented a corporation from recovering against its accountants if the accountants conspired with corporate officers to misstate the corporation’s finances to the corporation’s detriment. The court responded that the proper test for determining if an allegedly non-innocent third party could assert defensive imputation involved analyzing whether the third party dealt with the principal in good faith. The court further responded that because defensive imputation was not available to an auditor that had not dealt materially in good faith with the client-principal, the in pari delicto doctrine was inapplicable in cases involving collusion between officers and auditors to misstate corporate finances.