Goldberg Segalla partner Jonathan S. Ziss spoke to Accounting Today about the firm’s recent victory in a Delaware Court of Chancery case that establishes a potential knockout defense for third-party service providers in actions involving allegations of corporate misconduct on the part of their clients.
Jonathan and fellow Professional Liability Practice Group partner Seth L. Laver defended one of the auditing firms in fraud claims brought by the receiver of several insolvent insurance entities against directors and officers of the entities, an outside management company, and two CPA firms.
“The CPA firms were sued on the theory that either they were complicit in what went wrong, or they failed to catch it,” Jonathan told Accounting Today. “We filed a motion to dismiss the complaint, raising a number of defenses. In essence, we asserted that the case was one of corrupt managers, who were claiming that the accountants either ‘helped us be bad, or failed to prevent us from being bad.’ This goes to the defense of in pari delicto [in equal fault], which recognizes that it’s not the function of the court to decide between wrongdoers.”
In dismissing the claims against the auditors, the court held that third parties, like auditors, “who are implicated in the alleged misconduct of the corporation’s directors and officers,” may assert in pari delicto as a defense to malpractice claims under Delaware law. The court also concluded that in pari delicto applies with equal force in the insurance receivership context.
“The court also noted that auditors are not fiduciaries,” added Jonathan. “The term is sometimes slung around loosely in asserting that auditors have breached their fiduciary duty. That’s the thrust of the decision, that the court was asked to recognize an auditor exception and chose not to. It should be a viable defense for auditors.”