Official Committee of Unsecured Creditors of Allegheny Health, Education & Research Foundation v. Pricewaterhousecoopers, LLP

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 07-1397

OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF ALLEGHENY HEALTH,
EDUCATION AND RESEARCH FOUNDATION,
Appellant

v.

PRICEWATERHOUSECOOPERS, LLP

Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil Action No. 00-cv-00684)
District Judge: Honorable David Stewart Cercone

Argued April 15, 2008
 Before: AMBRO, JORDAN, and MICHEL,* Circuit Judges

(Filed: May 28, 2010)

Beth Heifetz, Esquire
Jones Day
51 Louisiana Avenue, N.W.
Washington, DC 20001-0000

James M. Jones, Esquire
Jones Day
500 Grant Street, 31st Floor
Pittsburgh, PA 15219-0000

Patrick F. McCartan, Esquire (Argued)
Richard B. Whitney, Esquire
Jones Day
901 Lakeside Avenue, North Point
Cleveland, OH 44114-0000

Counsel for Appellant

Joseph F. McDonough, Esquire
Manion, McDonough & Lucas
600 Grant Street, Suite 1414
Pittsburgh, PA 15219-0000

*
Honorable Paul R. Michel, Chief Judge, United States
Court of Appeals for the Federal Circuit, sitting by designation.

2
Thomas G. Rafferty, Esquire (Argued)
Antony L. Ryan, Esquire
Cravath, Swaine & Moore
825 Eighth Avenue, Worldwide Plaza
New York, NY 10019-0000

Counsel for Appellee

OPINION OF THE COURT

AMBRO, Circuit Judge

We deal with a much-debated question of Pennsylvania
law—if a third party (here, an auditor) colludes with agents to
defraud their principal, do we impute to the principal the agents’
misconduct and, if so, does that preclude recovery by another
standing in the principal’s place? With the benefit of a much-
appreciated clarifying opinion from the Supreme Court of
Pennsylvania, we now hold that Pennsylvania law requires an
inquiry into whether the third party dealt with the principal in
good faith. Because the District Court did not have the benefit
of this clarifying opinion and did not conduct such an inquiry,
we remand for further proceedings.

I. Facts and Procedural Background

A. The Debtor’s Growth

3
 The debtor is the Allegheny Health, Education, and
Research Foundation (“AHERF”), a Pennsylvania non-profit
corporation that, prior to its liquidation, provided a wide range
of healthcare services, including operating hundreds of
physicians’ practices, 14 hospitals, and two medical schools.

From the mid-1980s, AHERF, under the leadership of
CEO Sherif Abdelhak, tried to build a region-wide “integrated
delivery system” through an aggressive program of acquisitions.
According to the then-popular theory, a health system could
make money by building a network of hospitals, physician
practices, and medical schools. The schools would staff the
hospitals with residents; the physician practices would, through
referrals, provide the hospitals with patients; and the hospitals
would bring in substantial net income through the provision of
high-dollar specialty care. Industry publications and news
articles from the 1990s discussing the integrated-delivery-
system model indicate that it was, at least for a time, the
business model du jour for large healthcare providers.1

1
See, e.g., Rhonda L. Rundle, The Great Divide: A Tale
of Two Doctors: One Who Embraces Managed Care, the Other
Who Assails It, Wall St. J., Oct. 26, 1997, at R11; Benjamin S.
Snyder, Future Lies in Managed Care, San Jose Mercury News,
Sept. 7, 1997, at 7P; George H. Pink & Tom Closson, An
Affordable Health-Care Delivery System that Works, Toronto
Star, Sept. 26, 1996, at A27; Robert Pear, Budget Cuts Stall
Broader Services in Medicare Plan, N.Y. Times, Nov. 26, 1995,
at A1 (“[H]ealth care providers are branching out into new

4
 AHERF pursued the integrated-delivery-system model by
acquiring hospitals and physician practices. When acquired,
these entities generally were losing money. The hospitals, some
thought, could be rehabilitated through better management,
operational efficiencies, price reductions from mass contracts
with vendors, and other economies of scale. The physician
practices, on the other hand, would perform better, but would
primarily serve as “loss leaders” to generate patients for the
hospitals’ high-dollar specialist care.

AHERF’s implementation of the integrated-delivery-
system model failed. By 1996, the company was suffering
substantial operating losses. Cost savings and efficiency gains
were not being realized, and cash was running out.

B. PwC’s 1996 and 1997 Audits of AHERF

areas, so one company can serve all of a patient’s medical needs
from birth to death. Health care executives say such full-service
arrangements, known as integrated delivery systems, are good
for patients and good for the company’s bottom line.”); Suzanne
White & Richard Lamm, Adam Smith Reshapes Colorado’s
Health Care, Denver Post, Nov. 11, 1997, at B-07; George
Anders & Rhonda L. Rundle, As Wellpoint Spinoff Attracts
Interest, Other Blue Cross Plans Consider Moves, Wall St. J.,
Feb. 16, 1995, at A3 (Blue Cross executive describes building
integrated delivery systems as “what everyone else in health
care is doing”).

5
 AHERF had for some time employed the services of
Coopers and Lybrand, now PricewaterhouseCoopers, LLP
(“PwC”), to audit its financial statements. Specifically, PwC
was engaged to provide an opinion on AHERF’s financial
statements to its board of trustees. PwC could either provide a
“clean” opinion, which would indicate that the statements were
accurate and complied with generally accepted accounting
principles (“GAAP”) and generally accepted auditing standards
(“GAAS”), or an “adverse” opinion, which would identify
deficiencies in the statements.

A group of high-level AHERF officers, led by David
McConnell (AHERF’s chief financial officer) and operating
with Abdelhak’s approval, is alleged to have knowingly
misstated AHERF’s finances in the figures they provided PwC
for the 1996 audit of AHERF. These misstatements were
designed to conceal how precarious AHERF’s financial position
was, and to make it look as though the integrated-delivery-
system model was beginning to pay dividends in the form of
cost savings and increased net income. As alleged by the
Official Committee of Unsecured Creditors (the “Committee”),
standing in the shoes of AHERF, PwC’s audit should have
brought these misstatements to light, but, rather than issuing an
adverse opinion as GAAP and GAAS required, PwC knowingly
assisted in the officers’ misconduct by issuing a “clean” opinion.
According to the Committee, the officers and PwC repeated this
misconduct in 1997.

The result of these misdeeds, according to the

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Committee, was that the AHERF board was under the false
impression that the company was in relatively good financial
shape. Thus, the board did not intervene in management’s
business strategy, and instead allowed Abdelhak to continue
making acquisitions.

C. Bankruptcy

By the spring of 1998, Abdelhak and McConnell were
unable to prevent board members from perceiving that
AHERF’s financial position was dire. Suppliers began
complaining directly to board members about not being paid,
and doctors threatened to quit over Allegheny General
Hospital’s lack of resources. As AHERF’s financial condition
leaked out, board members became less confident in Abdelhak’s
leadership, and in early June 1998 they removed him as
President and CEO. They also removed McConnell as CFO.
Soon thereafter, they terminated PwC and issued warnings that
their 1997 financial statements were not reliable.

AHERF’s corrective measures came too late, and in July
1998 it filed for relief under Chapter 11 of the Bankruptcy Code.

D. This Action

In this adversary proceeding, the Committee, on behalf
of AHERF, asserted three causes of action against PwC: (1)
breach of contract, (2) professional negligence, and (3) aiding
and abetting a breach of fiduciary duty. PwC moved for

7
summary judgment on numerous grounds.

On January 17, 2007, the District Court granted summary
judgment in favor of PwC. Official Comm. of Unsecured
Creditors of Allegheny Health, Educ. & Research Found. v.
PricewaterhouseCoopers, LLP (Allegheny I), No. 2:00cv684,
2007 WL 141059 (W.D. Pa. Jan. 17, 2007). Although PwC
asserted seven arguments in favor of granting summary
judgment to it, the District Court granted it on the sole ground
that AHERF was in pari delicto 2 with PwC, and thus the

2
In pari delicto is an ill-defined group of doctrines that
prevents courts from finding for a plaintiff equally at fault as the
defendant. See Cenco, Inc. v. Seidman & Seidman, 686 F.2d
449, 453–54 (7th Cir. 1982) (Posner, J.) (identifying multiple
doctrines that embody a common principle and often apply in
similar ways across various causes of action); see also Official
Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d
340, 354–55 (3d Cir. 2001) (“We nevertheless can legitimately
speak of one doctrine, in pari delicto, across the different claims
because the analysis under various causes of action will
typically be the same.”). It is a murky area of the law, and
courts in Pennsylvania have not been of one mind as to whether
the doctrine is legal or equitable. Compare Sacco v. Twp. of
Butler, 863 A.2d 611, 615 n.3 (Pa. Commw. Ct. 2004) (referring
to doctrine as “equitable”) with Feld & Sons, Inc. v. Pechner,
Dorfman, Wolfee, Rounick & Cabot, 458 A.2d 545, 548 (Pa.
Super. Ct. 1983) (referring to the “common-law” doctrine of in
pari delicto). Because it was not clear from the few
Pennsylvania cases invoking it how the doctrine applied to the

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Committee could not recover. Put another way, the Court found
that the wrongdoing of AHERF’s senior management must be
imputed to AHERF, and that the doctrine of in pari delicto
applies to bar the Committee’s claims, as AHERF was at least
as much at fault as PwC. Id. at *6.

On the issue of imputation, the District Court looked to
our decision in Lafferty, Official Comm. of Unsecured Creditors
v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), and applied
a two-part test to determine whether fraud of an officer is
imputed to a corporation. It found both prongs (course of
employment and benefit to the corporation) satisfied and
imputed the officers’ conduct to AHERF. Allegheny I, 2007
WL 141059, at *9–13. In particular, it set a low bar for benefit
to the corporation: “the question is a relatively simple
one—whether any benefit accrued to AHERF.” Id. at *10
(emphasis in original). Although it noted that there were “many
factual issues that are disputed,” the District Court determined
that “AHERF management was acting within the scope of their
employment in submitting the [false] financial statements and
that such misconduct enabled further acquisitions that, in the
short term, was a benefit to AHERF.” Id. at *11.

On the issue of in pari delicto, the District Court found
that even though the auditor was alleged to have improperly

causes of action at issue here, we submitted certified questions
to the Supreme Court of Pennsylvania.

9
colluded with management, the “mutual fault” of the corporation
(as a result of imputation) barred its (and thereby, the
Committee’s) claims. Id. at *13. The Court also rejected the
“innocent and independent decision-maker” argument3 adopted
by some courts to bar in pari delicto defenses in the auditor-
liability context. Id. at *14.

This timely appeal followed.

E. Certification to the Supreme Court of
Pennsylvania

Although we normally resolve issues of state law without
certifying questions to a state Supreme Court, this case includes
a dimension not previously considered in the Pennsylvania cases
cited to us. After reading the briefs and submissions of the
parties, hearing oral argument, and reviewing applicable
Pennsylvania law, we certified two questions to the Supreme
Court of Pennsylvania to clarify important and unresolved

3
The District Court looked to cases holding that
“innocent and independent” Board members of a corporation
could have, if so informed, stopped the wrongdoing. Those
cases thereby barred in pari delicto defenses against a
bankruptcy trustee seeking to recover against outside
professionals. See Allegheny I, 2007 WL 141059, at *14 (citing
In re Sharp Int’l Corp., 278 B.R. 28, 36 (Bankr. E.D.N.Y.
2002), and Wechsler v. Squadron, Ellenoff, Plesent & Sheinfeld,
L.L.P., 212 B.R. 34, 36 (S.D.N.Y. 1997)).

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questions concerning the interaction between the in pari delicto
doctrine and the imputation of an agent’s fraud to his principal
under Pennsylvania law. Official Comm. of Unsecured
Creditors of Allegheny Health, Educ. & Research Found. v.
PricewaterhouseCoopers, LLP (Allegheny II), No. 07-1397,
2008 WL 3895559, at *6 (3d Cir. July 1, 2008).

The Pennsylvania Supreme Court unanimously answered
the certified questions and returned the matter to us. Official
Comm. of Unsecured Creditors of Allegheny Health Educ. &
Research Found. v. PricewaterhouseCoopers, LLP (Allegheny
III), 989 A.2d 313 (Pa. 2010). It conducted a comprehensive
analysis of the certified questions, for which we are most
grateful, and we proceed with the benefit of that opinion.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction over this matter
pursuant to 28 U.S.C. § 1334(b). We have jurisdiction pursuant
to 28 U.S.C. § 1291.

We exercise plenary review over an appeal from a grant
of summary judgment. Revell v. Port Auth. of N.Y., N.J., 598
F.3d 128, 134 (3d Cir. 2010). Summary judgment is appropriate
if there is no genuine issue of material fact and the moving party
is entitled to judgment as a matter of law. Id.

III. Discussion

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 As we discussed in the certification request, the District
Court’s grant of summary judgment rests on two holdings.
First, the Court imputed to AHERF its officers’ fraud in
misstating the company’s finances to the corporation. Second,
it held that the doctrine of in pari delicto prevents AHERF (and
thereby the Committee standing in its shoes) from recovering
against PwC because, even were PwC in collusion with the
officers, the latter were joint fraudfeasors whose conduct was
imputed to AHERF. However, the District Court did not have
the benefit of Allegheny III when it considered Pennsylvania
law, and it did not consider whether imputation and in pari
delicto were appropriate under the Supreme Court of
Pennsylvania’s “good faith” test discussed below. In that
context, this case requires further inquiry, and we vacate the
judgment of the District Court and remand for further
proceedings.

A. Imputation

The first question we certified to the Supreme Court of
Pennsylvania concerned the test in Pennsylvania for imputing an
agent’s fraud to the principal. We asked:

What is the proper test under Pennsylvania law
for determining whether an agent’s fraud should
be imputed to the principal when it is an allegedly
non-innocent third-party that seeks to invoke the
law of imputation in order to shield itself from
liability?

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Allegheny II, 2008 WL 3895559, at *6. The Court answered the
question as follows:

The proper test to determine the availability of
defensive imputation in scenarios involving non-
innocents depends on whether or not the
defendant dealt with the principal in good faith.
While one of the primary justifications for
imputation lies in the protection of innocents, in
Pennsylvania . . . it may extend to scenarios
involving auditor negligence, subject to an
adverse-interest exception, as well as other limits
arising out of the underlying justifications
supporting imputation. Imputation does not
apply, however, where the defendant materially
has not dealt in good faith with the principal.

Allegheny III, 989 A.2d at 339.

Because the underlying purpose of imputation is “fair
risk-allocation, including the affordance of appropriate
protection to those who transact business with corporations,” id.
at 335, the Court “dr[e]w a sharp distinction between those who
deal in good faith with the principal-corporation in material
matters and those who do not,” id. This “sharp distinction” led
the Court to reach different policy outcomes for imputation in
the negligence context versus the collusion context.

For the former, the Court saw two possibilities. First, a

13
third party would generally be able to impute an agent’s bad acts
to the principal corporation if they benefit the corporation
(though the Court did not specify a minimum quantum of
benefit). Id. at 333. This “creates incentives for the principal to
[select and delegate responsibility to agents] carefully and
responsibly.” Id.4 In this manner, the Court maintained the
“traditional, liberal test for corporate benefit.” Id. at 336.

Second, a third party would not be able to impute an
agent’s bad acts to the principal corporation if those bad acts
were only in the agent’s self-interest and conferred benefits only
to the agent, not the corporation. Id. at 333–34. This is the
“adverse interest” exception to imputation.

4
The Court also looked for support outside the corporate
auditing context to the analysis of the Delaware Court of
Chancery’s AIG decision, in which Vice Chancellor Strine made
an “extensive case for strong imputation rules, including a low
threshold for benefit.” Id. at 334 & n.30 (citing Am. Int’l Group,
Inc., Consol. Derivative Litig. (AIG), 976 A.2d 872, 889 (Del.
Ch. 2009) (Strine, V.C.)). Vice Chancellor Strine balanced the
allocation of risk between (1) innocent shareholders attempting
to sue derivatively a third-party corporation alleged to have
conspired with the principal corporation, and (2) the principal
corporation’s co-conspirators, and he concluded that denying
imputation would “diminish[] corporate boards’ incentives to
supervise their own agents.” AIG, 976 A.2d at 889. He did not,
however, address the scenario of a suit filed against a negligent
auditor who failed to uncover the corporate conspiracy.

14
 Addressing the negligent-auditor context, the Court
concluded that, to the extent that an auditor is alleged to have
acted negligently in conducting the corporate audit, imputing the
beneficial misconduct of corporate officers (agents) to the
corporation may be appropriate because such a result “gives
appropriate recognition to the fact that it is the principal who has
empowered the agent[,] and [imputation] dovetails with other
defenses [that] may be available to a negligent auditor under
prevailing Pennsylvania law, in particular, those related to audit
interference.” Id. at 335.

The Court took pains, however, to limit the corporate-
benefit test to non-collusive scenarios. It took a different
approach to secretive, collusive conduct between corporate
agents and third parties that was “overwhelmingly adverse to the
corporation” even if the collusion provided “a peppercorn of
benefit.” Id. at 334–35 (citation omitted). In such cases, “the
ordinary rationale supporting imputation breaks down
completely,” and thus the corporation, or those in its place, may
sue the corporation’s auditor free of that auditor’s claim that the
misconduct of corporate officers is imputed to the corporation
itself. Id. at 336. This is because “imputation rules justly
operate to protect third parties on account of their reliance on an
agent’s actual or apparent authority,” but there can be no
justifiable reliance on the agent’s authority when “both the agent
and the third party know very well that the agent’s conduct goes
unsanctioned by one or more tiers of corporate governance.” Id.
Indeed, though the Court parted ways with New Jersey’s NCP

15
decision in the negligence context,5 it was in “full agreement
with its rationale as pertaining to collusive ones.” Id. at 336 &
n.32 (citing NCP Litig. Trust v. KPMG LLP, 901 A.2d 871,
881–82, 891, 896 (N.J. 2006)).

When the third party and an agent collude against the
corporation, the conduct is transparently unsanctioned.
Furthermore, the Pennsylvania Supreme Court rejected PwC’s
assertion that the “alleged, secretive falsification of corporate
financial information by rogue officers can be regarded as a
benefit to the corporation.” Id. at 337. This was because “it [is]
in the best interests of a corporation for the governing structure
to have accurate (or at the very least honest) financial
information.” Id. at 338. Therefore, “in settings involving
auditors who have not proceeded in material good faith relative
to a principal-corporation,” the Court “as a matter of law . . .
decline[d] to consider a knowing, secretive, fraudulent

5
In the negligence context, the Pennsylvania Supreme
Court read NCP “effectively [to] negat[e] imputation . . . relative
to comparable claims of negligence against auditors.” 989 A.2d
at 335 (citing NCP Litig. Trust v. KPMG LLP, 901 A.2d 871,
888, 890 (N.J. 2006)). In other words, unlike in Pennsylvania,
New Jersey does not allow negligent auditors to impute to a
corporation the misconduct of its corporate officers even if the
corporation received a benefit from that misconduct. See NCP,
901 A.2d at 888 (“[A]ny benefit [to the corporation] would not
be a complete bar to liability [of the auditor,] but only a factor
in apportioning damages.”).

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misstatement of corporate financial information to be of benefit
to a company.” Id. (emphasis added).

The Supreme Court concluded its discussion of
imputation by looking to what a reasonable third party should
glean from its dealings with a corporate agent. The touchstone
of the availability of an imputed defense for PwC is “whether
there is sufficient lack of benefit (or apparent adversity) such
that it is fair to charge the third party [PwC] with notice that the
agent [the officer group] is not acting with the principal’s
[AHERF’s] authority.” Id. Collusion between agent and auditor
makes imputation of the agent’s conduct to its principal
“unavailable [because] the auditor has not proceeded in material
good faith,” for the auditor is on notice that the officer-agent
will withhold material information from the principal. Id. at
338–39 (citing Restatement (Third) of Agency § 5.04, cmt. c
(2006)).

B. In pari delicto

The second question we certified to the Supreme Court
of Pennsylvania concerned the availability of the in pari delicto
defense to a particular auditor-liability scenario. We asked:

Does the doctrine of in pari delicto prevent a
corporation from recovering against its
accountants for breach of contract, professional
negligence, or aiding and abetting a breach of
fiduciary duty, if those accountants conspired

17
 with officers of the corporation to misstate the
corporation’s finances to the corporation’s
ultimate detriment?

Allegheny II, 2008 WL 3895559, at *6. The Court responded:

The in pari delicto defense may be available in its
classic form in the auditor-liability setting, subject
to ordinary requirements of pleading and proof
(including special ones related to averments of
fraud where relevant), and consideration of
competing policy concerns. However, . . .
imputation is unavailable relative to an auditor
which has not dealt materially in good faith with
the client-principal. This effectively forecloses an
in pari delicto defense for scenarios involving
secretive collusion between officers and auditors
to misstate corporate finances to the corporation’s
ultimate detriment.

Allegheny III, 989 A.2d at 339.

The Court noted that although in pari delicto has been
imported from equity and recast as an at-law defense, its origins
in equity mean that it “is subject to appropriate and necessary
limits.” Id. at 330. Even though the Court was “in full accord
with [the application of the in pari delicto defense] to instances
in which a corporate plaintiff can be said to be at least equally
culpable relative to the subject of its lawsuit, . . . matters of

18
public policy [are] to be taken into consideration in determining
the defense’s availability in any given set of circumstances.” Id.
In pari delicto is not to be “woodenly applied and vindicated in
any and all instances,” but instead may be trumped by another
policy more important than the policy basis for the doctrine
itself. Id. (citing Am. Int’l Group, Inc., Consol. Derivative
Litig., 976 A.2d 872, 888 (Del. Ch. 2009) (Strine, V.C.)). Public
policy (as set out below) is what undergirds in pari delicto, not
a concern with the interests of the party claiming it as a defense.
Id. at 330 n.21 (citations omitted).

Looking specifically at the auditor-liability setting, the
Court examined the Seventh Circuit Court’s “pioneering
decision” in Cenco v. Seidman & Siedman, 686 F.2d 449 (7th
Cir. 1982) (Posner, J.). It read Cenco as “favor[ing] a very
strong application” of in pari delicto based on the policy
judgment that it is desirable to “incentivize[] independent
directors and even stockholders to be effective monitors of
managerial behavior.” 989 A.2d at 331–32 (citation omitted).
The Supreme Court, however, prioritized the policy objectives
of the “traditional schemes governing liability in contract and in
tort” over the policy of incentivizing internal corporate
monitoring. Id. at 332. In so doing, it disapproved of Cenco
and our Lafferty decision to the extent that they place the policy
objectives of corporate monitoring ahead of those contemplated
by the traditional schemes governing liability. Id. at 332 &

19
n.25.6

The Supreme Court was “cognizant of the special—and
crucial—role assumed by independent auditors as a check
against potential management abuses,” and took the

6
In that respect, we note that Lafferty relied on a portion
of Cenco analyzing jury instructions and equating breach of
contract, negligence, and fraud as “a single form of wrongdoing
under different names” when committed by auditors that may be
subject to a defense of in pari delicto. Lafferty, 267 F.3d at 355
(quoting Cenco, 686 F.2d at 454). The Cenco decision
determined the correctness of those in pari delicto jury
instructions through an examination of in “what circumstances,
if any, fraud by corporate employees is a defense in a suit by the
corporation against its auditors for failure to prevent the fraud.”
Cenco, 686 F.2d at 454. Judge Posner predicted how Illinois
courts would decide the case by analyzing it as a matter of
deterrence. Id. at 455. He concluded that “if the owners of the
corrupt enterprise are allowed to shift the costs of its
wrongdoing entirely to the auditor, their incentives to hire
honest managers and monitor their behavior will be reduced.”
Id. Therefore, “the corporation should not be allowed to shift
the entire responsibility for the fraud to its auditors. Id. at 456.

To the extent that our Lafferty decision relied on Cenco’s
reasoning and not merely its recitation of the various causes of
action in which in pari delicto may apply, we are now explicitly
on notice that our prediction of Pennsylvania law is
“disapproved.” 989 A.2d at 332 n.25.

20
complexities of the auditor relationship “into account as a factor
in a responsible policy-setting decision.” Id. Thus, in the
absence of more information regarding “the growing prevalence
of breathtaking malpractice claims against auditors in the
corporate insolvency setting . . .[,] the corresponding litigation
burden, and the resultant impact on the profession as a whole . . .
as well as those they serve,” the Supreme Court refused to create
a general rule against auditors asserting an in pari delicto
defense. Id. at 332–33. Instead, it noted that while in pari
delicto may be available to auditors generally, one who has not
dealt materially in good faith with the client-principal will be
“effectively foreclose[d] [from asserting] an in pari delicto
defense for scenarios involving secretive collusion between
officers and auditors to misstate corporate finances to the
corporation's ultimate detriment.” Id. at 339. This is because
imputation to the corporation of its officers’ misconduct will not
be available to the colluding auditors. Id.

C. Application to this case

The District Court determined that any benefit to AHERF
was sufficient to impute the misconduct of its managers to the
corporation. This, combined with in pari delicto, led it to grant
summary judgment in favor of PwC. The Supreme Court of
Pennsylvania has since clarified the test for imputation when
there is collusive conduct between the agent and a third-party
(such as an auditor), and this intervening change in law warrants
a remand.

21
 While Allegheny III maintained the potential availability
of in pari delicto in the auditor-liability setting, that defense is
conditioned on the auditor dealing materially in good faith with
the client-principal. The District Court’s analysis did not
consider whether PwC dealt with AHERF in good faith, and it
is appropriate for it to consider the issue in the first instance.
Furthermore, two key aspects of the District Court’s holding
need to be revisited in light of Allegheny III: (1) the District
Court’s use of an “any benefit” test is not appropriate because
“a peppercorn of benefit” cannot “provide total dispensation to
defendants knowingly and substantially assisting insider
misconduct that is overwhelmingly adverse to the corporation,”
989 A.2d at 335; and (2) the District Court’s identification of
misstated financials as enabling short term benefits to AHERF
was incorrect because “as a matter of law . . . a knowing,
secretive, fraudulent misstatement of corporate financial
information” is not “of benefit to a company,” id. at 338.

* * * * *

The Supreme Court of Pennsylvania has clarified the law
of imputation and in pari delicto in the less-than-clear area of
collusive fraud between third parties and agents against a
principal corporation. With this added clarity, we now vacate
and remand to the District Court for further proceedings,
including a determination of whether PwC dealt with AHERF
in good faith.

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