J-A21018-19
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
ZITO MEDIA, L.P., : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
:
v. :
:
:
DELOITTE & TOUCHE, LLP : No. 3033 EDA 2018
Appeal from the Order Entered September 6, 2018
In the Court of Common Pleas of Philadelphia County Civil Division at
No(s): 06280 March Term, 2004
BEFORE: BOWES, J., OLSON, J., and FORD ELLIOTT, P.J.E.
MEMORANDUM BY OLSON, J.: March 25, 2020
Appellant, Zito Media, L.P., appeals from the order entered September
6, 2018, granting Deloitte & Touche, LLP’s (“Deloitte”) motion for summary
judgment. We vacate and remand.
The factual history has been summarized as follows:
[I]n 1952, John Rigas purchased a cable television franchise for
the small town of Coudersport, Pennsylvania. Over the next thirty
years, John [Rigas] acquired additional cable companies.
In 1985, John [Rigas] hired Deloitte to provide him and his
companies with accounting and auditing services. John [Rigas]
ran the companies with his sons[,] James [Rigas], Timothy
[Rigas], and Michael [Rigas]. In July 1986, they reorganized five
of the companies into a single holding company, Adelphia
[Communications Corporation (“Adelphia”)], which they
subsequently took public. Rigas family members (including John
[Rigas], James [Rigas], Timothy [Rigas], Michael [Rigas], and
members of their immediate families) retained voting control over
Adelphia. The family privately owned another set of companies
(the "Managed Entities") that Adelphia managed for a fee:
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[including Coudersport Television Cable Company, Inc.
(“Coudersport”)]. [Coudersport’s] assets eventually were
transferred to Zito Media.[FN 2] None of the Managed Entities had
any employees. In addition, the Rigas family held partnerships
(the "Rigas Family Partnerships" or "RFPs") that owned interests
in the Managed Entities and in Adelphia securities.
[FN2] It appears that Zito Media does not own any assets
other than those transferred by [Coudersport].
Island Partners, Inc., et al. v. Deloitte & Touche, LLP, 2017 WL 4862765,
*11-12 (Pa. Super. October 27, 2017) (unpublished memorandum) (citations
to record omitted).
Deloitte began providing services to Adelphia and its affiliates in
the 1980s, but the audit services that form the basis for this
lawsuit were provided between 1996 and 2002. In 1996, as part
of its growth plan as a cable TV operator, Adelphia and several
related entities, including Coudersport, entered into the first of
several Co-Borrowing debt agreements, which are described by
one of [Zito Media’s] expert witnesses, [] as follows:
An element of Adelphia's approach to continually source
financing involved the use of Co-Borrowing debt agreements
with various bank syndicates whereby certain Adelphia
subsidiaries and [RFP’s] would be grouped as the borrowers.
The first Co-Borrowing group credit facility [involving Zito
Media’s predecessor Coudersport] was established February
28, 1996, as amended March 29, 1996, for the amount of
$200,000,000. []The banks' Co-Borrowing agreements
required the submission of audited combined financial
statements for each of the respective Co-Borrowing groups.
As a result, Deloitte's scope of audit services expanded as
the firm was engaged to perform audits of each of the
separate Co-Borrowing groups' combined financial
statements.
According to [Zito Media's] liability expert []the significant
Co-Borrowing debt incurred by Adelphia-related entities should
have been treated differently than was done in the audits Deloitte
performed for the Adelphia entities for fiscal years 1996-2001:
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In order to finance business activity, a basic concept is that
of a single company borrowing funds via a term loan or a
line of credit facility with a single bank. In a direct and
straightforward process, the single company records receipt
of the borrowed funds and thereafter makes payments on
the outstanding balance pursuant to terms of the loan
agreement. The balance of the bank debt outstanding is
then reported as a financial statement element in the
company's balance sheet at any point in time for a specific
report date (i.e. - December 31st) with typical reference
such as note payable or long-term debt.
The Co-Borrowing bank debt reported as an element of the
Adelphia and Co-Borrowing group[’s] financial statements
was not of a nature having the direct one-to-one single
company to single bank relationship. In each instance, it
involved several Adelphia subsidiaries and [RFPs] put
together as a Co-Borrowing group and several banks put
together as a syndicate to provide the loan or credit facility.
The arrangement was different and more complex than the
basic one-to-one scenario. Deloitte audit engagement staff
however, viewed the Co-Borrowed debt no differently than
other bank debt of Adelphia and the Co-Borrower groups.
Deloitte failed to consider or chose to ignore that the
Co-Borrowing debt was different in substance [than] the
other bank debt.
Based upon the expert's review of Deloitte work paper
documents available in this matter, it is evident that the
framework for the Adelphia audit work remained generally
consistent over seven financial statement audit reporting
dates from 1996 through 2001 particularly with respect to
Co-Borrowing bank debt.
Despite the new Co-Borrowing agreement entered into [on]
March 29, 1996, [which, again, featured multiple
Adelphia-related borrowers securing funds from multiple
bank participants in the credit facility,] there is no mention
of its occurrence in the Audit Planning Memo or the Audit
Summary Memorandum. There is also no mention of any
risk regarding off balance sheet debt. The initial 1996 audit
is what served as the basis for Deloitte's performance on
each subsequent audit up to March 27, 2002. Deloitte's
Co-Borrowed debt accounting determination was that the
joint and several liability provision was a contingent liability
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akin to a guarantee of the indebtedness of other
Co-Borrowers. Therefore[,] the contingency was not to be
recorded on Adelphia's books, but only disclosed in the
financial statements.
Deloitte's understanding included a view that the
Co-Borrowing arrangements allowed "the Co-Borrowers to
determine" who was the particular borrower with respect to
the allocation of debt reflected on the respective
Co-Borrower's financial statements. This view is striking
considering the nature of the Co-Borrowing debt structure
and related accounting process maintained and/or
controlled by Adelphia. For example, Deloitte admits
knowledge no later than 2000 that "co-borrowed debt
originally recorded on one co-borrower's books was moved
-- or 'reclassified' -- to another co-borrower's books.”
Deloitte also admits knowledge no later than 2000 that
Co-Borrowed funds were used to acquire Adelphia stock.
Such factors should have been red-flags to the Deloitte
engagement team.
Fiscal Year 2001 was the second time that [Zito Media's]
predecessor, Coudersport, was a Co-Borrower, and the amount of
the 2001 Co-Borrowing credit facility was over $2 billion. When
Deloitte undertook the [Fiscal Year ]2001 audit in early 2002, it
apparently proceeded in the same manner as it had in prior years
until late March[] 2002, when the SEC began to ask questions
about Deloitte's "audit performance regarding Co–Borrowing
debt."
Adelphia issued an earnings press release on March 27,
2002[,] reporting its "Full Year 2001 Results," which was
reviewed by Deloitte beforehand. Adelphia was left with the
understanding that the audit was substantially complete but
for some miscellaneous closing items. Adelphia also held a
conference call with investors and analysts the same day.
We understand the press release included for the first time
an explicit disclosure of the amount of Co-Borrowing debt
outstanding[, but] not recorded on Adelphia's balance
sheet. There appears to be no dispute in this matter that
after the press release, the stock market reacted negatively
to the Co-Borrowing debt information and Adelphia's stock
value dropped.
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At that point, Deloitte apparently refused to issue an audit similar
to the ones it had issued in past years, so "Adelphia and the
Co-Borrowing groups were left unable to file their financial reports
by the respective April 1, 2002, and April 30, 2002 deadlines."
Adelphia and its affiliates sought bankruptcy protection and [John
Rigas and Timothy Rigas] were convicted of fraud in connection
with their management of Adelphia and related companies,
including the incurrence and treatment of the Co-Borrowing debt.
Trial Court Opinion, 9/6/18, at 2-5 (footnotes, original brackets and ellipses
omitted).
Procedurally, Appellant filed suit in the Court of Common Plea of
Philadelphia County (“trial court”) against Deloitte in 2004, alleging, inter alia,
breach of contract, professional negligence, and negligent misrepresentation.
Deloitte removed the case to the United States Bankruptcy Court for the
Eastern District of Pennsylvania due to the relationship the case had with
Adelphia’s, and its affiliates’, pending bankruptcy. A federal Judicial Panel on
Multidistrict Litigation transferred the case to the United States District Court
for the Southern District of New York (“district court”) as part of the
multidistrict litigation relating to the collapse of Adelphia and its affiliates. In
June 2013, Appellant filed an amended complaint with the district court.
Deloitte filed a motion for summary judgment that the district court granted,
in part, with regard to Appellant’s breach of contract claim and denied, in part,
as to Appellant’s professional negligence and negligent misrepresentation
claims. In re Adelphia Communications Corp. Sec. and Derivative
Litig., No. 03 MDL 1529 (JMF), 2013 WL 6838899, at *13 (S.D.N.Y. December
27, 2013) (unpublished opinion).
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Upon Appellant’s filing of a second amended complaint with the district
court, Deloitte filed a motion for summary judgment arguing Appellant’s
claims were barred by the doctrine of in pari delicto. Id., 2014 WL 6982140,
at *10 (S.D.N.Y. December 10, 2014) (unpublished opinion). The district
court denied the motion and transferred the case back to the trial court. Id.
at *11.
Deloitte, thereafter, successfully moved for summary judgment with the
trial court on the ground that Appellant’s expert failed to provide a reasonable
calculation of damages. Island Partners, 2017 WL 4862765, at *10.
Appellant appealed the trial court’s decision, and this Court reversed the order
granting summary judgment. Id. at *11. The case was remanded to the trial
court for further proceedings. Id.
On March 26, 2018, Deloitte filed a motion for summary judgment,
which is the subject of this appeal. In its motion, Deloitte argued, inter alia,
that Appellant’s claims were precluded as a matter of law by the doctrine of
in pari delicto. Deloitte’s Motion for Summary Judgment, 3/6/18, at 38 ¶ 231.
The trial court granted Deloitte’s motion for summary judgment on September
6, 2018. Trial Court Opinion, 9/6/18. Appellant filed a timely notice of
appeal.1
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1 The trial court did not direct Appellant to file a concise statement of matters
complained of on appeal pursuant to Pa.R.A.P. 1925(b). On October 29, 2018,
the trial court filed a Rule 1925(a) opinion wherein it relied on its September
6, 2018 opinion and order granting the motion for summary judgment. Trial
Court Opinion, 10/29/18.
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Appellant raises the following issues for our review:
1. Whether the [trial court] erred by overruling the
[district court’s] prior rejection of Deloitte's in pari
delicto defense during multidistrict litigation
proceedings?
2. Whether the [trial court] erred on the merits by
granting summary judgment to Deloitte based on the
in pari delicto defense?
3. Whether the [trial court] erred in concluding that one
of [Appellant’s] two damages theories could not go to
a jury?
4. Whether the [trial court] erred in entertaining [a
theory] of summary judgment that Deloitte failed to
raise in the [district court] during the first round of
summary []judgment proceedings, in the [trial court]
during the second round of summary []judgment
proceedings, or during the previous appeal to this
Court?
5. Whether the [trial court] erred in granting summary
judgment to Deloitte?
Appellant’s Brief at 5.
We begin by addressing Appellant’s claim that the trial court erred in
granting the motion for summary judgment based on the in pari delicto
defense in contravention of the coordinate jurisdiction rule, as this issue is
dispositive of the appeal.
Our standard of review of an order granting a motion for summary
judgment is well settled.
[A]n appellate court may reverse a grant of summary judgment if
there has been an error of law or an abuse of discretion. But the
issue as to whether there are no genuine issues as to any material
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fact presents a question of law, and therefore, on that question
our standard of review is de novo. This means we need not defer
to the determinations made by the [trial court].
Summers v. Certainteed Corp., 997 A.2d 1152, 1159 (Pa. 2010) (citation
omitted). “To the extent that [an appellate court] must resolve a question of
law, we shall review the grant of summary judgment in the context of the
entire record.” Id.
Appellant argues the trial court, in determining that the in pari delicto
defense precluded its claims against Deloitte and that Deloitte was entitled to
summary judgment, erred because the coordinate jurisdiction rule prohibited
the trial court, as the transferee court, from overruling the resolution of this
same issue by the transferor district court. Appellant’s Brief at 24-25.
“[T]he coordinate jurisdiction rule commands that upon transfer of a
matter between trial judges of coordinate jurisdiction, a transferee trial judge
may not alter resolution of a legal question previously decided by a transferor
trial judge.” Zane v. Friends Hosp., 836 A.2d 25, 29 (Pa. 2003), citing
Commonwealth v. Starr, 664 A.2d 1326, 1331 (Pa. 1995). “Departure from
the rule is allowed in exceptional circumstances when there has been a change
in the controlling law or where there was a substantial change in the facts or
evidence. [A]n exception is permitted where the prior holding was clearly
erroneous and would create a manifest injustice if followed.” Zane, 836 A.2d
at 29 (citation and original quotation marks omitted).
Here, the trial court determined that the district court’s denial of
Deloitte’s motion for summary judgment was in error because the district
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court “did not take into consideration the fact that Coudersport[, which was
the predecessor-in-interest of Appellant,] participated as a co-borrower in the
fraudulent borrowing scheme for which John Rigas, Coudersport's sole owner,
was convicted” and “did not consider this Commonwealth's ‘public interest in
relieving [its] courts from lending their offices to mediating disputes among
wrongdoers.’” Trial Court Opinion, 9/6/18, at 13 n.43 (brackets in original).
Appellant contends the district court’s decision was not erroneous.
Appellant’s Brief at 26-29. Appellant argues that Coudersport’s participation
as a co-borrower in the loans was a well-known fact that the district court
properly considered. Id. at 27-28. Appellant also asserts the district court
properly applied Pennsylvania’s law of in pari delicto and took into
consideration the Commonwealth’s interests. Id. at 28-29.
Deloitte contends that John Rigas’s criminal convictions “focused on the
accounting of co-borrowing at . . . Coudersport” and that John Rigas, and
others, “actively committed fraud on behalf of Coudersport” when he signed
management representation letters stating there was no fraud of any kind
surrounding the co-borrowing agreements. Deloitte’s Brief at 33-34. Deloitte
avers that the district court’s decision not to impute John Rigas’s fraud onto
Coudersport was erroneous. Id. Deloitte also argues that the coordinate
jurisdiction rule did not apply because the case before the trial court was at a
different point in the procedural posture than when the case was before the
district court and that additional evidence had been presented to the trial
court. Id. at 28-33.
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In determining whether the trial court’s order granting summary
judgment contravened the coordinate jurisdiction rule, we must examine
whether the district court’s denial of summary judgment was, in fact,
erroneous.
Our Supreme Court in Official Comm. of Unsecured Creditors of
Allegheny Health Educ. and Research Found. v.
PriceWaterhouseCoopers, LLP, 989 A.2d 313 (Pa. 2010) (“AHERF”)
explained that in order for the in pari delicto defense to apply, “Pennsylvania
requires the plaintiff be an active, voluntary participant in the wrongful
conduct or transaction(s) for which it seeks redress, and bear substantially
equal or greater responsibility for the underlying illegality as compared to the
defendant.” AHERF, 989 A.2d at 329, citing Bateman Eichler, Hills
Richards, Inc. v. Berner, 472 U.S. 299, 306-307 (1985) (stating, the
defense “derives from the Latin, in pari delicto potior est conditio defendentis:
‘In a case of equal or mutual fault ... the position of the [defending] party ...
is the better one.’”). The AHERF Court stated, “in pari delicto serves the
public interest by relieving courts from lending their offices to mediating
disputes among wrongdoers, as well as by deterring illegal conduct.” AHERF,
989 A.2d at 329 (citation omitted). When the plaintiff is a corporation,
applicability of the in pari delicto defense turns on whether the actions of the
corporate principal’s agent, who committed the wrongful acts, may be imputed
to the corporate principal. Id. at 330 n.20, 333. “[W]here an agent acts in
his own interest, and to the corporation's detriment, imputation generally will
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not apply.” Id. at 333 (explaining, “the imputation doctrine recognizes that
principals generally are responsible for the acts of agents committed within
the scope of their authority.”), citing Todd v. Skelly, 120 A.2d 906, 909 (Pa.
1956). Further, a corporate principal whose agent has acted for the benefit
of the corporation with culpability exceeding that of the defendant will be
denied recovery based upon imputation of fraudulent deeds. AHERF, 989
A.2d at 336. Absent clear evidence of the agent’s wrongdoing, the
determination of whether the agent acted in his or her own self-interest to the
detriment of the corporate principal or the inquiry into whether the agent’s
actions benefited the corporate principal are “questions steeped in fact and
open to legitimate differences among reasonable minds.” Id. at 337 (citation
omitted).
Here, a review of the district court’s opinion demonstrates the district
court, recognizing the long history of this case, understood that Appellant,
through its predecessor, Coudersport, was one of the Managed Entities and
Rigas Family Partnerships, collectively known as RFPs, that were frequently
the co-borrowers in the co-borrowing agreements with Adelphia. In re
Adelphia Communications Corp. Sec. and Derivative Litig., 2014 WL
6982140, at *1-2, *10. The district court further considered that John Rigas,
who wholly owned Appellant’s predecessor, Coudersport, was convicted of
fraud in connection with the co-borrowing agreements, including those
involving Appellant. Id. at *10. The district court then considered whether
John Rigas’s acts of wrongdoing could be imputed to Appellant thereby barring
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Appellant’s cause of action under Pennsylvania’s law of in pari delicto; a
principle recognizing that no court should lend its hand in aiding a party who
grounds its action upon an immoral or illegal act. Id. In considering
Pennsylvania’s law surrounding the in pari delicto defense, the district court
stated,
Deloitte may ultimately be able to make [a showing that John
Rigas committed the fraud in the course of his employment with
Coudersport]—after all, John Rigas was convicted of fraud in
connection with his dealings with the Managed Entitie[s] and RFPs,
one of which was Coudersport—but, drawing all inferences in
[Appellant’s] favor, the [district c]ourt cannot say that it has done
so sufficiently to grant it summary judgment. At bottom, Deloitte
points to little more than the indictment against John Rigas and
the jury's verdict in the criminal trial. The indictment, however,
is hearsay, and thus not evidence upon which the [district c]ourt
can rely.
And while the jury necessarily found that John Rigas engaged in
fraud—making application of the in pari delicto [defense] against
him an easier call—given the general nature of the jury's verdict,
it cannot be said that the jury necessarily found that he did
so in his capacity as an officer or sole shareholder of
Coudersport as opposed to his capacity as an officer of
Adelphia or the other entities.
Id. (citations omitted, emphasis added). Having identified a genuine issue of
material fact requiring resolution at trial, the district court determined that
Deloitte was not entitled to summary judgment based upon the in pari delicto
defense. Id.
Based upon our review of the district court’s analysis as set forth in its
opinion, we find the trial court erred in finding that the district court’s decision
was erroneous. Specifically, the trial court erred in its determination that the
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district court failed to consider Appellant was a co-borrower in the
co-borrowing agreements that formed a part of John Rigas’s fraud conviction,
and that the district court was not mindful that the objective of the in pari
delicto defense was to alleviate judicial mediation of disputes between two
wrongdoers. Furthermore, we find no merit to Deloitte’s argument that an
exception to the coordinate jurisdiction rule existed because there were
substantial changes to the facts or in the procedural posture of the case before
the trial court.
Under the coordinate jurisdiction rule, the trial court was bound by the
decision of the district court that factual issues remained as to whether John
Rigas’s wrongful actions could be imputed to Appellant and, if imputed,
whether John Rigas’s wrongdoing exceeded Deloitte’s alleged wrongdoing
thereby requiring a grant of summary judgment pursuant to the in pari delicto
defense. Therefore, the coordinate jurisdiction rule precluded entry of
summary judgment in Deloitte’s favor. Consequently, we vacate the
September 6, 2018 order and remand the case for proceedings consistent with
this memorandum.2
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2 Appellant also claims the trial court erred in concluding that one of
Appellant’s two theories of damages could not be presented to the jury.
Appellant’s Brief at 40-43. Appellant argues this Court previously determined
that both damages theories could be presented to the jury, and the law of the
case doctrine precludes the trial court from altering this Court’s previous
resolution of that legal question. Id. at 41-43; see also Mariner Chestnut
Partners, L.P. v. Lenfest, 152 A.3d 265, 282 (Pa. Super. 2016) (stating, law
of the case doctrine mandates “upon remand for further proceedings, a trial
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Order vacated. Case remanded. Jurisdiction relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 3/25/20
____________________________________________
court may not alter the resolution of a legal question previously decided by
the appellate court in the matter”).
We find this issue not yet ripe for appellate review. Commonwealth ex rel.
Kane v. UPMC, 129 A.3d 441, 473 (Pa. 2015) (stating, doctrine of ripeness
seeks to avoid appellate court prematurely adjudicating controversy, thereby
becoming entangled in resolving abstract or hypothetical issue, whenever
party has yet to suffer concrete harm that can be alleviated through appellate
review).
Here, the trial court granted Deloitte’s motion for summary judgment on the
basis of the in pari delicto defense. In doing so, the trial court remarked that
Appellant’s first theory of damages (1999 Damages) was the only theory
under which Appellant could recover and that Appellant conceded as such.
Trial Court Opinion, 9/6/18, at 7-8, 8 n.25. Because the September 6, 2018
order does not specifically grant or deny Appellant the right of recovery under
one or more damages theories, we find this issue is not yet ripe for appeal.
Nonetheless, a review of this Court’s previous decision in this matter
demonstrates that this Court held both damages theories are viable means of
potential recovery, and the credibility of those theories and the amount of
damages suffered by Appellant, if any, are issues for the factfinder. Island
Partners, 2017 WL 4862765, at *34-42.
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