Title: Merrimack College v. KPMG LLP

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

NOTICE:  All slip opinions and orders are subject to formal 
revision and are superseded by the advance sheets and bound 
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error or other formal error, please notify the Reporter of 
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SJC-12434 
 
MERRIMACK COLLEGE  vs.  KPMG LLP. 
 
 
 
Suffolk.     May 8, 2018. - September 27, 2018. 
 
Present:  Gants, C.J., Lenk, Gaziano, Lowy, Budd, & Cypher, JJ. 
 
 
Agency, Agent's knowledge.  Practice, Civil, Answer, Amendment, 
Affirmative defense. 
 
 
 
 
Civil action commenced in the Superior Court Department on 
June 30, 2014. 
 
 
A motion for leave to file an amended answer was heard by 
Kenneth W. Salinger, J., and the case was heard by him on a 
motion for summary judgment. 
 
 
The Supreme Judicial Court granted an application for 
direct appellate review. 
 
 
 
Elizabeth N. Mulvey for the plaintiff. 
 
Ian D. Roffman (George A. Salter also present) for the 
defendant. 
 
The following submitted briefs for amici curiae: 
 
Matthew P. Bosher, of the District of Columbia, & Elbert 
Lin for American Institute of Certified Public Accountants & 
another. 
 
Susan M. Whalen for Chelsea Housing Authority. 
 
Jeffrey J. Nolan for Massachusetts Academy of Trial 
Attorneys. 
 
 
2 
 
 
 
GANTS, C.J.  "The doctrine of in pari delicto bars a 
plaintiff who has participated in wrongdoing from recovering 
damages for loss resulting from the wrongdoing."  Choquette v. 
Isacoff, 65 Mass. App. Ct. 1, 3 (2005).  The main issue 
presented in this civil case is whether, where the plaintiff is 
an organization acting through its agents, we should follow the 
traditional principles of agency law and impute the wrongdoing 
of those agents to the plaintiff organization when determining 
whether it should be barred from recovery under the in pari 
delicto doctrine.  We hold that, for purposes of measuring fault 
under the in pari delicto doctrine, we impute only the conduct 
of senior management to the plaintiff organization.  Because the 
judge here granted summary judgment to the defendant under the 
in pari delicto doctrine after imputing to the plaintiff college 
the wrongdoing of an employee who was not a member of senior 
management, we vacate the order allowing summary judgment and 
remand the case to the Superior Court.1 
 
Background.  Merrimack College (Merrimack) is a small 
private college incorporated under the laws of Massachusetts.  
From 1998 to 2004, Merrimack engaged KPMG LLP (KPMG), a large 
multinational accounting firm, as its independent auditor.  
                                                          
 
 
1 We acknowledge the amicus briefs submitted by the American 
Institute of Certified Public Accountants and the Massachusetts 
Society of Certified Public Accountants, by the Chelsea Housing 
Authority, and by the Massachusetts Academy of Trial Attorneys. 
3 
 
 
Pursuant to this engagement, KPMG conducted annual audits of 
Merrimack's financial statements.  Because Merrimack received 
substantial Federal funds in the form of student financial aid, 
KPMG also conducted audits pursuant to the United States Office 
of Management and Budget Circular A-133 (A-133 audits) to 
evaluate Merrimack's compliance with relevant Federal 
requirements. 
 
In conducting these audits, KPMG reviewed the operations of 
Merrimack's financial aid office, which was responsible for 
administering various grant and loan programs, including Federal 
programs such as the Perkins Loan Program.2  On several occasions 
KPMG noted issues with the financial aid office, including 
delayed reconciliations, discrepancies between loan amounts 
recorded in the billing system and loan amounts recorded on the 
ledger, and Perkins loans disbursed without the required 
promissory notes.  KPMG also noted a lack of formal policies and 
procedures relating to the disbursement of grants and loans.  
KPMG reported these issues to Merrimack's management and to its 
                                                          
 
 
2 The Perkins Loan Program is "designed to assist 
institutions of higher education in financing low-interest loans 
to financially needy students."  De La Mota v. United States 
Dep't of Educ., 412 F.3d 71, 74 (2d Cir. 2005).  See 20 U.S.C. 
§ 1070 (2012).  Under this program, the United States Department 
of Education provides Federal funds to participating schools, 
who in turn make additional capital contributions and disburse 
the combined funds as loans to eligible students.  The 
individual schools are responsible for determining eligibility, 
advancing funds, and collecting payments.  See De La Mota, 
supra. 
4 
 
 
board of trustees.  However, for every fiscal year between 1998 
and 2004, KPMG issued an unqualified opinion that Merrimack's 
financial statements were free from material misrepresentation 
and also issued an opinion, based on its A-133 audits, that 
Merrimack was in material compliance with Federal program 
requirements. 
 
What KPMG's audits failed to reveal was that, during this 
time period, Merrimack's financial aid director, Christine 
Mordach, was engaged in a fraudulent scheme whereby she 
regularly replaced grants and scholarships that had previously 
been awarded to students with Perkins loans, often without the 
students' knowledge or consent and in some cases creating false 
paperwork with false names and false Social Security numbers.  
One consequence of Mordach's fraud was that it made the 
financial aid office's budget appear more balanced, because 
grants and scholarships reduce tuition revenue, whereas Perkins 
loans, because they are expected to be repaid in the future, are 
recorded as an asset on Merrimack's balance sheet.  Another 
consequence of her fraud was that many students ended up 
shouldering student debt they had not sought and did not even 
know they had.  Mordach did not tell anyone else at Merrimack 
that she was issuing fraudulent loans. 
 
Mordach's fraud went undetected until 2011, when Merrimack 
instituted a new system for keeping track of its student 
5 
 
 
borrowers and many students started to receive billing 
statements for Perkins loans they never knew they had.  As the 
number of complaints increased, Merrimack hired a forensic 
accounting team, unrelated to KPMG, to investigate the financial 
aid office.  This investigation revealed more than 1,200 
"irregular" student loans that were either invalid or 
potentially uncollectible because of Mordach's activities. 
 
In 2014, Mordach pleaded guilty to Federal criminal charges 
of mail and wire fraud.  She was sentenced to a term in prison 
and ordered to pay over $1.5 million in restitution to former 
Merrimack students.  However, her motivation for committing this 
fraud remains unclear.  No one at Merrimack ever told Mordach to 
issue loans to students without the students' consent.  Mordach 
did not profit financially from her fraud; in fact, in order to 
avoid detection she sometimes used her own funds to pay back the 
fraudulent loans.  There was evidence that, at least in the 
short run, until the fraud was detected, the fraud benefited 
Merrimack in that it enabled Merrimack to present a more 
favorable view of its financial position in connection with bond 
issues and bond ratings.  But there was also evidence that 
Mordach devised the fraudulent scheme in order to keep her job, 
because she was under pressure to balance the financial aid 
office's budget, had nearly been fired in 1990 for her poor 
6 
 
 
performance, and continued to have performance issues that 
caused Merrimack to place her on probation in 2003. 
 
Once Mordach's activities were discovered, Merrimack wrote 
off the fraudulent loans and repaid students who had already 
made payments on them.  According to Merrimack, the total cost 
of these write-offs and repayments, along with investigation and 
administrative fees, amounted to more than $6 million. 
 
In an effort to recover some of these losses, Merrimack 
commenced an action against KPMG in the Superior Court, alleging 
professional malpractice, breach of contract, negligence, 
negligent misrepresentation, and violation of G. L. c. 93A.  
Following discovery, KPMG moved for summary judgment on four 
separate grounds, arguing that Merrimack's claims were barred 
under the equitable doctrine of in pari delicto, that Merrimack 
had released KPMG from liability under the terms of their 
agreements because its management had made false statements to 
KPMG,3 that Merrimack's claims were barred by the Massachusetts 
                                                          
 
 
3 Pursuant to the terms of its agreements with KPMG LLP 
(KPMG), Merrimack College (Merrimack) provided annual management 
representation letters to KPMG.  In these letters, the 
president, the chief financial officer, and the controller of 
Merrimack represented "to the best of [their] knowledge and 
belief" that, among other things, there were no instances of 
fraud involving management or employees with "significant roles 
in internal control," no instances of fraud involving others 
that could have "a material effect on the financial statements," 
and "no . . . [v]iolations or possible violations of laws or 
regulations."  Merrimack also provided representation letters in 
connection with KPMG's audits conducted pursuant to the United 
7 
 
 
statute of limitations for auditor malpractice claims, and that 
Merrimack had failed to establish a claim under c. 93A.  KPMG 
also filed a motion for leave to file an amended answer, seeking 
to add the affirmative defense of release based on false 
statements from management. 
 
The Superior Court judge allowed KPMG's motion for summary 
judgment, concluding that Merrimack's claims were barred under 
the doctrine of in pari delicto.  The judge's analysis proceeded 
in three steps.  First, the judge considered whether Mordach's 
fraudulent conduct should be imputed to Merrimack.  In doing so, 
the judge relied on traditional principles of agency law, 
concluding that "[the] same 'agency-based imputation rules' for 
deciding whether an employer will be held vicariously liable for 
its employee's wrongdoing" under a theory of respondeat superior 
"appl[ied] with full force in this case, because they also 
determine whether an employee's misconduct is imputed to the 
                                                                                                                                                                                           
States Office of Management and Budget Circular A-133, in which 
members of Merrimack's management -- including in some years 
Christine Mordach -- represented, again "to the best of [their] 
knowledge and belief," that Merrimack had "complied . . .  with 
the requirements of laws and regulations."  Separately, the 
engagement letters setting forth the terms of KPMG's engagement 
provided that "[Merrimack] agrees to release KPMG . . . and its 
personnel from any claims . . . relating to [KPMG's] services 
. . . attributable to any misrepresentations in the 
representation letter [from management]."  With respect to the 
management representation letters not signed by Mordach, the 
parties dispute whether there was any "misrepresentation," given 
that the representations were only based on "knowledge and 
belief."  The parties also dispute whether the representation 
letters signed by Mordach fall within the scope of the release. 
8 
 
 
employer when applying the in pari delicto doctrine" (citation 
omitted).  The judge then applied the familiar three-pronged 
test for determining vicarious liability under a theory of 
respondeat superior, concluding that, because Mordach's conduct 
was "of the kind [she was] employed to perform," "occur[red] 
substantially within the authorized time and space limits," and 
"[was] motivated, at least in part, by a purpose to serve the 
employer," it was "within the scope of [her] employment" and 
should be imputed to Merrimack.  Wang Lab., Inc. v. Business 
Incentives, Inc., 398 Mass. 854, 859 (1986). 
 
Second, the judge weighed the seriousness of the imputed 
misconduct against KPMG's failure to detect it.  Because 
Merrimack had admitted to facts indicating that Mordach's 
conduct was deliberate, the judge concluded that Mordach's 
intentional fraud -- now imputed to Merrimack -- was "far more 
serious" than KPMG's alleged negligence in failing to uncover 
Mordach's fraud, and that Merrimack therefore could not recover 
from KPMG under the doctrine of in pari delicto. 
 
Third, the judge considered whether he should, on public 
policy grounds, make an exception to the in pari delicto 
doctrine for cases like this one, where an auditor through 
alleged negligence failed to discover fraud committed by a 
client's employee.  The judge recognized that, because "[the in 
pari delicto] doctrine is equitable in nature, considerations of 
9 
 
 
public policy are always relevant."  But the judge declined to 
make an exception, reasoning that such an exception would be 
inconsistent with Massachusetts law, which, in the analogous 
context of legal malpractice claims, bars clients who engaged in 
wrongdoing from suing their attorneys for joining in the 
wrongdoing.  See Choquette, 65 Mass. App. Ct. at 7-8.  The judge 
also noted that the majority of courts that have considered the 
issue have "declined to create a blanket 'auditor exception' to 
the doctrine of in pari delicto."  See, e.g., Stewart v. 
Wilmington Trust SP Servs., Inc., 112 A.3d 271, 315-318 (Del. 
Ch.), aff'd, 126 A.3d 1115 (Del. 2015); Kirschner v. KPMG LLP, 
15 N.Y.3d 446, 476-477 (2010); Official Comm. of Unsecured 
Creditors of Allegheny Health Educ. & Research Found. v. 
PriceWaterhouseCoopers, LLP, 605 Pa. 269, 305 (2010). 
 
Having concluded that Merrimack's claims were barred under 
the in pari delicto doctrine, the judge dismissed the claims 
with prejudice, without addressing KPMG's other grounds for 
summary judgment.  The judge also allowed KPMG's motion for 
leave to amend its answer to add an affirmative defense of 
release.  Merrimack appealed from these decisions, and we 
granted its application for direct appellate review. 
 
Discussion.  1.  Motion for summary judgment.  We review a 
grant of summary judgment de novo.  See Federal Nat'l Mtge. 
Ass'n v. Hendricks, 463 Mass. 635, 637 (2012).  In granting 
10 
 
 
summary judgment to KPMG, the judge relied on two separate legal 
doctrines:  the agency-based doctrine of imputation, and the 
equitable doctrine of in pari delicto.  To determine whether 
Merrimack's claims are indeed barred as a matter of law, we must 
first examine these two legal doctrines and the relationship 
between them. 
 
a.  Imputation.  The law of agency establishes a set of 
rules for determining when, in relation to third parties, an 
agent's conduct or knowledge should be imputed to his or her 
principal.  See Restatement (Third) of Agency §§ 2.01-2.04, 5.03 
(2006).  For example, in transactions with third parties, an 
agent's conduct will be imputed to the principal if the agent 
acted with actual or apparent authority, or if the principal 
ratified the agent's conduct.  See Fergus v. Ross, 477 Mass. 
563, 566-568 (2017).  See also Restatement (Third) of Agency, 
supra at §§ 2.01-2.03, 4.02.  In the realm of torts, the 
tortious conduct committed by an agent in the scope of his or 
her agency will be imputed to the principal under a theory of 
respondeat superior.  See Lev v. Beverly Enters.-Mass., Inc., 
457 Mass. 234, 238 (2010).  See also Restatement (Third) of 
Agency, supra at § 2.04.  Knowledge that an agent acquires in 
the scope of his or her employment can also be imputed to the 
principal.  See Sunrise Props., Inc. v. Bacon, Wilson, Ratner, 
Cohen, Salvage, Fialky & Fitzgerald, P.C., 425 Mass. 63, 66-67 
11 
 
 
(1997).  See also Restatement (Third) of Agency, supra at 
§ 5.03. 
 
The result of imputation is that the principal bears the 
legal consequences of the agent's conduct.  Thus, if an agent 
with actual or apparent authority enters into a contract with a 
third party, the principal will be bound by that contract.  See, 
e.g., Linkage Corp. v. Trustees of Boston Univ., 425 Mass. 1, 4, 
17, cert. denied, 522 U.S. 1015 (1997) (university bound by 
agreement signed by vice-president where vice-president had 
apparent authority).  And if an agent negligently injures a 
third party while acting within the scope of the agency, the 
principal will be held vicariously liable for that negligence.  
See, e.g., Dias v. Brigham Med. Assocs., Inc., 438 Mass. 317, 
323 (2002) (corporation could be held vicariously liable for 
alleged medical malpractice of its physician-employee). 
 
Imputation serves various functions.  It creates incentives 
for principals to choose their agents wisely.  See Restatement 
(Third) of Agency, supra at § 5.03 comment b, at 360.  It also 
encourages principals to supervise their agents and to share 
information with them.  Id.  The ultimate purpose behind these 
rules of imputation, however, is to fairly allocate risks 
between principals and innocent third parties.  As we explained 
in Kansallis Fin. Ltd. v. Fern, 421 Mass. 659, 664-665 (1996) 
(Kansallis): 
12 
 
 
 
"Standing behind [the] diverse concepts of vicarious 
liability is a principle that helps to rationalize them.  
This is the principle that as between two innocent parties 
-- the principal-master and the third party -- the 
principal-master who for his own purposes places another in 
a position to do harm to a third party should bear the 
loss.  A principal who requires an agent to transact his 
business, and can only get that business done if third 
parties deal with the agent as if with the principal, 
cannot complain if the innocent third party suffers loss by 
reason of the agent's act.  Similarly, the master who must 
put an instrument into his servant's hands in order to get 
his business done . . . must also bear the loss if the 
servant causes harm to a stranger in the use of that 
instrument as the business is transacted."  (Citations 
omitted.) 
 
See also Dias, 438 Mass. at 320 ("The doctrine of respondeat 
superior in the Commonwealth . . . evolved to place the burden 
of liability on the party better able to bear that burden"); GTE 
Prods. Corp. v. Broadway Elec. Supply Co., 42 Mass. App. Ct. 
293, 300 (1997) ("The rationale for imputing an agent's 
knowledge to his principal . . . [is] to do justice to an 
innocent third party . . ."); Restatement (Third) of Agency, 
supra at § 5.04 comment b, at 392 ("imputation protects innocent 
third parties"). 
 
Because the rules of imputation are designed to protect 
innocent third parties, they are typically applied in situations 
where a third party sues a principal, for example to enforce a 
contract entered into by an agent or to recover for injuries 
caused by the agent's tortious conduct.  Imputation can also 
provide a defense to a third party, for example where a 
13 
 
 
principal seeks to enforce a contract that a third party 
executed because of the fraudulent inducement of the agent.  
See, e.g., Jewett v. Carter, 132 Mass. 335, 337 (1882) 
(principal cannot enforce contract that third party entered into 
based on agent's false representations).  See also Restatement 
(Third) of Agency, supra at § 6.11 & comment c. 
 
Importantly, the purpose of imputation is not to adjudicate 
fault.  As we have consistently recognized, imputing the 
wrongful actions of an agent to a principal does not mean that 
the principal itself has acted wrongfully.  See Elias v. Unisys 
Corp., 410 Mass. 479, 481 (1991) ("[T]he principles of vicarious 
liability apply where . . . [t]he principal is without fault.  
The liability of the principal arises simply by the operation of 
law and is only derivative of the wrongful act of the agent" 
[emphasis added]).  See also Karcher v. Burbank, 303 Mass. 303, 
305 (1939) ("if the [principal] is chargeable with the 
negligence of the [agent], it is only because his negligence is 
imputed to it by a rule of law").  The rules of imputation are 
legal rules, not equitable principles, that are designed to 
allocate risk, not blame. 
 
b.  In pari delicto.  In contrast, the doctrine of in pari 
delicto is an equitable one, focused squarely on the moral blame 
14 
 
 
of the parties.  Latin for "in equal fault,"4 the doctrine 
provides that a plaintiff who has participated in wrongdoing 
cannot recover damages resulting from the wrongdoing.  See 
Black's Law Dictionary 911 (10th ed. 2014).  See also Choquette, 
65 Mass. App. Ct. at 3.  This long-standing doctrine "is 
grounded on two premises:  first, that courts should not lend 
their good offices to mediating disputes among wrongdoers; and 
second, that denying judicial relief to an admitted wrongdoer is 
an effective means of deterring illegality" (footnotes omitted).  
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 
306 (1985) (Bateman). 
 
In Massachusetts, the doctrine has generally operated to 
bar recovery where the parties have engaged in joint wrongdoing.  
Where a plaintiff engages in intentional wrongdoing and seeks to 
recover from a defendant who was a coconspirator or accomplice 
in the plaintiff's wrongdoing, the doctrine will generally bar 
recovery.  See Baena v. KPMG LLP, 453 F.3d 1, 6 (1st Cir. 2006); 
Scattaretico v. Puglisi, 60 Mass. App. Ct. 138, 140 n.6 (2003) 
("one in tortious league with another is generally without 
remedy against the other").  See also, e.g., Duane v. Merchants 
Legal Stamp Co., 231 Mass. 113, 118, 119 (1918), cert. denied, 
                                                          
 
 
4 The full maxim is "in pari delicto potior est conditio 
defendentis," meaning "[i]n a case of equal or mutual fault 
. . . the position of the [defending party] . . . is the better 
one" (citation omitted).  Bateman Eichler, Hill Richards, Inc. 
v. Berner, 472 U.S. 299, 306 (1985). 
15 
 
 
249 U.S. 613 (1919) (minority shareholder who participated in 
corporation's anticompetitive scheme barred from recovering 
profits from that scheme); Choquette, 65 Mass. App. Ct. at 7-8 
(plaintiff who committed perjury barred from recovering from 
attorney who participated in perjury).  Similarly, where the 
parties have entered into an illegal contract, courts will 
generally decline to enforce the contract.  See Berman v. 
Coakley, 243 Mass. 348, 350 (1923) ("courts will not aid in the 
enforcement, nor afford relief against the evil consequences, of 
an illegal or immoral contract").  See also, e.g., Arcidi v. 
National Ass'n of Gov't Employees, Inc., 447 Mass. 616, 619-622 
(2006) (plaintiff barred from recovering payment made under 
contract where contract violated statute); Patterson v. Clark, 
126 Mass. 531, 532-533 (1879) (plaintiff barred from recovering 
payment made under illegal gambling contract); Atwood v. Fisk, 
101 Mass. 363, 363-364 (1869) (plaintiff barred from seeking 
cancellation of notes executed in exchange for illegal promise 
to suppress prosecution). 
 
Because the doctrine is equitable in nature, however, it is 
not to be applied mechanically.  "One well established exception 
to the doctrine of in pari delicto provides that 'where the 
parties are not in equal fault as to the illegal element . . . 
and where there are elements of public policy more outraged by 
the conduct of one than of the other, then relief in equity may 
16 
 
 
be granted to the less guilty.'"  Choquette, 65 Mass. App. Ct. 
at 4, quoting Council v. Cohen, 303 Mass. 348, 354 (1939).  See, 
e.g., Berman, 243 Mass. at 355 (plaintiff who was fraudulently 
induced to enter into illegal contract by attorney could recover 
from attorney, where attorney's conduct was "far more 
reprehensible" than plaintiff's).  See generally 1 J. Story, 
Commentaries on Equity Jurisprudence § 423, at 399-400 (14th ed. 
1918) ("One party may act under circumstances of oppression, 
imposition, hardship, undue influence, or great inequality of 
condition or age; so that his guilt may be far less in degree 
than that of his associate in the offence" [footnote omitted]). 
 
"Another exception involves 'cases where the public 
interest requires that [the courts] should, for the promotion of 
public policy, interpose, and the relief in such cases is given 
to the public through the party.'"  Choquette, 65 Mass. App. Ct. 
at 4, quoting Council, 303 Mass. at 354-355.  See, e.g., 
Broussard v. Melong, 322 Mass. 560, 562 (1948) (worker who 
contracted to work longer hours than permitted by statute could 
recover overtime wages from employer where statute was enacted 
to protect workers); Council, supra (homeowner who granted 
mortgage in violation of statute could recover interest paid to 
mortgagee where statute was enacted to protect homeowners).  See 
generally Story, supra at 400 ("there may be on the part of the 
court itself a necessity of supporting the public interests or 
17 
 
 
public policy in many cases, however reprehensible the acts of 
the parties may be"). 
 
Thus, in Bateman, 472 U.S. at 301-305, the United States 
Supreme Court concluded that the in pari delicto doctrine did 
not bar investors who purchased securities based on inside 
information (tippees) from bringing an action under Federal 
securities laws against the insiders who provided them with the 
information to recover their subsequent trading losses when the 
inside information turned out to be false.  The Court concluded 
that a private action for damages may be barred under the in 
pari delicto doctrine "on the grounds of the plaintiff's own 
culpability only where (1) as a direct result of his own 
actions, the plaintiff bears at least substantially equal 
responsibility for the violations he seeks to redress, and (2) 
preclusion of suit would not significantly interfere with the 
effective enforcement of the securities laws and protection of 
the investing public."  Id. at 310-311. 
 
As to the first element, the Court determined that a tippee 
who trades on inside information is not as blameworthy as a 
corporate insider or broker-dealer who discloses the inside 
information for personal gain.  See id. at 312-314.  As to the 
second, the Court determined that "denying the in pari delicto 
defense in such circumstances will best promote the primary 
objective of the federal securities laws -- protection of the 
18 
 
 
investing public and the national economy through the promotion 
of 'a high standard of business ethics . . . in every facet of 
the securities industry.'"  Id. at 315, quoting Securities & 
Exch. Comm'n v. Capital Gains Research Bur., Inc., 375 U.S. 180, 
186-187 (1963).  The Court reasoned that barring private actions 
in these types of cases because of the in pari delicto doctrine 
"would inexorably result in a number of alleged fraudulent 
practices going undetected by the authorities and unremedied," 
Bateman, supra, and that allowing tippees to bring such cases 
against corporate insiders and broker-dealers would maximize the 
deterrence of insider trading.  See id. at 316. 
 
We note that the doctrine of in pari delicto is separate 
and distinct from comparative negligence, codified in G. L. 
c. 231, § 85.  Under the comparative negligence statute, a 
plaintiff is barred from recovery only where the plaintiff's 
negligence is greater than the defendant's, meaning that it 
accounts for more than fifty per cent of the parties' combined 
negligence.  Where the plaintiff's negligence is less than the 
defendant's, the plaintiff is still allowed to recover, although 
any damages awarded will be "diminished in proportion to the 
amount of negligence attributable" to the plaintiff.  Id.  Thus, 
under the comparative negligence statute, the plaintiff's 
relative fault is considered only when apportioning damages and 
does not necessarily preclude recovery.  But the comparative 
19 
 
 
negligence statute does not apply where the plaintiff has 
engaged in intentional wrongdoing; it applies only where the 
plaintiff and defendant are both found to be negligent.  See 
Boyd v. National R.R. Passenger Corp., 446 Mass. 540, 548 n.11 
(2006) ("The comparative negligence statute is not applicable to 
intentional or wilful, wanton, or reckless conduct").  Where the 
plaintiff has engaged in intentional wrongdoing, the in pari 
delicto doctrine, if applicable, serves as a complete bar to 
recovery. 
 
Where the parties are individuals, application of the in 
pari delicto doctrine is relatively straightforward:  the moral 
culpability of one party is measured against the moral 
culpability of the other.  Thus, a plaintiff who engages in 
intentional wrongdoing is unlikely to recover from a defendant 
who is alleged to be merely negligent, unless public policy 
dictates otherwise.  See Kirschner, 15 N.Y.3d at 464 ("A 
criminal who is injured committing a crime cannot sue the police 
officer or security guard who failed to stop him; the arsonist 
who is singed cannot sue the fire department"). 
 
But where the parties are organizations that can act only 
through their agents, as here, the task becomes more 
complicated.  The question then arises:  how do we determine the 
moral culpability of each party?  If we apply the traditional 
rules of imputation that determine legal responsibility with 
20 
 
 
respect to third parties and impute Mordach's intentional 
misconduct to Merrimack, the in pari delicto doctrine may bar 
recovery.  But if we do not impute Mordach's intentional 
misconduct to Merrimack, then the worst that can be alleged here 
based on the evidence is that Merrimack was negligent in its 
retention or supervision of Mordach, in which case Merrimack's 
recovery will be governed by the principles of comparative 
negligence, not in pari delicto. 
 
The judge cited two cases in support of his decision to 
apply traditional principles of agency law and impute Mordach's 
fraudulent conduct to Merrimack.  One was a decision from the 
New York Court of Appeals, Kirschner, 15 N.Y.3d at 446, applying 
New York law.  See id. at 465 ("Traditional agency principles 
play an important role in an in pari delicto analysis").  The 
other was a decision from the United States Court of Appeals for 
the First Circuit, Baena, 453 F.3d at 1, applying Massachusetts 
law. 
 
In Baena, the First Circuit held that the in pari delicto 
doctrine barred a trustee, acting on behalf of a bankrupt 
corporation, from recovering from the corporation's former 
accountants for their failure to prevent the fraudulent conduct 
of the corporation's senior managers.  Id. at 6.  In imputing 
the senior managers' conduct to the corporation, the First 
Circuit explicitly recognized the possibility that 
21 
 
 
"Massachusetts might take a narrow view of imputation in the 
context of in pari delicto."  Id. at 7.  It also noted that 
"[w]hether or not application of the in pari delicto doctrine 
should depend on imputation rules borrowed from agency law is 
debatable."  Id. at 8.  Nevertheless, absent clear guidance from 
Massachusetts appellate courts, the First Circuit limited itself 
to the "traditional standards" governing imputation, id. at 7, 
writing:  "It is not our job to make new law for Massachusetts 
. . . ."  Id. at 8.5 
And indeed, that job is ours.  See O'Melveny & Myers v. 
Federal Deposit Ins. Corp., 512 U.S. 79, 83-85 (1994) (rules 
governing imputation are matter of State law).  We recognize 
that, in at least one case, we have barred a plaintiff from 
recovery under the in pari delicto doctrine because of the 
                                                          
 
5 The First Circuit concluded that "ordinary agency-based 
imputation rules appear to operate in Massachusetts, . . . 
whether the issue is primary liability of the company or in pari 
delicto."  Baena v. KPMG LLP, 453 F.3d 1, 8 (1st Cir. 2006).  
However, the only case cited in support of this proposition of 
Massachusetts law was Rea v. Checker Taxi Co., 272 Mass. 510 
(1930), and this case is simply inapposite.  In Rea, we held 
only that the doctrine of in pari delicto did not bar a taxicab 
passenger who was injured by the driver's negligence from 
recovering from the driver's employer, because she was not at 
fault.  Id. at 514.  The only conduct that was imputed in that 
case was the conduct of the defendant's agent, the driver, to 
the defendant, the driver's employer -- as is typical under a 
theory of respondeat superior.  Id. at 512.  The plaintiff 
herself was an individual acting on her own behalf, not a 
principal acting through an agent.  Thus, this case has no 
bearing on whether, where a plaintiff is acting through an 
agent, that agent's conduct should be imputed to the plaintiff 
for purposes of the in pari delicto doctrine. 
22 
 
 
misdeeds of the plaintiff's agent.  In Arcidi, 447 Mass. at 619-
622, we held that a union that had entered into an illegal 
contract could not recover the payments it had made under that 
contract.  In doing so, we rejected the union's argument that 
the union itself was not at fault because it was the decision of 
the union president, acting on behalf of the union, to enter 
into the illegal contract.  Id. at 618, 622.  We reasoned that, 
"because an organization can only act through agents," 
separating the conduct of an organization from its agents in 
this context "would make it too easy for organizations to reap 
the benefits of illegal contracts when it is convenient, while 
deflecting the consequences onto agents and third parties when 
it is not."  Id. at 622.  Thus, in Arcidi we effectively imputed 
the union president's conduct to the union to bar recovery under 
the in pari delicto doctrine.  We did not, however, consider 
whether the doctrine is always governed by traditional rules of 
imputation under Massachusetts common law, and we are not aware 
of any decision from this court or the Appeals Court -- nor has 
one been cited to us -- that squarely confronts the issue.  In 
deciding this issue, we therefore write on what is essentially a 
clean slate of Massachusetts law. 
We note first that the traditional rules of imputation, 
although broad in application, are not without their limits.  As 
stated, the rules of imputation are premised on the risk-
23 
 
 
allocation principle that, as between an innocent principal and 
an innocent third party, it is the principal -- who is 
responsible for selecting and supervising the agent -- who 
should bear the loss resulting from an agent's actions.  See 
Kansallis, 421 Mass. at 664.  "This overarching principle" not 
only unifies the various rules of imputation but also "suggests 
[their] . . . limitations."  Id. at 665.  Here, for instance, if 
a student who had been issued a fraudulent loan sought to 
recover damages from Merrimack, there would be little doubt that 
Mordach's fraud should be imputed to Merrimack under a theory of 
respondeat superior and that Merrimack should be held 
vicariously liable to the student.  This is because the student 
is an innocent third party and, as between Merrimack and the 
student, it is Merrimack that should pay for the damage.  But if 
Merrimack were to then sue Mordach for indemnification, as it 
would be entitled to do, see Elias, 410 Mass. at 482, Mordach 
may not offer as a defense to the indemnification claim that her 
fraud should be imputed to Merrimack, making it equally 
culpable, because the rationale for imputation -- the need to 
protect innocent third parties -- is absent.  See Restatement 
(Third) of Agency, supra at § 5.03 comment b ("imputation does 
not furnish a basis on which an agent may defend against a claim 
by the principal").  Cf. American Int'l Group, Inc. v. 
Greenberg, 965 A.2d 763, 828 n.246 (Del. Ch. 2009), aff'd, 11 
24 
 
 
A.3d 228 (Del. 2011) ("[Although] the behavior of faithless 
fiduciaries is imputed to the corporation when the corporation 
faces liability to innocent third-parties . . . [,] [t]his, of 
course, has never prevented the corporation [itself] from 
recovering against those faithless fiduciaries in a derivative 
suit"). 
 
The traditional rules of imputation are similarly 
inapplicable where the aim is to assign blame rather than risk.  
Thus, where an employee has engaged in misconduct, and where a 
person harmed by that misconduct seeks punitive damages against 
the employer, that misconduct will not necessarily be imputed to 
the employer.  See Gyulakian v. Lexus of Watertown, Inc., 475 
Mass. 290, 298-299 (2016).  Rather, in awarding punitive 
damages, "it is the actions of the employer, not the actions of 
that employee, that are the appropriate focus, and . . . it is 
the employer's conduct that must be found to be outrageous or 
egregious."  Id. at 299 n.14.  And, in determining whether the 
employer engaged in outrageous or egregious conduct, we look to 
whether "members of senior management" participated in the 
misconduct, or acquiesced in it by knowing of the misconduct and 
failing to remedy it.  See id. at 300-301.  The misconduct of 
lower-level employees -- even those at the supervisory level -- 
is insufficient to warrant punitive damages.  See id. at 298.  
In this context, we depart from the usual rules of imputation 
25 
 
 
because an award of punitive damages requires a moral judgment 
that the defendant's conduct is so blameworthy that it 
"justifies punishment [rather than] merely compensation."  
Haddad v. Wal-Mart Stores, Inc. (No. 1), 455 Mass. 91, 110 
(2009).  See Pinshaw v. Metropolitan Dist. Comm'n, 402 Mass. 
687, 697 (1988), quoting Smith v. Wade, 461 U.S. 30, 52 (1983) 
("The award of punitive damages is 'a discretionary moral 
judgment' . . .").  Accordingly, conduct by an employee that is 
sufficient to hold an employer vicariously liable for 
compensatory damages does not necessarily suffice to justify 
punitive damages against the employer.  To support an award of 
punitive damages, a jury must find the employer itself to be 
morally blameworthy, and that requires a finding that a member 
of the employer's senior management was morally blameworthy. 
 
For similar reasons, we conclude that, under our common 
law, a principal acting through an agent may not be barred from 
recovery under the doctrine of in pari delicto unless the 
principal itself is found to be morally blameworthy, and conduct 
by an agent that is sufficient to hold a principal vicariously 
liable to third parties will not always be sufficient, on its 
own, to support that finding.  Where the plaintiff is an 
organization that can only act through its employees, its moral 
responsibility is measured by the conduct of those who lead the 
organization.  Thus, where the plaintiff is a corporation, as 
26 
 
 
here, we look to the conduct of senior management -- that is, 
the officers primarily responsible for managing the corporation, 
the directors, and the controlling shareholders, if any.  Only 
their intentional misconduct may be imputed to the plaintiff 
under the doctrine of in pari delicto and, only then, will a 
court need to consider whether application of the doctrine would 
comport with public policy.6 
 
Here, viewing the evidence in the light most favorable to 
Merrimack, we conclude that Mordach cannot be deemed a member of 
senior management whose conduct may be imputed to Merrimack.  
Although we recognize that Mordach had substantial 
responsibilities as financial aid director, she was not an 
officer of Merrimack and, in contrast with its president and 
chief financial officer, she was not among the select few who 
were primarily responsible for the management of the college.  
As a result, Merrimack cannot be deemed because of Mordach's 
                                                          
 
 
6 We note that this rule is consistent with the few cases 
where courts, applying Massachusetts law, have imputed an 
agent's conduct to a plaintiff to bar recovery under the in pari 
delicto doctrine.  In Arcidi v. National Ass'n of Gov't 
Employees, Inc., 447 Mass. 616, 622 (2006), we barred a union 
from recovering under an illegal contract based on the actions 
of the union's president.  Meanwhile, in Baena, 453 F.3d at 3 & 
n.1, 6-7, the First Circuit held that the in pari delicto 
doctrine barred a claim against a corporation's auditors for 
failing to prevent fraud, where the corporation's "top officers 
and directors" -- the chairman of the board, the chief executive 
officer, the chief financial officer, and the managing director 
-- were alleged to have orchestrated the fraud.  In both cases, 
it was the conduct of senior management that was imputed for 
purposes of the in pari delicto doctrine. 
27 
 
 
misconduct to have engaged in intentional wrongdoing that would 
bar it from recovering damages against KPMG under the in pari 
delicto doctrine.  Instead, we must look to the conduct of 
Merrimack's senior management, and the evidence, again viewed in 
the light most favorable to Merrimack, supports at most a 
finding that senior management was negligent in retaining 
Mordach as financial aid director or in failing adequately to 
supervise her.  This conduct may limit Merrimack's recovery 
under the comparative negligence statute, but does not rise to 
the level that would bar recovery entirely under the doctrine of 
in pari delicto. 
 
Because the judge granted summary judgment to KPMG on the 
sole ground that Merrimack's claims were barred under the 
doctrine of in pari delicto, we vacate the order granting 
summary judgment and remand the case to the Superior Court for 
consideration of KPMG's three other grounds for summary 
judgment.  We decline to address these grounds where the judge 
did not address them, and where the parties did not brief them 
on appeal.  On remand, the judge will therefore have to consider 
whether summary judgment is warranted on alternative grounds. 
 
Having so found, we need not consider whether, as a matter 
of public policy, we would carve out an exception to the in pari 
delicto doctrine in cases where an organization seeks to recover 
damages from its auditor for the auditor's negligence in failing 
28 
 
 
to detect fraud committed by members of senior management.7  We 
decline to consider whether to adopt such an exception under our 
common law, not only because it is unnecessary to our decision, 
but also because the Legislature in 2001 enacted G. L. c. 112, 
§ 87A ¾, which applies to "conduct occurring after its effective 
date [February 23, 2003]."  St. 2001, § 147, § 2.  Section 87A ¾ 
provides that, where a "firm licensed to practice public 
accountancy . . . is held liable for damages in a civil action 
arising from or related to its provision of services," and where 
                                                          
 
 
7 In NCP Litig. Trust v. KPMG LLP, 187 N.J. 353, 357 (2006) 
(NCP), the Supreme Court of New Jersey held that imputation does 
not bar corporate shareholders from suing an auditor where the 
auditor negligently failed to uncover fraud committed by 
corporate officers and directors.  In reaching this conclusion, 
the court emphasized that "third-party auditors are specifically 
retained for the task of monitoring corporate activity," id. at 
379, and that allowing an auditor to escape liability where it 
fails to do so would "stretch [the imputation doctrine] to its 
breaking point," id. at 372.  The Superior Court judge in this 
case characterized the decision in NCP as creating an "auditor 
exception" to the doctrine of in pari delicto, when in fact the 
court in NCP did not address the in pari delicto doctrine, and 
instead focused only on the related doctrine of estoppel.  The 
court's holding is better understood as creating an exception to 
the traditional rules of imputation for cases involving auditor 
negligence.  See id. at 372 n.2 (auditor negligence is 
considered both "an exception to the imputation doctrine and a 
ground for estoppel").  See also Kirschner v. KPMG LLP, 15 
N.Y.3d 446, 471 (2010) (New Jersey has "fashioned [a] carve-
out[] from traditional agency law in cases of corporate fraud so 
as to deny the in pari delicto defense to negligent or otherwise 
culpable auditors"); Official Comm. of Unsecured Creditors of 
Allegheny Health Educ. & Research Found. v. 
PriceWaterhouseCoopers LLP, 605 Pa. 269, 305 (2010) ("we read 
the rationale for the New Jersey Supreme Court's decision in NCP 
as effectively negating imputation [and thus barring the in pari 
delicto defense] relative to . . . claims of negligence against 
auditors"). 
29 
 
 
the "plaintiff or other party, individual, or entity has been 
found to have acted fraudulently in the pending action or in 
another action or proceeding involving similar parties, 
individuals, entities and claims" and "the fraud was related to 
the performance of the duties of the . . . firm," "the trier of 
fact shall determine:  (a) the total amount of the plaintiff's 
damages, (b) the percentage of fault attributable to the 
fraudulent conduct of the plaintiff or other party, individual 
or entity contributing to the plaintiff's damages, and (c) the 
percentage of fault of the . . . firm . . . in contributing to 
the plaintiff's damages."8  Under this statute, if a plaintiff 
suffered damages of $1 million, and seventy per cent of those 
damages is attributable to the plaintiff's own fraudulent 
conduct while only thirty per cent is attributable to the 
negligence of the defendant accounting firm, the defendant shall 
not be required to pay more than $300,000.9 
                                                          
 
 
8 General Laws c. 112, § 87A ¾, does not apply "where a 
finding is made that the acts of the individual or firm in the 
practice of public accountancy were willful and knowing." 
 
 
9 The full text of G. L. c. 112, § 87A ¾, is reprinted 
below: 
 
 
"When an individual or firm licensed to practice 
public accountancy under [§] 87B or 87B ½ is held liable 
for damages in a civil action arising from or related to 
its provision of services involving the practice of public 
accountancy, in which action a claim or defense of fraud is 
raised against the plaintiff or another party, individual 
or entity, and that plaintiff or other party, individual, 
30 
 
 
 
The parties and the judge did not cite § 87A ¾ or make 
reference to it, even though there may be relevant conduct that 
occurred after its effective date and that may be governed by 
it.10,11  By enacting this statute, the Legislature appears to 
have replaced the common-law doctrine of in pari delicto in 
                                                                                                                                                                                           
or entity has been found to have acted fraudulently in the 
pending action or in another action or proceeding involving 
similar parties, individuals, entities and claims, and the 
fraud was related to the performance of the duties of the 
individual or firm licensed to practice public accountancy, 
the trier of fact shall determine:  (a) the total amount of 
the plaintiff's damages, (b) the percentage of fault 
attributable to the fraudulent conduct of the plaintiff or 
other party, individual or entity contributing to the 
plaintiff's damages, and (c) the percentage of fault of the 
individual or firm in the practice of public accountancy in 
contributing to the plaintiff's damages.  Under the 
circumstances set forth in this section, individuals or 
firms in the practice of public accountancy shall not be 
required to pay damages in an amount greater than the 
percentage of fault attributable only to their services as 
so determined.  This section shall not apply where a 
finding is made that the acts of the individual or firm in 
the practice of public accountancy were willful and 
knowing.  In such an action involving the practice of 
public accountancy in which a claim or defense of fraud is 
raised, if there is pending a separate action or proceeding 
in which the alleged fraudulent conduct of the same party, 
individuals or entity against whom the claim or defense is 
raised is to be adjudicated or determined, the court may 
stay, on its own or by motion, the action involving the 
practice of public accountancy until the other action or 
proceeding is concluded or the issue of fraudulent conduct 
is determined in that other action." 
 
 
10 The statute was cited and discussed in the amicus brief 
submitted by the Chelsea Housing Authority. 
 
 
11 Perhaps because there was no discussion of the statute, 
the record does not reflect whether KPMG is a firm licensed to 
practice public accountancy under G. L. c. 112, § 87B ½.  One 
would expect that it is. 
31 
 
 
cases where an accounting firm is sued for its failure to detect 
fraud by a client's employee, with a statutory allocation of 
damages akin to, but different from, comparative negligence.12  
But we do not endeavor here to interpret § 87A ¾, where the 
parties have not discussed it and where we have not found any 
appellate court opinion that has interpreted or applied it, or 
any legislative history that sheds light on its origin or 
purpose.  The Superior Court, on remand, may consider the 
statute's application to this case, if any. 
2.  Motion for leave to amend answer.  On appeal, Merrimack 
also challenges the Superior Court judge's decision to allow 
KPMG's motion for leave to amend its answer to add an 
affirmative defense of release, which we review for abuse of 
discretion.  Johnston v. Box, 453 Mass. 569, 582 (2009). 
 
"It is well established that the defense of a release must 
be raised as an affirmative defense and that the omission of an 
affirmative defense from an answer generally constitutes a 
waiver of that defense."  Sharon v. Newton, 437 Mass. 99, 102 
                                                          
 
 
12 One difference is that comparative negligence under G. L. 
c. 231, § 85, compares only the negligence attributed to all 
parties, but G. L. c. 112, § 87A ¾, compares the damages 
attributable to the plaintiff's fraudulent conduct with the 
damages attributable to the accounting firm's negligence.  
Another difference is that a plaintiff is barred from any 
recovery under the comparative negligence statute if its 
negligence is greater than the defendant's negligence, whereas a 
plaintiff under § 87A ¾ is entitled to recovery even if the 
damages attributable to its fault are greater than the damages 
attributable to the defendant's fault. 
32 
 
 
(2002), citing Mass. R. Civ. P. 8 (c), 365 Mass. 749 (1974).  
"It is equally well settled," however, "that a party may amend 
its pleading by leave of court and that such leave 'shall be 
freely given where justice so requires.'"  Sharon, supra, 
quoting Mass. R. Civ. P. 15 (a), 365 Mass. 761 (1974).  Like the 
plaintiff in Sharon, supra, Merrimack contends that undue delay 
should have led the judge to deny KPMG's motion to amend.  
"While we have often upheld a judge's discretion to deny leave 
to amend based in part on undue delay, such denials have 
generally been coupled with consideration of other factors such 
as imminence of trial and futility of the claim sought to be 
added."  Id., citing Leonard v. Brimfield, 423 Mass. 152, 157, 
cert. denied, 519 U.S. 1028 (1996); Mathis v. Massachusetts 
Elec. Co., 409 Mass. 256, 264 (1991); Castellucci v. United 
States Fid. & Guar. Co., 372 Mass. 288, 292 (1977).  Here, as in 
Sharon, we conclude that where "the amendment . . . did not 
raise a new issue on the eve of trial and could not be 
considered futile or irrelevant to [KPMG's] defense, the judge 
did not abuse [his] discretion in granting the motion to amend 
[KPMG's] answer."  Sharon, supra at 102-103. 
Conclusion.  For the reasons stated, the order allowing 
KPMG's motion for summary judgment is vacated, the order 
allowing KPMG's motion for leave to amend its answer is 
affirmed, and the case is remanded to the Superior Court.  On 
33 
 
 
remand, the Superior Court judge will determine whether summary 
judgment should be granted on any of the alternative grounds 
asserted by KPMG, including release. 
 
 
 
 
 
 
So ordered.