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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."

       The statute was cited and discussed in the amicus brief
      10

submitted by the Chelsea Housing Authority.

       Perhaps because there was no discussion of the statute,
      11

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

     12One 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.
