## Facts

- Allegheny Health, Education and Research Foundation (AHERF), a Pennsylvania nonprofit health-care system, pursued rapid acquisitions to create an integrated delivery network.
- By the mid-1990s, AHERF incurred significant losses; senior officers allegedly concealed deterioration through false information and accounting improprieties.
- PricewaterhouseCoopers, LLP (PwC) served as AHERF’s outside auditor and issued allegedly unqualified (“clean”) audit opinions for 1996 and 1997 financial statements.
- The clean opinions allegedly misled AHERF’s board into delaying corrective action until the severity of the financial condition became apparent in early 1998.
- AHERF filed for Chapter 11 and entered liquidation.
- Acting for the bankruptcy estate, the Official Committee of Unsecured Creditors sued PwC, alleging that proper auditing would have led to earlier board intervention and reduced losses.
- The Committee asserted claims for breach of contract, professional negligence, and aiding and abetting breaches of fiduciary duty by AHERF’s officers.

## Issues

1. Under Pennsylvania law, may an allegedly culpable third party (such as an auditor) defensively impute corporate agents’ fraud to the corporation without showing it dealt with the corporation in good faith?
2. Where an auditor allegedly colludes with corporate officers to misstate financials, does the in pari delicto doctrine bar the corporation (or its bankruptcy representative) from recovering from the auditor?
3. Did the district court err by granting summary judgment on imputation and in pari delicto without an inquiry into PwC’s good faith?

## Decision

- The Third Circuit vacated the district court’s summary judgment for PwC and remanded.
- Under Pennsylvania law (as clarified by the Pennsylvania Supreme Court), defensive imputation by an allegedly non-innocent third party requires a determination that the third party dealt with the principal in good faith.
- Because the district court did not apply this good-faith requirement, summary judgment based on imputation and in pari delicto could not stand.
- The Third Circuit did not decide whether PwC acted in good faith or whether in pari delicto ultimately applies; those fact- and standard-dependent determinations were left for further proceedings.

## Legal Principles

- Imputation of an agent’s fraud to the principal is not automatically available as a defense to an allegedly culpable third party; availability turns on whether the third party dealt with the principal in good faith.
- In pari delicto, when premised on imputed wrongdoing, is unavailable where the defendant cannot satisfy the good-faith requirement for defensive imputation.
- Allegations of collusion between an auditor and corporate management can defeat defensive imputation and thus prevent in pari delicto from categorically barring the corporation’s claims.
- On summary judgment, a court must apply the governing state-law standard for defensive imputation, including any good-faith limitation, before barring corporate claims against outside professionals.

## Conclusion

The Third Circuit held that, under Pennsylvania law, an auditor’s reliance on imputation and in pari delicto depends on whether the auditor dealt with the client-corporation in good faith; because the district court failed to apply that standard, summary judgment for PwC was vacated and the case remanded.


Official Comm. of Unsecured Creditors of Allegheny Health, Educ. & Rsch. Found. v. PricewaterhouseCoopers, LLP, 607 F.3d 346 (3d Cir. 2010)