The in pari delicto doctrine is a rather rare defense to see asserted in a case. The doctrine bars a plaintiff from recovering damages when they are a participant in the wrongdoing that creates the damages. In Nicholson v. Shapiro & Associates, LLC, the First District Appellate Court examined whether the doctrine should be applied to bar claims brought by a court-appointed receiver of a company (that was appointed because of illegal acts by the company’s owner) against the company’s outside auditor for failing to detect the fraudulent and illegal acts. 2017 IL App (1st) 162551 (2017).
In this case, the Illinois Stock Transfer Co. (“IST”) hired Shapiro & Associates, LLC (“Shapiro”) to assist it with its tax returns and annual audits as required by the SEC Act. However, the SEC discovered that IST’s sole-owner was converting client funds. After this discovery, the SEC filed an action in the Northern District of Illinois and a court-appointed receiver was appointed for IST’s and the sole-owner’s estates.
After her appointment, the receiver filed an accounting malpractice action against Shapiro for failing to detect the fraudulent and illegal acts. In response, Shapiro filed a motion to dismiss arguing, in part, that the doctrine of in pari delicto should be imputed to the receiver by arguing that the sole-owner’s actions are what caused the damages.
But, the Court disagreed reasoning that any award to the estate of the company would benefit the investors and creditors of IST rather than the actual wrongdoer – the owner – who had been removed. (citing Albers v. Continental Illinois Bank & Trust Co., 296 Ill. App. 592 (1938); McRaith v. BDO Seidman, LLP, 391 Ill. App. 3d 565 (2009)). Therefore, the doctrine was inapplicable.
Nicholson v. Shapiro & Associates, LLC, 2017 IL App (1st) 162551 (2017).
Alex Passo and the Patterson Law Firm, LLC handle accounting malpractice actions throughout Illinois and Indiana. If you have a matter that you would like to discuss with Alex, you can reach him at (312) 750-1820 or apasso@pattersonlawfirm.com.