Paula Schaefer, ‘In Pari Delicto Deconstructed: Dismantling the Doctrine that Protects the Business Entity’s Lawyer from Malpractice Liability’

The equitable doctrine in pari delicto provides that a plaintiff who participated equally with a defendant in wrongdoing cannot pursue a claim against the defendant. Courts often describe dual policies underlying the in pari delicto defense: deterrence of illegal conduct and protection of the sanctity of the courts. Lawyers invoke in pari delicto when sued for malpractice for failing to protect a client from legal liability. A common scenario involves a lawyer advising a client to lie under oath; the client follows the advice and suffers damage as a result. When the client sues the lawyer for legal malpractice based on the lawyer’s negligent advice, the lawyer can have the case dismissed based on in pari delicto. Courts reason that the client understood that it was wrong to lie under oath and that both client and lawyer are equally at fault for the client’s resulting damages, justifying dismissal on the basis of in pari delicto.

The in pari delicto defense also can be invoked when the client is a business that (through its agents) engaged in fraudulent or criminal conduct that ultimately damaged the company. In this context, the legal malpractice case is filed against a business entity’s attorney who failed to advise against the conduct, failed to inform other agents within the organization about the misconduct so that they could intervene, or participated in the misconduct. Often the business has filed for bankruptcy and the trustee is bringing the malpractice claim against the company’s former lawyers. In other cases, suit is filed by the company itself, an assignee of the company’s rights, a court-appointed receiver, or its shareholders (as a derivative suit).

Courts have applied in pari delicto to dismiss these claims against the company’s lawyers. The plaintiffs in these cases stand in the shoes of the wrongdoing company and cannot escape the company’s misconduct. And there is indeed ‘company misconduct’ because – applying basic agency principles – management’s knowledge or misconduct must be imputed to the company. While there is an exception to imputation when the agents acted adverse to the company’s interests, that exception is a narrow one inapplicable when agents engaged in misconduct for the company’s benefit. Courts reason that applying in pari delicto in such cases deters illegal conduct and allows courts to avoid being parties to the misconduct.

This Article deconstructs these principles that seemingly favor the in pari delicto doctrine barring claims against an organization’s lawyer. In examining in pari delicto in these cases, it becomes apparent that the doctrine is inconsistent with an attorney’s fiduciary duty to organizational clients. By barring or substantially limiting claims against business lawyers in this context, in pari delicto has effectively immunized lawyers from liability when they fail to perform one of their most important functions: acting competently to protect their organizational clients from legal liability. This Article explains how two bodies of law – in pari delicto and attorney fiduciary duty – should be reconciled to better protect the interests of organizational clients and to give attorneys incentives to competently represent their organizational clients.

Schaefer, Paula, In Pari Delicto Deconstructed: Dismantling the Doctrine that Protects the Business Entity’s Lawyer from Malpractice Liability (February 15, 2016).

First posted 2016-02-17 06:51:03

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