In Pari Delicto Doctrine Limited When Agent Defrauded its Principal

On December 17, 2014, the Second Department issued a decision in Schwartz v. Leaf, Salzman, Manganelli, Pfiel, & Tendler, LLP, 2014 NY Slip Op. 08823, applying the adverse interest exception to the in pari delicto doctrine.

In Schwartz, the plaintiff brought an action "inter alia, to recover damages for negligence, accounting malpractice, fraud, breach of fiduciary duty, and unjust enrichment." The parties both appealed the trial court's decision dismissing in part the plaintiff's claims. This post focuses on the Second Department's discussion of the trial court's refusal to dismiss the plaintiff's accounting malpractice cause of action on in pari delicto grounds:

The defendants contend that that cause of action is barred by the doctrine of in pari delicto, which mandates that the courts will not intercede to resolve a dispute between two wrongdoers. However, the adverse interest exception to the doctrine of in pari delicto provides that when an agent is engaged in a scheme to defraud his principal, either for his own benefit or that of a third person, the presumption that knowledge held by the agent was disclosed to the principal fails because he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose. Here, the documentary evidence submitted by the defendants did not conclusively foreclose the application of the adverse interest exception to the in pari delicto defense.

(Internal quotations and citations omitted) (emphasis added).