In Pari Delicto Deconstructed: Dismantling the Doctrine that Protects the Business 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. In pari delicto is a shortened version of the phrase in pari delicto potior est conditio defendantis, which means “[i]n a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one.”

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 of the claim.

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 a trustee sues the company’s former lawyers.

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.

In the article In Pari Delicto Deconstructed, I deconstruct 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.

Imputing the agent’s knowledge or conduct to the company is a necessary step in the in pari delicto analysis in these malpractice cases. Imputation is based upon agency principles, just as it would be in a case filed by a third party against the company. But imputation in the in pari delicto context is incompatible with the law of organizational attorney fiduciary duty. An attorney is not permitted to follow the directions of an agent who wants to engage in conduct that will create liability for the company. In other words, the law of fiduciary duty provides that company insiders lack actual and apparent authority when they ask an attorney to facilitate liability-creating conduct. It is legally inconsistent, then, to attribute the conduct of these insiders to the company in order to bar the company’s claim against an attorney who breached his fiduciary duty by taking direction from those very insiders. Further, the attorney’s duty includes providing notice – or knowledge – to higher authorities within the company. Imputing an agent’s knowledge to the company to defeat a claim against an attorney who was required (but failed) to provide notice of that same information to the company is illogical.

The adverse interest exception provides that if the company’s agent was acting adversely to the principal’s interest, the agent’s knowledge or conduct should not be imputed to the company for purposes of in pari delicto. The adverse interest analysis of many courts turns largely on whether the corporation received any benefit – however slight or short-lived – from the agent’s misconduct. Any benefit to the company results in a finding that the exception does not apply. This interpretation of the adverse inference exception fails to consider an attorney’s fiduciary obligations. Competent attorneys are bound to advise their clients’ agents against both stealing from the company and stealing for the company. Neither is in the company’s long-term financial interest. One creates liability from the agent to the company and one will result in liability for the company when it is discovered. It is not the lawyer’s proper role to bet on non-detection of liability-creating conduct or to weigh its possible benefits to a business entity client.

It is absurd that the adverse interest exception protects lawyers from liability in the very situation that should trigger lawyer liability. As a fiduciary, a lawyer must protect an organizational client from an agent that orchestrates a fraudulent scheme to enrich the client. But a narrow interpretation of the adverse interest exception provides that as long as the fraudulent scheme was meant to enrich the organization, the organization is barred from suing the attorney who failed to protect it. This is nonsensical.

A stated policy underlying the in pari delicto doctrine is protection of the sanctity of the courts. It is ironic, then, that courts in business lawyer malpractice cases regularly and seriously give consideration to attorney arguments that a claim should be dismissed because counsel was facilitating beneficial illegal conduct. Rather than avoiding entanglement in misconduct, courts are using the violation of an attorney’s duty as grounds for rewarding the attorney with a dismissal. Dismissing an attorney malpractice claim is fundamentally different from dismissing a case against a “classic” co-conspirator. A lawyer is engaged to provide a legitimate service: legal advice and assistance to an organizational client. Considering the merits of such a claim is not unseemly. It is what courts do in any legal malpractice case. By dismissing these claims without consideration, courts are signaling that there are no consequences to lawyers for violating fiduciary duties to organizational clients. Ironically, the application of in pari delicto in these cases makes courts participants in lawyer misconduct.

Courts also justify the in pari delicto doctrine on the ground that it deters illegal conduct by incentivizing businesses to use care in selecting and supervising agents. But it is the lawyer’s role to know the law, to advise about conduct that could result in legal liability, and to seek out higher authorities in a company who will take the steps necessary to avoid liability by correcting course. Greater deterrence of illegal conduct could be accomplished by not dismissing these malpractice claims. A lawyer, as a fiduciary, has an obligation to act competently and loyally to protect an organizational client from liability at the hands of misguided insiders. If lawyers are never held accountable to their clients for failing to do so, there is little incentive to perform this difficult job. Civil liability is a powerful enforcement mechanism. The prospect of the lawyer malpractice liability would give lawyers a strong financial incentive to fulfill fiduciary duties to their clients.

The solution is to align the application of in pari delicto with the law of attorney fiduciary duty. Agent conduct should not be imputed to an organizational client when the client (or its successor in interest) alleges that its lawyer failed to act competently to protect the organization from committing a crime or fraud and that failure was the legal cause of the client’s injury (such as liability or bankruptcy). This formulation effectively aligns both bodies of law by not imputing agent conduct to organizational client under circumstances when the attorney would not be allowed to do so. Taking away in pari delicto does not guarantee a finding of malpractice in these cases, but simply the opportunity for the client (or its successor) to prove its case.

Sometime soon, another corporate scandal will break and the public will ask, “Where were the lawyers?” The honest answer to that question should embarrass the legal profession. Lawyers are fiduciaries who owe their clients duties of competence and loyalty. If lawyers would uphold these duties, many business scandals could be prevented. But there is no real incentive for lawyers to get it right. The reason is the in pari delicto doctrine. Aligning in pari delicto with attorney fiduciary duty would further the interests of business clients and the legal profession. When attorneys know their fiduciary duty is not just theoretical but a possible basis of liability, they will have an incentive to protect their business clients from misguided agent conduct.

The preceding post comes to us from Paula Schaefer, Associate Professor of Law at the University of Tennessee College of Law. The post is based on her paper, which is entitled “In Pari Delicto Deconstructed: Dismantling the Doctrine that Protects the Business Entity’s Lawyer from Malpractice Liability” and available here.