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Archive for November, 2019

KPMG Owes No Damages to College For Not Detecting Student Loan Fraud Scheme

Posted on: November 22nd, 2019

By: Nancy Reimer

After a three-week trial, a Massachusetts jury held on November 19, 2019 that “big four” accounting firm, KPMG LLC, owed no damages to Merrimack College even though it was negligent and did not detect a former Merrimack employee’s student loan fraud during the years it audited the College’s financial statements. The employee did not personally benefit from the fraud but treated student aid given in the form of grants as loans and billed and collected from students for money they did not owe.

After discovery of the fraud, Merrimack’s then-Director of Financial Aid, Christine Mordach, plead guilty to mail and wire fraud.  Mordach began a one-year prison term in August 2014 and was ordered to pay $1.5 million in restitution to the victims of her fraud. The College filed suit against KPMG for failing to detect the major irregularities in the College’s financial statements between 1998 and 2004 arising from Mordach’s fraud.

The case is notable as it is the first known to go to verdict with a jury applying M.G.L. c. 112, § 87 ¾, a statute applicable only to licensed Massachusetts accountants and enacted by the Massachusetts Legislature in 2002. That statute provides in cases of fraud and an accountant’s attest services:

the trier of fact shall determine (a) the total amount of the plaintiff’s damages, (b) the percentage of fault attributable to the fraudulent conduct of the plaintiff or other party, individual or entity contributing to the plaintiff’s damages, and (c) the percentage of fault of the individual or firm in the practice of public accountancy in contributing to the plaintiff’s damages. Under these circumstances set forth in this section, individuals or firms in the practice of accountancy shall not be required to pay damages in an amount greater than the percentage of fault attributable only to their services as so determined.

Before the trial, KPMG had been awarded summary judgment when a trial judge ruled the in pari delicto doctrine barred recovery for the College. In pari delicto (latin for “in equal fault”) is an equitable doctrine which provides when a plaintiff is engaged in wrongdoing, and certainly fraud, a plaintiff cannot benefit by recovering damages from another alleged wrongdoer. The College appealed, and in May 2018, the Supreme Judicial Court of Massachusetts (“SJC”) reversed, ruling for the first time that in pari delicto could succeed as a defense only if the fraud was attributable to “senior management” and, most surprisingly, ruled that Mordach, even though she was the College’s Director of Financial Aid, was not a member of the school’s senior management.  Earlier this year SJC addressed in pari delicto again, overturning summary judgment for an accounting firm in Chelsea Housing Authority v. Michael E. McLaughlin, et al.  and ruling that M.G.L. c. 112, § 87 ¾ superseded the in pari delicto doctrine for Massachusetts licensed accountants for events after its enactment in 2002. After the Chelsea Housing Authority decision, in pari delicto is no longer available as an absolute defense to an accountant where a fraud is committed, and instead, an accountant’s liability is limited to his/her percentage of fault in contributing to the plaintiff’s damages.

The jury deliberated for one and one-half days before returning a verdict for KPMG.  The verdict slip provided a roadmap for how the trial judge interpreted M.G.L. c. 112, § 87 ¾ and its interplay with KPMG’s comparative negligence defense. In answering special questions, the jury found KPMG’s auditors had been negligent when conducting the College’s audits, but that the College was as well.  After being instructed Mordach’s fraud was not to be considered is assessing the College’s contributory negligence, the jury found KPMG’s negligence was only fifteen percent (15%) compared to the College’s eighty-five percent (85%). Although the College asked for damages exceeding $4 million, the jury found the College’s damages were only $100,000. The jury also answered questions under M.G.L. c. 112, § 87 ¾, finding the College suffered a total of $50,000 attributable to any negligence of KPMG for the two years when the statute applied, but that the percentage of fault attributable to KPMG was only seven and one-half (7.5) percent compared to  nine two and one-half (92.5) percent for Mordach. The result was a verdict in favor of KPMG, because under Massachusetts law of comparative negligence, a plaintiff whose own negligence is greater than fifty percent is barred from recovery.

If you have any questions or would like more information, please contact Nancy Reimer at [email protected].

Pennsylvania Taking Steps to Help the Small Contractor

Posted on: November 21st, 2019

By: Josh Ferguson

There are currently two bills in the Pennsylvania House of Representatives intended to limit the ability of property owners, managers and general contractors from pushing their liability onto the sub-contractors.

Pennsylvania State Representatives introduced House Bill 1887, which would allow for only limited indemnification within construction contracts.  The Bill would amend Act 164, which has been in force since 1970.  If passed as written, the bill would significantly curtail broad and intermediate forms of indemnification.  Any level of negligence contributed by the owner or general contractor could eliminate their right to indemnification from a subcontractor.  This Bill would align Pennsylvania’s anti-indemnity statutes with that of Delaware, New York, and Ohio.

A similar indemnity limiting bill has been proposed to protect snow and ice management contractors. The Commercial Snow Removal Service Liability Limitation Act has been reintroduced into the Pennsylvania General Assembly. The proposed legislation, House Bill 1702, is intended to limit property owners and managers from passing on their negligence through hold-harmless agreements and indemnification clauses. Similar legislation has been adopted into law in Illinois, Colorado and Connecticut.

For further information or for further inquiries you may contact Joshua Ferguson of Freeman Mathis & Gary, LLP, at [email protected].

Georgia’s Statute of Repose Bars Contractual Claims Involving Deficient Construction

Posted on: November 21st, 2019

By: Jake Carroll

Georgia’s statute of repose provides an eight (8) year deadline for actions seeking to recover damages for deficiencies in construction.[1] The period runs from the substantial completion of the work, and was enacted with the intent of establishing an outside time limit on actions arising out of the improvement of real property. While Georgia courts have consistent held that the statute of repose bars claims for negligent construction, and that common law claims for indemnity and contribution are also barred by this statute of repose,[2] Georgia state courts have never addressed whether the statute also bars related contractual claims (i.e. indemnity, contribution, and breach of warranty).[3]

In S. States Chem., Inc. v. Tampa Tank & Welding, Inc.,[4] the Georgia Court of Appeals clarified the reach and application of the statute, holding that since Georgia’s statute of repose makes “no distinction” among claims sounding in negligence and those sounding in contract, “the statute broadly precludes any action to recover damages brought outside the eight-year period of repose.”[5] “It is well settled that ‘a statute of ultimate repose frames the time period in which a right may accrue, if at all. Therefore, if an injury occurs outside this time period, the injury is not actionable[.]’”[6] While the opinion specifically addressed claims for breach of an express promise to renovate a storage tank, the court’s reasoning appears to apply to bar all untimely contractual claims alleging deficiency in construction—including indemnity, contribution, and breach of warranty.

The decision provides clarity as to which claims are subject to the statutory window of liability for completed projects. However, even with these changes, owners and contractors should still review their construction contracts for specific provisions regarding completion, statutes of limitations, and indemnity. Additionally, the Court’s decision in S. States does not extend the statute of repose to claims for contractual indemnification where the indemnitor does not allege deficient construction and the indemnification provision does not require a showing of negligence.[7] Those claims would still be governed by the applicable statute of limitations.

If you have questions regarding this decision, or any other construction questions, Jake Carroll practices construction and commercial law as a member of Freeman Mathis & Gary’s Construction Law, Commercial Litigation, and Tort and Catastrophic Loss practice groups. Mr. Carroll represents business and commercial entities in a wide range of disputes and corporate matters involving breach of contract and warranty claims, business torts, and products liability claims.

[1] O.C.G.A. § 9-3-51(a) (“No action to recover damages for any deficiency in the . . . construction of an improvement to real property . . . shall be brought against any person performing . . . construction of such an improvement more than eight years after substantial completion of such an improvement.”).
[2] See e.g., Std. Fire Ins. Co. v. Kent & Assoc., 232 Ga. App. 419, 420 (1998) (“[C]laims for indemnity and contribution are among those contemplated by the Legislature when it enacted [O.C.G.A. § 9-3-51].”); Gwinnett Place Assoc., L.P. v. Pharr Engineering, 215 Ga. App. 53, 55 (1994) (indemnity claim); Krasaeath v. Parker, 212 Ga. App. 525 (1994) (contribution claim).
[3] Notably, a federal court interpreting Georgia’s statute of repose held that contractual indemnity claims in cases involving allegations of deficient construction were barred. Facility Constr. Mgmt. v. Ahrens Concrete Floors, Inc., 2010 U.S. Dist. LEXIS 29242, 2010 WL 1265184 (N.D. Ga. Mar. 24, 2010). However, that opinion was only persuasive to Georgia state courts.
[4] No. A19A0960, 2019 Ga. App. LEXIS 657 (Oct. 31, 2019).
[5] Id. at 18 (emphasis added).
[6] Id. (quoting Rosenberg v. Falling Water, Inc., 289 Ga. 57 (Ga. 2011) (citation omitted)).
[7] See Nat’l Serv. Indus. v. Ga. Power Co., 294 Ga. App. 810, 813 (2008).

One if by land, . . . ZERO if by sea? (Apologies to Paul Revere) The Trapdoor of COGSA

Posted on: November 18th, 2019

By: Jon Tisdale

Lawyers who represent businesses who ship goods around the world need to protect their clients (and themselves) from the congressionally-mandated trapdoor of the Carriage of Goods By Sea Act (COGSA).  We now live in a world where brick-and-mortar stores are increasingly a thing of the past and the majority of goods sold are purchased online.  And then they have to be delivered.  Until someone invents the Transporter from Star Trek to “beam” products across the globe, our businesses and lives would grind to a screeching halt without the ability to ship products and goods.

So critical is the shipping industry to our economy, the United States Congress has acted to protect the integrity of this industry.  The legislative history tells us that congress reasoned (probably correctly) that if every time a shipper of goods was held responsible when a third party acted negligently and damaged the goods the shipper was entrusted to transport, negligence actions and damage awards would cause the cost of shipping anything to skyrocket and completely paralyze the shipping industry.  Congress reasoned further that the sophisticated players engaged in international shipping should be free to negotiate their own terms and conditions for indemnification, rather than be at the mercy of 50 different tort law systems nationwide.  Hence, the Carriage of Goods by Sea Act was born.

COGSA establishes an indemnity protocol governing reimbursement for the damage or destruction of goods that are shipped by sea.  Importantly, it does not matter whether the damage is occasioned by an intervening negligent third party or the shipping company’s own employee, agent or subcontractor.  If a ship filled with Bentleys and Rolexes is (a) hijacked by terrorists or (b) sunk by a negligent sea captain, the COGSA-mandated damages for the loss or destruction of whatever is shipped is limited to actual market value of the goods up to a maximum of $500 per item shipped.  This is fine if you are shipping inexpensive items; not so fine if you are shipping cars, heavy equipment or more expensive products or goods.

Under COGSA, the person or entity that contracts with the shipper has the option of (a) accepting the risk of the $500 COGSA limitation of indemnity, or (b) declaring the true value of the item being shipped and paying a non-trivial fee to increase the coverage.

The takeaway:  If your clients are shipping expensive products across country by truck, they are protected by state law systems of subrogation recovery.  But if your clients ship by sea, be sure they are cognizant of COGSA limitations and negotiate around them.

If you have any questions or would like more information, please contact Jon Tisdale at [email protected].

Changes In Store for California HOA Elections

Posted on: November 18th, 2019

By: Nicole Clowdsley

With 2020 fast approaching, California HOAs should be proactively preparing to comply with a litany of new statutorily mandated changes to their election processes. On October 12, 2019, California Governor Gavin Newsom signed Senate Bill 323 into law resulting in amendments to multiple sections of the California Civil Code regulations governing HOA elections. These changes become effective January 1, 2020.

Among the more significant substantive changes are specific standards HOAs may use to disqualify candidates from running, such as ineligibility of persons with certain past criminal convictions. Also, in order for an HOA to allow for board member acclamation – meaning there are more open positions than nominees and the nominees simply take the board seats – an HOA needs to have at least 6,000 units! HOAs may no longer suspend any member’s voting rights for any reason other than not being a member. Finally, in addition to limiting who may serve as an inspector of elections, HOAs must now ensure the inspector retains additional election materials, such as candidate registration and voter lists, for one year following the election process.

In addition to all the new requirements HOAs must abide by, associations needing to amend their election operating rules must now do so no later than 90 days before an election. So, for those HOAs with elections after the first of the year, time is of the essence. HOAs must act quickly to ensure upcoming elections are conducted in accordance with California’s extensive new requirements, or, they could find their election results overturned for legal noncompliance.

If you have any questions or would like more information, please contact Nicole Clowdsley at [email protected].