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Posts Tagged ‘Massachusetts’

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].

Court of Appeals clarifies “Your Work” Exclusion in CGL

Posted on: October 30th, 2019

By: Robert Bazzo

A frequently litigated issue in the commercial general liability (CGL) policy is the extent and limits of the coverage for contractors under the definition of “Your Work” and related exclusions. Under the insurance laws in most states, defective workmanship alone is not considered an accident and, therefore, not “property damage” as the result of an “occurrence” within the standard CGL definition.

In a recent Massachusetts case, All America Ins. Co. vs. Lampasona Concrete Corp. et al., the trial court granted the insurance company’s motion for summary judgment based on a finding that the “Your Work” policy exclusion applied to the claim against the insured.

The underlying construction projects related to a new hospital’s concrete floor installation, 90,000 square feet at a cost of $30 million. As part of the construction project, the subcontractors had to install a flooring system for the first floor. This system consisted of a concrete slab (Lampasona’s work), installed over a plastic vapor barrier which was done by another subcontractor. The finished first floor of the hospital included flooring tile (attached with adhesive) and carpeting, installed by other subcontractors on top of the concrete slab.

After completion of the hospital, the owner complained to the general contractor that first-floor tiles had become loose, were “tenting” and “blistering” and that the liquid adhesive was leaking from underneath the flooring. The damage was allegedly related to excessive moisture migrating through the concrete slab. The claimed excessive moisture was allegedly caused by Lampasona’s installation (work product [or “Lampasona’s work”]), including (1) Puncturing the vapor barrier; (2) Improperly mixing fiber reinforcement into the concrete; and (3) Improperly curing the concrete.

Based on these allegations, the trial court found coverage for the occurrence to be barred by the “Your Work” exclusion [TO AVOID THE POSSIBLE READING THAT THE INSURING AGREEMENT DID NOT APPLY IN THE FIRST INSTANCE]. The trial court focused on the definition of “Occurrence” and the policy exclusion stating the insurance does not apply to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘Your Work’ was incorrectly performed on it.” In the judge’s opinion, Lampasona’s work applied to the entire flooring structure because it was an “integral and inseparable part” of the construction of the flooring surface. Although the flooring surface consisted of several different layers, only one of which was placed by Lampanosa, together they constituted “one completed product: Interior flooring for the first floor” of the hospital.

On appeal, the court found that the “Your Work” exclusion did not apply. The appeals court agreed that a CGL policy does not provide coverage for faulty workmanship that damages only the insured’s work product. However, the policy does provide coverage if the faulty workmanship causes property damage to something other than the insured’s work product. The appellate judges determined that the trial court did not properly differentiate between Lampasona’s work and the work of the other subcontractors. It was not wrong to conclude that the vapor barrier, concrete slab, and floor tiles or carpeting could be characterized as layers of an integrated flooring system. However, just because the separate parts made up one system does not mean that the exclusion applied. Instead, said the appeals court, “Where Lampasona was hired to install one layer of the flooring system but caused discrete damage to the other layers, that damage falls outside the . . . exclusion.”

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

Consent-to-Settle Clauses Under Review in Massachusetts

Posted on: September 30th, 2019

By: David Slocum

Earlier this month, the Massachusetts Supreme Judicial Court (the SJC), the state’s highest court, heard oral argument in a case which presents the question whether consent-to-settle clauses typical to most professional malpractice insurance policies should be deemed unenforceable as against public policy.

The case, Rawan v. Continental Casualty Co., places before the SJC an important issue of first impression in Massachusetts, the outcome of which will have significant implications for professional liability insurers and their insureds throughout the state.

The case arises out of an underlying engineering malpractice lawsuit in which plaintiff homeowners alleged the defendant professional engineer negligently designed their home.  The engineer was insured by Continental Casualty Co. (CNA) under a professional liability policy, which contained a standard consent-to-settle clause providing: “We [CNA] will not settle any claim without the informed consent of the first Named Insured.”

Consistent with its insured’s wishes, CNA made no settlement offer during the underlying engineering malpractice litigation.  At trial, the jury found the engineer was negligent and awarded $400,000 in damages.

Thereafter, in a separate follow-on lawsuit against CNA, the plaintiff homeowners alleged CNA had violated Massachusetts’ unfair settlement practices statute, Chapter 176D §3(9)(f), which requires insurers to effectuate a prompt, fair and equitable settlement when an insured’s liability has become reasonably clear.  Plaintiffs alleged CNA had failed to properly investigate and settle the plaintiffs’ claims against the engineer during the underlying litigation.

CNA moved for, and was granted, summary judgment in its favor on the grounds that its insured had not consented to settlement of the claims.  Thus, CNA argues, it was contractually bound under the consent-to-settle clause of the policy not to effectuate a settlement of the plaintiffs’ claims against the insured, irrespective of whether the insured’s liability had become reasonably clear.

In asking the SJC to overturn the trial court’s grant of summary judgment in CNA’s favor, the plaintiffs argue that such consent-to-settle clauses undermine the purpose of Chapter 176D by ceding settlement authority to insureds who potentially may unreasonably refuse to settle valid claims against them.  Plaintiffs contend that such clauses therefore should be deemed unenforceable as against public policy in Massachusetts.

CNA and a number of bar and professional associations, which have filed amicus briefs in its support, argue the grant of summary judgment in CNA’s favor should be affirmed because consent-to-settle clauses in noncompulsory professional liability insurance policies are compatible with insurers’ obligations under Chapter 176D.  They contend Chapter 176D’s purpose of preventing insurance company overreach is not implicated in such situations, and a professional insured’s important reputational interest also supports the enforceability of consent-to-settle clauses.

The SJC is expected to issue its decision in this important and closely-watched case later this term.

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


Saporous Naming Rights Protected

Posted on: September 10th, 2019

By: William Gildea

The Business Litigation Session of the Massachusetts Superior Court recently granted the prior owner of the registered trademark “Zuma” a preliminary injunction against a transferee’s decision to open a restaurant in Boston named “Zuma Boston.” B.B. Kitchen, Inc. v. Azumi, Ltd., 2019 Mass. Super. LEXIS, * 469 (Mass. Super. Ct. July 12, 2019 (Davis, J.). Plaintiff B.B. Kitchen, Inc. d/b/a Zuma Tex-Mex Grill (“Plaintiff”) sought to enforce a 2008 written settlement agreement (“Settlement Agreement”)with Defendant Azumi, Ltd. (“Defendant”). Plaintiff has operated a restaurant named “Zuma Tex-Mex Grill” in Faneuil Hall since 1989, while Defendant operates more than a dozen “Zuma” Japanese restaurants across the globe. Defendant recently opened a new restaurant “Zuma Boston” at the Four Seasons Hotel. After “Zuma Boston” opened, “Zuma Tex-Mex Grill” began experiencing “instances of actual confusion among members of the dining public” based off the name similarities.

The Settlement Agreement resolved “a prior dispute between the parties regarding their respective rights to use the ‘ZUMA’ mark in conjunction with the provision of restaurant services.” Plaintiff held the trademark for the ZUMA mark, but eventually reached the Settlement Agreement where the mark would pass to Defendant, except in the “Licensed Territory” which expressly included the six New England States.

Plaintiff asserted the Settlement Agreement prohibited Defendant from opening any restaurant with the “ZUMA” mark in New England. Plaintiff filed suit alleging Defendant’s opening of “Zuma Boston” violated the Settlement Agreement, further alleging claims for breach of contract and violation of G.L. ch. 93A, § 11. Plaintiff sought damages and injunctive relief, specifically a preliminary injunction preventing Defendant from operating “Zuma Boston” under that name.

The Court found Plaintiff had satisfied all requirements entitling it to a preliminary injunction against Defendant. Plaintiff demonstrated a strong likelihood of success on the merits on its claim that Defendant breached the Settlement Agreement. The Court found that Defendant “expressly agreed in… the Settlement Agreement to ‘refrain from opening any restaurant incorporating the term ZUMA or any mark confusingly similar thereto as part of a trade name, trademark, or service mark within the Licensed Territory” which included Massachusetts.

The Court further found Plaintiff would suffer irreparable harm based off the evidence that the name similarities created “significant actual confusion among dining customers, financial institutions, and others.” Finally, the Court found the balance of harm weighed in Plaintiff’s favor as it is a small single location business while conversely, Defendant is an international operation with approximately $200,000,000 in annual revenue.

This decision reflects the importance of businesses doing due diligence prior to absorbing the high costs of opening a new business such as a restaurant. This decision further demonstrates a 10-year-old agreement can impact an organization’s rights. Counsel advising a new business should be wary of old agreements that may impact the rights of organizations they represent and the costs of opening in a new locale, including future litigation costs in connection with failing to abide by old agreements.

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

In Attorney Malpractice Suit Alleging “Negligent Settlement,” Massachusetts Appeals Court Holds No Expert Testimony Is Needed to Show “Fair Settlement Value” of the Underlying Claim

Posted on: July 10th, 2019

By: Ben Dunlap

The Massachusetts Appeals Court recently addressed the requirements for expert testimony in an attorney malpractice suit, concluding lack of an expert opinion on “fair settlement value” was not fatal to the plaintiff’s case.

Marston v. Orlando, 95 Mass. App. Ct. 526 (2019) arose from injuries sustained by a worker on an offshore light tower. The injured worker retained counsel to pursue a workers’ compensation claim and also federal law claims against his employer and other parties. His attorneys negotiated a $7,500 lump-sum workers’ compensation settlement and a $200,000 settlement of the federal claims.

Following the settlement, the injured worker’s conservator brought an attorney malpractice action against the attorneys, alleging the settlement was inadequate in light of the severe injuries sustained, and that the attorneys “pressured” their client to accept an inadequate settlement to “disguise” their negligent handling of the case. Among other issues, the plaintiff contended the attorneys took certain positions in the workers’ compensation case that may have precluded recovery in the federal claims.  The plaintiff proffered expert testimony regarding the requisite standard of care applicable to an attorney practicing in Massachusetts but no expert testimony on the issue of what a “fair settlement value” would have been in the underlying case.  The trial court dismissed the case on the eve of trial, ruling the plaintiff was required to show the settlement was “unreasonable” and failed to do so because he lacked expert testimony regarding the “fair settlement value” of the claim.

On appeal, the plaintiff argued, among other things, that the trial judge misapplied the law as to the requirement for expert testimony.  The Appeals Court, revisiting the standards set forth in Fishman v. Brooks, 396 Mass. 643 (1986), agreed with the plaintiff and vacated the trial court’s dismissal, concluding that “[t]he absence of an expert opinion on fair settlement value was not fatal to the conservator’s legal malpractice case.”

The Appeals Court explained there are two ways to establish attorney malpractice based on a “negligent settlement.” One method rests on proving the “case within the case.”  Using this method, the plaintiff must show first that the attorneys breached the standard of care in their settlement of the underlying claims, and second, that if the claims had not been settled, the client would have recovered more than he received in the negligently-obtained settlement.  As in most jurisdictions, Massachusetts law requires expert testimony to prove the attorneys breached the standard of care (except where a breach is “obvious”), but using the “case within the case” method, an expert is not needed to prove what a fair settlement would have been. Instead, a jury could determine what the plaintiff would have recovered in the absence of a settlement – with or without expert testimony.

The second method of proving attorney malpractice relies on the “fair settlement value” of the underlying case. To prevail using this method, a plaintiff shows that absent the attorney’s negligence, he would have obtained a more favorable settlement. The damages are the difference between the settlement obtained and what the fair settlement value would have been in the absence of any malpractice.  This method requires an expert to show what the fair settlement value would have been.

Because the plaintiff in Marston sought to prove malpractice using the first method – the “case within the case,” he was not required to present expert testimony to show the “fair settlement value.”

The Appeals Court’s decision brings into focus two distinct methods for proving an attorney malpractice case under Massachusetts law and clarifies the differing requirements for expert testimony with each method. It also highlights an issue that in many other jurisdictions is unsettled. Although most jurisdictions recognize some form of the “case within the case” method for proving an attorney malpractice claim, the treatment of the “fair settlement value” method varies widely. Some, like California, New Jersey, and New York, permit the use of the “fair settlement value” method but caution against damages that are too “speculative,” suggesting expert testimony may be needed establish the claim. Others, like Pennsylvania and Georgia, generally disfavor claims for “negligent settlement,” regardless of the theory pursued. Florida law permits recovery for “negligent settlement” but appears to favor the “case within the case” method of proof. The Marston case is a significant addition to this developing area of the law.

If you have questions or would like more information, please contact Ben Dunlap at [email protected].