Adverse Interest Exception to In Pari Delicto Defense May Apply—The Two Concepts Are Briefly Explained

In an accounting malpractice action, the Second Department determined the defendants’ motion to dismiss based upon the defense of in pari delicto defense was properly denied because the adverse interest exception may apply.  The court explained the two concepts:

The defendants contend that [the accounting malpractice] 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 … . Schwartz v Leaf Salzman Mangenelli Pfiel, & Tendler LLP, 2014 NY Slip Op 08823, 2nd Dept 12-17-14