Third Circuit Keeps Fraud Suit Alive Against PricewaterhouseCoopers

The U.S. Court of Appeals for the Third Circuit has reversed a district court decision granting summary judgment to

PricewaterhouseCoopers in a fraud suit filed by a creditors’ committee following the bankruptcy filing of a Pennsylvania non-profit corporation. The circuit court’s decision, coming on the heels of a decision by the Pennsylvania Supreme Court upon certification of the circuit court, requires that the district court conduct an inquiry into the good faith of PricewaterhouseCoopers in its dealings with the debtor. 

The particular issue in the case was the following: If a third party (i.e., PricewaterhouseCoopers, the auditor) colluded with agents to defraud their principal, does the law impute to the principal the agents' misconduct and, if so, does that preclude recovery by another standing in the principal's place? The circuit court decided that applicable Pennsylvania law, as amplified by the Pennsylvania Supreme Court, requires an inquiry into whether the third party dealt with the principal in good faith. Because the district court did not conduct such an inquiry, the circuit court remanded the case for further proceedings.

The case is Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers, LLP, No. 07-1397 (3rd Cir. May 28, 2010). Attorneys involved include: Beth Heifetz, James M. Jones, Patrick F. McCartan, and Richard B. Whitney, Jones Day; Joseph F. McDonough and Thomas G. Rafferty, Manion, McDonough & Lucas; and Antony L. Ryan, Cravath, Swaine & Moore.