United States District Court Denies Liquidator's Motion to Strike Audit Firm's In Pari Delicto Defense

On July 18, 2023, the United States District Court for the District of Vermont granted in part and denied in part a liquidator’s motion to strike certain of Crowe LLP’s affirmative defenses in an action relating to Crowe’s 2016-2018 audits of Global Hawk Insurance Company Risk Retention Group. Acting as liquidator for Global Hawk, a now-insolvent Vermont insurance company, the Vermont Department of Financial Regulation (“VDFR”) alleges that Crowe failed to confirm financial information with appropriate external parties and failed to evaluate whether the external confirmation it did receive provided reliable audit evidence. The VDFR alleges that if Crowe had conducted its audits with due professional care, Global Hawk’s insolvency would have been discovered years earlier.

The Court denied VDFR’s motion to strike Crowe’s in pari delicto defense and reaffirmed its prior ruling on Crowe’s motion to dismiss that the availability of an in pari delicto defense against a liquidator represents an issue of first impression under Vermont law. The Court held that it would be inappropriate to resolve the issue on a motion to strike. Citing its prior ruling, the Court explained that although it predicted that the Vermont Supreme Court would find that a liquidator’s appointment “removes the wrongdoer from the scene and thus the sting from the in pari delicto defense,” the Court would not resolve the issue without further development of the factual record.

The Court granted the VDFR’s motion to strike Crowe’s affirmative defense asserting that plaintiff’s damages were caused by the VDFR’s failure to exercise appropriate oversight over Global Hawk to the extent that Crowe intended to assert a “regulatory comparative negligence defense.” The Court held that the VDFR acts in distinct legal capacities as a regulator and as a liquidator under Vermont law, such that its regulatory conduct could not serve as the basis for a comparative negligence defense.

The case is Gaffney v. Crowe LLP, No. 2:21-cv-00273 (D. Ver. July 19, 2023). Crowe LLP is represented by Gravel & Shae PC. A copy of the decision is attached.