CHELSEA HOUSING AUTHORITY v. MCLAUGHLIN (2020)

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

This case arises out of two schemes in which defendant Michael E. McLaughlin conspired to have the United States Department of Housing and Urban Development (HUD) provide undeserved funding to his employer, Chelsea Housing Authority (CHA), and to have CHA pay him an excessively high salary, which he underreported to regulators.³ Following HUD's efforts to recapture some of its money from CHA, CHA filed this action for, among other things, conversion, unjust enrichment, and breach of fiduciary duty against McLaughlin.⁴ On cross motions for summary judgment, the motion judge entered an amended judgment in favor of CHA on its claims against McLaughlin in the amount of $1,187,460.44, which reflected the amount of pay that McLaughlin received in excess of what he reported to regulators. Because we agree with McLaughlin that his defense of in pari delicto presents genuine issues of material fact, we vacate the grant of summary judgment in CHA's favor.

Background. Because this case was decided on cross motions for summary judgment, we summarize the facts in the light most favorable to McLaughlin, who was the losing party. See Welch v. Barach, 84 Mass. App. Ct. 113, 119 (2013). CHA is a local housing authority that administers the low-income housing program in Chelsea. CHA receives the majority of its revenue from the Massachusetts Department of Housing and Community Development (DHCD) and from HUD. That funding comes with restrictions. DHCD issues detailed guidelines that cap the amount of its money that local housing authorities may spend on salaries. Any additional money spent on salaries must come from other sources, such as HUD, and HUD requires all salaries that it funds to be reasonable.

From 2000 to 2011, McLaughlin was the executive director of CHA. During McLaughlin's tenure as the executive director, he and James Fitzpatrick, who was CHA's director of modernization, participated in an inspection-rigging scheme whereby they received advance notice when HUD planned to inspect one of CHA's housing units. Because this gave CHA time to repair the housing unit before the inspection, the inspection would go well. HUD thus classified CHA as a high performer. Due to CHA's status as a high performer, it received additional, undeserved funding from HUD. CHA used at least some of that funding for repairs to CHA's housing units or for capital improvements.

At the same time, McLaughlin and Vitus Shum, who was CHA's director of finance, engaged in a scheme to underreport McLaughlin's salary to DHCD. McLaughlin's employment agreements were executed between McLaughlin and CHA's board of commissioners (board). McLaughlin's first employment agreement, which specified that he would receive a salary of $77,500, was also submitted to DHCD for approval. Thereafter, McLaughlin regularly sought exorbitant raises, all of which were approved by the board and were memorialized in subsequent employment agreements. By 2011, McLaughlin's salary was $324,896.⁵ McLaughlin, with Shum's and the board's knowledge and approval, hid his exorbitant raises from DHCD by failing to submit any of his subsequent employment agreements to DCHD for approval and by instead submitting budget reports that significantly underreported his salary. The salary that McLaughlin reported to DHCD reflected only that portion of his salary that was paid for using DHCD's funding. The difference between McLaughlin's actual salary and his reported salary was paid for using HUD's funding, and Mclaughlin's actual salary moreover did not comply with HUD's reasonableness requirement.

These misdeeds eventually came to light and had many consequences. McLaughlin and the members of the board resigned, the board dissolved, and a receiver was appointed. McLaughlin and Fitzpatrick were indicted on Federal criminal charges, to which McLaughlin pleaded guilty and Fitzpatrick was found guilty by a jury. Lastly, HUD sought to recapture some of its money from CHA, including the funding that HUD concluded was spent on McLaughlin's excessively high salary in violation of HUD's reasonableness requirement. CHA now seeks to be reimbursed by McLaughlin for that same money.

Discussion. 1. CHA's prima facie case. Through its claims for unjust enrichment, conversion, and breach of fiduciary duty, CHA seeks to recover the portion of McLaughlin's salary that exceeded what he reported to DHCD. McLaughlin contends, however, that DHCD would have approved his salary even if he had reported it accurately to DHCD, which he argues is a genuine issue of material fact as to all of CHA's claims. McLaughlin argues that the motion judge (1) erroneously concluded that regulations in effect at the time of McLaughlin's employment would have allowed DHCD to reduce his salary ⁶ and (2) erroneously relied on affidavits from Lizbeth Heyer and Amy Stitely, two DHCD directors, to conclude that DHCD would not have approved McLaughlin's actual salary.⁷

Contrary to McLaughlin's arguments, the regulations that were in effect at the time of his employment provided that if CHA and McLaughlin “negotiated an employment agreement to be funded in whole or in part by [DHCD], [DHCD] shall have approved the agreement.”⁸ 760 Code Mass. Regs § 4.05(1)(d) (1998). And aside from the affidavits, the record contains additional evidence indicating that DHCD would not have approved McLaughlin's actual salary. McLaughlin previously admitted during the sentencing hearing on his Federal criminal charges that DHCD would have tried to reverse his actual salary. See Metropolitan Prop. & Cas. Ins. Co. v. Morrison, 460 Mass. 352, 364 (2011) (guilty plea, while not given preclusive effect in subsequent civil litigation, may be offered as evidence of defendant's guilt). In light of the regulation that required DHCD to approve McLaughlin's employment agreement and the other evidence indicating that DHCD would not have approved McLaughlin's actual salary, his unsupported assertion to the contrary is insufficient to raise a genuine issue of material fact. See Ng Bros. Constr., Inc. v. Cranney, 436 Mass. 638, 647-648 (2002) (bare assertion in affidavit that contradicted affiant's earlier deposition testimony was insufficient to defeat summary judgment).

McLaughlin also argues that whether he provided a valuable service in exchange for his salary and was paid pursuant to his employment agreements present genuine issues of material fact as to CHA's claims for unjust enrichment and conversion, respectively. We need not dwell on these arguments. As to the claim for unjust enrichment, we accept that McLaughlin may have provided a valuable service in exchange for the portion of his salary that he reported to DHCD, but CHA's claim for unjust enrichment does not pertain to that portion of McLaughlin's salary. CHA's claim for unjust enrichment instead pertains to the portion of McLaughlin's salary that exceeded what he reported to DHCD, and there is no basis in the record to conclude that he provided a valuable service in exchange for that excess pay. Cf. Malonis v. Harrington, 442 Mass. 692, 697 (2004) (on theory for quantum meruit, employer must compensate employee for “fair and reasonable value of services and skills expended on [employer's] behalf”). As to the claim for conversion, where the employment agreements were the very means by which McLaughlin intentionally and wrongfully exercised acts of ownership over the excess pay that he received, he cannot rely on those agreements to argue that he had a right of possession to that excess pay.⁹ See Beliveau v. Ware, 87 Mass. App. Ct. 615, 618 (2015) (elements of conversion are that defendant intentionally or wrongfully exercised acts of ownership, control, or dominion over property to which he had no right of possession).

2. McLaughlin's affirmative defense. McLaughlin's primary argument on appeal is that, regardless of whether the elements of CHA's claims have been met, there are genuine issues of material fact as to CHA's culpability that may prevent it from recovering damages from McLaughlin. As to this argument, we agree.

“The doctrine of in pari delicto bars a plaintiff who has participated in wrongdoing from recovering damages for loss resulting from the wrongdoing.” Choquette v. Isacoff, 65 Mass. App. Ct. 1, 3 (2005). This doctrine “is grounded on two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality” (quotation and citation omitted). Merrimack College v. KPMG, LLP, 480 Mass. 614, 622 (2018). Thus, “[w]here a plaintiff engages in intentional wrongdoing and seeks to recover from a defendant who was a coconspirator or accomplice in the plaintiff's wrongdoing, the doctrine [of in pari delicto] will generally bar recovery.” Id. As with most doctrines, however, there are exceptions. One exception provides that, where the parties are not equally at fault and “there are elements of public policy more outraged by the conduct of one than of the other,” relief may be granted to the less guilty (quotation and citation omitted). Choquette, supra.

The motion judge concluded that the doctrine of in pari delicto did not bar CHA from recovering damages from McLaughlin because, in the motion judge's view, McLaughlin was the “driving force” behind the wrongdoing at issue here and that everyone else associated with CHA was either negligent or acting at the behest of McLaughlin. While the evidence in the record certainly supports that conclusion, a reasonable person could find otherwise. There is no doubt that CHA, through the actions of Fitzgerald, Shum, and the former board members, was complicit in the schemes to obtain additional, undeserved funding from HUD and to underreport McLaughlin's salary to DHCD.¹⁰ Fitzgerald was an active participant in the inspection-rigging scheme that allowed CHA to receive the additional, undeserved funding from HUD and was found guilty on related Federal criminal charges. Shum and the former board members had full knowledge that McLaughlin was underreporting his salary to DHCD. A reasonable person could find that these schemes were intertwined and that Shum and the former board members participated in the second scheme because of the benefits CHA received from the first scheme.¹¹ A reasonable person could thus conclude that McLaughlin was no more at fault than CHA and that CHA's conduct was equally outrageous. Accordingly, summary judgment was improperly entered in CHA's favor. See Witkowski v. Richard W. Endlar Ins. Agency, Inc., 81 Mass. App. Ct. 785, 791 (2012) (summary judgment improperly entered where reasonable fact finder could have construed evidence differently).

Amended judgment vacated.

FOOTNOTES

3.   This civil case follows McLaughlin's Federal criminal convictions on charges arising out of the same conduct.

4.   In addition to the claims against McLaughlin, Marotto, and Scafidi, CHA also sued former members of its board of commissioners, as well as James Fitzpatrick and Vitus Shum, two former CHA directors. The claims against the former board members and Fitzpatrick were dismissed, and CHA filed a notice of voluntary dismissal as to Shum following his immunized testimony in Federal criminal proceedings against Fitzpatrick.

5.   Charts included in McLaughlin's and CHA's briefs list different ending salaries. We take the number from the motion judge's recitation of the facts and note that McLaughlin's precise ending salary is not material to our discussion.

6.   The regulations at issue have since been amended. While McLaughlin does not dispute that DHCD would have been allowed to reduce his salary under the current regulations, he does dispute that DHCD would have been allowed to do so under the prior regulations.

7.   McLaughlin argues that because neither affiant was a director at the time of McLaughlin's employment, neither was qualified to offer an opinion as to what would have happened at that time.

8.   We are not persuaded by McLaughlin's argument that CHA could have circumvented this regulation simply by paying McLaughlin whatever salary it desired without entering into a written employment agreement.

9.   To the extent that McLaughlin's argument regarding his employment agreements instead goes to CHA's own culpability, we address that argument infra.

10.   CHA argues that the doctrine of in pari delicto does not apply because the bad acts of Fitzgerald, Shum, and the former board members may not be imputed to CHA. The law, however, is to the contrary. Merrimack College, 480 Mass. at 628, makes clear that the bad acts of senior management may be imputed to an organization under the doctrine of in pari delicto, and CHA does not dispute that Fitzgerald, Shum, and the former board members were all senior management.

11.   While CHA tries to separate the two schemes and argues that it received no benefit from the second scheme -- and was in fact legally adverse to McLaughlin where that scheme is concerned -- this presents a genuine issue of material fact.