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Keywords

lawsuitdefendantappealfiduciarytrustbankruptcycorporationfiduciary dutybreach of fiduciary duty

plaintiffdefendantdamagesmotionfiduciarytrustleasebankruptcy

Related Cases

Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 45 Bankr.Ct.Dec. 279, Bankr. L. Rep. P 80,449, RICO Bus.Disp.Guide 11,025, 19 Fla. L. Weekly Fed. C 229

Facts

Darryl S. Laddin, the trustee for ETS, a corporation that operated a Ponzi scheme, filed a lawsuit against several entities, including Reliance Trust Co., for aiding and abetting breaches of fiduciary duty and violations of RICO. ETS, led by Charles Edwards, misrepresented its payphone investment scheme, promising high returns while consistently losing money and relying on new investors to pay existing ones. After ETS filed for bankruptcy, Laddin was appointed as trustee and sought to recover funds from those he alleged facilitated the fraudulent scheme.

Laddin alleged that in October 1994, Charles Edwards formed ETS Payphones, Inc., a company that sold and leased-back payphones as investment opportunities. 'With Edwards at its helm, ETS devised [a] scheme' where an investor paid a fixed sum to purchase a payphone, and ETS leased the payphone back from the investor for a fee.

Issue

Whether the doctrine of in pari delicto bars a trustee's claims on behalf of a bankrupt debtor for violations of the Racketeer Influenced and Corrupt Organizations Act, and whether the trustee can maintain a claim for aiding and abetting a breach of fiduciary duties under Georgia law.

The doctrine of in pari delicto is an equitable doctrine that states 'a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing.'

Rule

The doctrine of in pari delicto, which states that a wrongdoer may not profit from their wrongful acts, applies equally to bankruptcy trustees as it does to debtors outside of bankruptcy. Additionally, Georgia courts do not recognize a cause of action for aiding and abetting a breach of fiduciary duty.

The equitable doctrine of in pari delicto applies with equal force to bankruptcy trustee as to debtor outside bankruptcy.

Analysis

The court determined that Laddin, as the trustee, stood in the shoes of the debtor and was subject to the same defenses that would have been available against the debtor at the commencement of the bankruptcy. Since ETS was actively involved in the Ponzi scheme, the court concluded that the in pari delicto doctrine barred Laddin's claims. Furthermore, the court noted that allowing the trustee to recover would not serve the purposes of RICO, as it would not divest the wrongdoers of their ill-gotten gains.

Because the defense of in pari delicto bars recovery by a central and active violator of RICO and Georgia courts do not recognize a claim for aiding and abetting a breach of fiduciary duties, we affirm the dismissal of Laddin's complaint.

Conclusion

The Court of Appeals affirmed the district court's dismissal of Laddin's complaint, concluding that the in pari delicto doctrine barred his claims and that Georgia law did not support a claim for aiding and abetting a breach of fiduciary duty.

The court reasoned that, because the 'legal and equitable interests of the debtor' in bankruptcy are only as strong as the debtor's claim against defendants at the commencement of the bankruptcy, the doctrine of in pari delicto barred Laddin's state law claims.

Who won?

Reliance Trust Co. and the other defendants prevailed because the court found that the trustee's claims were barred by the doctrine of in pari delicto, which applies to both the debtor and the trustee.

The district court granted the motions to dismiss.

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LHO Chicago River, L.L.C. v. Perillo, 942 F.3d 384

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Reisner v. Stoller, 51 F.Supp.2d 430, RICO Bus.Disp.Guide 9760