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Keywords

lawsuitplaintiffdamagesnegligenceappealtrustbankruptcy
plaintiffdamagesnegligenceappealtrust

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Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 67 Collier Bankr.Cas.2d 418, 56 Bankr.Ct.Dec. 79, Bankr. L. Rep. P 82,195

Facts

In 2002, Gregory Bell established five mutual funds, known as the Lancelot or Colossus group, which raised about $2.5 billion to invest in businesses like Thousand Lakes, LLC. However, these investments were part of a Ponzi scheme orchestrated by Thomas Petters, who used new investments to pay off older debts. When Petters was caught in September 2008, the funds collapsed, leading to bankruptcy and the appointment of Ronald Peterson as Trustee. Peterson filed a lawsuit against the auditor, McGladrey & Pullen, LLP, claiming negligence for failing to detect the fraudulent nature of Thousand Lakes.

In 2002 Gregory Bell established five mutual funds, known as the Lancelot or Colossus group. They raised about $2.5 billion, which they reinvested in businesses such as Thousand Lakes, LLC, that claimed to act as commercial factors.

Issue

Did the district court err in applying the in pari delicto doctrine to dismiss the trustee's negligence claims against the auditor?

Did the district court err in applying the in pari delicto doctrine to dismiss the trustee's negligence claims against the auditor?

Rule

The in pari delicto doctrine prevents a plaintiff from recovering damages if they are equally at fault for the wrongdoing. However, this doctrine may not apply if the plaintiff can demonstrate that they were not aware of the fraud at the time of the alleged negligence.

The in pari delicto doctrine prevents a plaintiff from recovering damages if they are equally at fault for the wrongdoing.

Analysis

The Court of Appeals found that the trustee's allegations were sufficient to suggest that Bell, the head of the funds, did not know about the Ponzi scheme until February 2008, which was after the audits in question. The court emphasized that the district court could not assume Bell's knowledge at the complaint stage and that the trustee's claims should not be dismissed based on the in pari delicto doctrine without a thorough examination of the facts.

The Court of Appeals found that the trustee's allegations were sufficient to suggest that Bell, the head of the funds, did not know about the Ponzi scheme until February 2008, which was after the audits in question.

Conclusion

The Court of Appeals vacated the district court's dismissal and remanded the case for further proceedings, allowing the trustee's claims against the auditor to proceed.

The Court of Appeals vacated the district court's dismissal and remanded the case for further proceedings.

Who won?

The trustee, Ronald Peterson, prevailed because the Court of Appeals ruled that the allegations were sufficient to avoid dismissal under the in pari delicto doctrine.

The trustee, Ronald Peterson, prevailed because the Court of Appeals ruled that the allegations were sufficient to avoid dismissal under the in pari delicto doctrine.

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