April 02, 2019

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

The In Pari Delicto Defense Strikes Again

By Michael Enright

Over the years, bankruptcy trustees and other estate fiduciaries have been frustrated in their assertion of claims against allegedly negligent professionals in cases where the debtor engaged in fraudulent conduct prior to filing bankruptcy. Claims against the debtor’s professionals have often been barred by the in pari delicto defense. The problem persists, as evidenced by Kapila v. Davis, Graham & Stubbs LLP, Case No. 17-15705 (11th Cir. March 22, 2019) (unpublished). In Kapila, the plaintiff was a liquidating trustee appointed pursuant to a confirmed chapter 11 plan. He sued the debtor’s auditors and lawyers, alleging that their conduct exacerbated the financial demise of the debtor, a publicly-traded mobile fueling business that overbilled its customers. The district court concluded that the debtor was responsible for the overbilling by its officers because undisputed evidence established that their wrongdoing achieved the debtor’s intended goal of boosting its revenues. The district court also concluded that the allegations asserted the same wrongdoing by the debtor and its professionals. Furthermore, the professionals were not required to admit any wrongdoing in order to assert the in pari delicto defense. On appeal, the 11th Circuit noted that Florida law imputes wrongdoing by a corporate officer to the company so long as the officer acts within the scope of his employment, and that an officer who acts to further the  interests of the company necessarily is acting within the scope of his employment. Because the plaintiff alleged that the overbilling by the debtor continued because of the auditors’ and the lawyers’ willful blindness to the scheme, or their advice that the arrangement was legal, the professionals were accused of the same wrongful conduct as the debtor, and the in pari delicto defense applied. The decision is a reminder to estate fiduciaries and other potential plaintiffs that the in pari delicto defense persists as a powerful tool for defense counsel when suit is brought against allegedly culpable professionals where fraudulent conduct by the debtor has contributed to its own demise.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.