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problem persists, as evidenced by Kapila v. Davis, Graham & Stubbs LLP, Case No. 17-15705 (11th Cir. March 22, 2019) (unpublished).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.