In Barry v. Santander Bank, N.A. (In re Liberty State Benefits of Del., Inc.), Case No. 11-12404, Adv. Pro. No. 14-500520, 541 B.R. 219 (Bankr. D. Del. Oct. 26, 2015), the Bankruptcy Court for the District of Delaware held that the in pari delicto defense required dismissal of certain of the causes of action asserted against Santander Bank, N.A. for its alleged role in four allegedly fraudulent transactions involving the misappropriation of proceeds from debt instruments offered by the debtors.
The court noted that the trustee steps into the shoes of the debtor and therefore is subject to the same defenses that could be asserted against the debtor, including the in pari delicto defense (which prevents recovery by a plaintiff who shares responsibility for the causes of action against it). The court then held that the in pari delicto defense applied to claims arising from one of the subject transactions because the debtors played a significant role in that transaction and derived a substantial benefit because they used the proceeds to pay down corporate liabilities.
However, the court also held that other of the trustee’s claims were not subject to dismissal on the basis of the in pari delicto defense because of the “adverse interest exception.” Under the “adverse interest exception,” the in pari delicto defense will not be applied where outright fraud or looting is committed against the debtor and that fraud or looting does not benefit the debtor in any way. In reaching this holding, the court determined that, as alleged in the complaint, the remaining fraudulent transactions plausibly amounted to outright looting of the debtors’ corporate assets from which the debtors received no benefit.
The court also denied Santander’s motion to dismiss most of the remaining claims against it, including a claim for violating New Jersey’s RICO statute.
Keywords: bankruptcy and insolvency litigation, Fair Debt Collections Practices Act, debt, proof of claim