Equity Turned on Its Head: The Applicability of in pari delicto to a Bankruptcy Trustee

By: Joseph J. Wielebinski (Co-author) and Phil C. Appenzeller, Jr. (Co-author)
Texas Lawyer
August 2005

The Latin phrase in pari delicto refers to a plaintiff's participation in the same wrongdoing as the defendant.1 An equitable principle and affirmative defense, in pari delicto prevents a wrongdoer from recovering damages resulting from the wrongdoing. Tolz v. Proskauer Rose LLP (In re Fuzion Techs. Group, Inc.), No. 03-2198-BKC-RBR-A, 2005 Bankr. LEXIS 718, at *9 (Bankr. S.D. Fla. Mar. 2, 2005). The primary focus of the defense is on the personal malfeasance of the individual seeking to recover damages.

A troubling line of cases has recently emerged regarding the applicability of the in pari delicto defense to bankruptcy trustees. Defendants are using this defense and these rulings to their advantage to prevent victims from recovering for wrongdoing and to set wrongdoers free. Unfortunately, some courts have blessed this perverted use of the defense, stripping trustees and creditors' committees of valuable claims. This cannot be and is not the law. To reach this unfortunate result, some courts have improperly confused the in pari delicto defense with the concept of standing, while others have applied an overly restrictive construction of the Bankruptcy Code. In fact, an affirmative defense like in pari delicto has nothing to do with standing, and the proper application of the Bankruptcy Code (itself a body of equitable principles) does not require this result. These cases are wrongly decided, as the rumblings of bankruptcy scholars across the country condemning this trend in the case law portend.

This article first addresses the standing argument. Second, and more substantively, the article analyzes imputation. Finally, this article provides what the authors believe is the correct interpretation of section 541 of the Bankruptcy Code as it applies to personal defenses such as in pari delicto.

¹The doctrine of in pari delicto has its root in the Latin phrase, in pari delicto potior est conditio defendentis, which translates to mean, "in the case of equal or mutual fault, the position of the defending party is the better one." Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S. Ct. 2622, 2626 (1985).
²See Jeffrey Davis, Ending the Nonsense: The in pari delicto Doctrine Has Nothing to Do with What is § 541 Property of the Bankruptcy Estate, 21 EMORY BANKR. DEV J. 519 (Summer 2005); Tanvir Alam, Fraudulent Advisors Exploit Confusion in the Bankruptcy Code: How in pari delicto Has Been Perverted to Prevent Recovery for Innocent Creditors, 77 AM. BANKR. L.J. 305 (Summer 2003); Gerald L. Baldwin, in pari delicto Should Not Bar a Trustee's Recovery, 23 AM. BANKR. INST. J. 8 (Oct. 2004); Making Sense of the in pari delicto Defense: "Who's Zoomin' Who?" 23 No. 11 BANKR. LAW LETTER 1 (Nov. 2003) Robert T. Kugler, The Role of Imputation and in pari delicto in Barring Claims Against Third Parties, 1 No. 14 ANDREWS BANKR. LIT. REP. 13 (2004).

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