A federal bankruptcy court in New York has held that a trustee's suit against the debtor's professionals was not barred by the doctrine of in pari delicto. The in pari delicto defense bars a trustee from asserting causes of action that the debtor would not have been able to assert because the debtor was an equal participant in the wrongdoing that is the subject of the suit.
The court ruled that the in pari delicto defense did not apply because the post-petition acts of the debtor's principals could not properly be imputed to the trustee so as to bar claims for damages suffered by the estate, because the principals acted outside the scope of their employment. In re Food Management Group, LLC (Grubin v. Rattet, et al.), 2008 Bankr. LEXIS 112, 49 Bankr. Ct. Dec. 102 (Bankr. S.D.N.Y. Jan. 23, 2008).
The Food Management decision adds another nuance to a line of cases addressing the application of the in pari delicto doctrine, which were summarized in an earlier issue of the Alert. See "Insolvencies Created by Bad Actors: In Pari Delicto Defense May Bar Recovery" (summarizing six U.S. Courts of Appeal decisions), Commercial Restructuring & Bankruptcy Alert, September 2007, Vol. III, No. 4, p. 1.
In Food Management, the chapter 11 Trustee sued the debtors' professionals for damages suffered by the estate as a result of the professionals' alleged wrongful interference—at the behest of the debtors' principals—with the sale of the debtors' assets conducted in the bankruptcy case.
The bankruptcy court held that the Trustee was not barred by the doctrine of in pari delicto in pursuing claims against the debtors' professionals who acted in concert with the debtors' principals because the "post-petition acts of the Debtors' principals were not properly imputed to the Trustee."
This article is presented for informational purposes only and is not intended to constitute legal advice.
