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Current Developments in the Commercial Divisions of the
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Posted: October 31, 2016

In Pari Delicto Defense Can Be Asserted Against Bankruptcy Trustee

On October 18, 2016, the First Department issued a decision in New Greenwich Litigation Trustee, LLC v. Citco Fund Services (Europe) B.V., 2016 NY Slip Op. 06796, holding that an in pari delicto defense can be asserted against an innocent bankruptcy trustee, explaining:

As the Court of Appeals has explained, the doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers. This doctrine serves important public policy purposes, including denying judicial relief to an admitted wrongdoer which deters illegality, and avoiding entangling courts in disputes between wrongdoers.

. . .

Regardless of the Trustee’s innocence, it is subject to Bankruptcy Code section 541, which prevents such trustees from bringing any suit that the corporation could not have brought pre-petition. In other words, since the funds could not bring these suits, the Trustee is barred from doing so. Further, the Court of Appeals, in Kirschner declined to view the in pari delicto doctrine in a manner that would permit a litigation trustee’s claims against third-party auditors to proceed. We find no basis to hold that Bankruptcy Code section 541 does not subject plaintiff to an in pari delicto defense, as urged by plaintiff. In any event, plaintiff Trustee stands in the shoes of the funds regardless of being an innocent successor.

(Internal quotations and citations omitted).

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