Commercial Division Blog

Posted: June 22, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Category Derivative Actions

Derivative Claim Falls Under In Pari Delicto

On May 11, 2022, in a decision after trial in Seibel v. Ramsay, 2022 NY Slip. Op. 31548(U), Justice Melissa Crane rejected Plaintiff’s claim that defendants had breached the unanimous consent provision of the parties LLC agreement concerning a restaurant in Los Angeles.  The Court explained:

Seibel, via a derivative claim, contends that Ramsey [sic] breached the unanimous consent provision of the Fat Cow LLC agreement by closing the restaurant unilaterally. The problem for Seibel is he is an active wrongdoer for the harm upon which he seeks to collect and therefore cannot recover derivatively. "The doctrine of in pari delicto bars a party that has been injured as a result of its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss" (Rosenbach v Diversified Grp., Inc., 85 A.D.3d 569, 570, 926 N.Y.S.2d 49 [Pt [sic] Dep't 2011]). Under the doctrine of in pari delicto, courts will not intercede to resolve a dispute between two wrongdoers" (Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 938 N.E.2d 941, 912 N.Y.S.2d 512 [2010]).

The doctrine serves an important policy purpose: "no court should be required to serve as paymaster of the wages of crime, or referee between thieves. Therefore, the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them" (Stone v. Freeman, 298 N.Y. 268, 271, 82 N.E.2d 571 [1948]).

The attorneys at Schlam Stone & Dolan frequently litigate derivative claims.  Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such claims.