On August 30, 2024, Justice Reed of the New York County Commercial Division issued a decision in Seitz v. Marcum LLP, 2024 NY Slip Op. 51141(U), dismissing a claim under the in pari delicto doctrine, explaining:
Defendant principally argues that the claims should be dismissed under the principle of in pari delicto. 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. The doctrine is available as a defense against all of the claims here.
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The decision of the Court of Appeals in Kirschner comprehensively resolves this motion. Plaintiff has alleged that LBH’s officers themselves engaged in fraud and other malfeasance, and those acts must be imputed to LBH. Further, plaintiff, as the trustee of the bankruptcy estates of the Liberation companies, stands in the shoes of the Liberation companies and has no greater rights than they would have if they had not filed for bankruptcy. Therefore, defendant sufficiently demonstrates that, as a party in pari delicto, plaintiff is barred from bringing its claims stemming from the wrongful acts of the Liberation companies’ directors and officers.
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[P]laintiff argues that the adverse interest exception to in pari delicto should apply, such that the wrongful actions of the company’s officers are not imputed to LBH. Under this narrow exception, management misconduct will not be imputed to the corporation if the officer acted entirely in his own interest and adversely to the interest of the corporation. To avail himself of this exception, plaintiff must show that the agent totally abandoned his principal’s interests and acted entirely for his own or another’s purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.
Here, plaintiff argues that, because, because the Fulcrum transaction was funded primarily through debt secured by the Liberation companies’ assets that the companies were not in a financial position to take on, the officers and directors caused the Liberation companies to be saddled with millions of dollars of debt, leaving it in a worse position. Plaintiff also argues that the officers and directors of LBH were the beneficiaries of the fraud.
However, as the Court of Appeals also observed in Kirschner, a fraud that by its nature will benefit the corporation is not adverse to the corporation’s interests, even if it was actually motivated by the agent’s desire for personal gain. So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive—to attract investors and customers and raise funds for corporate purposes—this test is not met. Moreover, any harm from the discovery of the fraud—rather than from the fraud itself—does not bear on whether the adverse interest exception applies. The disclosure of corporate fraud nearly always injures the corporation. In addition, pertinent to this case, the mere fact that a corporation is forced to file for bankruptcy does not determine whether its agents’ conduct was, at the time it was committed, adverse to the company.
At the time of the Fulcrum transaction, it cannot be said that the officers and directors totally abandoned their principal’s interests and be acted entirely for their own or another’s purposes. The transaction would have benefited the companies through the infusion of $12 million from Fulcrum and Vocap and $29.6 million in loans from Oxford. That the loan would was secured by LBH’s assets alone does not render the transaction in adverse interest to the Liberation companies. Indeed, the transaction may, at least before discovery of the officers’ fraudulent acts, have permitted them to survive, attract investors and customers and raise funds for corporate purposes for the time being.
(Internal quotations and citations omitted).