On December 8, 2025, Justice Patel of the New York County Commercial Division issued a decision in Castleman v. Interactive Brokers LLC, 2025 NY Slip Op. 34694(U), holding that a receiver’s claims were barred by the in pari delicto doctrine, explaining:
As a threshold matter, we first address the application of the doctrine of in pari delicto. IBKR asserts that all of Receiver’s claims are barred by in pari delicto, which bars a party that has been injured by its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss.
The general rule is that knowledge acquired by an agent acting within the scope of his agency is imputed to his principal and the latter is bound by such knowledge although the information is never actually communicated to it. Underlying the rule is the presumption that an agent has discharged his duty to disclose to his principal all the material facts coming to his knowledge with reference to the subject of his agency.
Receiver asserts that the adverse interest exception protects him from the application of the in pari delicto doctrine. This exception provides that when an agent is engaged in a scheme to defraud his principal, either for his own benefit or that of a third person, the presumption that knowledge held by the agent was disclosed to the principal fails because he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose. To come within the exception, the agent must have totally abandoned his principal’s interests and be acting 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.
Under the sole actor rule, the adverse interest exception does not apply if the alleged wrongdoers were, at the time of their misconduct either the sole managers or the sole owners of the plaintiff. Receiver expressly admits in the CFTC Action that, at all relevant times, Alexandre was the sole owner of EminiFX.
Receiver’s reliance on Williamson v. PricewaterhouseCoopers, LLP, Index No. 602206/2004, 2007 WL 5527944 (Sup. Ct. N.Y. County, Nov. 7, 2007) to argue that the doctrine of in pari delicto should not apply to him, as an innocent receiver, is misplaced. Williamson involved tort claims by the liquidating trustee of a securities company that had been defrauded by the company’s former managers and officers, which were asserted against the company’s accounting firm for failure to discover the former managers and officers’ fraud, through its audit. Here, Receiver contends that, because Alexandre’s misconduct only harmed EminiFX, the adverse interest exception to the in pari delicto doctrine is implicated, and questions of fact remain as to whether Alexandre was acting in his own interest when he took funds from EminiFX to deposit in an account at IBKR.
In Williamson, the Court observed that, in some jurisdictions, receivers are not subjected to the doctrine of in pari delicto because they had brought fraudulent conveyance claims, seeking to claw back funds that from those who had received the fraudulent transfers, citing, inter alia, Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995). The court further stated that outside of the fraudulent transfer context, cases relieving a trustee from the restrictions of in pari delicto are few and far between. The Court in Williamson, however, declared that although case law is sparse regarding relieving a trustee or receiver with third-party rot claims from the restrictions of in pari delicto, it agreed with Vice Chancellor Strine of the Delaware Court of Chancery who said in Trenwick Am. Litig. Trust v Ernst & Young LLP, 906 A.2d 168, 212 n.132 (Del. Ch., New Castle County 2006) that:
the federal case law on in pari delicto does not strike me as reflecting a nuanced approach to business law. There are certainly situations when an entity could be injured by an insider’s misconduct and when the entity, as to third parties, would be charged with knowledge of that misconduct. Many of the great corporate scandals have involved concerted activity by company advisors and insiders, activity that sometimes harmed not only outsiders but also, derivatively, the company’s innocent stockholders. The doctrine of in pari delicto has never operated in Delaware as a bar to providing relief to the innocent by way of a derivative suit.
Employing Trenwick’s approach, the Williamson court held that it would be inequitable to apply in pari delicto to block the Trustee’s claims against PWC.
Although it does not discuss Williamson, the Court of Appeals recently adopted a rule that balances the equities differently. The Court of Appeals held that it saw no merit in narrowing the scope of the in pari delicto doctrine, to permit corporations to shift responsibility for their own agents’ misconduct to third parties. The Court of Appeals articulated that:
The Litigation Trustee and the derivative plaintiffs, with whom the dissent agrees, ask us to do this as a matter of public policy in order to compensate the innocent and deter third-party professional (and, in particular, auditor) misconduct and negligence.
On the first point, the Litigation Trustee and the derivative plaintiffs urge us to consider that, although they both stand in the shoes of corporate malefactors, any recovery they achieve will, in fact, benefit blameless unsecured creditors (in the Refco case) and shareholders (in the AIG case) at the expense of defendants who allegedly assisted the fraud or were negligent. They ask us to broaden the adverse interest exception and create exceptions to imputation along the lines adopted by the Supreme Courts in New Jersey and Pennsylvania, and endorsed by the dissent, in the interests of fairness. We are not persuaded, however, that the equities are quite so obvious. In particular, why should the interests of innocent stakeholders of corporate fraudsters trump those of innocent stakeholders of the outside professionals who are the defendants in these cases? The costs of litigation and any settlements or judgments would have to be borne, in the first instance, by the defendants’ blameless stakeholders; in the second instance,
by the public.In a sense, plaintiffs’ proposals may be viewed as creating a double standard
whereby the innocent stakeholders of the corporation’s outside professionals are held responsible for the sins of their errant agents while the innocent stakeholders of the corporation itself are not charged with knowledge of their wrongdoing agents. And, of course, the corporation’s agents would almost invariably play the dominant role in the fraud and therefore would be more culpable than the outside professional’s agents who allegedly aided and abetted the insiders or did not detect the fraud at all or soon enough. The owners and creditors of KPMG and PwC may be said to be at least as innocent as Refco’s unsecured creditors and AIG’s stockholders.Accordingly, IBKR’s motion to dismiss must be granted with prejudice where the doctrine of in pari delicto bars Plaintiff’s claims because Alexandre’s fraudulent actions are imputed to EminiFX as a matter of law. In light of Kirschner, Receiver’s argument to narrow the scope of in pari delicto must also be rejected.
(Internal quotations and citations omitted).