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Rules: The in pari delicto defense has two components and applies "where (1) the plaintiff, as compared to the defendant, bears at least substantially equal responsibility for the wrong he seeks to address and (ii) preclusion of the suit would not interfere with the purposes of the underlying law or otherwise contravene the public interest."
Holding: Affirmed.
Reasoning: With regard to the first element, it is appropriate to consider the in pari delicto defense on a motion to dismiss so long as the facts establishing the defense are "definitively ascertainable from the complaint or other allowable sources of information... and... suffice to establish the affirmative defense with certitude." Both of these requirements are met here. Moreover, it does not matter whether the defendants were professionals since in pari delicto is a question of whether the plaintiff is at least equally responsible for the wrong; here, HVE was fully aware that the 2004 Plan contained inaccurate and outdated information. Additionally, the adverse interest exception to in pari delicto does not come into play here because the Complaint does not allege that the Debtor's officers were acting only for themselves. And, lastly, HVE's public policy argument lacks force because HVE is essentially asking a court to overlook HVE's own bad acts with regard to the 2004 Plan; and, moreover, this case is likely limited to these facts.
Facts: The Trustee sued Callister, Nebeker & McCullough and two of its attorneys (collectively, "CNM") for a number of professional torts in connection with CNM's representation of the National School Fitness Foundation ("NSFF"). NSFF operated a Ponzi scheme disguised as a non-profit organization and ultimately declared bankruptcy. NSFF retained CNM prepetition seeking advice with regard to NSFF's tax-exempt status. Although CNM's representation was brief and limited, CNM never advised NSFF that it was breaking the law by operating a Ponzi scheme. Thus, the Trustee sued CNM for its failure to advise NSFF that it was operating illegally. The district court ruled that the Trustee was barred from bringing this claim under the doctrine of in pari delicto.
Issue: Whether in pari delicto applies to preclude the Trustee's claim against CNM.
Holding: Affirmed.
Rule: It is well established the in pari delicto is available in an action by a bankruptcy trustee, and may bar an action by a bankruptcy trustee against third parties who participated in the debtor's wrongdoing.
Reasoning: Here, there is no evidence that CNM's actions were any more blameworthy than NSFF's. NSFF had already received and ignored advice that it was operating an illegal Ponzi scheme. CNM did not make any false representations, participate in any felony, or counsel NSFF to continue operating. Furthermore, the adverse interest exception does not apply here.
Facts: Ernst & Young, LLP ("E&Y") filed a motion for summary judgment requesting a permanent injunction enjoining the defendants from continuing to prosecute their state court tort action (the "Reilly Lawsuit") against E&Y in connection with accounting services E&Y performed for the Debtors during the course of the Debtors' bankruptcy. Prior to the Reilly Lawsuit, the plan of reorganization was confirmed pursuant to which the Debtors were substantively consolidated and equity holders retained no interests in the Debtors. The defendants were the principals of two of the
