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Insolvencies Created By Bad Actors
While the market is swimming with innovative and highly leveraged financial transactions, and many parties are enjoying sizeable gains, some of those involved in these enterprises ultimately will become insolvent. A fraction of these insolvencies will result from fraudulent investment schemes perpetrated by multiple parties acting in concert for their mutual benefit. Innocent victims, including creditors and investors, will bear the financial brunt of the insolvencies, and will be eager to recover from all parties that participated in the fraud.
These innocent victims are likely to weigh recovery options, including the alternatives of either filing a bankruptcy petition (whether voluntary or involuntary) or seeking the appointment of a receiver to obtain recovery on their behalf. Before such actions are taken, careful consideration should be given as to whether the defense of 'in pari delicto' will preclude the ability of the bankruptcy estate or the receiver from pursuing such recovery.
Application of the in pari delicto defense can bar recovery for claims asserted by an insolvent corporation on behalf of its estate. The defense, however, does not apply in all circumstances, and it does not apply to all actors involved in a proceeding to recover property lost in a fraudulent scheme.
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