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In Pari Delicto Not a Bar to a Bankruptcy Trustee's Recovery

By Travis Powers
May 24, 2013

The doctrine of in pari delicto stands for the proposition that when parties litigate based on mutual fault, the defending party's position is superior. See Pinter v. Dahl, 486 U.S. 622, 632 (1988); see also Mosier v. Caliter, Nebeker & McCullough, 546 F.3d 1271, 1275 (10th Cir. 2008). The doctrine, rooted in the common law, prevents a wrongdoer from profiting from its own bad acts and promotes judicial efficiency by ensuring “that courts [do] not lend their good offices to mediating disputes among wrongdoers ' .” Mosier, 546 F.3d at 1275.

Bankruptcy trustees are particularly susceptible to this affirmative defense when pursuing certain claims against third parties, as the debtor's own culpability may bar recovery. This is especially relevant in cases of fraud where a trustee pursues an action against a third party that colluded with the debtor or its agents, resulting in pre-petition harm to the debtor. See, e.g., Grassmueck v. American Shorthorn Ass'n, 402 F.3d 833, 837-41 (8th Cir. 2005). Courts have equally found that in pari delicto bars a trustee's recovery against certain professionals whose negligence contributed to the debtor's fraudulent conduct. See Luzinski v. Peabody & Arnold, LLP (In re Gosman), 382 B.R. 826, 838 (S.D. Fla. 2007). However, courts generally have refused to apply the in pari delicto defense to a bankruptcy trustee seeking to avoid certain fraudulent transfers under section 548 of the United States Bankruptcy Code (Code) despite the debtor's pre-petition bad acts. See, e.g., Kapila v. Bennet) In re Pearlman, 472 B.R. 115, 122 (Bankr. M.D. Fla. 2012).

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