978-1285770178 Case Problem Case CPC-22-08

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368 N.J.Super. 587

Page 1

368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

437 F.3d 1145

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF PSA, INC., et al., on

behalf of PSA, Inc., et al., Plaintiff,

Trustee Darryl S. Laddin, of the ETS Creditors’ Litigation Trust, Plaintiff-Appellant,

Charles EDWARDS, et al., Defendants,

PWH, Inc., d.b.a. Friedman, Denver & Merlin, LLC d.b.a. Sheldon E. Friedman,

Karlovec Financial, Inc., Reliance Trust Company, PENSCO, et al., Defendants–

Act; and (2) whether the trustee can maintain a claim for aiding and abetting a breach

of investors of hundreds of millions of dollars. Laddin appeals an order that dismissed

Appellees.

No. 05-12320.

Jan. 30, 2006.

, Circuit Judge:

This appeal presents two issues, the first of which is an issue of first impression in this

his complaint, under RICO and Georgia law, against entities that, Laddin alleges,

assisted ETS in the operation of its fraudulent scheme. Because the defense of in pari

recognize a claim for aiding and abetting a breach of fiduciary duties, we affirm the

I. BACKGROUND

Payphones, Inc., a company that sold and leased-back payphones as investment

opportunities. “With Edwards at its helm, ETS devised [a] scheme” where an investor

paid a fixed sum to purchase a payphone, and ETS leased the payphone back from the

investor for a fee. “ETS represented itself as … a no loss proposition” and induced

its obligations to existing investors. “[W]ith the sale of each phone, ETS assumed a

scheme that defrauded thousands of investors of over $300 million. As the sole

companies he owned.

On September 11, 2000, ETS filed for bankruptcy. The bankruptcy court allowed the

creation of an Official Committee of Unsecured Creditors, and the Debtors and

Creditors’ Committee created the ETS Creditors’ Litigation Trust. The committee

Laddin sued several defendants, including Reliance Trust Co., PENSCO, Inc., and

Community National Bank, for (1) aiding and abetting a breach of fiduciary duties under

Georgia law, (2) violations of of RICO, avoidance claims. Reliance Trust Co.,

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

additional debt.”

The IRA Custodians moved to dismiss Laddin’s complaint. They argued that Laddin,

as trustee, could not maintain a claim of aiding and abetting a breach of fiduciary duties

and the doctrine of in pari delicto, which provides that a wrongdoer *1149 may not profit

from his wrongful acts, barred Laddin’s claims. The district court granted the motions to

Agreement did not authorize Laddin to bring claims on behalf of creditors.

The district court also concluded that the doctrine of in pari delicto barred Laddin’s

complaint. The district court found that, under Georgia law, the wrongdoing of Edwards

as a sole shareholder was imputed to ETS, the debtor corporation, under the “sole

actor” rule. The court reasoned that, because the “legal and equitable interests of the

construes the allegations in the complaint “in the light most favorable to the plaintiff.” .

A motion to dismiss should not be granted unless “it appears beyond doubt that the

plaintiff can prove no set of facts in support of his claim which would entitle him to

relief.” .

III. DISCUSSION

A. The Trustee Is Subject to the Defenses that Were Available Against the Debtor.

The Bankruptcy Code provides that property of the debtor estate includes “all legal or

equitable interests of the debtor in property as of the commencement of the case.” .

“Legal interests or equitable interests” include any causes of action the debtor may

bring. . A trustee, as the representative of the estate, succeeds into the rights of the

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

that the wrongdoing of ETS deprives Laddin of standing to assert claims against them

fails because “[a]n analysis of standing does not include an analysis of equitable

argues that, because the doctrine of in pari delicto depends on the “personal

malfeasance of the individual seeking to recover,” the wrongs of ETS should not be

imputed to him as the bankruptcy trustee. Laddin asserts that his argument is

supported by the legislative history to the Bankruptcy Code, which explains that “[t]o the

extent … an interest is limited in the hands of the debtor, it is equally limited in the hands

has standing to bring any suit that the debtor could have instituted” when the debtor

filed for bankruptcy, and there is no suggestion in the text of the Bankruptcy Code that

the trustee acquires rights and interests greater than those of the debtor. see also . If

a claim of ETS would have been subject to the defense of in pari delicto at the

commencement of the bankruptcy, then the same claim, when asserted by the trustee,

See 124 Cong. Rec. 32,399. In the law of commercial paper, personal defenses are

affirmative defenses that may not be asserted against a holder-in-due-course. See

(stating that a holder-in–due-course is subject to real defenses of duress, fraud in the

factum, infancy, insolvency, and legal incapacity); see also ; 6 Ronald A. Anderson,

Anderson on the Uniform Commercial Code § 3-305:103 (3d ed., rev.vol.1998) (“Under

that Congress could not have intended it” (internal quotations and citations omitted)).

Upon the commencement of a bankruptcy case, *1151 an automatic stay freezes the

rights of parties to the bankruptcy, both debtor and creditors. . The automatic stay and

the definition of the debtor estate “place [ ] both temporal and qualitative limitations on

the reach of the bankruptcy estate.” ; see . Under Laddin’s erroneous interpretation of

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

, a postpetition event, the appointment of a trustee, could undermine the automatic stay

and change the nature of the legal and equitable interests of the debtor estate.

Laddin argues that his recovery would ultimately inure to the benefit of innocent

creditors instead of the wrongful debtor, but he fails to account for the likelihood that

interests”). If creditors who were harmed by the IRA Custodians, on the other hand,

sued separately outside of bankruptcy, then those creditors would not risk dilution

through apportionment to senior creditors or unharmed creditors of equal priority. See

(prioritizing classes of claims). Creditors whose legal interests were harmed by the IRA

Custodians could rightfully recover more outside of bankruptcy because they would not

law claims brought by trustee-in-bankruptcy). Against this weight of authority, Laddin

urges us to chart a new course.

Laddin erroneously relies on a decision of the Seventh Circuit and the perspective of a

commentator to support his argument that in pari delicto does not bar recovery by a

bankruptcy trustee. See ; cf. Jeffrey Davis, . Laddin argues that the Seventh Circuit

commencement of the bankruptcy) with id. (providing that the debtor estate includes

“all legal or equitable interests of the debtor in the property as of the commencement of

the case” (emphasis added)). As for Laddin’s other persuasive authority, the legal

commentator makes the same flawed arguments about legislative history and the

decision that we have already rejected. See Davis, supra at 521-22, 538-39; see also

The next questions involve whether the defense of in pari delicto would have barred

recovery by the debtor, ETS, under either the federal RICO statute or Georgia law. We

consider these questions in turn.

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

Laddin argues that the district court erroneously dismissed his RICO claims because

the defense of in pari delicto is not an available defense against the debtor. Under

RICO, “[a]ny person injured in his business or property by reason of a violation of of

this chapter may sue … and shall recover threefold the damages he sustains….” . of

RICO states, “It shall be unlawful for any person employed by or associated with any

Latin, in pari delicto potior est conditio defendentis: ‘In a case of equal or mutual fault …

the position of the [defending] party … is the better one.’ ” . The doctrine of in pari

delicto is based on the policy that “courts should not lend their good offices to mediating

disputes among wrongdoers” and “denying judicial relief to an admitted wrongdoer is an

effective means of deterring illegality.” The issue whether this defense bars a

indeed, we are not aware of any cases anywhere that adopt such a requirement.”); cf.

(considering whether the doctrine of in pari delicto barred a RICO defendant for

purposes of equitable tolling).

In two cases, the Supreme Court has considered the application of the in pari delicto

doctrine in the enforcement of antitrust and securities laws. . Although in both cases

recognized as a defense to an antitrust action.” The plaintiffs were franchisees who

alleged that the franchisor, its parent corporation, other subsidiaries, and several

individuals conspired to restrain trade and engage in illegal price discrimination. The

Court cautioned against “invoking broad common-law barriers to relief where a private

suit serves important public purposes,” and in the antitrust context, the Court explained

fault,’ ” the Court reasoned that the doctrine should not “deny[ ] recovery to injured

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

by federal statutes depends on two factors: (1) the plaintiffs’ active participation in the

violation vel non and (2) the policy goals of the federal statute. See . Both of these

factors support the application of the in pari delicto doctrine *1155 in this appeal. We

consider each factor in turn.

First, it is beyond doubt that the allegations of the trustee’s complaint render ETS in

active participation with the IRA Custodians. If anything, the conduct of ETS was in

majore delicto. Laddin alleged that “ETS devised the scheme and promoted and

marketed the sale and leaseback of payphones as investment opportunities to

individuals.” ETS also “control[led] all aspects of the operation,” “created marketing

and promotional materials,” and “promised returns … of 14% or 15%” although it

was a passive bystander in their scheme to defraud. Laddin’s complaint alleged that

ETS was the hub of the Ponzi scheme to defraud investors. The allegations in the

complaint logically compel the conclusion that ETS had “substantially equal

responsibility for [its] injury.” .

Second, the application of in pari delicto to bar Laddin’s complaint advances the policy

(emphasis added). It would be anomalous, to say the least, for the RICO statute to

make racketeering unlawful in one provision, yet award the violator with treble damages

in another provision of the same statute. “Congress intended RICO’s civil remedies to

help eradicate ‘organized crime from the social fabric’ by divesting ‘the association of

the fruits of ill-gotten gains.’ ” (quoting ). Laddin’s recovery under RICO would not

relied on to conclude that the punitive and deterrent aspects of antitrust treble damages

are equally applicable in the racketeering context, (stating that the reasoning in is

“equally applicable to RICO treble damage actions”), but they misinterpret the holding of

Because federal RICO violations, as a matter of law, require affirmative wrongdoing

rather than passive acquiescence, *1156 does not preclude the defense of in pari

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

violators do not “seek each and every clause of the agreement,” but must accept

plaintiff who negotiated, prepared, and earned revenues from an exclusive sales

agreement with the defendant); (“[W]hen parties of substantially equal economic

strength mutually participate in the formulation and execution of the scheme and bear

equal responsibility for the consequent restraint of trade, each is barred from seeking

treble damages from the other.”); cf. (“[W]e believe that holds only that plaintiffs who

pattern of racketeering activity.” ; . A “ ‘pattern of racketeering activity’ requires at least

two acts of racketeering activity.” (emphasis added); see (defining “racketeering” as

“any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery,” etc.).

The defendant also must “knowingly implement[ ]” and “mak[e]” decisions. see

(holding that the defendant “participates” if he “directs” the pattern of racketeering

err when it dismissed Laddin’s claim for treble damages under the federal RICO statute,

because his recovery was barred based on the face of his complaint.

C. Georgia Does Not Recognize a Claim for Aiding and Abetting a Breach of Fiduciary

Duties.

Laddin contends that the doctrine of in pari delicto does not bar his claims for aiding and

aider and abettor liability in the context of a breach of fiduciary claim, the facts in this

case do not warrant its creation now.” Because the bankruptcy trustee may only

“bring any suit that the debtor could have instituted had it not been thrown into

bankruptcy,” the district court correctly dismissed Laddin’s claim for aiding and abetting

a fiduciary duty.

368 N.J.Super. 587

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368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573

(Cite as: 368 N.J.Super. 587)

The dismissal of Laddin’s complaint for federal RICO violations and aiding and abetting

a breach of fiduciary duties under Georgia law is

AFFIRMED.