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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)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
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,
v.
Charles EDWARDS, et al., Defendants,
368 N.J.Super. 587
Page 2
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
Page 3
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
Page 4
368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573
(Cite as: 368 N.J.Super. 587)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
, 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
Page 5
368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573
(Cite as: 368 N.J.Super. 587)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
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
Page 6
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
Page 7
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
Page 8
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
Page 9
368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573
(Cite as: 368 N.J.Super. 587)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
The dismissal of Laddin's complaint for federal RICO violations and aiding and abetting
a breach of fiduciary duties under Georgia law is
AFFIRMED.
368 N.J.Super. 587
Page 2
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
Page 3
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
Page 4
368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573
(Cite as: 368 N.J.Super. 587)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
, 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
Page 5
368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573
(Cite as: 368 N.J.Super. 587)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
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
Page 6
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
Page 7
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
Page 8
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
Page 9
368 N.J.Super. 587, 847 A.2d 628, 53 UCC Rep.Serv.2d 573
(Cite as: 368 N.J.Super. 587)
© 2005 Thomson/West. No Claim to Orig. U.S. Govt. Works.
The dismissal of Laddin's complaint for federal RICO violations and aiding and abetting
a breach of fiduciary duties under Georgia law is
AFFIRMED.
