Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc. Cogen Sklar, L.L.P

COWEN, Circuit Judge,

dissenting:

In this case we confront a regrettably common scenario. Using a type of Ponzi scheme, William and Kenneth Shapiro along with others fraudulently induced the appellant to invest in the Shapiros’ companies long past the point where those companies could repay the funds. In the ensuing bankruptcy, the appellant formed a creditors’ committee and, acting as the equivalent of a bankruptcy trustee, sought to recover some of its losses by pursuing claims that the debtor corporations have against various professionals, such as accountants and underwriters, who allegedly facilitated the Shapiros’ fraud. The majority holds that these creditors — and indeed any creditors in a case like this — are barred from obtaining relief in bankruptcy from the professionals. I believe the majority’s reasoning rests on a mistaken interpretation of the bankruptcy code, needlessly thwarts recovery for innocent creditors, and insulates from civil liability those who help perpetrate fraud. Under the majority’s reasoning, no matter how egregious the conduct is of a professional who facilitated a fraudulent sale of securities, creditors cannot recover from that professional in the likely event that the corporation winds up in bankruptcy.

Despite my disagreement with the outcome reached by the majority, I agree with much of the majority’s reasoning. In particular, I agree with the majority that the creditors’ committee has standing to sue. The creditors’ committee received an assignment of the debtor corporations’ claims, and it is well settled that an “as- *361 signee of a claim has standing to assert the injury in fact suffered by the assignor.” Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 774 , 120 S.Ct. 1858, 1863 , 146 L.Ed.2d 886 (2000). The question then reverts to whether the debtor corporations have standing. As the majority points out, a corporation has a distinct legal existence from its officers and owners, and economic losses wrongfully suffered by a corporation are sufficient injuries to confer standing. See, e.g., Barlow v. Collins, 397 U.S. 159 , 90 S.Ct. 832 , 25 L.Ed.2d 192 (1970); Hardin v. Kentucky Utils. Co., 390 U.S. 1 , 88 S.Ct. 651 , 19 L.Ed.2d 787 (1968); FCC v. Sanders Bros. Radio Station, 309 U.S. 470 , 60 S.Ct. 693 , 84 L.Ed. 869 (1940). The only reason to suppose that a corporation lacks standing in a case like this one is that there is an allegedly valid affirmative defense available against the corporation’s claims. But as a general matter, the ultimate merits of an affirmative defense do not raise questions about a plaintiffs standing, or else the moment the court was poised to rule in favor of the defendant on the affirmative defense, the court would lose jurisdiction and there would be no binding judgment. Moreover, as I explain below, I think the defense fails in this case.

Like the majority, I agree that in evaluating the affirmative defense at issue here — the in pari delicto doctrine — we apply state law for the plaintiffs’ state causes of action, see O’Melveny & Myers v. FDIC, 512 U.S. 79, 83-85 , 114 S.Ct. 2048, 2052-53 , 129 L.Ed.2d 67 (1994), and federal law for federal causes of action. Id. (citing Schacht v. Brown, 711 F.2d 1343, 1347 (7th Cir.1983)). And I also agree with the majority that, regardless of whether federal or state (in this case Pennsylvania) law is applied, the in pari delicto doctrine is best understood as a broad equitable principle that encompasses a variety of different, more specific legal rules and defenses drawn from torts, contracts, or other areas of law depending on the underlying cause of action at issue. See Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 453-54 (7th Cir.1982). Broadly, the idea behind in pari delicto is that “a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing.” Black’s Law Dictionary 794 (7th ed.1999).

Because the wrongdoers here were officers of the debtor corporations, a special case of the in pari delicto doctrine comes into play — the standards covering when to impute the acts of a corporation’s officers to the corporation itself. If those officers remain in control of the corporation or stand to benefit from any recovery, then the officers’ conduct plainly would be imputed to the corporation. See, e.g., Cenco, 686 F.2d at 455-56 ; Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3d Cir.1975).

But, as Judge Posner has explained, the equitable principles underlying the doctrines of imputing misconduct and in pari delicto lead to a different result when the miscreant officers are removed and no wrongdoer will receive the benefit of recovery. See Scholes v. Lehmann, 56 F.3d 750, 753-55 (7th Cir.1995) (citing McCandless v. Furlaud, 296 U.S. 140, 160 , 56 S.Ct. 41, 47 , 80 L.Ed. 121 (1935) (Cardozo, J.)). No longer will it be true that, as Black’s definition puts it, one “who has participated in- wrongdoing [will] ... recover damages resulting from the wrongdoing.” Instead, allowing the corporation to impose liability on professionals who wrongfully facilitated the fraud will both help deter that professional misconduct and help compensate victims who may otherwise go away empty-handed. The Ninth Circuit has recognized this point as well and refused to apply in pari delicto when the recovery would not benefit the wrongdoers. FDIC v. O’Melveny & Myers, 61 *362 F.3d 17, 18 , (9th Cir.1995). Nothing suggests that Pennsylvania would interpret in pari delicto and the rules of imputation differently than the Seventh and Ninth Circuits have.

As I understand the majority, they accept that if the wrongdoers within a corporation are removed and the benefit of the recovery will ultimately help victims of the fraud, then the corporation can proceed with its claims. The reason the majority concludes nevertheless that the creditors’ committee is barred from recovery is that at the moment the bankruptcy petition was filed, the majority maintains that the wrongdoers had not actually been removed yet. The majority’s argument tracks a Tenth Circuit decision, In re Hedgedr-Investments Assoc., Inc., 84 F.3d 1281 (10th Cir.1996). That case refused to follow Scholes and the Ninth Circuit’s decision in O’Melveny, which both involved receiver-ships, because the Tenth Circuit thought that a contrary result was compelled by a provision in the bankruptcy code, 11 U.S.C. § 541 (a). The court explained that under § 541(a) the debtor’s estate is formed at the time the bankruptcy petition is filed. Since the bad corporate officers were only removed post-petition, the court reasoned that § 541(a) dictates that the removal cannot be considered. That is, because the officers were still in control at the moment the petition was filed, in pari delicto still erected a bar at that moment. 84 F.3d at 1285 .

There are a number of problems with this reasoning. The first and most obvious is that, whatever the inflexibility is of the bankruptcy code, an equitable doctrine like in pan delicto is highly sensitive to the facts and readily adapted to achieve equitable results. What is sufficient to satisfy the doctrine, in other words, need not be parsed like a statute. Even if we assume that we can look no further than the filing of the bankruptcy petition, it can scarcely be denied that as soon as the Shapiros’ companies were placed in bankruptcy, the Shapiros lost any ability to benefit further from their Ponzi scheme. The bankruptcy court would not have allowed itself to become an instrument of their fraud. Some time, of course, would elapse before the full process of bankruptcy proceedings took their course, but there is nothing in the equitable doctrine of in pari delicto that insists those formalities must be completed before the doctrine is triggered.

The point of equitable doctrines is to avoid injustice caused by overly inflexible rules: equity is “[t]he recourse to principles of justice to correct or supplement the law as applied to particular circumstances.” Black’s Law Dictionary 560 (7th ed.1999). Here the majority injects a pointless technicality into an equitable doctrine. For example, one court has distinguished the Tenth Circuit’s decision that the majority follows by noting that if the debtor corporation is placed in receivership prior to the filing of the bankruptcy petition, there is no in pari delicto bar on an action by the corporation. See, e.g., Hannover Corp. of America v. Beckner, 211 B.R. 849, 859 (M.D.La.1997). It is difficult to understand what is accomplished by forcing future plaintiffs to take that extra step or denying these plaintiffs relief because they failed to take it. Equity does not turn on that kind of empty technicality.

A second problem with the majority’s reasoning is that, while it is certainly true that a trustee (or a creditor’s committee acting as trustee) assumes the same causes of action and is subject to the same defenses as the debtor, see Bank of Marin v. England, 385 U.S. 99, 101 , 87 S.Ct. 274, 276 , 17 L.Ed.2d 197 (1966); Integrated Solutions, Inc. v. Serv. Support Specialties, Inc., 124 F.3d 487, 495 (3d Cir.1997), *363 that rule does not mandate that in evaluating a trustee’s claims on behalf of an estate, post-petition events can never be considered. Segal v. Rochelle, 382 U.S. 375 , 86 S.Ct. 511 , 15 L.Ed.2d 428 (1966). The rule that the trustee must be restricted to the debtor’s causes of action and is subject to the same defenses as the debtor does not mandate that post-petition events are never considered in evaluating those causes of action and defenses inherited by the trustee.

In Segal , the question before the Court was whether a trustee could claim as property of the estate a tax loss-carryback refund for a taxable year that ended post-petition. Significantly, even though under the Internal Revenue Code the refund could not be claimed until the end of the taxable year, which occurred after the petition date, the Supreme Court agreed with the trustee that the refund was property of the estate. The refund was “sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupt’s ability to make an unencumbered fresh start that it should be regarded as “property.” ” 382 U.S. at 380 , 86 S.Ct. at 514 .

So too in this case the losses suffered by the debtor corporation all took place before the bankruptcy and the only obstacle to the corporations’ recovery is the removal of the Shapiros, an event as inevitable as that completion of the taxable year in Se-gal. More important, since our case involves corporations, there is no concern about the competing fresh-start policy for individuals that the Supreme Court had to weigh in Segal . Corporations do not get fresh starts.

One last point is worth noting parenthetically. Under the majority’s logic, the claims brought by the creditors’ committee against the Shapiros themselves and other corporate insiders should be barred as well as the claims against the outside professionals. After all, the corporations and the insiders were as much in pari delicto as the corporation and the outside professionals. The District Court did not dismiss the claims against the insiders, but inexplicably failed to explain why those creditors’ claims, which apparently were also on behalf of the corporation, were not subject to the same reasoning that the court applied in dismissing the claims against Lafferty. Although the claims against the insiders are not properly before us, having been severed below to create a final judgment, it is especially disturbing that the majority’s reasoning applies with equal force to them.

In short, the majority’s position retards the normal goals of tort law, misinterprets equitable doctrine, and reads the bankruptcy code too narrowly. I dissent.