Opinion
Case No. 04-17602-BKC-AJC, Adv. No. 06-1220-BKC-AJC-A.
July 23, 2010
ORDER CLARIFYING ORDER DENYING BDO SEIDMAN, LLP AND SANDOR LENNER'S MOTION FOR SUMMARY JUDGMENT
THE MATTER originally came before the Court on September 18, 2008 at 2:00 p.m. in Miami, Florida upon the Motion of Defendants BDO Seidman, LLP and Sandor Lenner (collectively "BDO") for Summary Judgment (the "Motion") against Plaintiff Lewis B. Freeman, the Responsible Officer for the Reorganized Debtor E.S. Bankest, L.C. ("Bankest"). By Order dated April 6, 2010, this Court denied the Motion. [D.E. #239]. BDO filed notice of leave to appeal and, on June 10, 2010, the District Court entered its Order Granting for Limited Purpose BDO's Motion for Leave to Appeal [D.E. #19 in District Court Case No. 10-21635] (the "District Court Leave Order") requesting the Bankruptcy Court to clarify whether BDO's defenses of in pari delicto and imputation are barred as a matter of law. The District Court Leave Order directed this Court to clarify whether it:
(i) intended the denial of BDO's Motion to bar BDO's in pari delicto and imputation defenses as a matter of law, such that BDO will not be allowed to present evidence in support of those defenses at trial; or, (ii) denied summary judgment only upon a determination that there are genuine issues of material fact on those defenses, such that BDO may present evidence at trial on either or both of the defenses.
At a hearing held upon remand on June 17, 2010, both parties agreed that the Order denied the imputation and in pari delicto defenses, at least in part, as a matter of law. At the June 17, 2010 hearing, this Court directed the parties to submit either memoranda of law or proposed orders supporting their respective positions on the issues framed by the District Court Leave Order by July 1, 2010, as memorialized in this Court's Scheduling Order [D.E. #284] entered on June 28, 2010.
June 17, 2010 Transcript [D.E. #286] at 18:17-20 (Plaintiff: "We believe that Your Honor ruled as a matter of law that [the imputation/ in pari delicto defense] was not a defense that would be available to defendants."); id. at 19:18-22 (BDO: "I agree with the first part of Mr. Singerman's statement, and that is, it is our understanding, as well, that Your Honor denied summary judgment on the basis that these defenses of imputation and in pari delicto could not raised."); 19:5-7, 20:7-9.
After the hearing and only after entry of the Scheduling Order which the parties were directed to draft jointly, BDO objected to the submission of post-hearing memoranda or proposed orders. While the Court found no basis for BDO's objections, it sustained same for the reasons stated previously in the Court's orders. As stated in the orders, the Court determined it would decide this matter based upon a review of the orders in this case, the Court's notes from the proceedings herein and recollections therefrom. Accordingly, this Order clarifies that (i) BDO Seidman's defenses of in pari delicto and imputation are barred as a matter of law, and (ii) on different, and alternative grounds, genuine issues of material fact also require denial of the summary judgment motion. The original order otherwise remains unchanged.
The Bankruptcy Court perceived the arguments presented by BDO for summary judgment in their favor to be based on multiple grounds, including but not limited to the affirmative defenses of in pari delicto and imputation. The Court was not persuaded that, as a matter of law, BDO Seidman was entitled to the defenses of in pari delicto and imputation and they were not entitled to summary judgment on these defenses.
However, without granting summary judgment in favor of the Plaintiff on this issue at this juncture, the Court thought BDO could have a second bite at the apple by presenting the defenses again to the District Court at trial. This approach was perhaps error. The Court therefore enters partial summary judgment in favor of Plaintiff and against BDO on the defenses of in pari delicto and imputation and rules that BDO should not be allowed to present evidence in support of those defenses at trial.
As set forth in O'Halloran v. PriceWaterhouseCoopers LLP, 969 So. 2d 1039 (Fla. 2d DCA 2007), in pari delicto means "in equal fault" and "in its classic formulation, the in pari delicto defense was narrowly limited to situations where the Plaintiff truly bore at least substantially equal responsibility for his injury." 969 So. 2d at 1044. "Broadly speaking, the defense prohibits plaintiffs from recovering damages resulting from their own wrongdoing." Id. (citations omitted).
Here, as in the O'Halloran case, the accountant defendant moved to bar plaintiff's claims "by the doctrines of imputation and in pari delicto." Id. at 1041. Imputation is the means by which wrongful conduct is attributed to the corporation, thus determining whether in pari delicto can, subject to law and public policy considerations, apply. See id. at 1044-46. Thus, if wrongful conduct cannot be "imputed" to the corporation, there is no in pari delicto either. See id. at 1044 ("Where the defense of in pari delicto is asserted against a corporate entity based on the misconduct of the corporation's agents, it must be determined whether the misconduct is properly imputed to the corporation."). Even where the wrongful conduct of a corporate person is imputed, in pari delicto may still not apply. See id. n. 4; see also Kulla v. E.F. Hutton Co., Inc., 426 So. 2d 1055, 1057 n. 1 (Fla. 3d DCA 1983).
The Court's Order held that because Bankest had four innocent directors — the Bank Directors — BDO's imputation and in pari delicto defenses failed. The in pari delicto defense is available only to a defendant who was involved a fraudulent scheme with a plaintiff. The Court reasoned that when Bankest declared bankruptcy, Bankest was no longer being run by the wrongdoers who had committed the fraud, the Capital Officers. See In re Le-Nature's Inc., 2009 WL 3571331, at *6 (W.D. Pa. Sept. 16, 2009); see also In re Le-Nature's Inc., 2009 WL 3526569, at *2-*3 (W.D. Pa. Oct. 23, 2009). Instead, prior to the bankruptcy filing, the United States District Court for the Southern District of Florida had appointed a Receiver over Bankest. In fact, it was the appointment of the Receiver that led to the detection of the fraud.
As in Le-Nature, Bankest, by the Receiver, literally "rid itself of the corrupt influence of certain corporate officers prior to the bankruptcy filing." See Le-Nature, 2009 WL 3571331, at *6 (emphasis in original). A "complete usurpation of corporate authority" occurred when the Receiver was appointed by the Federal District Court over Bankest. See id. Because the Receiver was appointed and took over Bankest's business before the filing of the bankruptcy case, Bankest "was no longer being operated by a corrupt management team." Id. Because the company "was not being run by the wrongdoers who allegedly engaged in fraud," "there is no fraud to impute." Id. As a result, where there is no fraud to impute, there can be no in pari delicto either attaching to the Responsible Officer and Liquidating Trustee as Plaintiff in this case. See id.
There is substantial law that imputation and in pari delicto do not apply to a Court-appointed Receiver. See Scholes v. Lehmann, 56 F.3d 750, 754-55 (7th Cir. 1995) ("The appointment of the receiver removed the wrongdoer from the scene."); Fuzion, 332 B.R. at 233 ("the defense of in pari delicto loses its sting when the person who is in pari delicto is eliminated."); Pearlman v. Alexis, 2009 WL 3161830, at *4 (S.D. Fla. Sept. 25, 2009) (same). Since it was this Court-appointed Receiver that put Bankest into bankruptcy — and no prior wrongdoing could be imputed to him in that capacity and thus no in pari delicto defense could apply — it would make no sense to say that suddenly imputation and in pari delicto were "back" when that Receiver caused Bankest to file for bankruptcy. As a result, the imputation and in pari delicto defenses are denied as a matter of law and no such evidence should be permitted at trial.
Defendants sought summary judgment on several other grounds, including the scienter element of Plaintiff's 10b-5 claim, whether the Plaintiff can establish causation "in connection with" and damages and whether Plaintiff can prove that Defendants aided and abetted a breach of fiduciary duty. A review of the operative complaint against BDO indicates that various allegations contained therein are disputed and require proof at a trial; and, therefore, this case cannot be entirely disposed of on summary judgment, either for Plaintiff or Defendants. Likewise, BDO's answer to the operative complaint contains, in addition to a denial of allegations, several other affirmative defenses, in addition to the in pari delicto and imputation defense, of which many are denied or disputed; and, therefore, the other defenses are not ripe for consideration and determination on summary judgment.
Accordingly, it is
ORDERED AND ADJUDGED that, in response to the its Order Granting for Limited Purpose BDO's Motion for Leave to Appeal, this Court CLARIFIES its prior Summary Judgment Order as follows:
1. The Order Denying BDO Seidman, LLP and Sandor Lenner's Motion for Summary Judgment entered April 6, 2010 is AMENDED AND MODIFIED so as to GRANT Partial Summary Judgment, as a matter of law, in favor of the Plaintiff and against the Defendants on the affirmative defense of in pari delicto and imputation, precluding the presentation of evidence on that issue at trial. A separate judgment will be entered contemporaneously herewith.
2. This case is not ripe for summary judgment on any other grounds and the Order Denying BDO Seidman, LLP and Sandor Lenner's Motion for Summary Judgment therefore remains in full force and affect with respect to all other rulings.
3. It is hoped that this Order is helpful in assisting the United States District Court in deciding whether the interlocutory appeal should go forward.ORDERED in the Southern District of Florida.