666 F. App'x 66
2d Cir.2016Background
- Lehr Construction was found to have systematically overbilled clients; public disclosure led to a Chapter 11 filing in Feb. 2011 and a grand jury indictment in May 2011.
- Lehr was convicted on thirteen counts (enterprise corruption, scheme to defraud, grand larceny); Gifford was not indicted but cooperated with prosecutors.
- The Chapter 11 Trustee (Flaxer) sued Gifford under New York’s faithless servant doctrine seeking disgorgement of >$1.2M for Gifford’s role in the fraud.
- Gifford moved for judgment on the pleadings under Fed. R. Civ. P. 12(c), asserting in pari delicto (and imputation) as an affirmative defense; the bankruptcy court granted dismissal and the district court affirmed.
- On appeal the Trustee argued employees may not assert in pari delicto/imputation against their employer and that doing so conflicts with the faithless servant rule. The Second Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an employee may assert in pari delicto/imputation against his employer | Trustee: employees cannot impute their own misconduct to defeat employer’s claims; imputation applies only when a principal sues a third party | Gifford: imputation and in pari delicto are long-established and apply where agent’s acts are presumptively imputed to the corporation | Court: employee can assert in pari delicto here; New York law presumes imputation of agents’ acts to principals absent narrow exceptions |
| Applicability of the adverse-interest exception to imputation | Trustee: Lehr was victim of insiders; adverse-interest exception should block imputation | Gifford: fraud was committed on behalf of Lehr, not against it, so the adverse-interest exception does not apply | Court: adverse-interest exception inapplicable because insiders defrauded third parties for the corporation; Kirschner controls |
| Whether applying in pari delicto conflicts with New York’s faithless servant doctrine | Trustee: faithless servant allows disgorgement regardless of benefit to employer, so in pari delicto should not bar such claims | Gifford: no conflict where in pari delicto is based on corporate culpability rather than solely on imputing the defendant’s own misconduct | Court: no inherent conflict in this case because in pari delicto defense rests on Lehr’s own criminal convictions and corporate-level culpability |
| Whether the “insider” exception or leave to amend saves Trustee’s claim | Trustee: federal bankruptcy law and insider exception should limit in pari delicto; also sought leave to amend to allege lower corporate culpability | Gifford: Gifford was not an insider in the relevant sense; amendment would be futile on these facts | Court: insider exception (if recognized) does not apply because Gifford was not an insider; denial of leave to amend was proper as amendment would be futile |
Key Cases Cited
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (N.Y. 2010) (acts of agents are presumptively imputed to principals; narrow adverse-interest exception; in pari delicto should not be weakened)
- Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928 (N.Y. 1977) (faithless servant rule allows disgorgement of compensation for disloyal agents)
- Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184 (2d Cir. 2003) (discussing faithless servant and disgorgement principles)
- McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465 (N.Y. 1960) (in pari delicto doctrine and judicial restraint dealing with two wrongdoers)
- In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013) (Rule 12(c) standard; accept complaint allegations and infer for plaintiff)
- In re Cacioli, 463 F.3d 229 (2d Cir. 2006) (standard of plenary review for bankruptcy court orders)