568 B.R. 596
S.D.N.Y.2017Background
- The SCIF Funds (Cayman entities) invested heavily in Triaxx, an ICP-managed CDO; ICP and its CEO Priore were fiduciaries for the Funds and also collateral manager for Triaxx.
- Beginning October 2008, ICP caused the Funds to transfer approximately $36.5 million to Barclays to meet Triaxx margin calls; DLA Piper (New York law firm) drafted Waiver and Direction Letters and billed for related work.
- Barclays reserved clawback rights; the Funds were not separately represented in the transactions and no robust repayment documentation was obtained.
- The transfers temporarily kept Triaxx afloat but ultimately the Funds lost their investment and entered Cayman liquidation; SEC sued ICP and Priore.
- Liquidators sued DLA in New York state court for aiding and abetting fraud and breach of fiduciary duty and for fraudulent trading under Cayman law; DLA removed to federal court and the bankruptcy court dismissed under New York law based on in pari delicto and failure to plead Cayman §147 fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law for in pari delicto | Cayman law should govern imputation questions (internal affairs) | New York law applies to both the underlying claims and the in pari delicto defense | New York law applies to in pari delicto (forum and conduct centered in NY) |
| Applicability of in pari delicto (imputation/adverse-interest) | ICP/Priore were looters; their misconduct was adverse so their wrongdoing should not be imputed to the Funds | ICP/Priore’s conduct conferred at least a temporary benefit (preserving the investment), so it is imputed to the Funds and bars recovery | In pari delicto applies; adverse-interest exception does not — Funds received a benefit by preserving Triaxx temporarily |
| Sufficiency of aiding-and-abetting pleading | Allegations show DLA knowingly assisted breaches and drafts documents that enabled transfers | Complaint fails to plausibly allege DLA had actual knowledge of fiduciary breach or intent to defraud | Court affirmed dismissal on in pari delicto grounds and did not reach sufficiency in depth |
| Cayman Companies Law §147 claim (fraudulent trading) | Cayman standard for "intent to defraud" is broader and can be inferred from prolonging company life | DLA lacked the requisite knowledge of intent to defraud; at least a prospect of repayment existed | Dismissed: plaintiffs failed to plead that DLA was a knowing party to an intent to defraud under §147 |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (addresses plausibility standard for pleadings)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (establishes Rule 12(b)(6) plausibility framework)
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (New York Court of Appeals on in pari delicto and narrow adverse-interest exception)
- Wellness Int’l Network v. Sharif, 135 S. Ct. 1932 (parties may consent to final adjudication by a bankruptcy judge)
- Roell v. Withrow, 538 U.S. 580 (consent inquiry for non-Article III adjudicators)
- Stern v. Marshall, 564 U.S. 462 (limits bankruptcy court adjudicatory authority; parties must timely assert objections)
- Auerbach v. Bennett, 47 N.Y.2d 619 (New York Business Judgment Rule)
- In re Momentum Mfg. Corp., 25 F.3d 1132 (standard of review for bankruptcy appeals)