145 A.D.3d 16
N.Y. App. Div.2016Background
- Greenwich Sentry, L.P. and Greenwich Sentry Partners, L.P. were Delaware-formed feeder funds that lost ~$325 million in Madoff’s Ponzi scheme; they filed Chapter 11 in 2010 and assigned litigation claims to litigation trusts; New Greenwich Litigation Trustee (Trustee) succeeded as plaintiff.
- Trustee sued fund administrators (Citco Europe, Citco Canada, GlobeOp) and auditors (PricewaterhouseCoopers Netherlands and PWC Canada) for negligence, breach of fiduciary duty, fraud, aiding and abetting, contribution, and indemnification; complaints were derivative originally and then prosecuted by the Trustee.
- Earlier derivative complaints (pre-bankruptcy) pleaded extensive wrongdoing and failures of the funds’ management (Fairfield Greenwich affiliates), including failure of oversight and issuing false/inflated reports; Trustee’s later complaints disclaimed the funds’ culpability but did not disavow the earlier derivative allegations.
- Defendants moved to dismiss under CPLR 3211(a)(1) and (7), invoking the New York in pari delicto doctrine and, for PWC Netherlands, a forum-selection clause requiring disputes be litigated in Amsterdam.
- Supreme Court dismissed most claims: applied New York law (declining to apply Delaware via the internal affairs doctrine), held in pari delicto barred Trustee’s claims (except contribution claims dismissed on other grounds), rejected plaintiff’s exceptions, dismissed indemnification causes of action, and enforced the Amsterdam forum clause.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law: whether Delaware internal affairs governs | Apply Delaware law because funds are Delaware partnerships and claims concern internal affairs | Internal affairs doctrine doesn’t govern claims against outside administrators/auditors; New York law controls | New York law governs; internal affairs doctrine not applicable to third‑party administrators/auditors |
| Applicability of in pari delicto | Trustee: funds were innocent; prior derivative allegations shouldn’t bind Trustee; exceptions (adverse interest, insider, innocent successor) apply | Prior derivative complaints impute management misconduct to the funds; Trustee stands in funds’ shoes and is barred by in pari delicto | In pari delicto bars Trustee’s claims; prior derivative allegations are binding (informal judicial admissions); exceptions fail |
| Indemnification (implied and contractual) | Trustee entitled to indemnity for the $200M settlement with Madoff Trustee | Trustee is not wholly innocent (so implied indemnity fails); contractual indemnity required prior written consent from Citco which was not obtained | Implied indemnity dismissed (Trustee not innocent); contractual indemnity dismissed for lack of required prior written consent |
| Forum selection clause (PWC Netherlands) | Clause is permissive; Trustee not bound; Amsterdam forum would be unreasonable; PWC waived by litigating in NY | Clause is mandatory (Amsterdam) and binding on Trustee; no waiver or unreasonable hardship shown | Clause is mandatory and enforceable; PWC Netherlands’ claims to be litigated in Amsterdam |
Key Cases Cited
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010) (New York Court of Appeals articulates modern in pari delicto doctrine and narrow adverse‑interest exception)
- In re American Int’l Group, Inc., 965 A.2d 763 (Del. Ch. 2009) (internal affairs doctrine does not apply to external contractual agents such as auditors)
- In re Bernard L. Madoff Inv. Sec. LLC, 721 F.3d 54 (2d Cir. 2013) (in pari delicto can be resolved on the pleadings where defense is plain on face of the record)
- Gatt Communications, Inc. v. PMC Assoc., L.L.C., 711 F.3d 68 (2d Cir. 2013) (in pari delicto-related factual disputes can preclude dismissal in some cases)
- Morgenthow & Latham v. Bank of N.Y. Co., 305 A.D.2d 74 (1st Dept 2003) (prior litigation allegations may constitute informal judicial admissions binding in later proceedings)
- Stahl v. Chemical Bank, 237 A.D.2d 231 (1st Dept 1997) (describes requirement that defendant’s wrongdoing be at least equal to plaintiff’s for in pari delicto to apply)