Nicholson v. Shapiro & Associates, LLC
2017 IL App (1st) 162551
| Ill. App. Ct. | 2017Background
- Illinois Stock Transfer Company (IST), an SEC-registered transfer agent, employed Robert Pearson as its president and sole shareholder; Pearson diverted client funds for payroll and personal use.
- The SEC sued Pearson and IST in federal court; Pearson was removed and a federal receiver (Jill Nicholson) was appointed for IST and Pearson with authority to bring suits.
- The receiver sued Shapiro & Associates (accountant/auditor retained by IST) in Cook County for accounting malpractice, breach of contract, and aiding and abetting Pearson’s fraud, alleging Shapiro failed to detect Pearson’s misconduct.
- Shapiro moved to dismiss, arguing the in pari delicto doctrine should bar the receiver’s claims because IST (through Pearson) was equally at fault.
- The trial court denied dismissal; Shapiro sought interlocutory review under Illinois Supreme Court Rule 308, presenting two certified questions about in pari delicto’s applicability to an SEC-appointed receiver and the effect of the wrongdoer’s departure.
- The appellate court reviewed de novo and answered: (1) in pari delicto does not bar a court-appointed SEC receiver from suing the company’s outside auditor; (2) the fraudulent actor’s departure prevents application of in pari delicto to the receiver’s claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether in pari delicto bars a court-appointed SEC receiver from suing the company’s outside auditor for failing to detect the owner’s fraud | Receiver: she stands in the shoes of the company’s creditors/victims and is not a wrongdoer; in pari delicto should not apply | Shapiro: IST benefitted from the fraud; receiver inherits company’s defenses, so in pari delicto should bar the suit | No — in pari delicto does not bar a court-appointed SEC receiver from bringing such claims |
| Whether the fraudulent actor’s departure prevents application of in pari delicto to the receiver’s claim | Receiver: once the wrongdoer is removed, in pari delicto’s purpose (preventing wrongdoer profit) disappears; receiver may sue | Shapiro: departure is irrelevant; plaintiff’s ability to sue shouldn’t depend on whether wrongdoer remains | Yes — departure of the fraudulent actor prevents application of in pari delicto to the receiver’s claim |
Key Cases Cited
- King v. First Capital Financial Services Corp., 215 Ill. 2d 1 (Ill. 2005) (defines in pari delicto and its general rule that a participating wrongdoer may not recover)
- Albers v. Continental Illinois Bank & Trust Co., 296 Ill. App. 592 (Ill. App. 1938) (receiver not equated with bank wrongdoer; in pari delicto should not bar receiver’s claims)
- McRaith v. BDO Seidman, LLP, 391 Ill. App. 3d 565 (Ill. App. 2009) (liquidator/receiver is a statutory officer protecting victims; in pari delicto inapplicable)
- Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) (once wrongdoer is removed, in pari delicto’s concern about profiting from wrongdoing is moot)