602 B.R. 357
Bankr. N.D. Cal.2019Background
- Trustee Randy Sugarman (chapter 11 trustee for Yellow Cab Cooperative, Inc. or YCC) sued former YCC accountant Douglas A. Taylor for professional negligence, accounting/auditing malpractice, and conspiracy based on patronage distributions (2012–2015) and alleged misclassification of liabilities.
- Trustee alleged Taylor calculated unlawful patronage distributions and mischaracterized probable liabilities as "reasonably possible," facilitating distributions that depleted YCC’s assets.
- Taylor removed the state-court action to bankruptcy court and moved to dismiss, asserting in pari delicto (unclean hands), lack of causation, and that conspiracy is not an independent tort under California law.
- Trustee pleaded that YCC was controlled by its officers/directors (who were also members) and that Taylor conspired with them to funnel assets out of YCC. Trustee sought to hold Taylor liable for YCC’s insolvency and unpaid claims.
- The court concluded the in pari delicto doctrine bars Trustee’s claims because the debtor’s culpable agents’ conduct is imputed to the debtor (sole-actor facts), and thus the trustee—standing in the debtor’s shoes—cannot recover.
- The court dismissed the complaint with leave to amend the accounting malpractice claim; causation and malpractice theories might survive if pleaded independent of debtor’s fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of in pari delicto to trustee's claims | Trustee: he is not a wrongdoer; defense shouldn't bar trustee's suit against third parties | Taylor: trustee stands in debtor's shoes under §541(a)(1); defenses available against debtor apply to trustee | Held: in pari delicto applies; trustee's claims barred because debtor's misconduct is imputed to the estate |
| Adverse-interest exception to imputation | Trustee: officers acted against corporation's interests, so their wrongdoing shouldn't be imputed to YCC | Taylor: factual allegations show the officers/members controlled YCC ("sole actor"), so adverse-interest exception does not apply | Held: adverse-interest exception inapplicable due to sole-actor allegations; imputation stands |
| Causation for damages | Trustee: Taylor's negligent/aiding acts caused distributions and insolvency | Taylor: damages caused by officers/directors (already settled), not by Taylor | Held: causation is a factual question; not adjudicated on dismissal because in pari delicto disposed of claims, but trustee may plead malpractice independently |
| Relief and amendment | Trustee seeks recovery for malpractice and conspiracy | Taylor seeks dismissal | Held: complaint dismissed; leave to amend accounting malpractice claim by deadline (May 31, 2019) to try to plead a claim independent of debtor's fraud |
Key Cases Cited
- In re Mortgage Fund '08 LLC, 527 B.R. 351 (N.D. Cal. 2015) (trustee subject to in pari delicto because trustee's rights are no greater than the debtor's under §541(a)(1))
- Federal Deposit Ins. Corp. v. O'Melveny & Myers, 61 F.3d 17 (9th Cir. 1995) (receiver—not a trustee—ordinarily not subject to unclean hands defense; distinguishable)
- Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP, 133 Cal. App. 4th 658 (Cal. Ct. App. 2005) (in pari delicto barred trustee's claims against attorney who aided debtor's fraud)
- Uecker v. Zentil, 244 Cal. App. 4th 789 (Cal. Ct. App. 2016) (application of in pari delicto against third parties in bankruptcy-related suits)
- Sender v. Buchanan (In re Hedged-Investments Assocs., Inc.), 84 F.3d 1281 (10th Cir. 1996) (§541(a)(1) makes estate's rights no stronger than debtor's; defenses imputed to trustee)
- Pellerin v. Stuhley (In re Destro), 675 F.2d 1037 (9th Cir. 1982) (trustee succeeds only to rights debtor possessed and is subject to defenses against the debtor)