31 F.4th 294
4th Cir.2022Background
- Infinity Business Group, a debt-collection company, used an improper accounting practice that materially inflated accounts receivable and revenues; CEO Byron Sturgill (who falsely claimed CPA credentials) prepared and supplied the financials.
- Infinity retained Morgan Keegan and adviser Keith Meyers to solicit institutional capital; Morgan Keegan’s offering memo used Infinity‑provided financials and disclaimed independent verification.
- Meyers questioned the receivables growth and recommended conservative accounting and a new auditor; Infinity’s management and external auditors nonetheless approved and continued the accounting practice.
- Infinity failed to raise sufficient capital, entered Chapter 7 bankruptcy, and the trustee sued management, the external auditor, Morgan Keegan, and Meyers; only Morgan Keegan and Meyers proceeded to trial.
- The bankruptcy court (after an 18‑day bench trial) and the district court found the trustee failed on the merits and held the trustee’s claims barred by the in pari delicto defense; the Fourth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a trustee suing under §544(a)(1) can evade in pari delicto by stepping into a hypothetical judgment‑lien creditor’s shoes | Trustee: §544 lets trustee act as creditor on behalf of blameless creditors and avoid in pari delicto | Morgan Keegan: even under §544 the trustee stands in the debtor’s shoes because the hypothetical creditor acquires no greater rights than the debtor; in pari delicto applies | Held: §544 does not avoid in pari delicto; trustee remains subject to defenses the debtor would face |
| Whether the agency/collusion exception prevents defendants from invoking in pari delicto when they colluded with insiders | Trustee: those who collude with insiders cannot assert in pari delicto | Morgan Keegan: no collusion or knowledge of wrongdoing; factual record does not support collusion | Held: bankruptcy court’s factual finding of no collusion was not clearly erroneous; exception inapplicable |
| Whether officers’ misconduct was so "adverse" that their wrongdoing should not be imputed to the corporation (adverse‑interest exception) | Trustee: officers acted adversely to Infinity so their fraud should not be imputed to the debtor | Morgan Keegan: officers and auditors benefited the corporation from the practice (growth, capital, life extension); conduct not totally adverse | Held: exception requires conduct completely/clearly adverse; here management derived benefit, so exception fails |
| Whether in pari delicto is categorically inapplicable to fiduciary‑duty or aiding‑and‑abetting claims (as urged by Delaware Chancery decisions) | Trustee: fiduciary suits (and claims vs. auditors aiding breaches) should not be barred by in pari delicto | Morgan Keegan: Nevada and South Carolina law apply in pari delicto to such claims and provide targeted tests/exceptions when equity requires | Held: Nevada and South Carolina would not adopt a categorical fiduciary exception; in pari delicto applies (with limited, fact‑specific neutralizing factors available under Nevada law) |
Key Cases Cited
- Grayson Consulting, Inc. v. Wachovia Secs., LLC, 716 F.3d 355 (4th Cir. 2013) (trustee stands in debtor’s shoes; in pari delicto bars trustee when it would bar debtor)
- Proctor v. Whitlark & Whitlark, Inc., 778 S.E.2d 888 (S.C. 2015) (explaining equitable basis and operation of in pari delicto)
- Glenbrook Capital Ltd. P’ship v. Dodds, 252 P.3d 681 (Nev. 2011) (Nevada applies in pari delicto to aiding‑and‑abetting fiduciary claims and sets standards to neutralize it in narrow circumstances)
- Myatt v. RHBT Fin. Corp., 635 S.E.2d 545 (S.C. Ct. App. 2006) (South Carolina appellate decision applying in pari delicto to bar receiver’s claims against a bank)
- Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 271 (Del. Ch. 2015) (Delaware Chancery critique of applying in pari delicto to suits against fiduciaries)
- Cook v. United States, 27 F.4th 960 (4th Cir. 2022) (trustee may exercise certain creditor powers under §544; discussed by the court here)
- Angeles Real Estate Co. v. Kerxton, 737 F.2d 416 (4th Cir. 1984) (explaining trustee’s powers under §544)