Kеvin O'HALLORAN, as trustee and individually as alleged assignee, Appellant,
v.
PRICEWATERHOUSECOOPERS LLP, Appellee.
District Court of Appeal of Florida, Second District.
*1041 Zala L. Forizs and Haley Dempsey of Forizs & Dogali, P.L., Tampa, and Nicholas J. DiCarlo of Beus Gilbert, PLLC, Scottsdale, AZ, for Appellant.
John R. Blue, Thomas J. Roehn, and Ellen K. Lyons of Carlton Fields, P.A., Tampa, and Jami Wintz McKeon and John C. Goodchild, III, of Morgan, Lewis & Bockius LLP, Philadelphia, PA, for Appellee.
CANADY, Judge.
In this case, the trial court dismissed with prejudice a complaint against PricewaterhouseCoopers (PWC) filed by Kevin O'Halloran, a chapter 11 bankruptcy trustee for Keller Financial Services of Florida, Inc., and subsidiary corporations (collectively, Keller Financial). The claims asserted by O'Halloran arose from the performance of financial advisory services by PWC for Keller Financial in 1997 and 1998. O'Halloran's claims include "debtors' causes of action," as well as a claim the noteholder claim brought pursuant to assignments made to O'Halloran by certain purchasers of secured notes sold by Keller Financial.
The gravamen of the complaint was that PWC, which was retained to give advice concerning the restructuring of Keller Financial, pursued a merger strategy that PWC knew or should have known was futile. By doing so, according to O'Halloran's allegations, PWC delayed Keller Financial's filing for bankruptcy and thereby "allowed Keller [Financial] to become increasingly insolvent and Keller [Financial's] assets to be looted, squandered or otherwise dissipated while PWC pursued [the] futile transaction." O'Halloran also alleged that PWC pursued the merger strategy because it would have involved "a lucrative `transaction fee'" for PWC.
The debtors' causes of action against PWC that is, claims against PWC allegеdly possessed by Keller Financial when it went into bankruptcy included claims for breach of fiduciary duty (count 1), negligence/professional malpractice (count 2), aiding and abetting breach of fiduciary duty (count 3), breach of contract (count 4), and constructive fraud (count 5). The noteholder claim was for aiding and abetting breach of fiduciary duty (count 6).
The trial court ruled that several of the claims counts 1, 3, 4, and 5 were subject to dismissal because they were barred by res judicata or claim preclusion arising from the bankruptcy court's order confirming the joint plan of liquidation presented in the Keller Financial bankruptcy proceedings. In brief, the trial court concluded that these claims could have been litigated in the bankruptcy proceedings and that the bankruptcy plan did not adequately preserve O'Halloran's right to litigate them after confirmation of the plan by the bankruptcy court.
The trial court also ruled that several of the claims counts 1, 2, 3, and 4 were barred by the doctrines of imputation and in pari delicto. The trial court reasоned that O'Halloran, as bankruptcy trustee, "stands in the shoes" of Keller Financial and that according to O'Halloran's own *1042 allegations Keller Financial was itself involved in wrongdoing "to further its existence." In reaching this conclusion, the trial court relied not only on the allegations of the complaint in the instant case but also on the allegations in a complaint filed by O'Halloran against insiders of Keller Financial and in a complaint filed by O'Halloran against KPMG Peat Marwick, Keller Financial's auditor.
In addition, the trial court ruled that the noteholder claim (count 6) was barred because O'Halloran "is not empowered to bring creditors' claims" and because allowing the claim would create the possibility of "double recovery" by noteholders who did not assign their claims to O'Halloran.
The trial court thus dismissed with prejudice all of the claims against PWC and entered a final judgment in favor of PWC.
1. Principles Governing Review of Dismissed Claims
Since a trial court's ruling on a motion to dismiss presents a question of law, it is subject to de novo review. Siegle v. Progressive Consumers Ins. Co.,
Florida Rule of Civil Procedure 1.110(d) provides that "[a]ffirmative defenses appearing on the face of a prior pleading may be asserted as grounds for a motion [to dismiss] under rule 1.140(b)." Accordingly, a complaint may be dismissed if its allegations show the existence of an affirmative defense to the claims asserted in the complaint. See Boca Burger, Inc. v. Forum,
2. The Res Judicata Issue
O'Halloran argues on appeal as he did before the trial court that the debtors' claims against PWC were specifically preserved in the bankruptcy proceeding and that the order confirming the bankruptcy plan therefore does not operate to preclude those claims. We conclude that O'Halloran's argument is supported by the record before the trial court concerning the bankruptcy proceedings and the law concerning the preservation of a debtor's claims in bankruptcy.[1]
Section 1123 of the Bankruptcy Code provides that a bankruptcy plan may provide for "the retention and enforcement by the debtor, [or] by the trustee" of "any claim or interest belonging to the debtor or to the estate." 11 U.S.C. § 1123(b)(3) (1994). Accordingly, although a bankruptcy confirmation order may give rise to res judicata with respect to claims of the debtor that could have been litigated in the bankruptcy proceeding, see Sure-Snap Corp. v. State Street Bank & Trust Co.,
Here, the trial court's ruling on the res judicata issue can be sustained only if we adopt a strict rule of specificity under which the naming of each cause of action is required for the effective retention of the debtors' claims. We decline to impose such an exacting rule of specificity.
To begin with, the text of § 1123 provides no support for the imposition of such a rule. Furthermore, the context strongly militates against such a rule. "To require a debtor to conjure up and list every imaginable cause of action would unduly complicate the reorganization process and would be unrealistic." EXDS, Inc. v. Ernst & Young LLP (In re EXDS, Inc.),
We turn now to the language used in the bankruptcy disclosure statement concerning claims retained against PWC and to our evaluation of the application of the law.
The disclosure statement filed by O'Halloran makes two references to claims against PWC. First, the statement states that "[t]he Debtors may be able to assert claims . . . against . . . accounting firms for professional malpractice." The statement then goes on to specifically list PWC after stating that "all [p]ersons identified herein by . . . name should understand that all claims against them held by the Trustee or the Debtors are preserved and may be asserted following confirmation of the Plan." (Emphasis added.) Second, under the heading of "Professional Liability," the statement again names PWC and states: "All claims held by the Trustee or the Debtors against any professional persons employed, retained, or consulted by the Debtors are reserved for the benefit of the Debtors' creditors under the Plan."
The trial court concluded that the language of the disclosure statement was sufficient to preserve only the claim against PWC for negligence/malpractice (count 2). If the only referenсe in the disclosure statement to claims against PWC were the reference to "professional malpractice" claims, we would be inclined to agree with the trial court. But the second reference to claims against PWC under the heading of "Professional Liability" suggests a broader interpretation of the scope of the claims preserved against PWC. Those provisions of the disclosure statement are most reasonably read as preserving all the asserted claims of the debtors against PWC arising from PWC's professional relationship with Keller Financial. We also conclude, for the reasons that we have discussed above, that such language preserving "all claims" against PWC arising from PWC's professional relationship with Keller Financial was sufficient to be an effective retention pursuant to section 1123.
The trial court read the claim preservation provisions of the disclosure statement in an unreasonably restrictive manner and *1044 applied an unduly exacting requirement of specificity. The trial court therefore errеd in dismissing the claim based on res judicata.
3. The In Pari Delicto Issue
O'Halloran contends that the doctrine of in pari delicto is inapplicable (1) because the alleged wrongdoing of the agents of Keller Financial should not be imputed to the corporation or to O'Halloran and (2) because the alleged wrongdoing of Keller Financial's agents is distinct from the alleged wrongdoing of PWC. Considering the allegations of fact before the trial court and the inferences to be drawn from those allegations in the light most favorable to O'Halloran, we conclude that there is merit in both of these arguments advanced by O'Halloran.
In pari delicto means "in equal fault." Black's Law Dictionary 806 (8th ed.2004). The phrase appears in the legal maxim: "Where both parties are equally in the wrong, the position of the defendant is the stronger."[2]Id. at 1725, appendix B. "In pari delicto refers to the plaintiff's participation in the same wrongdoing as the defendant." Memorex Corp. v. Int'l Bus. Machs. Corp.,
The defense [of in pari delicto] is grounded on two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality. In its classic formulation, the in pari delicto defense was narrowly limited to situations where the plaintiff truly bore at least substantially equal responsibility for his injury, because "in cases where both parties are in delicto, concurring in an illegal act, it does nоt always follow that they stand in pari delicto; for there may be, and often are, very different degrees in their guilt." 1 J. Story, Equity Jurisprudence 304-305 (13th ed.1886) (Story).
Bateman Eichler, Hill Richards, Inc. v. Berner,
Where the defense of in pari delicto is asserted against a corporate entity based on the misconduct of the corporation's agents, it must be determined whether the misconduct of those agents is properly imputed to the corporation. "As *1045 a general rule, a principal may be held liable for the acts of its agent that are within the course and scope of the agency." Roessler v. Novak,
But if a corporate аgent was "acting adversely to the corporation's interests, the knowledge and misconduct of the agent are not imputed to the corporation." State, Dep't of Ins. v. Blackburn,
This limitation on the general rule that the acts of a corporate agent are imputed to the corporation is commonly known as the "adverse interest exception." See Tew v. Chase Manhattan Bank, N.A.,
A claim of adverse interest cannot be successfully invoked where the corporate actors whose conduct is at issue were the "alter egos" of the corporation. Where a corporation is wholly dominated by persons engaged in wrongdoing, the corporation has itself become the instrument of wrongdoing. See Terlecky v. Hurd (In re Dublin Sec.),
*1046 In summary, determining whether misconduct should be imputed to a corporation requires that the focus of analysis be on whether the misсonduct was calculated to benefit the corporation. The misconduct will be imputed where the corporation has been operated as an "engine of theft." See Cenco, Inc. v. Seidman & Seidman,
The law is well established that under § 541(a) of the Bankruptcy Code, "[a] bankruptcy trustee stands in the shoes of the debtor.'" Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards,
We thus turn to the factual question of whether Keller Financial was in pari delicto with PWC with respect to the alleged wrongdoing which is the basis for the assertion of the debtors' claims by O'Halloran against PWC.
In considering this question and conducting our de novo review of the dismissal of O'Halloran's claims, we are required to consider the allegations of fact and inferences from those allegations "in the light most favorable to" O'Halloran. Aguilera,
The complaint against PWC contains two allegations that are particularly pertinent to the in pari delicto issue. The first of these is the allegation that "[a]t no time during the period of PWC's engagement was Keller [Financial] merely a `Ponzi scheme' organized for the purpose of engaging in criminal activity or committing fraud." The second is the аllegation that the former president of Keller Financial, Michael Nixon, testified under oath that "had PWC recommended an immediate bankruptcy for Keller [Financial] in the spring of 1997, Nixon would have followed PWC's advice and placed Keller [Financial] into bankruptcy at that time and would not have pursued a restructuring plan involving another company."
*1047 Both of these allegations which we are required to accept as true in considering the motion to dismiss seriously undermine the in pari delicto defense. Both allegations support the сonclusion that even if agents of the corporation were somehow complicit in the alleged wrongdoing of PWC, the adverse interest exception applies and the wrongdoing of the corporate agents therefore should not be imputed to Keller Financial.
Furthermore, it is not clear from the allegations of the complaint that the alleged wrongdoing of PWC is the same as the alleged wrongdoing of the agents of Keller Financial. Viewing the allegations in the light most favorable to O'Halloran, the allеged misconduct of PWC can be considered distinct from the alleged misconduct of the corporate agents. There is no allegation that the corporate insiders participated in the specific wrongdoing alleged against PWC of pursuing the merger with actual or constructive knowledge that doing so was futile.
Accordingly, we hold that the trial court erred in dismissing claims based on the in pari delicto defense. Of course, our holding with respect to the trial court's ruling on the in pari delicto defense as a basis for dismissal of claims does not foreclose PWC from further litigating the in pari delicto defense issue and establishing the facts necessary to support that defense.
4. The Issue of the Noteholder Assignments
The trial court ruled that O'Halloran was precluded from bringing the claim based on the noteholder assignments because a trustee in bankruptcy "is not empowered to bring creditors' claims." In dismissing the claim based on the noteholder assignments, the trial court also relied on the potential for "double recovery" by nonassigning noteholders. We conclude that the trial court erred in dismissing O'Halloran's noteholder claim.
In support of thе trial court's ruling, PWC relies primarily on Caplin v. Marine Midland Grace Trust Co. of New York,
The Caplin Court relied on three related grounds to support the conclusion that the trustee lacked standing. First, the Court noted thаt "nowhere in the statutory scheme is there any suggestion that the trustee in reorganization is to assume the responsibility of suing third parties on behalf of debenture holders."
The three problems identified by the Court in Caplin are all remedied by the giving of unconditional assignments of *1048 claims to a bankruptcy trustee. In so understanding Caplin, we follow Logan v. JKV Real Estate Services (In re Bogdan),
The assignments made to the bankruptcy trustee which were at issue in Logan were of claims by certain mortgage lender creditors against alleged coconspirators of the debtor corporation in a scheme to defraud the mortgage lender creditors. The Logan court pointed to the provision of § 541(a)(7), which provides that the "property of the estate" includes "`[a]ny interest in property that the estate acquires after the commencement' of [the] bankruptcy case."
Other courts have similarly concluded that a trustee may bring suit based on assigned claims. See Schnelling v. Thomas (In re AgriBioTech),
The Logan court also held that although the doctrine of in pari delicto would be applicable to the debtor, it would not bar the trustee's suit based on the assignments. The court stated that "[a]s assignee, the trustee stands in the shoes of the [assigning creditors], thereby assuming all rights and interests that the [assigning creditors] have in the causes of action and becoming subject to all defenses that could have been asserted against the [assigning creditors], not [the debtors]."
Here, O'Halloran's complaint alleged that "[u]pon execution of the respective assignments, those claims became property of the Bankruptcy Estate pursuant to Bankruptcy Code section 541(a)(7)" and that "[t]he assigned claims can no longer be pursued by the individual assignors." Documents that were subject to judicial *1049 notice by the trial court indicаte that "any proceeds derived from [the assigned] claims will be treated as property under the Liquidation Plan and distributed in accordance therewith." Although the form of assignment which was also subject to judicial notice does not expressly state that the assignment of claims was made unconditionally and for the benefit of the bankruptcy estate, for purposes of the motion to dismiss, the factual allegations of the complaint must be accepted as true. Those allegations bring the noteholder claims squarely under the rule articulated in Logan which we adopt with respect to unconditionally assigned claims of creditors.
Finally, we reject the trial court's speculation concerning the potential for "double recovery" by nonassigning noteholders. We are unconvinced that such a double recovery will necessarily result even if the noteholders' claim is successfully litigated. Furthermore, we see no reason that such a potential should prevent the assigning noteholders from choosing how they wish to pursue their claims against PWC.
Wе therefore conclude that the trial court erred in dismissing the noteholder claim.
5. Conclusion
The final judgment in favor of PWC is reversed, and the case is remanded for further proceedings.
Reversed and remanded.
NORTHCUTT and WALLACE, JJ., Concur.
NOTES
Notes
[1] Because we conclude that the claims against PWC were preserved, we need not address the argument of O'Halloran that PWC was not a party to the bankruptcy proceeding and thus was not entitled to assert any res judicata effect of the bankruptcy confirmation order.
[2] The Latin maxim is "In pari delicto potior est conditio defendentis." Black's Law Dictionary 1725, appendix B.
[3] The in pari delicto doctrine is a corollary of the doctrine of unclean hands which requires "that no one shall be permitted to profit from his own fraud or wrongdoing, and that one who seeks the aid of equity must do so with clean hands." Yost v. Rieve Enters., Inc.,
[4] Application of the doctrine may yield to public policy considerations: "The defense of in pari delicto is not woodenly applied in every case where illegality appears somewhere in the transaction; since the principle is founded on public policy, it may give way to a supervening public poliсy." Kulla v. E.F. Hutton & Co.,
[5] Similarly, the adverse interest exception to the imputation rule has been held inapplicable "where the transaction on behalf of the principal is entrusted solely to the officer or agent having the knowledge." Nerbonne, N.V.,