This appeal presents two issues, the first of which is an issue of first impression in this Circuit: (1) whether the doctrine of in pari delicto bars a trustee’s claims on behalf of a bankrupt debtor for violations of the Racketeer Influenced and Corrupt Organizations Act; and (2) whether the trustee can maintain a claim for aiding and abetting a breach of fiduciary duties under Georgia law. See 11 U.S.C. § 541(a); 18 U.S.C. § 1964(c). Darryl S. Laddin is the trustee-in-bankruptcy for ETS, which operated a massive Ponzi scheme that defrauded thousands of investors of hundreds of millions of dollars. Laddin appeals an order that dismissed his complaint, under RICO and Georgia law, against entities that, Laddin alleges, assisted ETS in the operation of its fraudulent scheme. Because the defense of in pari delicto bars recovery by a central and active violator of RICO and Georgia courts do not recognize a claim for aiding and abetting a breach of fiduciary duties, we affirm the dismissal of Laddin’s complaint.
I. BACKGROUND
In his complaint, Laddin alleged that in October 1994, Charles Edwards formed ETS Payphones, Inc., a company that sold and leased-back payphones as investment opportunities. “With Edwards at its helm, ETS devised [a] scheme” where an investor paid a fixed sum to purchase a payphone, and ETS leased the payphone back from the investor for a fee. “ETS represented itself as ... a no loss proposition” and induced individuals to purchase the phones. Although “ETS ... created marketing and promotional materials that promised returns ... of 14% or 15%,” it consistently lost money on its payphone operations and continually had to attract new investors to meet its obligations to existing investors. “[W]ith the sale of each phone, ETS assumed a liability it could not satisfy.” The operation of the sale-leaseback program was a Ponzi scheme that defrauded thousands of investors of over $300 million. As the sole shareholder of ETS, Edwards transferred the proceeds from ETS to himself or other companies he owned.
On September 11, 2000, ETS filed for bankruptcy. The bankruptcy court allowed the creation of an Official Committee of Unsecured Creditors, and the Debtors and Creditors’ Committee created the ETS Creditors’ Litigation Trust. The committee appointed Laddin as trustee of the debtor estate.
Laddin sued several defendants, including Reliance Trust Co., PENSCO, Inc., and Community National Bank, for (1) aiding and abetting a breach of fiduciary duties under Georgia law, (2) violations of section 1962(c) and (d) of RICO, 18 U.S.C. §§ 1962(c), (d), and (3) avoidance claims. Reliance Trust Co., PENSCO, Inc., and Community National Bank (collectively, IRA Custodians) are large holders of individual retirement accounts, and Laddin alleged that these IRA Custodians aided ETS in defrauding investors by funneling investor IRA funds into ETS payphone investments. Laddin alleged that “[b]y failing to conduct appropriate due diligence and/or ignoring the facts altogether,” “[t]he IRA Custodians enabled thousands of investors to partake of the ETS scheme and caused ETS to incur millions of dollars in additional debt.”
The IRA Custodians moved to dismiss Laddin’s complaint. They argued that Laddin, as trustee, could not maintain a claim of aiding and abetting a breach of fiduciary duties and the doctrine of in pari delicto, which provides that a wrongdoer *1149 may not profit from his wrongful acts, barred Laddin’s claims. The district court granted the motions to dismiss.,
Before it addressed the merits of Lad-din’s complaint, the district court addressed Laddin’s standing to sue. The district court concluded that Laddin had standing to bring claims on behalf of the debtor, ETS, but Laddin did not have standing to assert claims on behalf of the creditors. The court reasoned that the Creditors’ Committee did not have the authority to assign the claims belonging to ETS creditors and the Trust Agreement did' not authorize Laddin to bring claims on behalf of creditors. '
The district court also concluded that the doctrine of in páñ delicto barred Lad-din’s complaint. The district court found that, under Georgia law, the wrongdoing of Edwards as a sole shareholder was imputed to ETS, the debtor corporation, under the “sole actor” rule. The court reasoned that, because the “legal and equitable interests of the debtor” in bankruptcy are only as strong as the debtor’s claim against defendants at the commencement of the bankruptcy, see 11 U.S.C. § 541(a), the doctrine of in pari delicto barred Lad-din’s state law claims. The district court also held that thé- doctrine of in pari delic-to barred Laddin’s claims under RICO. Laddin appeals the dismissal by the district court!
II. STANDARD OF REVIEW .
This Court reviews
de novo
the ruling of the district court on a motion to dismiss and construes the allegations in the complaint “in the light most favorable to the plaintiff.”
Jackson v. BellSouth Telecomms.,
III. DISCUSSION
Our. discussion is divided into three parts. We first address the trustee’s argument that his complaint is not subject to a defense of in pari delicto that might have been asserted against the debtor. We then discuss whether the defense of in pari delicto can be asserted against a plaintiff who asserts violations of the federal RICO statute. We finally consider whether the trustee can maintain a claim under Georgia law for aiding and abetting a breach of fiduciary duties.
A. The Trustee Is Subject to the . Defenses that Were Available Against the Debtor.
The Bankruptcy Code provides that property of the debtor estate includes “all legal or equitable interests of the debt- or in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). “Legal interests or equitable interests” include' any causes of action the debtor may bring.
Official Comm, of Unsecured Creditors v. R.F. Lafferty & Co.,
Laddin contends that his enforcement, as a trustee of the “legal interests or equitable interests” of the debtor estate, is not subject to the doctrine of in pari delicto. Laddin argues that, because the doctrine of in pari delicto depends on the “personal malfeasance of the individual seeking to recover,” the wrongs of ETS should not be imputed to him as the bankruptcy trustee. Laddin asserts that his argument is supported by the legislative history to the Bankruptcy Code, which explains that “[t]o the extent ... an interest is limited in the hands of the debtor, it is equally limited in the hands of the estate except to the extent that' defenses which are personal against the debtor are not effective against the estate.” 124 Cong. Rec. 32,399 (1978).
We need not resort to legislative history because the text of section 541(a) is unambiguous, and “the language of our laws is the law.”
CBS, Inc. v. PrimeTime 24 Joint Venture,
Even if we considered legislative history, Laddin’s argument would fail. The portion of the legislative history on which Laddin relies pertains to section 541(d), not section 541(a). Section 541(d) governs “[pjroperty in which the debtor holds ... only legal title and not an equitable interest, such as a mortgage secured by real property....” 11 U.S.C. § 541(d). The portion of the legislative history quoted by Laddin is inapplicable to the interpretation of “property of the debtor estate” under section 541(a).
See
124 Cong. Rec. 32,399. In the law of commercial paper, personal defenses are affirmative defenses that, may not be asserted against a holder-in-due-course.
See
U.C.C. § 3-305(a)(l), (2), (3) (stating that a holder-in-due-course is subject to real defenses of duress, fraud in the factum, infancy, insolvency, and legal incapacity);
see also FDIC v. Wood,
Our reading of the text of section 541(a) also comports with the purposes of the Bankruptcy Code.
See Demarest v. Manspeaker, 49
Laddin argues that his recovery would ultimately inure to the benefit of innocent creditors instead of the wrongful debtor, but he fails to account for the likelihood that individual creditors damaged by the debtor’s Ponzi scheme could separately pursue claims against the IRA Custodians free from the bar of in pari delicto. If Laddin were allowed to pursue the debt- or’s claims, his recovery, on the one hand, would become part of the bankruptcy estate to be apportioned among creditors without regard to whether they were harmed by the IRA Custodians. See 11 U.S.C. §§ 507, 1129(b)(2) (stating that the plan of confirmation must be “fair and equitable!] with respect to each class of claims or interests”). If creditors who were harmed by the IRA Custodians, on the other hand, sued separately outside of bankruptcy, then those creditors would not risk dilution through apportionment to senior creditors , or unharmed creditors of equal priority. See id. § 507 (prioritizing classes of claims). Creditors whose legal interests were harmed by the IRA Custodians could rightfully recover more outside of bankruptcy because they would not compete with the trustee’s claims on behalf of the debtor estate.
We are not alone in concluding that the defense of
in pari delicto
may be asserted against a- bankruptcy trustee. - Although this is an issue of first impression in this Circuit, our sister circuits that have considered the issue have unanimously concluded that
in pari delicto
applies with equal force to a trustee-in-bankruptcy as a debtor outside of bankruptcy.
See Grassmueck v. Am. Shorthorn Ass’n,
Laddin erroneously relies on a decision of the Seventh Circuit and the perspective of a commentator to support his argument that
in pari delicto
does not bar recovery by a bankruptcy trustee.
See Scholes v. Lehmann,
Both the text and purposes of the Bankruptcy Code support the conclusion of the district court that Laddin’s complaint is subject to the same defenses that were available against a complaint filed by the debtor at the commencement of the bankruptcy. “The equitable defense of
in pari delicto
is available in an action by a bankruptcy trustee against another party if the defense could have been raised against the debtor.”
Grassmueck,
B. The Doctrine of In Pari Delicto Bars a RICO Claim by a Conspirator.
Laddin argues that the district court erroneously dismissed his RICO claims because the defense of in pari delicto is not an available defense against the debtor. Under RICO, “[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue ... and shall recover threefold the damages he sustains....” 18 U.S.C. § 1964(c). Section 1962(c) of RICO states, “It shall be unlawful for any person employed by or associated with any enterprise ... to conduct or participate ... in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” Id. § 1962(c). Conspiracies in violation of section 1962(c) are also prohibited. Id. § 1962(d).
The doctrine of
in pari delicto
is an equitable doctriné that states “a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing.” Black’s Law Dictionary 794 (7th ed.1999). This common law defense “derives from the Latin,
in pari delicto potior est conditio defendentis:
Tn a case of equal or mutual fault ... the position of the [defending] party ... is the better one.’ ”
Bateman Eichler, Hill Richards, Inc. v. Berner,
The federal law of affirmative defenses governs the enforcement of causes of action created by federal statutes.
See O’Melveny & Myers v. FDIC,
In two cases, the Supreme Court has considered the application of the
in pari delicto
doctrine in the enforcement of antitrust and securities laws.
Bateman Eichler,
At first glance, the earlier decision of the Supreme Court,
Perma Life Mufflers,
would appear to preclude the use of
in pari delicto
against a federal RICO claim because the Court held “that the doctrine of
in pari delicto,
with its complex scope, contents, and effects, is not to be recognized as a defense to an antitrust action.”
The rest of the story in
Perma Life Mufflers
is that the franchisees were, in the eyes of the Court,- at worst, passive violators of the antitrust laws. Because
“in pari delicto
literally means ‘of equal fault,’ ” the Court reasoned that the doctrine should not “deny[] recovery to injured parties
merely because they have participated
to the extent of utilizing illegal arrangements formulated and carried out by others.”
Id.
at 138-39,
The later decision of the Supreme Court in
Bateman Eichler
is much like the earlier one in
Perma Life Mufflers
because the Court refused to apply the doctrine of
in pari delicto
to bar tippees from recovery for insider trading under federal securities
*1154
laws.
Bateman Eichler,
As in
Perma Life Mufflers,
the holding in
Bateman Eichler
was limited, because the Court concluded that the tippees were not active participants in the alleged violation of federal law. The Court stated , that, “in its classic formulation, the
in pari de-licto
defense was narrowly limited to situations where the plaintiff truly bore at least substantially equal responsibility for his injury,”
id.
at 306-07,
The Court explained that “there are important distinctions between the relative culpabilities of tippers, securities professionals, and tippees in these circumstances.”
Id.
at 312-13,
The Court in
Bateman Eichler
expressed its desire to advance the policy goal of the securities laws to protect “the investing public and the national economy through the promotion of ‘a high standard of business ethics ... in every facet of the securities industry.’ ”
Id.
at 315,
Under
Peima Life Mufflers
and
Bateman Eichler,
the application of the defense of
in pari delicto
to causes of action created by federal statutes depends on two factors: (1) the plaintiffs’ active participation in the violation
vel non
and (2) the policy goals of the federal statute.
See Pinter v. Dahl,
First, it is beyond doubt that the allegations of the trustee’s complaint render ETS in active participation with the IRA Custodians. If anything, the conduct of ETS was in majors delicto. Laddin alleged that “ETS devised the scheme and promoted and marketed the sale and leaseback of payphones as investment opportunities to individuals.” ETS also “controlled] all aspects of the operation,” “created marketing and promotional materials,” and “promised returns ... of 14% or 15%” although it “assumed a liability it could not satisfy.” Although the IRA Custodians allegedly “enabled thousands of investors to partake of the ETS scheme and caused ETS to incur millions of dollars in additional debt,” ETS “devised the scheme,” transferred funds from IRA accounts, and “with the sale of each phone, [ ] assumed a liability it could not satisfy.”
On appeal, Laddin fails to explain how the IRA Custodians violated RICO while ETS was a passive bystander in their scheme to defraud. Laddin’s complaint alleged that ETS was the hub of the Ponzi scheme to defraud investors. The allegations in the complaint logically compel the conclusion that ETS had “substantially equal responsibility for [its] injury.”
Bate-man Eichler,
Second, the application of
in pari delicto
to bar Laddin’s complaint advances the policy of civil liability under the federal RICO statute. Laddin argues that plaintiffs should be allowed to recover to serve the deterrent purposes underlying the civil liability provision of RICO regardless of whether the plaintiffs participated in the wrongdoing. We disagree. Under RICO, “[i]t shall be unlawful for
any person
employed by or associated with
any enterprise
... to conduct or participate ... in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” 18 U.S.C. § 1962(c) (emphasis added). It would be anomalous, to say the least, for the RICO statute to make racketeering unlawful in one provision, yet award the violator with treble damages in another provision of the same statute. “Congress intended RICO’s civil remedies to help eradicate ‘organized crime from the social fabric’ by divesting ‘the association of the fruits of ill-gotten gains.’ ”
Genty v. Resolution Trust, Corp.,
Laddin argues that some district courts and bankruptcy courts have held that the doctrine of
in pari delicto
is not an available defense in federal RICO actions because the public policy objectives of RICO are similar to those of the antitrust laws, but Laddin’s reliance on these decisions is misplaced.
See, e.g., Harper v. AT&T,
The Court in
Perma Life Mufflers
premised its holding on the passive characteristics of antitrust participants. In that context, “participation [i]s not voluntary in any meaningful sense” when antitrust violators do not “seek each and every clause of the agreement,” but must accept questionably violative terms to obtain an otherwise attractive business opportunity.
Perma Life Mufflers,
In contrast with antitrust violations, a federal RICO violation requires affirmative and deliberate participation. A violation of RICO requires that the defendants “participated, either directly or indirectly, in the conduct of the affairs of the enterprise ... through a pattern of racketeering activity.”
United States v. Starrett,
Because a complaint brought by ETS, outside of bankruptcy, against other members of its RICO conspiracy would have been barred by the doctrine of in pari delicto, Laddin is likewise barred from recovery within bankruptcy. Laddin’s complaint is barred because ETS was an active participant in the Ponzi scheme and the application of the defense of in pari delicto furthers the policy of the federal RICO statute. The district court did not err when it dismissed Laddin’s claim for treble damages under the federal RICO statute, because his recovery was barred based on the face of his complaint
C. Georgia Does Not Recognize a Claim for Aiding and Abetting a Breach of Fiduciary Duties.
Laddin contends that the doctrine of
in pari delicto
does not bar his claims for aiding and abetting a breach of
*1157
fiduciary duties. We need not reach this issue because we previously have held that Georgia courts have not recognized a cause of action for aiding and abetting a breach of fiduciary duties.
Munford, Inc. v. Valuation Research Corp.,
IV. CONCLUSION
The dismissal of Laddin’s complaint for federal RICO violations and aiding and abetting a breach of fiduciary duties under Georgia law is
AFFIRMED.