A FEDERAL COURT APPOINTED PLAINTIFF-RECEIVER TO TAKE OVER A BUSINESS RUNNING A PONZI SCHEME; THE PLAINTIFF-RECEIVER SUED THE BROKER TO WHICH THE PONZI-SCHEME FUNDS WERE TRANSFERRED; BECAUSE PLAINTIFF-RECEIVER STEPPED INTO THE SHOES OF A WRONGDOER (THE PONZI SCHEME OPERATOR) TO SUE ANOTHER WRONGDOER (THE BROKER), THE “IN PARI DELICTO” (“IN EQUAL FAULT”) DOCTRINE APPLIED TO PROHIBIT THE SUIT (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Michael, over a comprehensive dissenting opinion, determined the plaintiff-receiver (appointed by the federal court to takeover a business running a Ponzi scheme) was prohibited from suing the broker to which the Ponzi scheme funds were transferred by the doctrine of “in pari delicto” (“in equal fault”). Under the doctrine, the courts will not get involved in a suit between two wrongdoers. The issue in this case is whether the court-appointed receiver steps into the shoes of the “Ponzi scheme” wrongdoer. The First Department held that the doctrine applies to the receiver, over an extensive dissent:

The common law doctrine of in pari delicto “mandates that the courts will not intercede to resolve a dispute between two wrongdoers” … . In other words, the doctrine bars a corporation engaged in wrongdoing from suing its co-conspirators on the grounds of negligence or fraud … . “The justice of the in pari delicto rule is most obvious where a willful wrongdoer is suing someone who is alleged to be merely negligent” … . The notion that “a wrongdoer should not profit from his own misconduct is so strong in New York that we have said the defense applies even in difficult cases and should not be weakened by exceptions” … .

The wrongdoer’s misconduct is not only imputed to the corporation through the bad acts of its officers … , but also to the corporation’s successors … . …

Plaintiff [receiver] argues, and the dissent agrees, that the in pari delicto doctrine does not apply to plaintiff because he is not a derivative shareholder plaintiff or a bankruptcy trustee appointed pursuant to 11 USC § 541, but rather a receiver appointed pursuant to 28 USC § 3103. It is true that plaintiff, as a receiver, is not subject to section 541 of the Bankruptcy Code. Nevertheless, there is no significant difference between bankruptcy trustees and nonbankruptcy receivers for purposes of in pari delicto … . Castleman v Interactive Brokers LLC, 2026 NY Slip Op 05904, First Dept 10-13-26

Practice Point: Here the “in pari delicto” (“in equal fault”) doctrine was applied to prohibit a suit by a court-appointed receiver which had taken over a business running a Ponzi scheme. The receiver sued the broker to which the Ponzi-scheme funds had been transferred. Under the “in pari delicto” doctrine, a court will not get involved in a dispute between wrongdoers. The doctrine applies to a wrongdoer’s successor, even a court-appointed receiver.