Rejecting the Second Circuit’s Wagoner rule and agreeing with the First, Third, Fifth, and Eleventh Circuits, the United States Court of Appeals for the Eighth Circuit held that the collusion of corporate insiders with third parties to injure the corporation does not deprive the corporation’s trustee of standing to sue third parties, resulting in a greater rift between Second Circuit and the other Courts of Appeal on this issue. Moratzka v. Morris, 482 F.3d 997, 1004 (8th Cir. 2007). Nevertheless, the court affirmed that such a situation may give rise to the defense of in pari delicto barring the trustee’s action. Id.
In Moratzka, the plaintiff-trustee brought suit against a third party-defendant alleging that it committed malpractice, aided and abetted a breach of fiduciary duty by the Chief Manager of the debtor corporation, and assisted the Chief Manager in looting the assets of the debtor corporation. Id. at 999. The Bankruptcy Court first dismissed the plaintiff-trustee’s complaint on the grounds that the trustee alleged only an injury to the creditors, not an injury to the corporation. The court then denied a motion to amend the complaint, reasoning that doing so would be futile because the defense of in pari delicto would bar the complaint anyway. Id. On appeal the district court affirmed on different theory, finding that the trustee lacked standing to bring such a claim, because it belonged to the creditors of the debtor corporation. Id. at 1000.
The Eight Circuit disagreed with the holdings of both lower courts. Id. at 1007. Throughout its analysis, the court stated that there were two distinct issues that had to be addressed: the issue of standing and the issue of defenses, and that the lower courts failed to deal with these issues correctly. Id. at 1004. The court then concluded that the plaintiff-trustee was the proper party to bring the claims against the third party-defendant for malpractice, and for aiding and abetting the Chief Manager’s breach of fiduciary duty. Id. at 1006. As to the issue of in pari delicto, the court held that it did not have to determine the merits of the defense, because defendants had not asserted it. Id. at 1005.
Although the decision of the Eight Circuit affirms the idea that trustee standing and the in pari delicto defense are two issues that should be dealt with separately, the implications of the case may be less substantial than expected. Although the circuits disagreed about whether issues of standing and in pari delicto should be separated, the Eight Circuit affirms the rule that in pari delicto may be asserted as a defense against a plaintiff-trustee defeating his recovery. Id. at 1005. The following discussion focuses on two issues: first it will examine why the constitutional issue of standing requires a separate and distinct analysis from affirmative defenses, like in pari delicto; and second the article will examine the impact of the Eight Circuit’s decision.