437 F.3d 1145 (11th Cir. 2006), 05-12320, Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards

Docket Nº:05-12320.
Citation:437 F.3d 1145
Party Name:OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF PSA, INC., et al., on behalf of PSA, Inc., et al., Plaintiff, Trustee Darryl S. Laddin, of the ETS Creditors' Litigation Trust, Plaintiff-Appellant, v. Charles EDWARDS, et al., Defendants, Legends Communications, Inc., Sheldon E. Friedman, Friedman, Dever & Merlin, LLC, PWH, Inc., d.b.a. Friedman, Denver
Case Date:January 30, 2006
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit
 
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437 F.3d 1145 (11th Cir. 2006)

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF PSA, INC., et al., on behalf of PSA, Inc., et al., Plaintiff,

Trustee Darryl S. Laddin, of the ETS Creditors' Litigation Trust, Plaintiff-Appellant,

v.

Charles EDWARDS, et al., Defendants,

Legends Communications, Inc., Sheldon E. Friedman, Friedman, Dever & Merlin, LLC, PWH, Inc., d.b.a. Friedman, Denver & Merlin, LLC d.b.a. Sheldon E. Friedman, Karlovec Financial, Inc., Reliance Trust Company, PENSCO, et al., Defendants-Appellees.

No. 05-12320.

United States Court of Appeals, Eleventh Circuit

Jan. 30, 2006

Appeal from the United States District Court for the Northern District of Georgia.

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[Copyrighted Material Omitted]

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Ross H. Parker, Phil C. Appenzeller, Jr., LaDawn Horn Conway, Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, Allen I. Hirsch, Neil C. Gordon, Arnall, Golden & Gregory, LLP, Atlanta, GA, for Plaintiff-Appellant.

George William Long, III, Adam Scott Katz, Womble, Carlyle, Sandridge & Rice, PLLC, Henry D. Fellows, Jr., Fellows, Johnson & La Briola, Craig A. Gillen, Gillen, Cromwell, Parker & Withers, LLC, Atlanta, GA, Dennis P. Zapka, McLaughlin & McCaffrey, LLP, Cleveland, OH, David W. White, Brandee B. Bower, Foland, Wickens, Eisfelder, Roper & Hofer, P.C., Kansas City, MO, for Defendants-Appellees.

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Before CARNES, HULL and PRYOR, Circuit Judges.

PRYOR, Circuit Judge:

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

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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 Laddin'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 pari delicto barred Laddin'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 Laddin's state law claims. The district court also held that the doctrine of in pari delicto 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., 372 F.3d 1250, 1263 (11th Cir. 2004). A motion to dismiss should not be granted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101 (1957).

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 debtor 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., 267 F.3d 340, 356 (3d Cir. 2001). A trustee, as the representative of the estate, succeeds into the rights of the debtor-in-bankruptcy and has standing to bring any suit that the debtor corporation could have brought outside of bankruptcy. 11 U.S.C. § 323; O'Halloran v. First Union Nat'l Bank, 350 F.3d 1197, 1202 (11th Cir. 2003). The argument of the IRA Custodians that the wrongdoing of ETS deprives Laddin of standing to assert claims against them fails because "[a]n analysis of standing does not include an analysis of equitable defenses, such as in pari delicto ." R.F. Lafferty & Co., 267 F.3d at 347. We agree with the district court that Laddin had standing based on

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an alleged injury to the debtor estate, see id. at 346-48, but Laddin's standing to bring claims on behalf of the debtor estate does not mean that the debtor's wrongdoing is immaterial.

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...

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