Opinion ID: 781162
Heading Depth: 4
Heading Rank: 1

Heading: Was the District Court's Interpretation of Texas In Pari Delicto Doctrine Correct?

Text: 38 As an initial matter, we are not as certain as the District Court and the parties that the interpretation of the in pari delicto doctrine applied here by the District Court is one that would be applied by the courts of Texas. There are no Texas cases opining on the applicability of the in pari delicto defense in a factual situation analogous to that alleged by Color Tile Committee. Rather, the cases decided in Texas arise where a party seeks to excuse its failure to perform on the ground that the transaction was unlawful. The Texas courts' response to this defense is that the party seeking to avoid performance may not be able to do so on this ground. See, e.g., Lewis v. Davis, 145 Tex. 468, 199 S.W.2d 146, 151 (Tex.1947); Graham v. Dean, 144 Tex. 61, 188 S.W.2d 372, 373 (1945); Am. Nat'l Ins. Co. v. Tabor, 111 Tex. 155, 230 S.W. 397, 399-400 (1921). The rule in Texas, even in the case of an unlawful transaction, is that courts must decide whether the policy against assisting a wrongdoer outweighs the policy against permitting unjust enrichment of one party at the expense of the other, and this balancing of the equities often depends upon the peculiar facts and the equities of the case, and the answer usually given is that which it is thought will better serve public policy. Lewis, 199 S.W.2d at 151. 39 Texas (and other) federal courts have applied a federal common-law in pari delicto defense that also uses this concept of not allowing wrongdoers to benefit at the expense of the public in adjudicating private rights of action arising under various federal regulatory statutes. For example, in Banc One Capital Partners Corp. v. Kneipper, 67 F.3d 1187, 1197 (5th Cir. 1995), a securities fraud action filed under federal and state securities laws, the court quoted language from the Supreme Court's decision in Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310-11, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985), to the effect that parties are in pari delicto where the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress. 10 As another court explained, after opining that tension apparently existed between the objectives of federal securities regulatory scheme and this common law equitable defense, the elements of the regulatory version of this defense in the Fifth Circuit are that (1) the fault of the parties must be clearly mutual, simultaneous, and relatively equal; (2) the plaintiff must be an active, essential, and knowing participant in the illegal activity; and (3) the effect on the investing public or on the regulatory scheme, caused by permitting the defense, must be so slight that it does not interfere with the objectives of the securities laws. Miller v. Interfirst Bank Dallas, N.A., 608 F.Supp. 169, 171 (N.D.Tex.1985). 40 In finding that in pari delicto was established in the Second Amended Complaint as a matter of Texas law, the District Court relied exclusively on this regulatory line of in pari delicto cases, see Color Tile I, 80 F.Supp.2d at 137-38, as did the parties in their briefs, even though the facts of the case at bar are not analogous to the facts in these cases. Our research has found no recent Texas case law on point. 11 Indeed, in Kalb, Voorhis & Co. v. American Financial Corp., 8 F.3d 130 (2d Cir.1993) — a case not cited by the District Court or the parties — we previously applied the regulatory interpretation of in pari delicto as the law of Texas in concluding that a creditor of a bankrupt corporation had standing to sue the corporation's former controlling shareholder on a theory that the corporation and defendant were alter egos and that the corporate veil between the two should be pierced. In reaching this conclusion, we rejected the argument that the bankrupt corporation was in pari delicto with its controlling shareholder because the former participated with the latter in its self dealing. Id. With respect to the in pari delicto defense, we held that, where the parties do not stand on equal terms and one party controls the other, the in pari delicto doctrine does not apply. Id. In so holding, we relied on our decision in Ross v. Bolton, 904 F.2d 819, 824 (2d Cir.1990), where we stated that: Where both parties are in delicto, but not in pari delicto, a trial court should make findings regarding the respective amount of blame assigned to each, granting relief to the one whose wrong is less. Kalb cited no Texas case law in support of its decision to apply the regulatory interpretation of in pari delicto found in federal common law to a set of facts not arising in the regulatory context. 41 Given the paucity of recent Texas authority applying the in pari delicto defense to facts such as those giving rise to this appeal, we decline to endorse the interpretation of that defense applied by the District Court and briefed by the parties. We will nevertheless review the District Court's analysis by applying that interpretation because the parties have not urged us to apply a different one and because we can find no Texas authority clearly repudiating or endorsing it. As they have done with their contract-related argument discussed above and for similar reasons, Color Tile Committee has thus waived its argument that the District Court's formulation of Texas' in pari delicto defense is incorrect. But cf. Thompson v. County of Franklin, 314 F.3d 79, 84 (2d Cir.2002) (Winter, J., concurring in the judgment) (declining to decide appeal based on clearly incorrect legal stipulation of federal law by the parties on the ground that doing so would be tantamount to issuing an advisory opinion). 42