Opinion ID: 77188
Heading Depth: 2
Heading Rank: 2

Heading: The Doctrine of In Pari Delicto Bars a RICO Claim by a Conspirator.

Text: 20 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). 21 The doctrine of in pari delicto is an equitable doctrine 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: `In a case of equal or mutual fault ... the position of the [defending] party ... is the better one.' Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 2626, 86 L.Ed.2d 215 (1985). The doctrine of in pari delicto is based on the policy that courts should not lend their good offices to mediating disputes among wrongdoers and denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality. Id. The issue whether this defense bars a complaint under RICO is one of first impression for our Circuit. 22 The federal law of affirmative defenses governs the enforcement of causes of action created by federal statutes. See O'Melveny & Myers v. FDIC, 512 U.S. 79, 84-85, 114 S.Ct. 2048, 2053, 129 L.Ed.2d 67 (1994). There is a paucity of federal caselaw regarding whether the doctrine of in pari delicto bars a complaint under RICO, and none of our sister circuits have squarely decided the issue. See Roma Constr. Co. v. aRusso, 96 F.3d 566, 570 (1st Cir.1996) (Whether or not there exists such an `innocent party' requirement is a question of first impression in this circuit and, indeed, we are not aware of any cases anywhere that adopt such a requirement.); cf. Bontkowski v. First Nat'l Bank of Cicero, 998 F.2d 459, 462 (7th Cir.1993) (considering whether the doctrine of in pari delicto barred a RICO defendant for purposes of equitable tolling). 23 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, 472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215; Perma Life Mufflers, Inc. v. Internat'l Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968). Although in both cases it declined to apply the doctrine of in pari delicto, the Court explained that this or a related doctrine might apply in other contexts. We consider each decision of the Supreme Court for guidance in resolving this issue. 24 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. 392 U.S. at 140, 88 S.Ct. at 1985. The plaintiffs were franchisees who alleged that the franchisor, its parent corporation, other subsidiaries, and several individuals conspired to restrain trade and engage in illegal price discrimination. Id. The Court cautioned against invoking broad common-law barriers to relief where a private suit serves important public purposes, and in the antitrust context, the Court explained that there is an overriding public policy in favor of competition. Id. at 138-39, 88 S.Ct. at 1984. A more fastidious regard for the relative moral worth of the parties would only result in seriously undermining the usefulness of the private action as a bulwark of antitrust enforcement. Id. That first glance does not tell the whole story, however. 25 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, 88 S.Ct. at 1985 (emphasis added). The Court explained that the participation of the franchisees in the alleged antitrust conspiracy was not voluntary in any meaningful sense. Id. at 139, 88 S.Ct. at 1985. Although the franchisees sought the franchises enthusiastically[,] ... they did not actively seek each and every clause of the agreement. Id. The franchisees alleged that they had continually objected to [the violative terms]. Id. Although the Court held that in pari delicto did not bar the franchisees from recovery, it explicitly left open the question whether complete involvement in an antitrust violation, wholly apart from the idea of in pari delicto,  would bar a plaintiff from bringing an antitrust claim. Id. at 140, 88 S.Ct. at 1985. 26 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 laws. Bateman Eichler, 472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215. The tippees alleged that a securities broker and a company official had induced them to purchase company stock by providing them with materially false insider information. Id. at 301-02, 105 S.Ct. at 2624-25. The tippees alleged that they suffered damages when the stock price fell as a result of the false information. Id. 27 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 delicto defense was narrowly limited to situations where the plaintiff truly bore at least substantially equal responsibility for his injury, id. at 306-07, 105 S.Ct. at 2627, and the Court explained that where a plaintiff truly bore at least substantially equal responsibility for the violation, a defense based on such fault ... should be recognized.  Id. at 308-09, 105 S.Ct. at 2628 (emphasis added). The Court then concluded that the face of the complaint did not reveal that the tippees had engaged in wrongdoing. Id. at 311 n. 21, 105 S.Ct. at 2629 n. 21 (stating that the complaint does not set forth sufficient facts to conclude that the tippees were in delictum because it is uncertain whether [the tippee-plaintiffs] had any basis to believe that [the tipper-defendant] ... had violated his fiduciary duties). 28 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, 105 S.Ct. at 2630. The Court did not believe that the tippee properly can be characterized as being of substantially equal culpability as his tippers. Id. at 314, 105 S.Ct. at 2631. The Court concluded that, because the tippers in Bateman Eichler masterminded this scheme to manipulate the market ... for their own personal benefit[] and ... used the ... respondents as unwitting dupes, the tippees were not equally culpable. Id. 29 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, 105 S.Ct. at 2631 (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186-87, 84 S.Ct. 275, 280, 11 L.Ed.2d 237 (1963)). Because `[t]he true insider or the broker-dealer is at the fountainhead of the confidential information[,] ... the most effective means ... is to nip in the bud the source of the information' and allow tippees to recover from the fraudulent tippers. Id. at 316, 105 S.Ct. at 2632 (quoting Nathanson v. Weis, Voisin, Cannon, Inc., 325 F.Supp. 50, 57-58 (S.D.N.Y. 1971)). For that reason, the Court explained that a tippee's complaint should be barred only where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. Id. at 310-11, 105 S.Ct. at 2629. 30 Under Perma 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, 486 U.S. 622, 632-33, 108 S.Ct. 2063, 2071, 100 L.Ed.2d 658 (1988). Both of these factors support the application of the in pari delicto doctrine in this appeal. We consider each factor in turn. 31 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 majore 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 control[led] 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. 32 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. Bateman Eichler, 472 U.S. at 308-09, 105 S.Ct. at 2628. 33 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., 937 F.2d 899, 910 (3d Cir.1991) (quoting United States v. Turkette, 452 U.S. 576, 585, 101 S.Ct. 2524, 2529, 69 L.Ed.2d 246 (1981)). Laddin's recovery under RICO would not divest RICO violators of their ill-gotten gains; it would result in a wealth transfer among similarly situated conspirators. 34 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, 54 F.Supp.2d 1371 (S.D.Ga.1999); Bieter Co. v. Blomquist, 848 F.Supp. 1446 (D.Minn. 1994); In re Nat'l Mortgage Equity Corp., 636 F.Supp. 1138 (C.D.Cal.1986). These courts have relied on Perma Life Mufflers to conclude that the punitive and deterrent aspects of antitrust treble damages are equally applicable in the racketeering context, In re Nat'l Mortgage Equity Corp., 636 F.Supp. at 1156 (stating that the reasoning in Perma Life Mufflers is equally applicable to RICO treble damage actions), but they misinterpret the holding of Perma Life Mufflers. Because federal RICO violations, as a matter of law, require affirmative wrongdoing rather than passive acquiescence, Perma Life Mufflers does not preclude the defense of in pari delicto in the RICO context. 35 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, 392 U.S. at 139, 88 S.Ct. at 1985. Perma Life Mufflers explicitly left open the possibility that a defense of active involvement could bar a complaint about an antitrust conspiracy, and our sister circuits have accordingly barred antitrust claims where the plaintiff was completely involved in the antitrust conspiracy. See THI-Hawaii, Inc. v. First Commerce Fin. Corp., 627 F.2d 991, 995 (9th Cir. 1980) (holding that there is complete involvement where the illegal conspiracy would not have been formed but for [the plaintiff's] participation and barring recovery by a plaintiff who negotiated, prepared, and earned revenues from an exclusive sales agreement with the defendant); Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 15-16 (4th Cir.1971) ([W]hen parties of substantially equal economic strength mutually participate in the formulation and execution of the scheme and bear equal responsibility for the consequent restraint of trade, each is barred from seeking treble damages from the other.); cf. Premier Elec. Constr. Co. v. Miller-Davis Co., 422 F.2d 1132, 1138 (7th Cir.1970) ([W]e believe that Perma Life holds only that plaintiffs who do not bear equal responsibility for creating and establishing an illegal scheme, or who are required by economic pressures to accept such an agreement, should not be barred from recovery simply because they are participants.). 36 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, 55 F.3d 1525, 1541 (11th Cir.1995); 18 U.S.C. § 1962(c). A `pattern of racketeering activity' requires at least two acts of racketeering activity. 18 U.S.C. § 1961(5) (emphasis added); see id. § 1961(1) (defining racketeering as any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, etc.). The defendant also must knowingly implement[] and mak[e] decisions. Starrett, 55 F.3d at 1548; see Reves v. Ernst & Young, 507 U.S. 170, 185, 113 S.Ct. 1163, 1173, 122 L.Ed.2d 525 (1993) (holding that the defendant participates if he directs the pattern of racketeering activity). 37 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. 38 Laddin contends that the doctrine of in pari delicto does not bar his claims for aiding and abetting a breach of 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., 98 F.3d 604, 613 (11th Cir.1996); see also Monroe v. Bd. of Regents of Univ. Sys. of Ga., 268 Ga.App. 659, 602 S.E.2d 219, 224 (2004) (Georgia has never recognized a claim for aiding and abetting a breach of fiduciary duty.). [W]e may affirm for any reason supported by the record, even if not relied on by the district court. Cochran v. U.S. Health Care Fin. Admin., 291 F.3d 775, 778 n. 3 (11th Cir.2002). Even assuming that Georgia courts will someday recognize a cause of action for aider and abettor liability in the context of a breach of fiduciary claim, the facts in this case do not warrant its creation now. Munford, 98 F.3d at 613. Because the bankruptcy trustee may only bring any suit that the debtor could have instituted had it not been thrown into bankruptcy, O'Halloran, 350 F.3d at 1202, the district court correctly dismissed Laddin's claim for aiding and abetting a fiduciary duty.