Opinion ID: 3011035
Heading Depth: 2
Heading Rank: 3

Heading: Illegal contract

Text: As noted, the Bankruptcy Court interwove its discussion of mistake with a discussion of illegal contract and the doctrine of in pari delicto. In addition to the mistake analysis, the court appeared to find for Resorts under the illegal contract doctrine, holding that it deserved restitution because it was not in pari delicto with Lowenschuss. The doctrine of in pari delicto normally applies as a common law defense against a party seeking to enforce an illegal contract. In pari delicto potior est conditio defendentis means that [i]n a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one. Black's Law Dictionary 791 (6th ed. 1990). 10 Here, Resorts seeks to use the doctrine to gain restitution for its payment to Lowenschuss. Resorts' argument runs counter to New Jersey's law, that courts will leave the parties to an executed illegal contract as they are. See, e.g., Marx v. Jaffe, 222 A.2d 519, 521 (N.J. Sup. Ct. App. Div. 1966); Paley v. Barton Sav. & Loan Ass'n, 196 A.2d 682, 685 (N.J. Super. Ct. App. Div. 1964). Courts on occasion, however, apply an equitable exception to this general rule when the parties are not in pari delicto. See, e.g., Singleton v. Foreman, 435 F.2d 962, 969 (5th Cir. 1970) (recognizing such an exception in Florida law). New Jersey courts give a traditional construction to the defense, McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750, 757 (3d Cir. 1990) (citing Pendleton v. Gondolf, 96 A. 47 (N.J. Ch. Ct. 1915)), and have found a party to an illegal agreement deserving of equitable relief because he was not in pari delicto with the other party to the agreement. See Appel v. Reiner, 195 A.2d 310, 317-18 (N.J. Super Ct. Ch. Div. 1963), rev'd on other grounds, 204 A.2d 146 (N.J. 1964). The Bankruptcy Court treated the doctrine as part of New Jersey law and applied it here. In its pre-trial ruling on the cross-motions for summary judgment, the Bankruptcy Court held that the transaction by which Lowenschuss tendered his shares and Resorts paid him for them constituted an illegal contract because the tender of the shares was contrary to Delaware Corporation Law S 262.5 The court held open the possibility _________________________________________________________________ 5. Section 262 sets forth the rights and obligations of shareholders seeking an appraisal in lieu of payment for their shares following a merger. Lowenschuss voted against the merger and timely requested an appraisal, thereby securing the right to an appraisal. See Del. Code Ann. tit. 8, S 262(d). Subsection (e) allows the withdrawal of an appraisal demand and acceptance of the merger terms at any time within 60 days after the effective date of the merger. Id., S 262(e). Lowenschuss, however, did not withdraw his request for appraisal within 60 days of the merger. The statute also provides for withdrawals that occur more than sixty days after the merger: (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided 11 that it might later find that the parties were not in pari delicto, and award Resorts the equitable remedy of restitution on this basis. Following trial, the court found that Lowenschuss's misrepresentations, apart from the illegal transaction, prevented him from being in pari delicto with Resorts and ordered restitution in the amount of the transaction on this basis. See Resorts I, at 37-43. If the relative guilt of the parties is a primarily factual determination, then a trial court's finding of such is reviewed for clear error. See Rothberg v. Rosenbloom, 808 F.2d 252, 260 (3d Cir. 1986) (Seitz, J., concurring). The Bankruptcy Court, however, was construing Lowenschuss's legal maneuvers to conclude that Lowenschuss was not in pari delicto with Resorts. The court noted: (1) that Lowenschuss tendered the shares knowing that they were subject to the appraisal action in Delaware; and (2) that after he tendered his shares, Lowenschuss _________________________________________________________________ in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock . . . ; provided, however, that . . . if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger . . . as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. Id., S 262(e), (k) (emphasis added). Thus, section 262 requires a shareholder who has sought appraisal to get the corporation's written approval and the court's approval in order to withdraw his demand for appraisal more than 60 days after the date of the merger. The merger closed on November 15, 1988, and Lowenschuss did not tender his shares until July 17, 1989. Lowenschuss did not obtain Resorts' written approval of his withdrawal demand before tendering his shares. Therefore, his tender was contrary to the statute and, at least arguably, created an illegal contract. 12 failed to notify Resorts or the Pennsylvania District Court of the tender. See Resorts I, at 40-41. Although Lowenschuss may well have known that his tender was questionable, we agree with the District Court's conclusion that he was not more responsible for the mistaken payment than Resorts. Resorts' Notice of Merger and Letter of Transmittal indicated that it would pay the merger price to shareholders who had previously requested appraisal. Although the Bankruptcy Court did not credit Lowenschuss's testimony that he relied on the Letter of Transmittal in tendering his shares, see Resorts I, at 37, the notice indicates that Resorts, like Lowenschuss, was acting inconsistently with section 262. In sum, Lowenschuss and Resorts were both to blame for the resulting transaction and were in pari delicto. The District Court correctly rejected this doctrine as a basis for recovery.