Court Opinion

ID: 2789506
Source: CourtListenerOpinion
Date Created: 2015-03-26 19:02:31.20263+00
Date Added: 2024-06-11T11:09:55.735244
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

THE HONORABLE KAREN WELDIN                   )
STEWART, CIR-ML, INSURANCE                   )
COMMISSIONER OF THE STATE OF                 )
DELAWARE, IN HER CAPACITY AS                 )
THE RECEIVER OF SECURITY PACIFIC             )
INSURANCE COMPANY, INC. IN                   )
LIQUIDATION, SPI-202, INC. IN                )
LIQUIDATION, SPI-203, INC. IN                )           C.A. No. 9306-VCP
LIQUIDATION, and SPI-204, INC. IN            )
LIQUIDATION,                                 )
                                             )
      Plaintiff,                             )
                                             )
              v.                             )
                                             )
WILMINGTON TRUST SP SERVICES,                )
INC., JOHNSON LAMBERT & CO., LLP,            )
JOHNSON LAMBERT, LLP, McSOLEY                )
McCOY & CO., JAMES M. JACKSON,               )
PAUL D. KING, KEVIN R. DAVIS, and            )
STEPHEN D. KANTNER,                          )
                                             )
      Defendants.                            )

                                      OPINION

                         Date Submitted: November 20, 2014
                           Date Decided: March 26, 2015

Diane J. Bartels, Esq., Wilmington, Delaware; Jeffrey B. Miceli, Esq., BLACK &
GERNGROSS, P.C., Philadelphia, Pennsylvania; Attorneys for Plaintiff The Honorable
Karen Weldin Stewart, CIR-ML, Insurance Commissioner of the State of Delaware, in
her Capacity as the Receiver of Security Pacific Insurance Company, Inc. in Liquidation,
SPI-202, Inc. in Liquidation, SPI-203, Inc. in Liquidation, and SPI-204, Inc. in
Liquidation.

C. Malcolm Cochran, IV, Esq., Chad M. Shandler, Esq., Blake Rohrbacher, Esq.,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for
Defendants Wilmington Trust SP Services, Inc. and Stephen D. Kantner.
Kevin A. Guerke, Esq., SEITZ VAN OGTROP & GREEN P.A., Wilmington, Delaware;
Kevin M. Murphy, Esq., Alexander M. Gormley, Esq., CARR MALONEY P.C.,
Washington, D.C.; Attorneys for Defendants Johnson Lambert & Co. LLP and Johnson
Lambert LLP.

John D. McLaughlin, Jr., Esq., CIARDI CIARDI & ASTIN, LLC, Wilmington,
Delaware; Jonathan S. Ziss, Esq., Seth L. Laver, Esq., GOLDBERG SEGALLA LLP,
Philadelphia, Pennsylvania; Attorneys for Defendant McSoley McCoy & Co.

PARSONS, Vice Chancellor.
       The key issue in this Opinion is when, under Delaware law, a corporation may

state claims against third parties, like auditors, who are implicated in the alleged

misconduct of the corporation‘s directors and officers. The plaintiffs here are four

Delaware-domiciled captive insurance companies, with the Insurance Commissioner of

the State of Delaware prosecuting their claims as their receiver in liquidation. The

complaint alleges an array of fraudulent conduct on the part of the four companies‘

president, CEO, and sole stockholder. The other directors of the corporations also are

alleged to have breached their fiduciary duties by either assisting or failing to catch and

report those fraudulent acts.

       As relevant here, the complaint also includes claims against the companies‘

auditors and their administrative management company for breaches of fiduciary duty,

breach of contract, negligence, and aiding and abetting breaches of fiduciary duty. Those

defendants moved to dismiss, contending that the wrongdoing of the companies‘ officers

and directors is imputed to each of the corporations themselves, and that the doctrine of

in pari delicto bars the court from intervening to adjudicate claims between wrongdoers.

In addition, the moving defendants seek dismissal of the claims against them based on the

defense of laches and for failure to allege the necessary elements of certain of the

putative causes of action. The receiver disputes the applicability of these defenses and

denies that in pari delicto should bar her claims for several different reasons.

       I first conclude that Delaware law governs the entirety of the pending motions.

Next, I reject the moving defendants‘ laches defense as without merit in the

circumstances of this case. After that, I briefly address the motions of the auditors, the

                                              1
administrative management company, and its defendant-employee to dismiss the various

claims for breach of fiduciary duties. I grant this aspect of the motions as to those

defendants, except the defendant-employee who was a director of the plaintiff insurance

companies. I then take up the issue of whether in pari delicto requires dismissal of the

remaining claims.

       For the reasons stated in this Opinion, I conclude that in pari delicto does apply in

this case, and that it effectively would bar the relevant claims against the moving

defendants, unless I found applicable one of the exceptions urged by the receiver. In the

circumstances of this case, the well-known ―adverse interest‖ exception does not apply.

The receiver also contends that the Court should set aside the in pari delicto doctrine on

public policy grounds tied to the specific concerns involved in the insurance receivership

context. But, I conclude that the facts of this case do not support such a result.

       Finally, I address the argument that Delaware law should recognize an ―auditor

exception‖ to the in pari delicto rule, as some states have done. Because I do not read the

applicable Delaware cases as supporting the conclusion the receiver urges, and I am not

convinced that Delaware public policy would be well-served by a broad auditor

exception, I reject that argument as it relates to the claims for breach of contract and

negligence and dismiss those claims on grounds of in pari delicto. I decline to dismiss

the claims for aiding and abetting a breach of fiduciary duty on that basis, however,

because I conclude, based on Delaware case law and the relevant policy concerns, that

the well-established ―fiduciary duty‖ exception to in pari delicto would cover those

claims.

                                              2
      Finally, I examine the aiding and abetting claims against each of the auditors and

the administrative management company. Based on the allegations in the Complaint, I

deny the motions to dismiss those claims, except as they relate to the auditor that was

retained second.

                               I.        BACKGROUND1

                                    A.    The Parties

      This case concerns Security Pacific Insurance Company, Inc. (―Security Pacific‖),

SPI-202, Inc. (―SPI-202‖), SPI-203, Inc. (―SPI-203‖), and SPI-204, Inc. (―SPI-204,‖ and

collectively, the ―SPI Entities‖). All of the SPI Entities are Delaware corporations. From

December 31, 2007, to June 15, 2011, they operated as Delaware-domiciled special

purpose captive insurance companies.

      On June 15, 2011, this Court entered an order in a related action placing the SPI

Entities into liquidation pursuant to 18 Del. C. § 5906 (the ―Liquidation Action‖).2

Plaintiff in this action is the Honorable Karen Weldin Stewart, the Insurance

Commissioner of the State of Delaware, who brings this action as Receiver of the SPI

Entities in liquidation. The Complaint initially named eleven Defendants: Wilmington

Trust SP Services, Inc. (―Wilmington Trust‖); Johnson Lambert & Co., LLP; Johnson

1
      All facts recited herein are drawn from the well-pled allegations of Plaintiff‘s
      Verified Complaint (the ―Complaint‖).
2
      In re Liquid. of Sec. Pac. Ins. Co., C.A. No. 6317-VCP, at 17 (Del. Ch. June 15,
      2011) (ORDER) (the ―Liquidation Order‖); see also In re Liquid. of Sec. Pac. Ins.
      Co., C.A. No. 6317-VCP (Del. Ch. June 28, 2011) (the ―Motion for Liquidation
      Transcript‖).

                                            3
Lambert, LLP; McSoley McCoy & Co. (―McSoley McCoy‖); Ryan Building Group, Inc.

(―Ryan Building Group‖); Kevin R. Davis; James M. Jackson; James L. Jackson; Stephen

D. Kantner; Paul D. King; and Anthony P. Muñoz.3

      As relevant to this Opinion, Wilmington Trust, a Delaware corporation with its

principal place of business in Wilmington, Delaware, provided management and

administrative services to the SPI Entities. Defendant Kantner, an individual residing in

Delaware, was an employee of Wilmington Trust and also a member of the boards of

directors of the four SPI Entities. Johnson Lambert & Co., LLP, is a South Carolina

limited liability partnership based in South Carolina, and Johnson Lambert, LLP, is a

Virginia limited liability partnership based in North Carolina (together, ―Johnson

Lambert‖).4   As discussed in further detail below, Johnson Lambert and McSoley

McCoy, a Vermont corporation with its principal place of business in Vermont, each

provided certified public accountant and independent auditor services to the SPI Entities.

Currently before the Court are motions to dismiss filed by Johnson Lambert and McSoley

3
      The Receiver voluntarily dismissed the claims against Ryan Building Group on
      April 10, 2014. As noted infra in Section I.C, I dismissed the Complaint as it
      relates to James L. Jackson and Anthony Muñoz on August 12, 2014.
4
      The Receiver alleges that Johnson Lambert & Co., LLP‘s rights, duties, and
      liabilities were assumed by Johnson Lambert, LLP in 2012. Compl. ¶ 14.
      Johnson Lambert asserts that the underlying company always has been the same; it
      simply changed its name from the former to the latter. Because this point is
      immaterial to the pending motions, I refer only to ―Johnson Lambert‖ for the
      remainder of this Opinion.

                                            4
McCoy (together, the ―Auditor Defendants‖), and by Wilmington Trust and Kantner

(collectively, the ―Moving Defendants‖).

                                     B.      Facts

                               1.      The SPI Entities

      In 2005, Defendant James M. Jackson formed Security Pacific Insurance

Company, Inc., as a captive insurance company incorporated in the District of Columbia

(―SPIC-DC‖). In general terms, a ―captive insurance company‖ is a business entity

formed as a subsidiary of a non-insurance parent company for the purpose of insuring the

parent‘s business risk, or the risk of the parent‘s affiliates or customers. It is a self-

insurance mechanism in which the insurer is wholly owned by the insured. In the State

of Delaware, captive insurance companies, like all commercial insurers, are subject to

extensive regulatory oversight and requirements, ranging from licensure and reporting to

minimum capital and reserve thresholds.5

      Jackson,6 through a wholly owned holding company, was the sole owner of SPIC-

DC. He also owned an insurance brokerage company, nonparty J. Mading Financial and

Insurance Services, Inc. (―J. Mading‖), which, in collaboration with SPIC-DC, designed

and marketed insurance solutions using captive insurance companies. For example, Ryan

Building Group, a client of J. Mading‘s, was insured by a subsidiary of SPIC-DC, and

nonparty OOM, LLC was insured by another. Those two clients, which engaged in

5
      See generally 18 Del. C. §§ 6901 to 6983.
6
      Because Defendant James L. Jackson has been dismissed from this action, the use
      of the name ―Jackson‖ in this Opinion refers to Defendant James M. Jackson.

                                            5
residential construction, apparently entered into participation agreements by which SPIC-

DC and its ―cells,‖ or subsidiary captives, would provide warranty reimbursement,

general liability, property, excess, and environmental liability insurance coverage.

       Beginning in July 2007, Jackson sought to re-domicile SPIC-DC and its subsidiary

cells to Delaware. According to Jackson‘s plan, SPIC-DC would merge into Security

Pacific, the Delaware corporation at issue in this case, and SPIC-DC‘s cells would merge

into the newly incorporated SPI-202 and SPI-203 entities. SPI-204 would be created to

insure the risk of Alexa Holding Company, LLC, another entity solely owned by Jackson.

Pursuant to the relevant statutory provisions, Jackson submitted an application for

authorization to the Delaware Department of Insurance (―DDOI‖). In the application

documents, Jackson represented that the SPI Entities would hold initial capital amounts,

in the aggregate, of roughly $2.7 million, with some additional reserves in the form of

letters of credit.7 Included in these application documents were SPIC-DC‘s audited

financial statements covering the time period from its inception in 2005 to December 31,

2006, which reported that SPIC-DC had total assets of roughly $4.8 million.8 Those

audited financial statements were prepared and certified by Johnson Lambert.

       In October 2007, SPIC-DC entered into a Management Services Agreement (the

―MSA‖) with Wilmington Trust, whereby Wilmington Trust agreed to serve as Security

7
       According to the application documents, Jackson represented that Security Pacific,
       SPI-202, SPI-203, and SPI-204 would hold initial capital amounts, respectively, of
       $962,792; $639,051; $349,356; and $698,968. Compl. ¶¶ 63-67.
8
       Compl. ¶¶ 68-69; id. Ex. B.

                                             6
Pacific‘s ―captive manager‖ in Delaware by providing administrative, compliance, and

other related services.9   Wilmington Trust also would ensure that the SPI Entities

conformed with certain statutory requirements, by, for example, providing a ―place of

business‖ in Delaware, and retaining all of the SPI Entities‘ original documentation and

books and records here.10 Consistent with the legal requirements, Defendant Kantner,

who was employed as an Accounting Supervisor at Wilmington Trust, served as a

―resident‖ director on the boards of each of the SPI Entities.11

       As relevant here, the captive management services provided by Wilmington Trust

included bookkeeping, financial account reconciliation and review, and preparation of

unaudited financial statements. In this regard, Wilmington Trust regularly reviewed

information regarding the SPI Entities‘ bank accounts.         The Complaint alleges that

Jackson provided monthly financial statements for the relevant accounts via an online

data link run through J. Mading.12 The Complaint also avers that Jackson‘s position as

the intermediary between Wilmington Trust and Bank of America, Wells Fargo, and

Wachovia—the banks housing the SPI Entities‘ financial accounts—was critical to his

fraudulent scheme.13

9
       Id. ¶¶ 71-80; id. Ex. C.
10
       18 Del. C. §§ 6903(b), 6923.
11
       Compl. ¶¶ 74, 88.
12
       Id. ¶¶ 81-82.
13
       Id. ¶¶ 83-85.

                                              7
      In November 2007, SPIC-DC engaged Johnson Lambert to prepare audited

financial statements for the calendar year ending December 31, 2007 (the ―2007 Audited

Financial Statements‖).14 On December 31, 2007, the DDOI approved the SPI Entities‘

application for a certificate of authorization, contingent on satisfactory receipt of the

2007 Audited Financial Statements, and Security Pacific, SPI-202, SPI-203, and SPI-204

were incorporated in Delaware as special purpose captive insurance companies.

2.      The 2007 Audited Financial Statements are prepared and approved amidst
                                     irregularities

      The allegations relating to the 2007 Audited Financial Statements span 120

paragraphs and over 40 pages of the Complaint. They describe in remarkable detail a

process in which Wilmington Trust and Johnson Lambert, from February to December

2008, struggled to obtain the necessary confirmations to complete the audit. In the

interests of brevity and clarity, I recount the well-pled facts relating only to the most

significant areas of irregularity in this process. The first such area involved confirming

the cash surrender value of a ―key man‖ life insurance policy issued by Hartford Life and

Annuity Insurance Company (―Hartford Life‖) in December 2005, which insured the life

of Jackson for a face value amount of about $23.5 million (the ―Key Man Policy‖). 15

That policy was owned by SPIC-DC, and its purported cash value comprised the bulk of

the assets Security Pacific claimed in its application to the DDOI. The 2005 and 2006

14
      Id. ¶ 89; id. Ex. D [hereinafter the ―2007 Johnson Lambert Engagement Letter‖].
15
      Id. ¶¶ 64, 100, 103.

                                            8
audited financial statements of SPIC-DC, prepared by Johnson Lambert, certified that the

Key Man Policy had a cash value of $628,783 as of December 31, 2006. As discussed

below, the audited financial statements for 2007, 2008, and 2009 continued to ―confirm‖

the policy‘s cash value. In reality, the policy had lapsed in May 2006 and was worthless.

       A second area in which Wilmington Trust and Johnson Lambert encountered

difficulty in producing audited financial statements for the SPI Entities was confirming

the cash and cash equivalents held in the several accounts they maintained at Bank of

America, Wachovia Bank, Wachovia Securities, and Wells Fargo. As with the Key Man

Policy, Johnson Lambert had confirmed the balances in these accounts in connection with

the 2005 and 2006 audits of SPIC-DC.16 By the time the Receiver took control of the SPI

Entities in 2011, however, several of the bank accounts were basically empty, even

though the 2007, 2008, and 2009 audits had ―confirmed‖ that they had held several

million dollars in the aggregate in those years.

                              a.      The Key Man Policy

       The interactions between Jackson, Wilmington Trust, and Johnson Lambert in

connection with the confirmation of the Key Man Policy exemplify the larger pattern of

delay tactics, deception, and otherwise questionable conduct that the Receiver ascribes to

Jackson. In February 2008, Johnson Lambert asked Allan Drost of Wilmington Trust to

obtain from Jackson a full, signed copy of the Key Man Policy. Drost emailed Jackson,

who responded that he would assemble the necessary documents later that same day.

16
       Id. ¶¶ 100-101.

                                              9
Several months passed, however, without any follow-up from Jackson.17 In early June

2008, Drost sent a series of confirmation forms to Jackson for him to sign and submit to

Johnson Lambert. Around the same time, Drost advised Thomas Bolton of Johnson

Lambert that Wilmington Trust intended to send a letter to the DDOI, advising it that the

SPI Entities‘ audited financials were delayed, but would be provided by the end of July.

Bolton agreed that that timeframe was not a problem.18

       On July 23, 2008, Justine Holeman of Johnson Lambert received a letter from

Hartford Life informing Johnson Lambert that, because the confirmation inquiry they had

submitted to Hartford Life was not signed by Jackson, they had forwarded the requested

information to Jackson rather than to Johnson Lambert directly.19 On the same day,

Hartford Life sent Jackson a letter informing him that the Key Man Policy lapsed on May

21, 2006, and ―does not have any value or coverage at this time.‖20 A week later, Colleen

Handy of Johnson Lambert emailed Jackson to ask if there was ―any resolution‖ on the

Key Man Policy confirmation and request that ―someone from your office forward it on

to us,‖ because Hartford Life told Johnson Lambert that they sent it to Jackson.21

17
       Id. ¶¶ 106-108.
18
       Id. ¶¶ 110-114.
19
       Id. ¶¶ 127-128.
20
       Id. ¶ 130.
21
       Id. ¶ 132.

                                            10
       The Receiver alleges that Johnson Lambert knew, or should have known, that it

was a breach of its internal policies and generally accepted auditing standards for it to

seek the requested confirmation from Jackson, instead of directly from Hartford Life.22

In any event, ten weeks went by without Jackson providing Johnson Lambert any

confirmation regarding the Key Man Policy. Handy again emailed Jackson on September

29, 2008. He still did not respond.23

       Unbeknownst to Handy, that same day Jackson faxed another confirmation request

to Hartford Life. By letter dated October 10, 2008, Hartford Life responded, again

informing Jackson that the Key Man Policy was no longer active. The Receiver alleges

that this second request from Jackson was a ruse, and that he sent it simply to obtain the

name and title of a different Hartford Life employee, which he got in the October 10

letter.24 According to the Complaint, Jackson used this information to alter the original

confirmation inquiry form Johnson Lambert had sent to Hartford Life in July 2008.

       On October 24, 2008, nearly eight months after her initial request, Handy of

Johnson Lambert reported to Drost of Wilmington Trust that she had received

confirmation that the Key Man Policy was current and held a cash value of $716,000 as

of December 31, 2007.25 This confirmation was a forgery, allegedly sent via facsimile to

22
       Id. ¶¶ 129, 133.
23
       Id. ¶¶ 167-168.
24
       Id. ¶¶ 184-185.
25
       Id. ¶ 187.

                                           11
Handy from Jackson, who had disguised the transmission as having come from Hartford

Life. The faxed confirmation form stated that the original would be mailed, but no

original ever arrived. Yet, Johnson Lambert never inquired further.26

                        b.     The bank account confirmations

      The alleged irregularities surrounding the SPI Entities‘ bank account

confirmations are even more suspicious than the long-delayed and apparently forged Key

Man Policy confirmation. The bank confirmation process unfolded during the same time

period as that regarding the Key Man Policy, starting in June 2008. As with the Key Man

Policy, Jackson delayed or failed to respond to the initial requests from Wilmington

Trust. In mid-July, Jackson signed request forms that Handy sent to the banks, with the

instruction that the banks should confirm the relevant account balances and return the

original confirmation requests, or ―confirms‖ as they were called, by mail directly to

Johnson Lambert.27

      Six bank account confirms evidently were needed to prepare the 2007 Audited

Financial Statements. In late July and August 2008, as Handy at Johnson Lambert was

receiving the account confirms from the banks, she was having difficulty matching them

up with the account statements that Jackson had given to Wilmington Trust. 28        In

addition, one of the larger accounts, a Wachovia Securities money market account, could

26
      Id. ¶¶ 189-191.
27
      Id. ¶¶ 121-123.
28
      Id. ¶¶ 135-137.

                                           12
not be confirmed because, according to Wachovia, Jackson had not paid the nominal

confirmation processing fee.29 As August drew to a close, Drost emailed Jackson a list of

issues that were preventing Johnson Lambert from completing its audit. The issues

included that: (1) Johnson Lambert needed to contact Jackson‘s person at Wachovia to

expedite the confirms on several of the banking accounts; (2) a Wachovia Securities

account confirm showed a balance that was $300,000 less than the corresponding bank

statement Jackson provided; (3) the confirm for a Wells Fargo money market account

owned by SPI-203 reflected a balance of only $104, while the corresponding statement

submitted by Jackson showed a balance of $2,361,706; (4) another Wells Fargo account

was apparently closed, while Jackson‘s statement showed it open and holding a $10,000

balance; and (5) there were discrepancies with three Bank of America confirms, but the

bank would not discuss them with Johnson Lambert.30 One would think that item (3), at

least, screamed for attention.

       Patrick Theriault of Wilmington Trust emailed Jackson, saying that these issues

were ―puzzling to say the least,‖ and that the ―significant variances . . . do not appear to

make sense.‖31 On September 4, Handy emailed Drost of Wilmington Trust to say that

she still had not received a signed request form from Jackson. Although Jackson told her

that he tried to send it, but it ―got bounced back to him,‖ Handy considered that odd

29
       Id. ¶¶ 138-141.
30
       Id. ¶ 147.
31
       Id. ¶ 145.

                                            13
because Jackson had emailed her that day, and he ―does have the right email address.‖32

Around the same time period, Drost and Theriault told Jackson that these ―logistical

difficulties‖ could be avoided if Wilmington Trust had direct access to the bank accounts.

Jackson allegedly ignored the request, and never took steps to give Wilmington Trust

such access.33

       As the process dragged on, the Wells Fargo, Wachovia Bank, and Wachovia

Securities accounts proved the most difficult for Johnson Lambert to confirm and

reconcile.   In September 2008, Jackson instructed Wilmington Trust and Johnson

Lambert that, instead of going through the audit departments at the banks, they should

speak directly with Jackson‘s contacts—Joe Lobe or his assistant Pamela Goyette at

Wells Fargo, and ―Alpesh‖ or his assistant ―Rachel‖ at Wachovia. 34 The Receiver avers

that an Alpesh Patel was employed during this time by Wachovia Securities, but that the

―Alpesh‖ and ―Rachel‖ to whom Jackson referred were in fact ―accomplices of [Jackson],

if they existed at all.‖35 Jackson apparently never provided the last name of ―Alpesh.‖

Moreover, the Complaint alleges that ―a simple internet search‖ at that time would have

revealed that the phone number Jackson provided for ―Alpesh‖ was not a Wachovia

32
       Id. ¶ 149.
33
       Id. ¶¶ 152-153.
34
       Id. ¶ 156.
35
       Id. ¶ 157.

                                           14
number.36 Instead, it appears that Jackson‘s own J. Mading used that phone number.

Indeed, J. Mading had included it on its website and in other publications.37

       On September 29, 2008, Handy notified Drost that the Wells Fargo and Wachovia

account confirms were ―rec‘d and tied,‖ without any further explanation. The Wachovia

confirms allegedly were provided by ―Rachel,‖ the purported assistant of ―Alpesh.‖38 A

day later, Handy told Drost and Theriault that she had attempted unsuccessfully to call

―Alpesh‖ and Lobe multiple times. In response, Drost asked whether ―the Wachovia

contact [was] a different person for the Wachovia Securities confirm, or is this a contact

for the regular retail banking accounts?‖ He also indicated that they should be ―curious‖

about the Wells Fargo and Wachovia Securities confirmations, because of their ―sudden

resolution.‖39 When Handy confirmed that ―Alpesh‖ was the contact Jackson had given

for both Wachovia Bank and Wachovia Securities, Drost observed that, ―This is a little

odd as Wachovia Securities is on the Trust side of the Wachovia structure,‖ and that in

his experience, ―Most banks . . . have definitive separation . . . between their retail

banking side of the business and the trust (investment) side.‖40 Drost concluded that it

―maybe, and hopefully is, OK,‖ but that he would ―try to contact both of them as well, to

36
       Id. ¶¶ 160, 162.
37
       Id. ¶ 162.
38
       Id. ¶¶ 165-166.
39
       Id. ¶¶ 171-172.
40
       Id. ¶ 174.

                                            15
confirm if there was any specific reasons why suddenly now they are able to satisfy all

the confirmations.‖41

       Nearly a month later, as of late October, Handy still had not heard from either

―Alpesh‖ or Lobe despite having left messages and asked Jackson several times to

instruct them to call her, or to set up a conference call for all of them. The discrepancies

between the statements provided by Jackson and the confirms received from Wachovia—

which allegedly had exceeded $2,000,000—were the only things preventing the 2007

Audited Financial Statements from being completed. Through an email to Jackson, Drost

joined in Handy‘s pleas.      Their efforts persisted through November and most of

December.

       It was not until December 29, 2008, however, that Bolton of Johnson Lambert

received a call from a person identifying himself as ―Alpesh.‖ The caller explained that

the bank confirmation discrepancies purportedly appeared because ―they sold ars [sic]

securities before year end that took a while to clear.‖42 Bolton attempted to verify this

information with Drost, but Drost could not find any trades that might fit Alpesh‘s

description. In a communication to Drost, Bolton stated that he thought ―maybe they

were sold from another account [and] then deposited into this one? At any rate does this

41
       Id. ¶ 175.
42
       Id. ¶ 204.

                                            16
make sense to you? He caught me at a bad time and the reception was not good, so it was

hard to hear him.‖43

          Drost, admitting that he was ―being optimistic,‖ thought that the explanation given

by ―Alpesh‖ potentially could be chalked up to internal errors at the bank, and the lengthy

delays and inconsistencies to the bank wanting to ―save face.‖ In any event, based on the

new documents provided by ―Rachel‖ and ―Alpesh,‖ Drost considered the bank

confirmation to have been completed satisfactorily.         According to the Receiver, in

preparing the final 2007 Audited Financial Statement, Johnson Lambert used the

fraudulent bank account balances from the documents that Jackson provided and

―Alpesh‖ confirmed, rather than the different and significantly lesser amounts reflected in

the written confirmations that it obtained directly from the banks.44 As a result, the 2007

Audited Financial Statement, which was completed at the end of December 2008,

reported that SPIC-DC held about $7.1 million in assets as of December 31, 2007.

     c.     The SPI Entities’ Boards approve the 2007 Audited Financial Statements

          Special meetings of the boards of directors of Security Pacific, SPI-202, SPI-203,

and SPI-204 were held at the Delaware offices of Wilmington Trust on February 3, 2009

(the ―February 2009 Meetings‖). The boards of the SPI Entities were identical; they

consisted of Jackson, James L. Jackson, King, Davis, and Kantner. Drost and Theriault

43
          Id. ¶ 206.
44
          Id. ¶ 209.

                                              17
allegedly attended the February 2009 Meetings in person or by teleconference, and one of

them served as secretary and recorded the meeting minutes.

          Notably, the audited financials were accompanied by a letter addressed to the SPI

Entities‘ boards from Johnson Lambert (the ―Significant Matters Letter‖). 45 The Letter

discussed the significant delay in completing the audit, and noted that six of the seven

bank account confirmations diverged from the relevant account statements by ―significant

amounts ($2,361,602 in one case)‖ and that several follow-up inquiries were needed to

resolve the discrepancies.46 Johnson Lambert also addressed a letter to Jackson, as

President and Chairman of Security Pacific, outlining several recommendations for

improving operations (the ―Jackson Letter‖). The Jackson Letter, which was provided to

the entire Board, indicated that the identified issues were ―not considered to be material

weaknesses.‖47 The minutes allegedly indicate that the directors reviewed the 2007

Audited Financial Statements and approved them with ―no substantive discussions or

debate.‖ 48

     3.        The 2008 Audited Financial Statements are prepared and approved

          Wilmington Trust‘s MSA automatically renewed at the end of 2008, and it

therefore remained the captive manager for the SPI Entities. Johnson Lambert again was

45
          Id. Ex. F [hereinafter ―Significant Matters Letter‖].
46
          Id. ¶ 217.
47
          Id. ¶ 218; id. Ex. G [hereinafter ―Jackson Letter‖].
48
          Id. ¶ 216.

                                                18
retained to serve as the SPI Entities‘ certified public accountant and independent auditor

for the preparation of the audited financial statements for the calendar year ending

December 31, 2008 (the ―2008 Audited Financial Statement‖).49 Wilmington Trust and

Johnson Lambert began the process of preparing that statement early in 2009.

        The Receiver‘s allegations with respect to the 2008 Audited Financial Statement

are substantially similar to those relating to the 2007 Audited Financial Statement. In

particular, the Complaint alleges that Jackson engaged in delay tactics and obfuscation in

his dealings with Wilmington Trust and Johnson Lambert.50 On June 23, 2009, Jackson

allegedly delivered to Johnson Lambert another fraudulent confirmation for the Key Man

Policy, after he had corresponded again with Hartford Life and received a second

indication that the Key Man Policy lapsed in October 2006 and was worthless.51 After

receiving the fraudulent facsimile confirmation of the Key Man Policy from Jackson,

Johnson Lambert never obtained the original or otherwise followed up with Hartford

Life.

49
        Id. ¶¶ 223-224.
50
        Id. ¶¶ 227-238.
51
        Id. ¶¶ 239-253. In this regard, I also note that Johnson Lambert received a letter
        from Hartford Life in June 2009, indicating that Johnson Lambert‘s confirmation
        form could not be processed because it was not signed by the policy owner.
        According to the Receiver, this was another red flag because Johnson Lambert had
        not sent a confirmation form to Hartford Life; rather, it is alleged that Jackson had
        emailed Hartford Life a form that was intended for Handy of Johnson Lambert to
        submit to Hartford Life. Id. ¶¶ 243-244.

                                             19
      Also in June of 2009, Wilmington Trust and Johnson Lambert received allegedly

fraudulent bank account confirmations from Jackson or his accomplice ―Alpesh.‖ Using

that information, Johnson Lambert completed the 2008 Audited Financial Statement. As

of September 2009, however, Johnson Lambert allegedly still was waiting for bank

statements and other items from Jackson so that it could perform the confirmations

needed for the ―subsequent events‖ aspect of the audit.52

      The boards of the SPI Entities held their annual meetings on October 8, 2009, at

Wilmington Trust‘s Delaware office (the ―October 2009 Meetings‖). As of that date, the

composition of the boards had changed. The directors for each of the SPI Entities in

October 2009 consisted of Jackson, Muñoz, King, Davis, and Kantner.            Drost and

Theriault also attended the October 2009 Meetings.53 At those meetings, the boards

approved the 2008 Audited Financial Statement, again with little or no discussion.

      Notably, there is no indication that Johnson Lambert ever followed up on the

Significant Matters Letter or the Jackson Letter. As discussed above, those letters were

provided to the Board in connection with the previous audit. They recommended that the

SPI Entities change their procedures to conduct bank reconciliations on a monthly basis,

and confirm accounts with the banks on a quarterly basis, in light of the ―numerous

differences‖ experienced in the 2007 Audited Financial Statements.54 In a similar vein,

52
      Id. ¶ 269.
53
      Id. ¶¶ 270-272.
54
      Jackson Letter 2.

                                            20
Wilmington Trust had requested during the preparation of the 2007 Audited Financial

Statements to have direct access to the bank accounts. The Complaint suggests that none

of those recommended changes were made in the months between the February 2009

Meetings and the October 2009 Meetings.           Indeed, it appears that neither Johnson

Lambert, nor Wilmington Trust, nor any of the SPI Entities‘ directors inquired at the

October 2009 Meetings as to the status of either of those previously reported deficiencies

or suggested procedural improvements.55 In any event, the recommended changes were

never made.

     4.         The 2009 Audited Financial Statements are prepared and approved

          At the October 2009 Meetings, Jackson notified the SPI Entities‘ boards that he

did not intend to re-engage Johnson Lambert for the companies‘ next audit. Wilmington

Trust‘s contract automatically renewed and in its continuing role as the captive manager,

it assisted in seeking a new accounting and audit firm. Pursuant to an agreement dated

April 23, 2010, McSoley McCoy was engaged to perform the SPI Entities‘ audit for the

year ending December 31, 2009 (the ―2009 Audited Financial Statement‖).56

          In May 2010, Drost forwarded to Nicholae Lungu of McSoley McCoy the bank

and Key Man Policy confirmations used in connection with the prior year‘s audit. In his

email to Lungu, Drost explained that, ―In previous years, all of the Wachovia and

Wachovia Securities confirmations were additionally faxed to a representative there

55
          Compl. ¶¶ 274-279.
56
          Id. ¶ 282; id. Ex. I.

                                             21
named Alpesh, since he was able to make sure these were responded to right away, and

avoided the new $25 audit confirmation response fee that they were initiating.‖57 Drost

copied Jackson on the email and asked him to ―please confirm this person‘s full name,

and his contact information,‖ saying that he only had a phone number for Alpesh‘s

assistant, and was not having ―any success getting through, or even getting an

opportunity to leave a message.‖58

      About two months later, either Jackson or ―Alpesh‖ complied with Drost‘s request

for bank confirmations.       The documents provided, however, were fraudulent

confirmations as to the bank accounts, and yet another forged Key Man Policy

confirmation, which showed the Policy as still effective and having a $700,000 cash

value.59 Like Johnson Lambert, McSoley McCoy never obtained the original policy from

Hartford Life or otherwise communicated directly with them regarding the Key Man

Policy.

      McSoley McCoy completed the 2009 Audited Financial Statements at the end of

July 2010.    As with the 2007 and 2008 Audited Financial Statements, this one

―confirmed‖ that the SPI Entities‘ total capitalization was around $7 million. The SPI

Entities‘ boards again met at Wilmington Trust on December 15, 2010 (the ―2010

Meetings‖). By the time of that meeting, only Jackson, Davis, and Kantner remained as

57
      Id. ¶ 287.
58
      Id.
59
      Id. ¶ 291.

                                          22
directors of the boards of Security Pacific, SPI-202, SPI-203, and SPI-204.60      The

Complaint does not address when, how, or why Muñoz and King left the boards or the

reasons for the director turnover between the February 2009 and October 2009 Meetings.

As with the previous two meetings, Drost and Theriault attended the 2010 Meetings on

behalf of Wilmington Trust. At those Meetings, the boards approved the 2009 Audited

Financial Statement with ―no substantive discussions or debates.‖61

                   5.    Wilmington Trust finally blows the whistle

      In March 2011, for reasons not alleged in the Complaint, Wilmington Trust

decided to inform the DDOI that it had noted certain irregularities or discrepancies

involving Wachovia bank statements provided by Jackson on behalf of the SPI Entities.

On March 15, 2011, Richard Klumpp, President and CEO of Wilmington Trust, sent an

email to the DDOI in which he listed several of the SPI Entities‘ Wachovia accounts and

compared the balances as reported in their recent statement to the Department (based on

figures they had received from Jackson) to those reflected in confirmations they had

received directly from Wachovia.62     Jackson‘s figures portrayed the six accounts as

holding values ranging from $25,000 to $1.7 million, and totaling $4.6 million in the

60
      Id. ¶ 299.
61
      Id. ¶ 302.
62
      Id. Ex. K.

                                           23
aggregate. In reality, those accounts held a few hundred dollars each, except for one

account, which seemed to be closed.63

       On March 25, 2011, the DDOI sought and obtained from this Court a

―Confidential Seizure and Injunction Order‖ pursuant to 18 Del. C. § 5943.             The

Department undertook further investigation, and ultimately obtained the Liquidation

Order on June 15, 2011. In her capacity as Receiver of the SPI Entities in liquidation, the

Commissioner investigated their financial condition. She concluded that ―the assets of

each of these entities is minimal when compared to the assets that were reflected in the

entities‘ audited financial statements and fraudulent bank statements‖ that were provided

by Jackson.64 The Receiver‘s Complaint focuses on certain fraudulent bank statements

Jackson gave to Wilmington Trust around July 2009, but also specifically alleges that

Jackson‘s deception ―both pre-existed and post-dated July of 2009.‖65

                              C.        Procedural History

       As noted above, the Liquidation Action commenced on March 25, 2011. The

Receiver filed this action on January 31, 2014, on behalf of the SPI Entities in

liquidation. Counts 1 through 3 of the Complaint, respectively, accuse Wilmington Trust

of breach of fiduciary duties, breach of contract, and negligence. The same basic charges

are leveled against Johnson Lambert (Counts 4–7) and McSoley McCoy (Counts 8–10).66

63
       Id.
64
       Id. ¶ 311.
65
       Id. ¶¶ 312-316.

                                            24
Count 11 includes a claim for breach of fiduciary duties against directors Jackson, Davis,

King, and Kantner, and against Wilmington Trust.              Finally, Count 12 charges

Wilmington Trust, Johnson Lambert, McSoley McCoy, and Kantner with aiding and

abetting the directors‘ alleged breaches of fiduciary duty.

       James L. Jackson, Muñoz, and Ryan Building Group also were named as

defendants in relation to the claim in Count 11 for breach of fiduciary duties against the

SPI Entities‘ directors. As noted above, Ryan Building Group was dismissed voluntarily.

James L. Jackson and Muñoz sought dismissal of the Complaint as it related to them

under Court of Chancery Rule 12(b)(6). On August 12, 2014, I granted that motion.67

       Currently before me are motions to dismiss filed by Wilmington Trust and

Kantner, Johnson Lambert, and McSoley McCoy.             Wilmington Trust and Kantner‘s

motion was fully briefed and argued September 9, 2014. Because those two Defendants

joined in several of the arguments raised by Johnson Lambert and McSoley McCoy in

support of their motions, I reserved judgment and determined to decide all three motions

66
       As to Johnson Lambert, two separate counts for breach of contract are pled, one
       each for the 2007 and 2008 engagement agreements.
67
Stew. v. Wilm. Trust SP Servs., Inc., C.A. No. 9306-VCP, at 25-26 (Del. Ch.
       Aug. 12, 2014) (TRANSCRIPT). In that ruling, I concluded based on the factual
       allegations in the Complaint that it was not reasonably conceivable that Muñoz or
       James L. Jackson could be found liable on a Caremark theory of director oversight
       liability. In part, I based that conclusion on the fact that the boards had retained
       and received reports from independent auditors, Johnson Lambert and McSoley
       McCoy. Id. at 16-17, 25.

                                             25
together. The separate motions filed by Johnson Lambert and McSoley McCoy were

argued November 20, 2014.68 This Opinion resolves all three of these motions.

                              D.      Parties’ Contentions

       In seeking dismissal, Wilmington Trust, Kantner, Johnson Lambert, and McSoley

McCoy raise a slew of arguments that overlap to a significant degree. All of the Moving

Defendants assert that the Complaint should be dismissed on grounds of in pari delicto.

They also join in arguing that the claims at issue are time-barred.

       Putting aside those common arguments, each Moving Defendant also seeks

dismissal of the various counts in the Complaint against them for failure to state claims

upon which relief could be granted. Johnson Lambert asserts that the breach of fiduciary

duty, negligence, and aiding and abetting claims against it are barred because, among

other reasons, they are precluded by the contractual relationship it has with the SPI

Entities. Johnson Lambert challenges the claim for breach of contract for failure to allege

causation. McSoley McCoy makes similar arguments.

       Wilmington Trust similarly contends that the Receiver cannot recover on her

fiduciary duty and negligence theories because those allegations sound in breach of

contract. It also asserts that the contract claim is defective, because it seeks to impose

68
       The briefing on these motions is voluminous, consisting of three separate briefs in
       both the opening and reply rounds—one each for Wilmington Trust and Kantner,
       Johnson Lambert, and McSoley McCoy. The Receiver filed two answering briefs,
       one in response to Wilmington Trust and Kantner, and one combined response to
       the Auditor Defendants‘ motions. I cite the briefs as, for example, ―Wilm. Trust
       Opening Br.,‖ ―Receiver‘s Answering Br. to Auditor Defs.,‖ and so on.

                                             26
duties that go beyond the terms of the MSA. Wilmington Trust further argues that the

aiding and abetting claim must be dismissed for lack of requisite ―knowing

participation.‖ Kantner seeks dismissal of the indirect aiding and abetting claim against

him on grounds that any conduct of his as a director of an SPI Entity that would rise to

the level of aiding and abetting would, in itself, be a direct breach of fiduciary duty.

Kantner also contends that the claim for breach of fiduciary duty against him should be

dismissed for failure to state a claim.

                                      II.    ANALYSIS

                                     A.     Choice of Law

       As a threshold matter, I conclude that Delaware law governs my analysis of the

pending motions to dismiss. None of the parties strongly contends otherwise,69 but

Johnson Lambert suggests that the applicable law arguably could be that of Delaware,

South Carolina (the location of Johnson Lambert‘s audit team), California (Jackson‘s

principal place of business), or the District of Columbia (the place of incorporation of the

SPI Entities‘ predecessors).70 The Receiver seems to argue that Delaware law should

apply in this situation, but she hedges by suggesting that material issues of fact may exist

as to the correct choice of law.71

69
       Wilm. Trust Opening Br. 31; McSoley McCoy Opening Br. 15 n.1.
70
       Johnson Lambert Opening Br. 30, 33-37.
71
       Receiver‘s Answering Br. to Auditor Defs. 46-47.

                                              27
      The causes of action here include claims sounding in breach of fiduciary duty,

breach of contract, and tort, which are subject to different considerations for purposes of

determining what law applies. Although the parties did not squarely address the question

of choice of law, I consider it necessary to decide that issue, because whether and how I

apply the doctrines of in pari delicto and laches might differ depending on which state‘s

law governs.72 Delaware law applies, however, at a minimum, to the claims for breach of

fiduciary duties, because the SPI Entities are Delaware corporations.73 Thus, each of the

Moving Defendants is defending against at least one claim that will be governed by

Delaware law.74

72
      I am mindful that, depending on the law of the states whose law arguably might
      apply, there may not be a conflict and the choice of law issue would be moot. See
      Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1161 (Del. 2010) (―As we explain
      below, the result would be the same under both Delaware and Dubai law.
      Therefore ‗[a]ccording to conflicts of law principles . . . there is a ‗false conflict,‘
      and the Court should avoid the choice-of-law analysis altogether.‘‖). But it is
      difficult to assess that question on the incomplete briefing record before me. I
      therefore provide the analysis that follows in the interest of completeness and to
      facilitate appellate review.
73
      See VantagePoint Venture P’rs 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del.
      2005) (―It is now well established that only the law of the state of incorporation
      governs and determines issues relating to a corporation‘s internal affairs.‖) (citing
      CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89-93 (1987)).
74
      Counts 1, 4, 8, and 11 plead claims for breaches of fiduciary duty against
      Wilmington Trust, Johnson Lambert, McSoley McCoy, and the SPI Entities‘
      directors (including Kantner).

                                             28
       The internal affairs doctrine, however, does not extend to claims ―where the rights

of third parties external to the corporation are at issue.‖75 Hence, the claims for breach of

contract and negligence against Wilmington Trust and the Auditor Defendants are subject

to the ―most significant relationship test‖ of the Restatement (Second) of Conflicts of

Laws.76 For torts, the relevant factors of that test are: ―(a) the place where the injury

occurred, (b) the place where the conduct causing the injury occurred, (c) the domicil,

residence, nationality, place of incorporation and place of business of the parties, and (d)

the place where the relationship, if any, between the parties is centered.‖77 For breach of

contract claims, the factors differ slightly. They are: ―(a) the place of contracting, (b) the

place of negotiation of the contract, (c) the place of performance, (d) the location of the

subject matter of the contract, and (e) the domicil, residence, nationality, place of

75
       VantagePoint Venture P’rs 1996, 871 A.2d at 1113 n.14.
76
       See Travelers Indem. Co. v. Lake, 594 A.2d 38, 41, 47 (Del. 1991). Although I
       need not reach the issue, I would expect to apply Delaware law to the aiding and
       abetting causes of action here. Wilmington Trust and Kantner assert that aiding
       and abetting liability sounds in tort, and there is support for that proposition. See,
       e.g., In re Rural/Metro Corp. S’holders Litig., 102 A.3d 205, 220 n.1 (Del. Ch.
       2014). Because liability for aiding and abetting a breach of fiduciary duty depends
       in part on the finding of an underlying fiduciary duty and a breach of that duty—
       issues that in this case, under the internal affairs doctrine, would turn on Delaware
       law—it would seem illogical to apply another state‘s law to the ―tort‖ of aiding
       and abetting such a breach, even if the most significant relationship test pointed to
       that result. Cf. In re Am. Int’l Gp., Inc. Consol. Deriv. Litig., 965 A.2d 763, 822
       (Del. Ch. 2009) [hereinafter ―AIG I‖], aff’d sub nom. Teachers’ Ret. Sys. of La. v.
       PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011).
77
       RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 145 (1971).

                                             29
incorporation and place of business of the parties.‖ 78 Under both the tort and contract

analyses, the relevant factors are to be evaluated according to their relative importance

with respect to the particular issue involved.79

       Having considered the relevant factors of the test applicable in both the contract

and tort contexts, I conclude that Delaware law should apply to all of the claims in this

action. Admittedly, several alleged facts slightly favor other states. Those facts include

that: Jackson allegedly lived and operated his business in California during the relevant

time period;80 the SPI Entities‘ predecessors were incorporated in the District of

Columbia;81 Theriault and Drost worked out of Wilmington Trust‘s office in Burlington,

Vermont;82 several of the relevant Johnson Lambert actors, including Bolton and Handy,

worked in the firm‘s South Carolina offices;83 and McSoley McCoy evidently also is

based in Vermont.84 It is not clear from the Complaint precisely where the accounting

and auditing services actually were performed by Johnson Lambert and McSoley McCoy.

At this relatively early stage, I consider it reasonable to infer, however, that it occurred in

78
       Id. § 188.
79
       TrustCo Bank v. Mathews, 2015 WL 295373, at *9 (Del. Ch. Jan. 22, 2015).
80
       Compl. ¶¶ 29, 43-46.
81
       Id. ¶ 42.
82
       Id. ¶ 87.
83
       Id. ¶ 97.
84
       Id. Ex. I.

                                              30
other states. Likewise, it fairly may be inferred that Theriault and Drost performed much

of their captive services management work for Wilmington Trust in Vermont.

       In contrast, many of the pertinent factors identified in the Restatement weigh in

favor of Delaware, and I find that their cumulative effect eclipses that of factors that

weigh in favor of applying California, D.C., South Carolina, or Vermont law. Regarding

the negligence claims, I consider the alleged injury to have occurred in Delaware, where

certain Defendants are alleged to have fraudulently inflated the SPI Entities‘ financial

situation in order to deceive, primarily, the DDOI. As relevant to both the tort and

contract analyses, while some of the Defendants may be incorporated in or reside

elsewhere, all of the SPI Entities, whose legal and equitable claims the Receiver asserts in

liquidation here, are Delaware corporations. Perhaps most persuasively, each of the three

meetings of the SPI Entities‘ boards, upon which the Complaint‘s narrative of

Defendants‘ alleged wrongdoing focuses, took place at Wilmington Trust‘s office in

Delaware. Thus, of the states discussed by the parties, Delaware has the strongest claim

to being ―the place where the relationship, if any, between the parties is centered.‖

       The subject matter of the relevant contracts, i.e., the provision of audit or

management services to Delaware-domiciled captive insurance companies, supports the

same conclusion. Consequently, without even delving into the myriad issues related to

the nature of captive insurance as a highly regulated industry under Delaware law, or the

fact that the Insurance Commissioner has brought this action pursuant to her statutory

authority as the receiver of these companies in liquidation, I conclude that Delaware law

should govern not only the claims that implicate the internal affairs doctrine, but also the

                                             31
breach of contract and negligence claims as well. It is also true, however, that, ―[i]n

applying Delaware law, [this Court may] look, as courts often do, to well-reasoned

precedent from federal courts, courts of our sister states, and our Anglo–American

jurisprudential tradition.‖85 Accordingly, I will not hesitate to do so.

                               B.      Standard of Review

       A motion to dismiss under Rule 12(b)(6) must be denied ―unless the plaintiff

could not recover under any reasonably conceivable set of circumstances susceptible to

proof.‖86 In determining whether the Complaint meets this pleading standard, this Court

will draw all reasonable inferences in favor of Plaintiffs and ―accept all well-pleaded

factual allegations in the Complaint as true.‖87 The Court, however, need not ―accept

conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences

in favor of the non-moving party.‖88

                      C.       Laches Does Not Bar These Claims

       All of the Moving Defendants contend that the Complaint is untimely. 89 They

focus on the three-year statute of limitations applicable to the claims for breach of

contract, negligence, and breach of fiduciary duty, and argue that each of the causes of

85
       In re Am. Int’l Gp., Inc., Consol. Deriv. Litig., 976 A.2d 872, 882 (Del. Ch. 2009)
       [hereinafter ―AIG II‖].
86
       Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
       (Del. 2011).
87
       Id.
88
       Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011).

                                             32
action accrued more than three years before the Receiver filed her Complaint on January

31, 2014.90 The Receiver does not contest that proposition, but contends that the statute

of limitations either should not apply because it would lead to an inequitable result, or did

not begin to run until March 25, 2011, when she was appointed as Receiver.91 Because I

agree with the first of those arguments, I do not address the second.

       To determine whether an action was timely filed, this Court adheres to the doctrine

of laches, the ―equitable analog of the statute of limitations defense.‖92 While the statute

of limitations is not controlling in this Court, a suit in equity generally ―will not be stayed

for laches before, and will be stayed after, the time fixed by the analogous statute of

limitations at law.‖93 Nevertheless, in cases where ―unusual conditions or extraordinary

circumstances make it inequitable to allow the prosecution of a suit after a briefer, or to

forbid its maintenance after a longer period than that fixed by the statute,‖ this Court has

the power to set aside the statutory limitation period and analyze whether the claim was

untimely based on laches principles.94 The Court must consider all the relevant facts in

89
       Wilm. Trust Opening Br. 28-30; Johnson Lambert Opening Br. 24-28; McSoley
       McCoy Opening Br. 21-23.
90
       See 10 Del. C. § 8106; Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC,
       2010 WL 363845, at *6 (Del. Ch. Jan. 27, 2010), aff’d, 7 A.3d 485 (Del. 2010).
91
       Receiver‘s Answering Br. to Wilm. Trust 19-26; Receiver‘s Answering Br. to
       Auditor Defs. 48-56.
92
       TrustCo Bank, 2015 WL 295373, at *5.
93
       IAC/InterActiveCorp v. O’Brien, 26 A.3d 174, 177 (Del. 2011).
94
       Id. at 177-78.

                                              33
this regard, as there is no specific definition of ―unusual or extraordinary

circumstances.‖95

       Based on the circumstances of this case, I am not inclined to mechanically apply

the three-year statute of limitations under the laches rubric. Rather, I must analyze the

timeliness of the Complaint based on the principles of laches more generally. To begin

with, while this action was not filed until January 2014, the Receiver has been ―pursuing‖

these claims at least since March 2011, when the Liquidation Action was commenced and

the SPI Entities were placed into receivership. Notably, in effectuating service of process

of the papers in the Liquidation Action on the SPI Entities, the Commissioner served

Wilmington Trust as their registered agent.96

       Further, from its inception until early 2014, the Liquidation Action involved fairly

extensive litigation activity, including, for example: (1) contested motions concerning

whether and how the Receiver could pay the ongoing administrative and legal expenses

95
       Id. at 178. Factors that guide this analysis include: ―1) whether the plaintiff had
       been pursuing his claim, through litigation or otherwise, before the statute of
       limitations expired; 2) whether the delay in filing suit was attributable to a
       material and unforeseeable change in the parties‘ personal or financial
       circumstances; 3) whether the delay in filing suit was attributable to a legal
       determination in another jurisdiction; 4) the extent to which the defendant was
       aware of, or participated in, any prior proceedings; and 5) whether, at the time this
       litigation was filed, there was a bona fide dispute as to the validity of the claim.‖
       Id.
96
       See In re Liquid. of Sec. Pac. Ins. Co., C.A. No. 6317-VCP, Docket Item (―D.I.‖)
       Nos. 5-8.

                                            34
of the SPI Entities;97 (2) periodic reports as to the financial status of the SPI Entities,

some of which were objected to;98 (3) a petition for the Court to set a bar date for claims

against the SPI Entities;99 and (4) numerous motions and hearings relating to former

Defendant Ryan Building Group‘s claim regarding SPI-202, which ultimately resulted in

a settlement shortly before the trial of that claim.100 Unlike a situation in which a plaintiff

is injured and then merely waits for years to file her action, the circumstances of this case

arguably required the Receiver first to achieve certain successes in the Liquidation Action

before completing her efforts to gather and marshal the facts necessary to plead non-

conclusory allegations on behalf of the SPI Entities. Much of the Receiver‘s activity in

that regard was occasioned by the positions taken by certain parties to this action, most

notably Ryan Building Group.

       Meanwhile, the Receiver engaged in an extensive investigation to uncover the

facts relating to the allegedly fraudulent conduct and related breaches of the Moving

Defendants. As is evident from the face of the Complaint, the Receiver obtained and

reviewed documents from at least some of the Moving Defendants, because the

Complaint quotes extensively from emails and other communications that could not

97
       Id., D.I. Nos. 44, 70; see also In re Liquid. of Sec. Pac. Ins. Co., C.A. No. 6317-
       VCP, at 1 (Del. Ch. May 10, 2012). One of the original Defendants in this action,
       Ryan Building Group, disputed the authority of the Receiver in that regard in the
       Liquidation Action.
98
       E.g., In re Liquid. of Sec. Pac. Ins. Co., C.A. No. 6317-VCP, D.I. Nos. 48-51, 54.
99
       Id., D.I. No. 52.
100
       Id., D.I. Nos. 107, 114, 144, 145, 158.

                                              35
otherwise have been known.101 This circumstance undermines any element of unfair

surprise the Moving Defendants might claim with respect to the timeliness of this action.

Indeed, taking into account all of the facts, I conclude that this case exhibits sufficiently

―unusual or extraordinary‖ circumstances, based on the factors the Delaware Supreme

Court has considered material in determining whether grounds exist for declining to

apply the statutory limitation period.102

       Instead, I find it more appropriate to consider whether laches would apply to bar

these claims. A laches analysis calls for a context-specific application of the maxim that

―equity aids the vigilant, not those who slumber on their rights.‖103 While there is ―no

hard and fast rule as to what constitutes laches,‖ establishing the elements of the defense

generally requires: (1) knowledge by the claimant; (2) unreasonable delay in bringing the

claim; and (3) resulting prejudice to the defendant.104 The defense of laches is ―not

ordinarily well-suited‖ for treatment on a Rule 12(b)(6) motion.‖105 Because there is

neither unreasonable delay on the Receiver‘s part, nor prejudice to the Moving

Defendants, I conclude that laches does not support dismissal of these claims.

101
       E.g., Compl. ¶¶ 171-175, 205-209.
102
       See IAC/InterActiveCorp, 26 A.3d at 178.
103
       Reid v. Spazio, 970 A.2d 176, 183 (Del. 2009) (quoting 2 JOHN NORTON
       POMEROY, EQUITY JURISPRUDENCE §§ 418, 419 (5th ed. 1941)).
104
       Reid, 970 A.2d at 183.
105
       Id.

                                             36
       An ―unreasonable delay‖ for purposes of laches can range from one month to

many years.106 ―The length of the delay is less important than the reasons for it.‖107 In

this case, there are two components of alleged delay. The first is from the time that the

DDOI knew or was on inquiry notice that there might be a problem with the SPI Entities

until the time the Receiver took action to prosecute these claims.           The Moving

Defendants contend that no later than the February 2009 Meetings,108 the SPI Entities‘

directors—and, by extension, the Commissioner—were on notice as to the possibility of

accounting irregularities based on the Significant Matters Letter. They conclude that

because the DDOI was on inquiry notice as of early 2009 at the latest, the filing of the

Complaint in January 2014 was unreasonably delayed.

       I do not consider it appropriate or helpful, however, to look at the period from

early 2009 to early 2014, as one undifferentiated time period. In reality, there are two

distinct periods: (1) from the time the claims accrued in or around 2009 until the

Commissioner placed the SPI Entities into receivership and began the process of stating

claims on their behalf; and (2) from the establishment of the receivership until the filing

106
       IAC/InterActiveCorp, 26 A.3d at 177.
107
       Id.
108
       Defendant McSoley McCoy did not provide audit services until 2010 in
       connection with the 2009 Audited Financial Statements. Because the claims
       against McSoley McCoy arose significantly later than the claims against
       Wilmington Trust and Johnson Lambert, but otherwise also are affected by the
       alleged fraud by Defendant Jackson and wrongdoing by the Moving Defendants,
       referenced infra, I consider it unnecessary to discuss separately McSoley McCoy‘s
       laches defense in this regard.

                                            37
of this action. The Moving Defendants‘ argument regarding inquiry notice relates to the

former period, beginning in early 2009, and not the latter. In view of the allegations in

the Complaint regarding fraud by Defendant Jackson and wrongdoing by the Moving

Defendants in connection with the 2007, 2008, and 2009 Audited Financial Statements, I

find that it is at least reasonably conceivable the Receiver will be able to show that

neither she, as Insurance Commissioner, nor the DDOI engaged in any unreasonable

delay before she was appointed Receiver in March 2011.109

      The second alleged period of delay is from the appointment of the Receiver in

March 2011 until the filing of this action in January 2014. As just discussed, there was a

substantial amount of litigation activity in the related Liquidation Action, and it is

reasonable to infer at this preliminary stage that the Receiver‘s tardiness in filing this

action was caused in large part by that activity. Moreover, as noted, when the Receiver

took control of the SPI Entities in March of 2011, she had to begin unraveling a

complicated web of facts as to how the SPI Entities ended up in the position they were in.

It is reasonable to infer that investigation took a considerable amount of time because of

its factual complexity rather than delay on the part of the Receiver. Based on these

circumstances, the Receiver‘s good faith prosecution of the related Liquidation Action,

the depth and complexity of this factual record, and the specificity and

comprehensiveness of the Complaint she ultimately filed, I am not convinced that the

Receiver‘s alleged delay, although significant, was unreasonable.

109
      In that regard, I note that the DDOI sought appointment of the Receiver less than a
      month after they were advised by Wilmington Trust that there might be a problem.

                                           38
      Additionally, the Moving Defendants suffered little or no prejudice due to the fact

that the Receiver filed her Complaint in January 2014. As noted above, Wilmington

Trust had actual notice from the very outset of the Liquidation Action that the SPI

Entities were entering receivership and that any claims of theirs would be prosecuted by

the Receiver. Based on the positions they occupied vis-à-vis the SPI Entities and the

incomplete information they allegedly had regarding them, I consider it reasonable to

infer that in or around March 2011 Wilmington Trust, Johnson Lambert, and McSoley

McCoy all recognized the possibility of future claims against them as to those entities.

As mentioned above, one or more of those Defendants probably participated in the

Receiver‘s investigation by providing access to documents or other information in their

possession, with which the Complaint is replete. I conclude, therefore, that the Moving

Defendants could not reasonably have been unaware of the possibility of future claims

against them arising out of their dealings with the SPI Entities, and thus were not

materially prejudiced when the Receiver waited until January 2014 to file this action. For

those reasons, I reject the Moving Defendants‘ argument that the Complaint should be

dismissed as untimely, and proceed to consider other aspects of their motions to dismiss.

                   D.      Claims for Breach of Fiduciary Duty110

      Counts 1, 4, and 8 of the Complaint lodge claims for breach of fiduciary duty

against, respectively, Wilmington Trust, Johnson Lambert, and McSoley McCoy. In

110
      As discussed below, the in pari delicto defense is not applicable to well-pled
      claims for breach of fiduciary duty, so I do not address that defense in this section
      of the Opinion. See infra notes 148-53 and related text.

                                           39
Count 11, the Receiver also pleads breach of fiduciary duty as to the SPI Entities‘

directors, and she includes Kantner and Wilmington Trust in that category.111

Wilmington Trust and the Auditor Defendants seek dismissal of these Counts, contending

that they owed no fiduciary duties to the SPI Entities, and that the factual allegations in

this regard are duplicative of the claims for breach of contract. Kantner has moved to

dismiss Count 11 as it relates to him on grounds that the Complaint does not allege facts

sufficient to give rise to a non-exculpated claim for breach of a fiduciary duty.

      1.     The claims against Wilmington Trust and the Auditor Defendants

       As to Wilmington Trust and the Auditor Defendants, I conclude that the claims

against them for breach of fiduciary duty must be dismissed. To state a claim for breach

of a fiduciary duty, the factual allegations in a complaint must be such that they

reasonably could support a finding that a fiduciary duty existed and the defendant

breached that duty.112 Neither Wilmington Trust nor the Auditor Defendants owed a

fiduciary duty to the SPI Entities, however.

       The Receiver emphasizes that the SPI Entities trusted and relied on the Auditor

Defendants‘ specialized experience in auditing generally and with captive insurance

clients specifically. Without those services, the SPI Entities could not have functioned or

been licensed in Delaware, and for that reason the Receiver asserts a fiduciary

111
       Compl. ¶ 371.
112
       See In re Mobilactive Media, LLC, 2013 WL 297950, at *21 (Del. Ch. Jan. 25,
       2013).

                                               40
relationship existed between those entities and the Auditor Defendants.113             Even

accepting those allegations as true and drawing all reasonable inferences in favor of the

Receiver, however, the Complaint fails to allege the existence of a fiduciary relationship

under Delaware law. The core principle of a fiduciary duty is that ―one who controls

property of another may not, without implied or express agreement, intentionally use that

property in a way that benefits the holder of the control to the detriment of the property or

its beneficial owner.‖114 The duties of care and loyalty flow from that ―central aspect‖ of

the fiduciary relationship.115 Inherent in the fiduciary relationship, ―which derives from

the law of trusts,‖ is that the fiduciary exercises control over the property of another, and

by virtue of that control, is obliged to act with care and loyalty to interests of the

beneficial owner.116 In normal circumstances, an auditor‘s interests do not align perfectly

with those of the client; in order properly to discharge its ―watchdog‖ function, the

auditor must ―maintain total independence from the client at all times.‖117

113
       Receiver‘s Answering Br. to Auditor Defs. 64-67.
114
       In re USACafes, L.P. Litig., 600 A.2d 43, 48 (Del. Ch. 1991).
115
       Id. (―There are, of course, other aspects—a fiduciary may not waste property even
       if no self interest is involved and must exercise care even when his heart is pure—
       but the central aspect of the relationship is, undoubtedly, fidelity in the control of
       property for the benefit of another.‖).
116
       Crosse v. BCBSD, Inc., 836 A.2d 492, 495 (Del. 2003); accord USACafes, 600
A.2d at 48-49.
117
       United States v. Arthur Young & Co., 465 U.S. 805, 818 (1984). Many courts that
       have addressed the question have declined to find a fiduciary relationship between
       auditor and client. See, e.g., Franklin Supply Co. v. Tolman, 454 F.2d 1059, 1065
       (9th Cir. 1971); Resolution Trust Corp. v. KPMG Peat Marwick, 844 F. Supp. 431,

                                             41
      Moreover, an auditor normally does not exercise any control over the affairs of the

corporation.   It is not surprising, therefore, that the Complaint is devoid of factual

allegations suggesting that there was some extraordinary circumstance here that would

have caused the Auditor Defendants to do so with respect to the SPI Entities. The mere

provision of audit services does not of itself convert an auditor into a fiduciary of the

corporation. ―Our courts have been cautious when evaluating entreaties to expand the

number and kinds of relationships that are denominated as ‗fiduciary.‘‖118 Consistent

with that approach, I see no basis for finding that the Auditor Defendants had a fiduciary

relationship with the SPI Entities, where the pillars of the fiduciary relationship—control

over the property of another and alignment of the controller‘s interests with those of the

beneficial owner—cannot reasonably be inferred from the well-pled allegations of the

Complaint.

      The situation is no different with Wilmington Trust, despite the Receiver‘s

twofold contention otherwise. First, she argues that, as with the Auditor Defendants,

because Wilmington Trust marketed itself to the SPI Entities as having special expertise

in captive management, and the SPI Entities relied on the management services provided,

      436 (N.D. Ill. 1994); Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531,
      552 (S.D.N.Y. 1990). The Receiver has not cited any case that reached the
      opposite conclusion.
118
      Bird’s Const. v. Milton Equestrian Ctr., 2001 WL 1528956, at *4 (Del. Ch. Nov.
      16, 2001).

                                            42
a fiduciary relationship existed that included duties of care and loyalty. 119 The Complaint

alleges that Wilmington Trust provided substantial administrative and ministerial

assistance relating to the day-to-day operation of the SPI Entities, especially in terms of

their compliance and regulatory obligations. Control of the SPI Entities, however, was in

the hands of their officers and boards of directors, who were charged, for example, with

causing the SPI Entities to contract with Wilmington Trust for the provision of captive

management services, and with reviewing and approving the financial statements that

were produced with the assistance of Wilmington Trust.              Notwithstanding how

fraudulently those managers allegedly acted, the SPI Entities were managed by

sophisticated business persons. That factual reality negates the kind of control and

interest-alignment between Wilmington Trust and the SPI Entities that our case law

requires for the existence of a fiduciary relationship.     Instead, the SPI Entities and

Wilmington Trust had a contractual relationship, defined by the MSA.

       The Receiver‘s second argument as to Wilmington Trust—that it was a ―de facto

director‖ of the SPI Entities—is similarly unpersuasive.120       The cases cited by the

Receiver in which courts have applied that theory have involved claims under the federal

securities and antitrust laws. She offered no support for the proposition that, under

Delaware common law, this Court should consider a third-party business entity as a ―de

119
       Receiver‘s Answering Br. to Wilm. Trust 28-30.
120
       Receiver‘s Answering Br. to Wilm. Trust 30-32.

                                            43
facto director‖ because its employee sat on the board of the client corporation.121 The

board of directors of a corporation organized under the Delaware General Corporation

Law (―DGCL‖) ―shall consist of 1 or more members, each of whom shall be a natural

person.‖122 In the absence of any case law or persuasive logic supporting the Receiver‘s

position, I reject the notion that a corporate employer of an employee designated to serve

as a director of another company could be deemed a de facto director of that other

company.

                            2.    The claims against Kantner

      The only remaining Moving Defendant, Kantner, clearly owed fiduciary duties of

care and loyalty to the SPI Entities, because he was a director of each of those entities

during the relevant time period.123 Kantner seeks dismissal of the breach of fiduciary

duty claim in Count 11 as it relates to him on grounds of exculpation. He argues that

each of the SPI Entities‘ charters contains an exculpation provision consistent with 8 Del.
C. § 102(b)(7), and the Complaint fails to allege bad faith or any other form of

121
      Id. (citing Blau v. Leman, 368 U.S. 403 (1962); U.S. v. Cleveland Trust Co., 392
F. Supp. 699 (N.D. Ohio 1974)). In discussing the Receiver‘s use of the term ―de
      facto director‖ here, I do not intend any reference to, or to engender any confusion
      with, the cases in which ―de facto director‖ means ―one who is in possession of
      and exercising the powers of that office under claim and color of an election,
      although he is not a director De jure and may be removed by proper proceedings.‖
      Prickett v. Am. Steel & Pump Corp., 253 A.2d 86, 88 (Del. Ch. 1969) (emphasis
      added); see also Hockessin Cmty. Ctr., Inc. v. Swift, 59 A.3d 437, 459-60 (Del. Ch.
      2012). The theory the Receiver advances in this regard has nothing to do with the
      line of cases dealing with disputed elections and contested board seats.
122
      8 Del. C. § 141(b).
123
      See, e.g., Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009).

                                            44
unexculpated conduct on his part. Kantner further contends that, as a director, he was

entitled to rely on the Auditor Defendants and Wilmington Trust, and is therefore

protected from liability under Section 141(e).124 Because neither of those contentions is

conclusive at this preliminary stage, I deny Kantner‘s motion to dismiss Count 11.

       The crux of the Complaint‘s allegations against Kantner relate to a claim for

failure of oversight, on a Caremark theory of liability.125 Directors can be liable on

Caremark grounds for: (1) utterly failing to implement any reporting or information

system or controls; or (2) consciously failing to monitor or oversee such a system,

thereby disabling themselves from being informed of risks or problems requiring their

attention.126 In either situation, oversight liability requires ―a showing that the directors

knew that they were not discharging their fiduciary obligations,‖ resulting in a breach of

the duty of loyalty for failure to act in good faith.127       Proving liability under the

Caremark line of cases ―is possibly the most difficult theory in corporation law upon

which a plaintiff might hope to win a judgment.‖128

       The Complaint contains sufficient non-conclusory factual allegations for it to be

reasonably conceivable that Kantner ultimately may be liable on this theory. Kantner‘s

124
       Wilm. Trust Opening Br. 34-39; Wilm. Trust Reply Br. 31-33.
125
       Receiver‘s Answering Br. to Wilm. Trust 48-60; see In re Caremark Int’l Inc.
       Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
126
       Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006).
127
       Id.
128
       In re Caremark, 698 A.2d at 967.

                                             45
tenure as a director of the SPI Entities covered each of the February 2009 Meetings, the

October 2009 Meetings, and the 2010 Meetings, at which the entities‘ boards approved

the audited financial statements with little or no substantive discussion, despite warnings

that significant irregularities occurred and the companies‘ procedures needed to be

changed. In terms of oversight, I note first that, based on the allegations in the Complaint

regarding those events, I do not consider it reasonably conceivable that Kantner could be

liable on grounds that he utterly failed to implement a monitoring or reporting system for

the SPI Entities. The boards of the SPI Entities authorized the retention of Wilmington

Trust and the Auditor Defendants to provide such a monitoring mechanism.

       Whether I reasonably can infer from the Complaint that Kantner consciously

disregarded a known duty to oversee that monitoring system depends on how I view the

Significant Matters Letter, in which Johnson Lambert indicated to the boards that

Johnson Lambert met with considerable difficulty in preparing the 2007 Audited

Financial Statements, including several extraordinary balance discrepancies in the SPI

Entities‘ accounts. The Receiver urges me to conclude that the Letter included ―red

flags‖ and that the directors‘ failure to follow up on those concerns reasonably could

amount to a conscious disregard of their oversight responsibilities. Kantner, on the other

hand, contends that, because the Significant Matters Letter implied that remedial actions

had been taken and the Jackson Letter suggested that the problems were ―not considered

material,‖ he and the other directors were justified in relying on the Auditor Defendants‘

representations and not inquiring further into the issues.

                                             46
       That argument might hold water as to some of the directors, but it reasonably

could be inferred from the allegations in the Complaint that Kantner, as an employee of

Wilmington Trust, actually knew or constructively knew more about the seriousness of

the problems Wilmington Trust and the Auditor Defendants were having with Jackson.

The Complaint is replete with allegations that Drost, Theriault, and others at Wilmington

Trust had actual notice of the fact that something material was amiss with Jackson and

his purported financial information.      Their extensive dealings with the mysterious

―Alpesh‖ are just one example of Wilmington Trust‘s awareness of Jackson‘s highly

unorthodox business practices. The picture that emerges from the facts alleged is that

Jackson‘s conduct did not pass the sniff test. Nevertheless, Wilmington Trust and the

Auditor Defendants allegedly held their noses and looked the other way in order to get

the audits finished, file the paperwork, collect their fees, and move on.

       The Complaint further supports an inference that Drost, Theriault, or some other

person at Wilmington Trust, consistent with Wilmington Trust‘s internal policies or

common sense business practices, shared their misgivings with Kantner. The Complaint

conceivably also could support the opposite inference—that that information never made

its way to Kantner, because, for example, Drost and Theriault worked in Wilmington

Trust‘s Vermont office, while he was in Delaware. I cannot say, however, that such a

contrary inference is the only reasonable inference that could be supported by the

Receiver‘s allegations. At the motion to dismiss stage, it would be improper to make that

leap, as Kantner urges me to do. I therefore conclude that, regardless of whether the

Significant Matters Letter and the Jackson Letter would have misled one or more

                                             47
directors into thinking that all was well at the SPI Entities, Kantner was positioned

differently than the others by virtue of his position as Accounting Manager at

Wilmington Trust and its designated director on the SPI Entities‘ boards.129

       The Complaint contains numerous allegations about Kantner‘s colleagues‘

repeated, and largely unsuccessful, attempts to get Jackson to provide information, or

sign a form, or set up a call with the elusive ―Alpesh,‖ or provide direct access to the

bank accounts. A reasonable inference can be drawn from the Complaint—and at this

stage, I am required to draw such inferences—that Kantner was made aware of these

problems through communications with Drost or Theriault, discussions made all the more

likely because of Kantner‘s position as the statutorily required ―resident director‖ on the

SPI Entities‘ boards. Yet, Jackson apparently went about his fraudulent scheme year

after year, while the Board unquestioningly approved the annual audited financial

statements and failed to follow up on the suggested operating procedure improvements.

Kantner allegedly went along without raising a peep. In their reliance on Jackson,

Wilmington Trust, the Auditor Defendants, Kantner, and the other directors may have

129
       See 18 Del. C. § 6906(f) (―In the case of a captive insurance company . . .
       [f]ormed as a corporation, at least 1 of the members of the board of directors or
       other governing body shall be a resident of, or have that member‘s principal place
       of business in, this State . . .‖); id. § 6903(b) (requiring a Delaware captive
       insurance company, inter alia, to maintain its principal place of business in this
       State, and hold at least one board meeting per year here); see also Compl. ¶¶ 7, 74.

                                            48
been overly supine.130       Taking all allegations in the Complaint as true, however,

Kantner‘s disengagement conceivably could amount to a conscious disregard of his

duties based on what he reasonably may be assumed to have known about the SPI

Entities‘ deficiencies.     As a result, I consider it reasonably conceivable that Kantner

knowingly disregarded his oversight responsibility, and thereby subjected himself to

potential liability on a Caremark claim. Thus, I deny his motion to dismiss that aspect of

the Complaint.

      E.       Claims for Breach of Contract, Negligence, and Aiding and Abetting

           Unlike claims for a breach of fiduciary duty, claims for breach of contract,

negligence, and aiding and abetting arguably may be subject to the defense of in pari

delicto. In this section of the Opinion, I take up the Moving Defendants‘ contention that

in pari delicto bars those claims as a matter of law. After reviewing the in pari delicto

doctrine under Delaware law and concluding that it may provide a bar, I examine whether

any of the exceptions to that doctrine could apply here and enable the relevant claims to

go forward.

                                     1.      In pari delicto

                                a.        Basics of the doctrine

           In pari delicto is an affirmative defense by which ―‗a party is barred from

recovering damages if his losses are substantially caused by activities the law forbade

130
           I express no opinion as to the potential Caremark liability of any of the SPI
           Entities‘ directors other than Kantner, because only Kantner is before me on the
           pending motions to dismiss.

                                                49
him to engage in.‘‖131 The doctrine provides that rather than adjudicating a suit by one

wrongdoer against her counterpart, courts will ―‗leave them where their own acts have

placed them.‘‖132 In pari delicto serves at least two important policy goals: deterring

wrongful conduct by refusing wrongdoers any legal or equitable relief, and protecting the

judicial system from having to use its resources to provide an accounting among

wrongdoers.133 Thus, courts have recognized that the rule ―‗is adopted, not for the benefit

of either party and not to punish either of them, but for the benefit of the public.‘‖134

Like most American jurisdictions, Delaware embraces this venerable doctrine.135

       Although the literal translation is ―in equal fault,‖ courts have eschewed a strict

requirement that the party asserting the defense demonstrate that the degree of his fault is

the same as or less than that of the party against whom he asserts it. The rule therefore

has been held to apply ―to situations more closely analogous to those encompassed by the

‗unclean hands‘ doctrine, where the plaintiff has participated ‗in some of the same sort of

131
       AIG II, 976 A.2d at 883 (quoting In re LJM2 Co–Inv., L.P., 866 A.2d 762, 775
       (Del. Ch. 2004)).
132
       Id. at 882 (quoting AM. JUR. 2d Actions § 40).
133
       Id. at 882 n.21; see also, e.g., Bateman Eichler, Hill Richards, Inc. v. Berner, 472
U.S. 299, 306 (1985); Stone v. Freeman, 82 N.E.2d 571, 572 (N.Y. 1948) (―[N]o
       court should be required to serve as paymaster of the wages of crime, or referee
       between thieves.‖)
134
       AIG II, 976 A.2d at 882 n.21 (quoting Lewis v. Davis, 199 S.W.2d 146, 151 (Tex.
       1947)); see also 3 POMEROY, supra note 103, § 940 n.5.
135
       AIG II, 976 A.2d at 882.

                                            50
wrongdoing‘ as the defendant.‖136 For that reason, in pari delicto may be raised against a

plaintiff wrongdoer even if that plaintiff ―was led into a path of crime by one more

culpable.‖137   Moreover, because the main purpose of in pari delicto would be

undermined by fact intensive proceedings comparing the culpability of the wrongdoers,

the defense may be raised successfully on a motion to dismiss, unless the complaint is

devoid of grounds for invoking the rule.138

       As relevant here, in pari delicto applies to bar claims between wrongdoers

regardless of whether the plaintiff wrongdoer is a natural person or a corporation. A

basic tenet of corporate law, derived from principles of agency law, is that the knowledge

and actions of the corporation‘s officers and directors, acting within the scope of their

136
       Pinter v. Dahl, 486 U.S. 622, 632 (1988). In this regard, I note that the full
       rendition of the legal maxim, in pari delicto potior est conditio defendentis, has
       been translated as, ―In a case of equal or mutual fault, the position of the
       defending party is the better one.‖ Berner, 472 U.S. at 306. It is the mutuality of
       fault that gives the doctrine its logical force; if emphasis were to be placed on the
       equality or relative degree of fault, the court probably would have to find facts and
       engage in a balancing analysis that would defeat the purpose of having the rule in
       the first place. See AIG II, 976 A.2d at 883-34. ―‗[H]ypertechnical interpretation
       of the in pari delicto doctrine is outdated‘ as ‗it is not necessary that [the]
       wrongdoing of plaintiff and defendant be clearly mutual, simultaneous, and
       relatively equal.‘‖ In re Oakwood Homes Corp., 389 B.R. 357, 371-72 (D. Del.
       2008) (quoting Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1090 (2d Cir.
       1997)), aff’d, 356 F. App‘x 622 (3d Cir. 2009)).
137
       1 AM. JUR. 2D Actions § 40; see also Kirschner v. KPMG LLP, 938 N.E.2d 941,
       950 (N.Y. 2010).
138
       See, e.g., AIG II, 976 A.2d at 878; Oakwood Homes Corp., 389 B.R. at 372.

                                              51
authority, are imputed to the corporation itself.139 Delaware law adheres to this general

rule of imputation—of holding a corporation liable for the acts and knowledge of its

agents—even when the agent acts fraudulently or causes injury to third persons through

illegal conduct.140 Though at superficial level it may appear harsh to hold an ―innocent‖

corporation (and, ultimately, its stockholders) to answer for the bad acts of its agents,

such ―corporate liability is essential to the continued tolerance of the corporate form, as

any other result would lack integrity.‖141 These considerations are central to the in pari

delicto doctrine: the practice of imputing officers‘ and directors‘ knowledge to the

corporation means that, as a general rule, when those actors engage in wrongdoing, the

corporation itself is a wrongdoer.142 As such, the company generally is barred from

stating a legal or equitable claim against a third party that participated in the scheme of

wrongdoing.

                             b.      Exceptions to the rule

       A principal, however, is not presumed to have knowledge of or be liable for the

actions of an agent that abandons the principal‘s interests.143 Likewise, corporations have

139
       See, e.g., Teachers’ Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 671 n.23 (Del. Ch.
       2006); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del.
       Ch. Aug. 26, 2005).
140
       See In re Brandywine Volkswagen, Ltd., 306 A.2d 24, 27 (Del. Super.), aff’d sub
       nom. Brandywine Volkswagen, Ltd. v. State Dep’t of Cmty. Affairs & Econ. Dev.,
       312 A.2d 632 (Del. 1973).
141
       AIG II, 976 A.2d at 893.
142
       Id. at 883-84.

                                            52
not been held to the general rule of in pari delicto ―when the corporate agent responsible

for the wrongdoing was acting solely to advance his own personal financial interest,

rather than that of the corporation itself.‖144 This departure from the general rule of

imputation, known as the ―adverse interest exception,‖ is one of three major ways that

courts adhering to the traditional in pari delicto rule have avoided application of the

doctrine in a specific context.

       The adverse interest exception, if applied correctly, should cover only the

―unusual‖ case in which the allegations support a reasonable inference of ―the type of

total abandonment of the corporation‘s interests‖ that is characteristic of, for example,

outright stealing from the corporation.145 Because most instances of fraud or illegal

misconduct by corporate actors confer at least some benefit on the corporation, the

adverse interest exception may not apply even when the ―benefit‖ enjoyed by the

corporation is outweighed by the long-term damage that is done when the agent‘s

mischief comes to light.146 Nevertheless, where agents act purely in pursuit of their own

interest to the detriment of the principal to whom they owe fiduciary duties, the societal

interest in deterring such action is strong enough that the policies underlying the in pari

143
       Id. at 891 n.50.
144
       Id. at 891 (emphasis added).
145
       Id. at 891 (citing In re CBI Hldg. Co., 529 F.3d 432, 453 (2d Cir. 2008)).
146
       AIG II, 976 A.2d at 892.

                                            53
delicto doctrine give way and the acts and knowledge of the faithless agent are not

imputed to the corporation.

       Deciding when a countervailing public policy should trump the policies animating

in pari delicto often proves difficult. The in pari delicto doctrine has manifest appeal in

the classic case of, for example, a thief who is injured in commission of a crime; it would

be absurd to allow him to sue a co-felon who stole the injured thief‘s share of the loot, or

the burglarized homeowner whose negligent maintenance caused a slip-and-fall.147 When

the rule is invoked against a corporation attempting to sue a party that previously joined

in or facilitated its wrongdoing, however, the policy rationale of the case can be less

clear-cut.   A prototypical instance involves ―innocent‖ stockholders bringing suit

derivatively on behalf of the corporation to recoup some of the losses caused by the

fraudulent actions of its officers and directors, who may well have been removed from

the company already. While equitable considerations may not come into play in the case

of the plaintiff thief, they might in the case of the corporation-as-derivative-plaintiff—or,

as relevant here, the receiver of entities driven to insolvency by faithless fiduciaries—

because innocent stockholders or creditors may gain or lose depending on the way the

doctrine is applied.

       That specific concern animates a second carve-out from in pari delicto: the

fiduciary duty exception. Under that exception, perhaps the most expansive, the doctrine

147
       Cf. Kirschner, 938 N.E.2d at 950.

                                             54
has no force in a suit by a corporation against its own fiduciaries.148 Although various

rationales have been advanced as supporting this exception,149 the underlying justification

is that parties like receivers, trustees, and stockholder derivative plaintiffs must be able to

act on the corporation‘s behalf to hold faithless directors and officers accountable. ―To

hold otherwise would be to let fiduciaries immunize themselves through their own

wrongful, disloyal acts,‖150 a ―transparently silly‖ result.151 The fiduciary duty exception

to the in pari delicto doctrine ensures that stockholders (and, in cases of insolvent

entities, creditors) have a remedy for the wrongdoing that caused them harm. That

consideration is paramount in a court of equity, such as this Court, which ―will suffer no

wrong without a remedy.‖152 The existence of the fiduciary duty exception, therefore, re-

frames the fundamental inquiry involved in deciding whether to apply in pari delicto or

148
       AIG II, 976 A.2d at 876, 889-95.
149
       Id. at 889-90; see also In re HealthSouth Corp. S’holders Litig., 845 A.2d 1096,
       1107 (Del. Ch. 2003), aff’d, 847 A.2d 1121 (Del. 2004).
150
       AIG II, 976 A.2d at 876.
151
       HealthSouth Corp., 845 A.2d at 1107.
152
       2 POMEROY, supra note 103, § 363. This maxim ―is the source of the entire
       equitable jurisdiction, exclusive, concurrent, and auxiliary.‖ Id. at § 423. The
       doctrine of in pari delicto, of course, implicates another of our first principles—
       that ―he who comes into equity must come with clean hands.‖ Id. at §§ 363, 397.
       Cf. Seacord v. Seacord, 33 Del. 485, 139 A. 80, 81 (Del. Super. 1927) (discussing
       ―the rule of pari delicto or the equitable maxim, ‗He who comes into court must
       come with clean hands‘‖).

                                              55
set it aside: the issue is ―not whether stockholders can seek relief on the corporation‘s

behalf, but from whom stockholders can seek that relief.‖153

       A similar rationale underlies a third category of cases in which courts have

avoided in pari delicto, even where by its terms it would apply: i.e., the exception that

applies ―when another public policy is perceived to trump the policy basis for the

doctrine itself.‖154 Cases falling under this seemingly diffuse ―public policy exception‖

are united by fact patterns involving statutory schemes like the federal securities laws that

rely in significant part on private causes of action for their enforcement. 155 In such

instances where the claim at issue directly furthers an established policy, courts may

defer to that policy by setting in pari delicto aside and allowing the action to go forward.

       c.      AIG I and AIG II—the leading Delaware cases on in pari delicto

       Because it is the central authority on which the parties rely for their statement of

the in pari delicto doctrine in Delaware, and because it is perhaps easiest to envision the

doctrine‘s application by way of example, I review briefly this Court‘s decisions in In re

153
       AIG II, 976 A.2d at 889.
154
       Id. at 888.
155
       See Perma Life Mufflers, Inc. v. Int’l Parts Corp., 392 U.S. 134, 136 (1968)
       (reversing lower federal court rulings that ―seemed to threaten the effectiveness of
       the private action as a vital means for enforcing the antitrust policy of the United
       States‖); see also Pinter, 486 U.S. at 633 (stating that, in the context of the federal
       securities laws, courts must ensure that ―judge-made law‖ like in pari delicto
       ―does not undermine the congressional policy favoring private suits as an
       important mode of enforcing federal securities statutes‖); Berner, 472 U.S. at 315.

                                             56
American International Group, Inc. Consolidated Derivative Litigation.156 That action

arose out of a wide-ranging array of financial misconduct by several high-level officers

and directors of American International Group, Inc. (―AIG‖). In particular, it was alleged

that AIG‘s Chairman and CEO, Maurice R. Greenberg, and several of his top lieutenants

orchestrated a series of transactions designed to inflate AIG‘s perceived financial

strength, engaged in illegal schemes to avoid taxes, sold illegal financial products to other

companies, and conspired with competitors to rig certain insurance markets.157 When the

various schemes were discovered, AIG had to restate years‘ worth of its financials, which

ultimately resulted in a reduction of the stockholders‘ equity of $3.5 billion.

Additionally, the company was forced to pay nearly $2 billion to resolve various criminal

and civil proceedings lodged against it.158

       Certain stockholders, derivatively on AIG‘s behalf, brought a litany of claims

against various defendants.159 Greenberg, his inner circle of corporate officers, and

multiple directors and employees of AIG were sued for, among other things, breaches of

fiduciary duty. The derivative complaint also leveled claims for fraud, conspiracy, and

156
       AIG I, 965 A.2d 763; AIG II, 976 A.2d 872.
157
       See AIG I, 965 A.2d at 782-94.
158
       Id. at 793-94.
159
       Id. at 775-76. Consistent with the decision of a special litigation committee of the
       AIG board, AIG itself also became a plaintiff in the litigation to pursue direct
       claims for breach of fiduciary duty against Greenberg and another officer. See id.
       Unless otherwise noted, all claims discussed in this section pertain to the
       derivative aspects of the AIG I and AIG II decisions.

                                              57
aiding and abetting against General Re Corporation (―Gen Re‖), with which AIG had

engaged in several illegal transactions designed to misrepresent the strength of AIG‘s

insurance reserves.160 In connection with AIG‘s scheme to rig bids in an insurance

brokerage market, the derivative complaint further included counts for fraud and

conspiracy against Marsh & McLennan Companies, Inc. (―Marsh‖), ACE Limited

(―ACE‖), and an ACE executive; Marsh additionally was sued for aiding and abetting a

breach of fiduciary duty and for unjust enrichment.161 Finally, the derivative plaintiffs

sued PricewaterhouseCoopers LLP (―PwC‖), AIG‘s independent auditor, for breach of

contract and malpractice, on the theory that they wrongly had certified AIG‘s financial

statements as accurate and GAAP-compliant, when they ultimately had to be restated by

billions of dollars.162

       In AIG I, Chief Justice Strine, then writing as Vice Chancellor, addressed motions

to dismiss filed by the AIG defendants—Greenberg and his inner circle, and several

former and current AIG employees—and PwC.163           The Court dismissed the claims

against the employee defendants on personal jurisdiction grounds, but largely refused to

dismiss the claims against Greenberg and his top lieutenants.164 Although it was not

160
       AIG II, 976 A.2d at 879.
161
       Id. at 880-81.
162
       AIG I, 965 A.2d at 776.
163
       Id.
164
       Id. at 795-815.

                                           58
discussed in AIG I, a necessary predicate of that aspect of the opinion was the fact that, as

corporate officers and directors who owed fiduciary duties to AIG and its stockholders,

none of those defendants were able to invoke the in pari delicto defense.165

       More pertinent to this Opinion, however, was the treatment in AIG I of PwC‘s

motion to dismiss.      In that regard, the complaint asserted that PwC committed

malpractice and breached its contract with AIG by failing to discover widespread fraud

that occurred at the upper levels of AIG management, and that AIG suffered greater

losses than it would have if PwC‘s auditing had conformed to generally accepted auditing

standards (―GAAS‖). PwC invoked the defense of in pari delicto, arguing that AIG was

a wrongdoer in that situation, and because the claim was AIG‘s—even if pursued

derivatively on its behalf by various stockholders—the company was barred from stating

a claim against a fellow wrongdoer under the law of New York, which PwC claimed

governed. The choice of law issue was addressed first. Relying on the most significant

relationship test, the Court agreed that New York law governed AIG‘s claims against

PwC.166

       After reviewing the applicable New York precedent relating to in pari delicto, the

Court concluded that, if it were to apply the in pari delicto doctrine as the New York

Court of Appeals likely would, AIG‘s derivative claims against PwC would be barred by

the rule of imputation. It also determined that the narrow adverse interest exception

165
       AIG II, 976 A.2d at 876.
166
       AIG I, 965 A.2d at 818-22.

                                             59
could not be invoked because the complaint suggested that the alleged wrongdoing of

Greenberg and other AIG officials had not been committed solely for the benefit of the

insiders themselves.167 AIG itself had benefitted from the financial machinations of the

insiders‘ fraud, even if those benefits turned out to be short-lived once the misconduct

came to light.168   Thus, in pari delicto applied, and the claims against PwC were

dismissed.

      In reaching that decision, then-Vice Chancellor Strine expressed discomfort with

the result of New York‘s rule, and two aspects of his obiter dictum comments in that

regard are particularly relevant to this case. First, he indicated that, if PwC had been

accused of aiding and abetting a breach of fiduciary duty, his choice of law determination

might have been different.169 Because of Delaware‘s ―paramount‖ interest in policing

alleged breaches of fiduciary duties within Delaware corporations, he posited that the

gravity of a claim for aiding and abetting such a breach potentially could trump another

state‘s interest in adjudicating issues of professional misconduct according to its own

laws.170 Second, then-Vice Chancellor Strine stated that, even as to AIG‘s breach of

contract and malpractice claims against PwC, if Delaware law were applicable, he

167
      Id. at 823-30.
168
      Id.
169
      Id. at 822.
170
      Id.

                                           60
―would be chary about following the New York approach.‖171 In so doing, he questioned

some of the assumptions that appeared to underlie the rationale of New York‘s in pari

delicto doctrine as it presumably would apply to corporate advisors like PwC.

       Two further aspects of the AIG litigation are noteworthy here. After this Court‘s

decision in AIG I, the Delaware Supreme Court certified to the New York Court of

Appeals (the ―New York Court‖) the issue of whether, under New York law, the in pari

delicto defense was effective to bar AIG‘s derivative claims against PwC.172             In

Kirschner v. KPMG LLP, the New York Court answered that question and a closely

related one arising out of an action in the federal courts of the Second Circuit.173 As to

both questions, the Court upheld New York‘s strict in pari delicto rule by refusing to

adopt a contrary position advocated by the stockholder derivative plaintiffs in AIG I and

the analogous position of a litigation trustee in a bankruptcy action. In so ruling, the New

York Court explicitly declined ―to alter our precedent relating to in pari delicto, and

imputation and the adverse interest exception, as we would have to do to bring about the

expansion of third-party liability sought by plaintiffs here.‖174

       Finally, in AIG II, the Court of Chancery addressed motions to dismiss brought by

Gen Re, Marsh, and ACE. As discussed above, those defendants were subject to claims

171
       Id. at 828 n.246.
172
       Teachers’ Ret. Sys. of La. v. PricewaterhouseCoopers, LLP, 998 A.2d 280 (Del.
       2010).
173
       938 N.E.2d 941, 945 (N.Y. 2010).
174
       Id.

                                              61
on behalf of AIG for fraud, conspiracy, and aiding and abetting breaches of fiduciary

duty. Notably, in ruling on the motions to dismiss, then-Vice Chancellor Strine applied

Delaware law. He concluded that Delaware‘s in pari delicto defense applied to bar AIG

from stating claims against any of those three alleged co-conspirators.175 In reaching that

decision, the Court rejected two arguments that the derivative plaintiffs advanced to

avoid the in pari delicto doctrine. First, as a factual matter, the Court ruled that the

allegations in the complaint reasonably could support an inference that AIG was ―in

equal fault‖ with the co-conspirators as to the alleged fraudulent transactions.176

       Second, the Court held that, as a matter of Delaware law, there was no policy

justification for setting aside the in pari delicto doctrine to allow a corporation guilty of

wrongdoing to sue its alleged co-conspirators.177 In this regard, it found unpersuasive the

derivative plaintiffs‘ argument that because the stockholders themselves had done

nothing wrong, it would be unjust to prevent them from recouping some of their losses.

The Court observed that accepting that line of reasoning ―would eviscerate the in pari

delicto doctrine and contravene the policy judgments upon which that doctrine rests.‖178

       The Court noted that the AIG stockholders already had the benefit of the major

exception to the in pari delicto rule: the ability to sue corporate insiders, such as directors

175
       Id. at 882, 895.
176
       Id. at 885-88.
177
       Id. at 888.
178
       Id. at 889.

                                              62
and officers whose actions precipitated the claimed losses, on behalf of the company.

―The issue,‖ it stated, ―is therefore not whether stockholders can seek relief on the

corporation‘s behalf, but from whom stockholders can seek that relief.‖179 Allowing

stockholders to expand this exception, however, by suing parties ―outside of the borders

of their corporation would not be socially useful.‖180 The important policy considerations

animating the in pari delicto doctrine—principally, sparing the court from wasting its

resources to provide an accounting among wrongdoers—would be severely undermined

by allowing the kind of claims brought by the derivative plaintiffs to go forward. As for

the purported benefits of setting aside the rule, the Court observed that companies like

Gen Re, Marsh, and ACE needed little added incentive to follow the law, based on ―the

potent public enforcement that exists as to many important laws that regulate‖ such

businesses.181

             2.   The question presented here, and the relevant contentions

       In summary, Delaware law adheres to the doctrine of in pari delicto, and where it

applies, the doctrine precludes the court from hearing claims as between wrongdoers

unless the wrongdoer-plaintiff against whom it is invoked can avail herself of an

exception to the rule. Guided by the foregoing principles, my analysis of this issue as it

pertains to the present motions consists of asking: first, should in pari delicto apply to the

179
       Id.
180
       Id.
181
       Id. at 895 n.59.

                                             63
Receiver‘s claims against Wilmington Trust and the Auditor Defendants? And if so, is

there an exception that would save those claims from dismissal?

       In this regard, the Moving Defendants contend that the doctrine applies here,

because the alleged misconduct of the SPI Entities‘ fiduciaries—most clearly, Jackson—

is imputed to the SPI Entities, making them at least substantially equal in fault to the

Moving Defendants. They contend that even though the Receiver has brought this action

on behalf of the SPI Entities and their stakeholders, she has only the rights of, and is

subject to the same defenses as, the SPI Entities themselves.          Finally, the Moving

Defendants argue that no exception to the doctrine is available to prevent the dismissal of

the SPI Entities‘ claims.

       The Receiver challenges all three of those contentions. In particular, she asserts

that the well-established adverse interest exception applies here. The Receiver also

contends that in pari delicto should not apply because this case involves an insurance

liquidation receivership action.     Thus, for the public policy reasons embodied in

Delaware‘s insurance statute and related regulations, she argues that this Court should

decline to apply the general rule of imputation by which in pari delicto operates to bar

claims. Finally, she maintains that, even if in pari delicto applies and the adverse interest

exception is unavailable, Delaware law should not permit an auditor to invoke the

doctrine, because of the special role auditors play in informing corporate fiduciaries. I

discuss these issues in turn.

                                             64
       At the outset, however, I note that, by the Complaint‘s own terms, the SPI Entities

bear ―substantially equal responsibility‖182 for the alleged schemes by which money was

stolen from the policyholders and the DDOI was misled about the SPI Entities‘ true

financial condition. For example, the Complaint accuses James M. Jackson of fraud, and

takes issue with the Moving Defendants‘ failure to detect and prevent that fraud. It is

clear, however, that the relevant actions in this regard were taken on behalf of the SPI

Entities, so that they could obtain the DDOI‘s approval to operate as captive insurers.183

Thus, the general doctrine of in pari delicto applies to bar the SPI Entities‘ claims against

the Moving Defendants, unless the Receiver can avail herself of some exception to that

doctrine.184

3.      Can the Receiver avail herself of the adverse interest exception to the in pari
                                      delicto doctrine?

       The Receiver contends that, even if it applies, in pari delicto does not bar the

claims against the Moving Defendants because she may take advantage of the ―adverse

interest exception.‖ As discussed above, this exception is derived from the same body of

agency law imputation principles that gave rise to the in pari delicto rule itself.185 That

182
       See AIG II, 976 A.2d at 883; Berner, 472 U.S. at 310.
183
       See, e.g., Compl. ¶¶ 56, 62-70, 78, 94-95, 102, 263-66.
184
       The Receiver does not seriously contend that the SPI Entities do not bear fault for
       their present situation, but rather advances several exceptions that she argues
       should apply here to preclude the Moving Defendants‘ in pari delicto defense. I
       address those arguments in the next sections.
185
       See supra notes 143-146; see also RESTATEMENT (THIRD) OF AGENCY § 5.03
       cmt.b (2006).

                                             65
is, in a case where the agent‘s action is totally adverse to the interests of his principal, the

law will not impute knowledge of the bad act to the principal, because it seems

nonsensical to presume that a thieving agent would tell his principal about the theft. 186 In

the corporate context, and as relevant here, where a corporate fiduciary acts ―solely to

advance his own personal financial interest, rather than that of the corporation itself,‖ the

adverse interest exception comes into play and permits the corporation to state a claim

against the faithless fiduciary‘s co-conspirator.187 This type of total abandonment, such

as siphoning corporate funds or other outright theft, is likely to be a ―highly unusual

case.‖188 Thus, the adverse interest exception is applied narrowly, lest it be expanded to

the point of covering more terrain than the rule itself.189 As a result, the exception will

not enable a party to avoid application of in pari delicto if the illegal scheme furthers

both the faithless fiduciary‘s interests and those of the corporation itself.190

186
       See RESTATEMENT (THIRD) OF AGENCY § 5.04 (―For purposes of determining a
       principal‘s legal relations with a third party, notice of a fact that an agent knows or
       has reason to know is not imputed to the principal if the agent acts adversely to the
       principal in a transaction or matter, intending to act solely for the agent‘s own
       purposes or those of another person.‖)
187
       AIG II, 976 A.2d at 891.
188
       Id.
189
       Id. at 894.
190
       Id. at 892-94 (holding that the traditional, narrow approach to the adverse interest
       exception was the correct statement of Delaware law); see also Kirschner, 15
N.Y.3d at 466-67, 938 N.E.2d 941, 952 (noting that the traditional, narrow
       formulation of the adverse interest exception ―avoids ambiguity where there is a
       benefit to both the insider and the corporation,‖ and therefore is suitable only
       where the insider‘s misconduct benefits only himself or a third party).

                                              66
       On the facts of this case, the adverse interest exception is unlikely to save the

Receiver‘s claims.    The allegations in the Complaint conceivably could support a

reasonable inference that at least Jackson was involved in siphoning money from the SPI

Entities‘ bank accounts, which could be the sort of total adversity required to sustain the

exception. Another equally plausible reading of the Complaint, however, is that there

never was any money in the bank accounts during the relevant time periods, but rather

that the entire structure was a sham. Because this action is before me on motions to

dismiss, I must draw all reasonable inferences in favor of the Receiver. Accordingly, I

assume that at some point during the relevant time period, at least Jackson stole funds

from the SPI Entities‘ accounts.

       While Jackson‘s alleged theft is indicative of an intent to act ―to advance his own

personal financial interest,‖ the Complaint also suggests that his activities furthered the

SPI Entities‘ interests. The Complaint is replete with allegations that, if not for the

misrepresented financial statements, the SPI Entities never would have been authorized

as Delaware-domiciled captive insurers. This may have been a temporary benefit, which

proved illusory once the fraud came to light, but it is clear from the face of the Complaint

that the SPI Entities‘ position was improved, if only for a time, by Jackson‘s

machinations.191

191
       Cf. Kirschner, 938 N.E.2d at 953 (―Consistent with these principles, any harm
       from the discovery of the fraud—rather than from the fraud itself—does not bear
       on whether the adverse interest exception applies. . . . If that harm could be taken
       into account, a corporation would be able to . . . disclaim virtually every corporate

                                            67
      Even if I were to assume that Jackson completely had abandoned the SPI Entities‘

interests and that those entities obtained no benefit from his conduct, however, the

Receiver still cannot invoke the adverse interest exception in the circumstances of this

case. The reason is because the SPI Entities are subject to an exception to the adverse

interest exception—the ―sole actor‖ exception.192 Courts have applied the sole actor

exception where the agent committing the fraud was the sole stockholder of the

corporation, or otherwise ―dominated‖ the corporation.193

      As discussed above, the adverse interest exception is based on the presumption

that a completely faithless agent would not communicate his knowledge to his principal,

and that the principal would not benefit from the agent‘s adverse action. The sole actor

rule overrides the adverse interest exception where the principal and the agent are the

same, because it is absurd to presume that the one actor involved and affected somehow

could keep secrets from himself, and because the principal, as the same sole owner,

benefits from the fraud.194 Thus, in the corporate context, where a high-level officer or

      fraud—even a fraud undertaken for the corporation‘s benefit—as soon as it was
      discovered and no longer helping the company.‖).
192
      See Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340,
      359 (3d Cir. 2001).
193
      Id. at 359-60; see also In re Jack Greenberg, Inc., 212 B.R. 76, 86 (Bankr. E.D.
      Pa. 1997).
194
      See, e.g., In re Mediators, Inc., 105 F.3d 822, 827 (2d Cir. 1997); RESTATEMENT
      (THIRD) OF AGENCY § 5.04 cmt.d (2006) (―[I]f the agent controls the principal‘s
      decisionmaking, the principal is charged with notice of the agent‘s wrongdoing.

                                           68
director also solely owns or otherwise dominates the corporation, the principal-agent

distinction virtually disappears. In terms of a claim against a third party that dealt with

the corporation, therefore, the adverse interest exception will not aid an agent-principal

who does wrong by protecting the corporation he controls from the effect of in pari

delicto.

       In this case, Jackson was at all relevant times the President and Chairman of

Security Pacific, SPI-202, SPI-203, and SPI-204, and held 100 percent of those

companies‘ stock.195 The Receiver does not dispute that Jackson solely owned and

dominated the SPI Entities. Rather, she contends that the sole actor rule should not apply

here because of the nature of the insurance business, in which policyholders and the

public at large have a stake in the solvency of insurers. According to the Receiver, it

therefore would be unjust for this Court to presume that there is a ―complete unity of

interest between a sole stockholder who loots his own insurance company and the

company itself.‖196    Taken to its extreme, this would mean that the existence of

policyholders and other innocent creditors in the insurance context should cause the

adverse interest exception to apply and avoid the in pari delicto doctrine, because the

       This rule, often termed the ‗sole actor doctrine,‘ treats principal and agent as
       one.‖).
195
       Compl. ¶¶ 30, 44, 96. See Receiver‘s Answering Br. to Auditor Defs. 2-3, 42.
196
       Receiver‘s Answering Br. to Auditor Defs. 43 (quoting Reider v. Arthur Andersen,
       LLP, 784 A.2d 464, 474 (Conn. Super. Ct. 2001) (refusing to use the sole actor
       rule to override the adverse interest exception, and allowing the state insurance
       commissioner to bring claims against liquidated insurer‘s former auditor)).

                                            69
fraudulent corporate insider was acting adversely to the public‘s interests, even if not to

those of the corporation‘s owners.197

       That reasoning, if accepted, would mean that the in pari delicto defense cannot

apply to any case in which the claims are being asserted by an insurance company, either

in receivership or as a derivative plaintiff. I cannot square such a result with the decision

in AIG II, which involved one of the most systemically important insurance companies in

the world.198 For that reason, I reject the Receiver‘s attempt to avoid application of the

―sole actor‖ rule.199 I therefore conclude that the adverse interest exception—even if it

197
       Cf. Reider, 784 A.2d at 474-75 (―Therefore, when a sole owner seeks to loot his
       own insurance company, every person with a legally protected interest in the
       insurer‘s continuing solvency is not a knowing and willing participant in the
       owner‘s fraud. Like an innocent minority shareholder whose interests in a
       corporation are harmed by a conspiracy of the other shareholders . . . the public is
       an innocent stake holder in the solvency of the insurer.‖). This type of argument
       was expressly rejected in AIG II because it would make in pari delicto a dead
       letter. AIG II, 976 A.2d at 893 (―[A]n innocent insider exception, like the
       plaintiffs‘ personal interest exception, would allow corporations to sue their own
       co-conspirators for actions that were undertaken, at least in part, for the
       corporation‘s own interest, giving corporations rights that natural persons do not
       have.‖)
198
       AIG II involved in pari delicto defenses raised by third-party co-conspirators, not
       auditors, and is there somewhat distinct from the claims against the Moving
       Defendants in this case. Nevertheless, if Delaware embraced the type of ―innocent
       stakeholder‖ exception the Receiver urges in this regard, it would gut the in pari
       delicto defense regardless of who was raising it. I address in the next Section the
       specific arguments regarding whether auditors should be treated differently than
       other defendants.
199
       In addition   to the holding AIG II, at least two other reasons support this
       conclusion.   First, insurance companies are not the only companies that are relied
       on by their   customers and creditors, nor are they unique in being systemically
       important.    Because similar considerations apply to many regulated industries

                                             70
conceivably could apply, which is dubious based on the allegations of the Complaint—

cannot be invoked here because of the sole actor rule.

      4.      Should in pari delicto be set aside on grounds that its application would
                        frustrate an established public policy of this State?

           As discussed above, while courts generally will refuse to hear claims as between

wrongdoers, ―that rule has always been regarded by courts of equity as without

controlling force in all cases in which public policy is considered as advanced by

allowing either party to sue for relief against the transaction.‖200        The Receiver‘s

contention in this regard is twofold: (1) that receivers are not, or should not be, barred by

the in pari delicto defense; and (2) that important public policy interests are served by the

Receiver here, in the specific context of insurance liquidation. I do not find either

contention persuasive.

           I begin with the suggestion that because the Receiver is innocent of wrongdoing

when she ―steps into the shoes‖ of the liquidated entities, she cannot be subject to the

defenses to which the entities themselves would be subject. If accepted, this principle

would eviscerate in pari delicto. In the typical case in which the doctrine plausibly is

           (e.g., financial institutions, food and drug companies, utilities, railroads, and
           aviation, etc.), the purportedly ―unique‖ or narrow carve-out urged here easily
           could sweep much of the economy within its ambit. Second, I note again that the
           innocent parties involved here are not without remedy. The issue again is ―not
           whether [they] can seek relief on the corporation‘s behalf, but from whom [they]
           can seek that relief.‖ AIG II, 976 A.2d at 889.
200
           AIG II, 976 A.2d at 888 n.43 (quoting Seacord v. Seacord, 33 Del. 485, 139 A. 80,
           81 (Del. Super. 1927)).

                                              71
invoked, it is because faithless corporate insiders committed misconduct that an innocent

party later wished to disavow in order to state a claim on behalf of the corporation. By

definition, if the insiders‘ fraud were ongoing, the innocent claimant either would not

have discovered the misconduct yet, or the entity in question might not yet have become

insolvent. Sometimes, it is stockholder derivative plaintiffs who bring claims in the name

of the corporation after an insider‘s wrongdoing is discovered and, often, the bad actor or

actors have been removed from their position. In other situations, a receiver or trustee

may bring claims on behalf of the delinquent or bankrupt entity. In either case, it is

tempting to view the innocent claimant as the true plaintiff and to set aside the in pari

delicto doctrine so as to allow the claim to be brought. As a Vice Chancellor, Chief

Justice Strine heard essentially identical arguments in AIG II, however, and he rejected

them.201 The same reasoning applies with equal force here. I see no cogent reason for

sparing the innocent Receiver the effect of in pari delicto while equally innocent

stockholders or policyholders would be barred from relief in the derivative context.202

201
       AIG II, 976 A.2d at 889 (―According to the plaintiffs, in such situations the
       traditional rule is unjust because the stockholders themselves did not act
       wrongfully, and therefore the traditional in pari delicto rules should be set aside so
       that the corporation can be made whole and thus the economic interests of the
       innocent stockholders can be protected. But, the exceptions that the plaintiffs
       request would eviscerate the in pari delicto doctrine and contravene the policy
       judgments upon which that doctrine rests.‖)
202
       I reject as unpersuasive the suggestion that parties like trustees or receivers should
       be able to avoid in pari delicto and similar defenses merely because they do not
       ―voluntarily step‖ into the shoes of the defunct entity, but rather are ―thrust into‖
       those shoes. See F.D.I.C. v. O’Melveny & Myers, 61 F.3d 17, 19 (9th Cir. 1995).
       Stockholder derivative plaintiffs are no less ―thrust into‖ a position of having to

                                             72
       Nor is the avoidance of in pari delicto supported by the Receiver‘s appeal to the

public policy interests extant in the context of insurance company delinquency generally,

or that of captive insurance companies in particular.        As the Receiver points out,

insurance is a heavily regulated industry in Delaware and every other state. An entire

title (Title 18) of the Delaware Code governs insurance companies, and an entire chapter

therein is devoted to captive insurers.203 Pursuant to the Insurance Code, the State has

vested the Insurance Commissioner with significant authority to enforce the relevant law

and its corresponding administrative regulations.204

       There are strong reasons for creating and maintaining a robust regulatory

framework regarding insurance. In general, the ―reach of influence and consequence‖ of

insurance companies have long been considered ―beyond and different from that of the

       bring suit on behalf of an entity betrayed by its fiduciaries. Further, the idea that
       the party raising in pari delicto ―enjoys a windfall,‖ id., misses the point of the
       doctrine—sparing the court from becoming entangled in claims between
       wrongdoers. See 3 POMEROY supra note 103, § 940 n.5. In any case, it is not
       clear that O’Melveny & Myers stands for a proposition that is helpful to the
       Receiver. See, e.g., In re Imperial Corp. of Am., 92 F.3d 1503, 1509 (9th Cir.
       1996) (clarifying that O’Melveny does not mean that ―equitable defenses can never
       be asserted against FDIC acting as a receiver‖); In re Bartoni-Corsi Produce, Inc.,
       130 F.3d 857, 862 (9th Cir. 1997) (clarifying that O’Melveny was focused on ―the
       question of fiduciary liability,‖ and finding O’Melveny inapposite in the context of
       determining whether a third party non-fiduciary is liable to a corporation)
       (emphasis added).
203
       See 18 Del. C. §§ 101 to 8412 (the ―Insurance Code‖); id. §§ 6901 to 6983
       (relating to captive insurers).
204
       See id. §§ 301 to 333.

                                            73
ordinary business.‖205 As relevant to this case, Delaware has a particularly significant

interest in regulating insurance companies domiciled here, whose assets purportedly

exceed $500 billion in the aggregate, making the Department of Insurance the largest

consumer protection agency in the state.206         All these considerations buttress the

proposition that the public has an interest in keeping insurers solvent and in overseeing or

facilitating the orderly disposition of insolvent or delinquent ones.

       Accepting the Receiver‘s premise, however, does not lead inexorably to the

conclusion she urges. For starters, the claims subject to the pending motions to dismiss

are the SPI Entities‘ claims, not the Insurance Commissioner‘s. Moreover, even setting

that aside, the expansive and intricate statutory and regulatory framework governing

Delaware-domiciled insurance companies arguably cuts against the Receiver‘s position

that in pari delicto should not apply, not in favor of it. The essence of her argument is

that, if I decline on the basis of public policy to allow Wilmington Trust and the Auditor

Defendants to invoke the in pari delicto defense, the State‘s policy goals will be furthered

in two ways: (1) the Moving Defendants, if ultimately held liable, can contribute to

making the SPI Entities‘ innocent policyholders whole; and, (2) the Commissioner can

incentivize better behavior on the part of firms providing management and auditing

services to captive insurers.

205
       German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 414 (1914).
206
       Karen Weldin Stewart – Biography, DEL. DEPT. OF INS. (last accessed Mar. 23
       2015), http://www.delawareinsurance.gov/bio.shtml.

                                             74
       As discussed above, the proper inquiry in considering whether to apply the ―public

policy‖ exception to in pari delicto—which itself serves important public policy

objectives—is whether ―preclusion of suit would not significantly interfere with the

effective enforcement‖ of a statutory policy scheme.207 In the case of Delaware insurance

regulation, however, no private enforcement scheme exists; to the contrary, the DDOI has

been given significant authority to achieve the goals of making innocent insurance

policyholders whole, and deterring bad conduct on the part of firms providing

professional services to insurers.208 The statute does not suggest that the Legislature

intended private causes of action to play a part in its enforcement,209 and the Receiver has

not cited any case law indicating otherwise.

       In this regard, I also note that, with respect to captive insurance companies

specifically, the Commissioner has even broader authority: in addition to the numerous

reporting and minimum capitalization requirements noted in Section I.B supra, captive

insurance companies are required to select from among audit firms and ―captive

207
       See Berner, 472 U.S. at 311; Pinter, 486 U.S. at 635.
208
       See, e.g., 18 Del. C. § 318 (Commissioner may examine any Delaware insurance
       company in her sole discretion); id. § 319 (same as to insurance agents, brokers,
       and the like).
209
       See, e.g., id. § 313 (granting the Commissioner broad authority to institute
       proceedings through the Attorney General to enforce ―any order or action‖ of the
       Commissioner, and to refer criminal violations of the insurance code to the
       Attorney General).

                                               75
managers‖ that are pre-approved by the Insurance Commissioner.210 In other words, if

the misconduct in this case is deemed to be grave enough, the Commissioner presumably

could impose some sort of administrative sanction against Wilmington Trust, Johnson

Lambert, or McSoley McCoy, or, perhaps, even remove one or more of them from the list

of pre-approved service providers.

       If the Commissioner is unable to achieve what she deems appropriate levels of

consumer protection and industry deterrence, she has been delegated the authority to

promulgate further regulations consistent with the insurance statute.211 Finally, if the

statutory tools thus far granted to the DDOI are insufficient, it is the province of the

Delaware General Assembly, not this Court, to provide a tailored solution, in a process

open to all relevant stakeholders and capable of balancing the numerous, and sometimes

competing, considerations democratically.

       For all of the foregoing reasons, I am not convinced that public policy would be

better served by preventing defendants from relying on the defense of in pari delicto

merely because the commercial backdrop is that of insurance. Indeed, because of the

highly regulated nature of insurance in this State, I do not consider it appropriate to

undermine the policies advanced by the in pari delicto doctrine, when the purported

benefits of doing so here appear to be achievable within the robust regulatory framework

that already exists.

210
       18 Del. Admin. C. §§ 302-2.4, 302-4.2.
211
       18 Del. C. § 311.

                                            76
5.     Should Delaware law recognize a common law “auditor exception” to in pari
                                        delicto?

       At this point in my analysis, the imputation of Jackson‘s knowledge and actions to

the SPI Entities is presumed, and in pari delicto applies to bar the Receiver from

asserting the SPI Entities‘ claims, unless I accept the Receiver‘s final argument in favor

of a special ―auditor exception‖ to the doctrine. In asking this Court to recognize an

―auditor exception‖ to the in pari delicto doctrine, the Receiver seeks adoption of her

interpretation of the dictum in AIG I to the effect that, were he able to address the

applicability of in pari delicto to bar AIG‘s claims against PwC under Delaware law,

then-Vice Chancellor Strine may not have applied the doctrine. Viewing the dictum in

AIG I in context with the rest of Delaware corporate case law, I do not read our precedent

as supporting the broad carve-out from in pari delicto that the Receiver urges. I do agree,

however, with the sentiment voiced in AIG I and AIG II that auditors are different from

genuine third parties when it comes to analyzing whether in pari delicto should apply,

and they ought not be afforded the protection of that rule based on a rote application of

agency law principles. As those considerations relate to the particular facts of this case, I

conclude, for the reasons that follow, that the claims against Wilmington Trust and the

Auditor Defendants for breach of contract and negligence must be dismissed. I decline to

dismiss, however, the claims against those Defendants for aiding and abetting breaches of

fiduciary duty.

       Before focusing on Delaware law, I note that several states have created specific

exceptions from in pari delicto to allow corporations claims‘ against auditors to proceed.

                                             77
For example, in NCP Litigation Trust v. KPMG LLP, the Supreme Court of New Jersey

held that a liquidation trustee was not barred from bringing a negligence claim against an

auditor whose alleged negligence contributed to the damages caused by the fraud of the

liquidated corporation‘s insiders.212 The court placed limitations on the holding in NCP

Litigation Trust, however.       Specifically, an auditor retains the right to raise the

―imputation defense,‖ as it is called there, against a stockholder who had participated in

the fraud, or defendants who by reason of their role in the company should have known

about the fraud but did not, or stockholders whose stake in the company was large

enough that they should have been able to exercise some oversight over company

operations.213 Because the NCP rule is intended to allow ―only ‗innocent‘ shareholders to

recover,‖ the court expressly noted that the assessment of relative fault in this regard is a

factual question that generally requires development of the factual record through

discovery and trial.214

       The Supreme Court of Pennsylvania also responded to a fact pattern involving

alleged auditor participation in corporate insiders‘ fraud by qualifying its in pari delicto

doctrine, although it took a slightly different tack.215 There, the Pennsylvania Court

212
       901 A.2d 871, 882-83 (N.J. 2006).
213
       Id. at 885-86.
214
       Id.; see also id. at 886 n.3.
215
       Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research
       Found. v. PricewaterhouseCoopers, LLP, 989 A.2d 313 (2010) [hereinafter
       ―AHERF‖].

                                             78
based its determination of whether the insiders‘ fraud should be imputed to the

corporation to bar claims against co-wrongdoers (including auditors) on a test of good

faith. That is, while imputation generally applies under Pennsylvania law, the court

precluded reliance on the in pari delicto defense by an auditor that ―has not dealt

materially in good faith with the client-principal,‖ with the goal of foreclosing application

of the doctrine in ―scenarios involving secretive collusion between officers and auditors

to misstate corporate finances to the corporation‘s ultimate detriment.‖216

       As noted above, the Court of Appeals of New York in Kirschner strictly adhered

to the traditional in pari delicto defense. The discussions and reasoning contained in the

NCP Litigation Trust, AHERF, and Kirschner decisions are enlightening on this issue,

but none of them are controlling, nor do I consider their logic dispositive of the issue

before me.

a.     Neither the case law nor public policy support a blanket “auditor exception”
                                     to in pari delicto

       The Receiver asks this Court to interpret Delaware‘s formulation of the in pari

delicto doctrine as not applying to any claims against auditors. In making that argument,

she relies on: (1) AIG I and AIG II; and (2) policy-based reasoning.217 I am not persuaded

that either the rationale of the AIG decisions or general policy considerations support

such a sweeping exception to in pari delicto.

216
       Id. at 339.
217
       Receiver‘s Answering Br. to Auditor Defs. 37-41.

                                             79
       First, as the Receiver correctly notes, AIG I does suggest that Delaware law should

approach on its own terms the question of whether auditors can raise in pari delicto, and

not mechanically follow the approach of New York or any other state. When read

alongside AIG II, as it must be, however, the rationale of AIG I does not support veering

to the opposite extreme by entirely setting aside in pari delicto to allow any and all

claims against auditors. The AIG I opinion observes, for example, that ―one can quibble

with [the New York approach] while still having doubt about the public policy utility of

exposing audit firms to uncapped liability for their negligent failure to detect financial

fraud by corporate managers.‖218 In that vein, then-Vice Chancellor Strine briefly noted

that ―a more thoughtful tact‖ would not involve simply allowing any and all causes of

action against auditor defendants to proceed, but rather would seek responsibly to

calibrate the auditors‘ ex post liability through the use of heightened standards of

pleading, liability, and proof, and damages caps.219 In that regard, the Court noted in AIG

I that ―[a]lthough audit fees are lucrative, they arguably pale in comparison to the

potential liability the auditors face,‖ and going too far in the direction of imposing ex post

liability can backfire.220

218
       AIG I, 965 A.2d at 828 n.246.
219
       Id.
220
       Id.; see also id. (―The even larger disproportion between independent directors
       fees and liability inspired § 102(b)(7) as well as the gross negligence standard
       Delaware corporate law applies in cases when a § 102(b)(7) clause does not apply.
       One can therefore understand the concern about the need to keep the auditor
       industry healthy, or to avoid the possibility that audit firms will suffer huge

                                             80
       Moreover, in deciding which law applied in AIG I, the Court expressly considered

the Delaware public policy interests that could have been furthered by refusing to apply

New York law (and possibly precluding PwC from asserting the in pari delicto

defense).221 The Court ultimately concluded, however, that those considerations do not

trump our choice-of-law principles and the policy goals they protect. To the extent the

Receiver relies on AIG I as supporting the proposition that all other policy interests must

yield to the benefits that arguably flow from precluding auditors from raising the in pari

delicto defense, I find that reliance misplaced.

       Second, I question the policy arguments the Receiver makes in favor of a broad

exception to in pari delicto for any and all claims against auditors. A theme of the

Receiver‘s argument in this case, and in decisions like AHERF and NCP, is that allowing

in pari delicto to bar claims against auditors essentially would subvert two policy goals in

that: (1) innocent stockholders and creditors who were harmed would be deprived of a

remedy for that harm; and (2) auditor misconduct, either knowing or negligent, would go

unpunished. I consider both of those contentions misguided.

       With the first, a flawed premise is disguised by noble sentiment. For starters, in

pari delicto only acts to bar claims that in fact belong to the corporation, so it would not

       verdicts by fact-finders desirous of holding anyone they can liable for a fraud-
       based corporate meltdown or whose judgment about the auditor‘s capability to
       have detected the fraud through the use of professional diligence is compromised
       by hindsight bias.‖).
221
       Id. at 821-22.

                                             81
preclude a stockholder or creditor who suffered a direct harm from bringing a direct

claim to redress it. Even in cases where it might apply, however, in pari delicto will not

bar the corporation from suing its faithless fiduciaries, because of the fiduciary duty

exception. Thus, the corporation has at least some remedy for wrongs done and a source

for recoupment of its losses.

       Even if concern for innocent stockholders were considered the most important

factor, however, making the defense of in pari delicto unavailable to auditor defendants

would be problematic. Adopting such a rule would mean that a wrongdoer-corporation

gets to sue its auditor and cause the innocent residual claimants of that firm to bear the

cost of the lawsuit and any damages, while residual claimants of true third-party co-

conspirators (like Gen Re, Marsh, or ACE in AIG II) would enjoy the protection of in

pari delicto. The imbalance of such a rule is especially pronounced where the audit firm

is allegedly negligent, while the corporation‘s fiduciaries and the agents of the third-party

co-conspirators are accused of purposefully engaging in fraud.

       A second main policy contention proffered by the Receiver—that carving out an

auditor exception from in pari delicto would undermine efforts to encourage auditors to

do a better job monitoring—takes a blinkered view of the world. It is one thing to accept

the premise that our corporate law should not automatically dismiss on in pari delicto

grounds all claims against auditors in cases involving serious corporate misconduct. It is

a significant leap, however, to conclude from that premise that the best policy answer is

to open a floodgate of ex post auditor liability.

                                              82
       The independent auditor undoubtedly plays a central role in effectuating important

public policies implicated in corporate law, such as investor protection, efficient capital

markets, and good corporate governance. Auditors are so central, in fact, that there are

numerous governmental and non-governmental bodies currently regulating and otherwise

overseeing the audit industry.222      Thus, to the extent it is suggested that the blunt

instrument of ex-post liability in contract or tort will cause auditors to do their jobs better,

it is questionable whether this Court would have much to add in this already well-covered

field. The best-case scenario is that the Court adequately understands and applies the

222
       Depending on who their client is, for example, auditors are subject to
       ―authoritative‖ standard-setting by, among others: the Federal Accounting
       Standards Advisory Board; the Financial Accounting Standards Board; the
       Governmental Accounting Standards Board; the Public Company Accounting
       Oversight Board (―PCAOB‖); the International Accounting Standards Board; and
       the International Auditing and Assurance Standards Board, in addition to the
       relevant boards and committees of the American Institute of CPAs, such as the
       Auditing Standards Board. See Authoritative Standards, AM. INST. OF CERTIFIED
       PUBLIC        ACCOUNTANTS          (last    accessed     Mar.      23,      2015),
       http://www.aicpa.org/Publications/AuthoritativeStandards/Pages/AuthoritativeSta
       ndards.aspx. See also 15 U.S.C.A. § 7211(c) (conferring upon the Securities and
       Exchange Commission (―SEC‖) the power to register and inspect public
       accounting firms, issue rules governing public company audits, investigate and
       discipline registered auditors, and otherwise ―enforce compliance‖ with Sarbanes-
       Oxley, PCAOB rules, professional standards, and the federal securities laws); John
       C. Coffee, Jr., Gatekeeper Failure and Reform: The Challenge of Fashioning
       Relevant Reforms, 84 B.U. L. REV. 301, 336-37 (2004). This structure of audit
       regulation does not disappear as the focus narrows from the national level and
       public companies to the particular facts of this case. In Delaware, as in
       presumably most states, the legislature has created a State Board of Accountancy
       to protect the public from incompetent auditing. 24 Del. C. § 101. That Board has
       the power to develop standards assuring professional competence, monitor and
       adjudicate complaints brought against practitioners, promulgate rules and
       regulations, and impose sanctions where necessary.

                                              83
applicable audit standards and generally accepted accounting principles (―GAAP‖)

equally as well as the relevant regulatory body whose core jurisdiction such issues fall

under. Even if the Court succeeds at that endeavor, the results—from the perspective of

auditor monitoring and deterrence—ideally should be duplicative. Thus, the benefits in

terms of auditor deterrence would likely be more limited than the Receiver suggests.

       For those reasons, I find that the purported benefits (in terms of investor protection

and auditor deterrence) of creating an exception to in pari delicto for all claims against

auditors are not sufficient to justify undermining the policy principles girded by the

doctrine, which protect the Court from accounting among wrongdoers. In addition to the

lack of persuasive benefits associated with that kind of sweeping exception, some

negative outcomes likely would flow from it. In that regard, one consideration is whether

it makes sense for a court of equity to purport to place itself on the level of, for example,

the SEC, the PCAOB, the AICPA, or the State Board of Accountancy in terms of

evaluating the performance of auditors.        With respect to monitoring auditors, the

experience and sophistication of those or other relevant audit and accounting regulatory

bodies is beyond that of law-trained judges, and their capacity to govern the audit

industry is appropriate for the scale of that endeavor. In my view, this Court should

avoid entangling itself unnecessarily in time- and resource-consuming inquiries about

whether GAAP and relevant audit standards were met, which would be the foreseeable

outcome if, for example, in pari delicto did not bar contract and negligence claims in

cases like this one. Because regulatory bodies exist for conducting such inquiries, I

                                             84
consider it ill-advised to insert this Court into matters within the core mandate of those

bodies.

b.        Well-pled aiding and abetting claims against defendants like auditors should
                                not be barred by in pari delicto

       Although the AIG decisions and the public policy considerations just discussed do

not point to a sprawling exception from in pari delicto for any and all claims against

auditors, they do support a more limited exception grounded in both the nature of the

claim asserted and the party likely to raise in pari delicto to bar that claim. As discussed,

Delaware law sets aside in pari delicto when a receivership trustee or derivative plaintiff

seeks to sue the corporation‘s own fiduciaries for breach of their fiduciary duties.

Applying the same reasoning, I conclude that Delaware law should do the same where an

auditor or similar defendant is alleged to have aided and abetted such breach. Rather than

create an expansive new ―auditor exception‖ to in pari delicto, therefore, I determine that

the fiduciary duty exception extends to cover well-pled aiding and abetting claims against

defendants like auditors. Thus, in this case, the claims against the Wilmington Trust and

the Auditor Defendants for breach of contract and negligence will be barred by in pari

delicto, but the claims against them for aiding and abetting breaches of fiduciary duty

will not.

       Both AIG I and AIG II recognize that defendants like auditors should be treated

differently than other third parties when it comes to in pari delicto. AIG I also made the

nuanced observation that claims against a defendant like PwC for aiding and abetting a

breach of fiduciary duty would be materially different from breach of contract or

                                             85
negligence claims against PwC.       Then-Vice Chancellor Strine placed ―an important

caveat‖ on his decision not to apply Delaware law in AIG I, observing that had the

stockholder derivative plaintiffs there stated claims against PwC for aiding and abetting

breaches of fiduciary duty, his choice of law analysis might have been ―quite

different.‖223 But ―[b]ecause PWC only face[d] claims for malpractice and breach of

contract, rather than claims that it consciously aided wrongful managerial misconduct,‖

he applied New York law and ultimately dismissed all claims as New York law required

him to.224

       I agree that claims for aiding and abetting breaches of fiduciary duty differ

materially from contract and negligence claims, because with the former, the

corporation‘s internal affairs are the focus of the claim.225 The policy goals advanced by

in pari delicto, while important enough to outweigh this Court‘s interest in adjudicating

breaches of contract and negligence claims at the periphery of a corporation‘s affairs,

223
       AIG I, 965 A.2d at 822.
224
       Id.
225
       The elements for establishing such a claim are well known: (1) a fiduciary
       relationship; (2) breach of the fiduciary‘s duty; (3) knowing participation in the
       breach by the alleged aider-and-abettor; and (4) causation of damages. Malpiede
       v. Townson, 780 A.2d 1075, 1096 (Del. 2001). In this regard, I note that, because
       of the significant overlap in their respective elements, much of the evidence for
       proving an aiding and abetting claim already would be coming in to prove the
       breach of fiduciary duty claim under the fiduciary duty carve-out to in pari delicto.
       Claims for breach of an audit contract or for professional negligence involve little
       or no such salutary overlap, which both reinforces the fundamental difference in
       the nature of the claims, and adds a practical reason for drawing this distinction.

                                            86
should not outweigh the importance of this Court‘s ability to adjudicate core fiduciary

duty claims arising out of entities organized under Delaware law.

       AIG II gives a further, equally critical insight, however: not all aiding and abetting

claims are created equal. Thus, in AIG II, the Court applied Delaware law to dismiss

aiding and abetting claims that the stockholder derivative plaintiffs sought to prosecute

against the third-party co-conspirators (Gen Re and Marsh). The lack of analogous

aiding and abetting claims was notable in AIG I, but that distinction was mentioned only

in passing in AIG II.226

       The distinction in the AIG cases between third parties like ACE, Gen Re, and

Marsh on one hand and PwC on the other comports with the reality that non-fiduciaries

like auditors, who occupy a position of trust and materially participate in the traditional

insiders‘ discharge of their fiduciary duties, are different from other third parties with

whom the corporation may transact business.227 For purposes of the motions currently

before me, I need not dilate upon this distinction, because it is evident from the face of

the Complaint that both Wilmington Trust and the Auditor Defendants are alleged to

226
       AIG II, 976 A.2d at 879 (―[T]he plaintiffs have brought claims for fraud,
       conspiracy, and aiding and abetting a breach of fiduciary duty against Gen Re.‖);
       id. at 881 (―[T]he Complaint pleads counts of fraud and conspiracy against Marsh
       & McLennan, ACE, and Rivera, as well as counts of aiding and abetting a breach
       of fiduciary duty and unjust enrichment against Marsh.‖).
227
       See AIG II, 976 A.2d at 895; see also id. at 895 n.60 (―Suits against corporate
       agents like outside auditors are best conceived of as also within the confines of a
       single corporate conspirator and are consistent with the traditional acceptance of
       derivative suits against corporate insiders.‖).

                                             87
have played a ―gatekeeper‖ role vis-à-vis the SPI Entities. On that basis alone, the aiding

and abetting claims against them are fundamentally unlike those that were dismissed in

AIG II. I conclude, therefore, that in pari delicto does not provide grounds for dismissing

the aiding and abetting claims against Wilmington Trust and the Auditor Defendants.

 c.      The Complaint states claims for aiding and abetting breaches of fiduciary
          duty against Wilmington Trust and Johnson Lambert, but not McSoley
                                          McCoy

       For the reasons stated in the preceding Sections, the Receiver‘s claims against

Wilmington Trust and the Auditor Defendants for breach of contract and negligence are

dismissed on grounds of in pari delicto, but the claims for aiding and abetting breaches of

fiduciary duty are not. As I next discuss, the Complaint adequately states aiding and

abetting claims as to Wilmington Trust and Johnson Lambert, but not as to McSoley

McCoy.228

       To survive a motion to dismiss, a complaint must allege facts that satisfy the four

elements of an aiding and abetting claim: (1) the existence of a fiduciary relationship, (2)

228
       The Complaint purports to name Kantner as a Defendant in connection with the
       aiding and abetting claims in Count 12. Compl. ¶ 381. As discussed above,
       Kantner owes fiduciary duties to the SPI Entities by reason of his position as a
       director, and is accused of breaching those duties. Any conduct of Kantner‘s that
       conceivably might rise to the level of aiding and abetting a breach of fiduciary
       duty in this regard would simply be a further breach of Kantner‘s own duties.
       Accordingly, Count 12 is dismissed as to Kantner. See, e.g., Gilbert v. El Paso
       Co., 490 A.2d 1050, 1057 (Del. Ch. 1984), aff’d, 575 A.2d 1131 (Del. 1990); Penn
       Mart Realty Co. v. Becker, 298 A.2d 349, 351 (Del. Ch. 1972); see also Higher
       Educ. Mgmt. Gp., Inc. v. Mathews, 2014 WL 5573325, at *13 (Del. Ch. Nov. 3,
       2014).

                                            88
a breach of the fiduciary‘s duty, (3) knowing participation in that breach by the

defendants, and (4) damages proximately caused by the breach.229

       As to the existence of fiduciary duties, alleged breaches thereof, and resulting

damages, the Complaint contains allegations sufficient to support a reasonable inference

of two general types of breach, both amply discussed in this Opinion: (1) the purposeful

fraud ascribed to James M. Jackson; and (2) the alleged failure on the part of at least the

SPI Entities‘ director Kantner to exercise sufficient oversight, in breach of his duty of

loyalty. Thus, as with most cases involving aiding and abetting liability, the sufficiency

of the claims against the Moving Defendants in this regard ―largely come[s] down to

what constitutes ‗knowing participation.‘‖230 Specifically, the relevant inquiry is whether

it is reasonably conceivable, based on the non-conclusory allegations in the Complaint

and all reasonable inferences drawn from them, that Wilmington Trust, Johnson Lambert,

and McSoley McCoy ―knowingly participated‖ in either of the alleged breaches

described in items (1) and (2) here.

       At this preliminary stage of the litigation, I cannot rule out the possibility, based

on the allegations in the Complaint, that Wilmington Trust and Johnson Lambert

knowingly participated in James M. Jackson‘s fraudulent scheme in breach of his

fiduciary duties. I need not decide that question for purposes of the pending motions to

229
       Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
230
       Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1995 WL 694397, at *15 (Del.
       Ch. Nov. 21, 1995).

                                            89
dismiss the aiding and abetting claim, however, because it also is reasonably inferable

that Wilmington Trust and Johnson Lambert knowingly participated in, at least, the

breaches of fiduciary duty allegedly committed by the SPI Entities‘ other directors, in the

critical sense that they ―created the unreasonable process and informational gaps that led

to the Board‘s breach of duty.‖231

       Drost and Theriault of Wilmington Trust worked hand-in-glove with Handy and

Bolton of Johnson Lambert to prepare the 2007 and 2008 Audited Financial Statements.

Those processes were replete with alleged irregularities, and it is reasonable at this stage

to infer that both Wilmington Trust and Johnson Lambert knew something was

significantly wrong within the SPI Entities‘ operations. In one of the more glaring

episodes detailed in the Complaint, after receiving bank account confirmations from

Wachovia and Bank of America that widely diverged from the information provided by

Jackson, Handy and Drost followed Jackson‘s instructions to talk to ―Alpesh‖ in order to

straighten things out. At one point, Drost and Handy actually discussed how strange it

was that their given contact person for Wachovia bank was the same as for Wachovia

Securities, in light of the strict separation of those units normally observed within

Wachovia‘s structure. Drost knew something was wrong, or at least it is reasonably

inferable that he did, when he stated ―maybe, and hopefully [it was] OK‖ that ―Alpesh‖

was the contact person for both. But Drost‘s disbelief was evident in his saying that they

should try to contact both sides of the Wachovia structure to figure out why all of the

231
       In re Rural Metro, 88 A.3d at 99.

                                            90
huge discrepancies ―suddenly‖ were explained away.232 Lengthy and unexplained delays

occurred, but were not challenged by Wilmington Trust or Johnson Lambert in trying to

resolve this issue. When, months after he initially inquired, Bolton finally heard from

―Alpesh,‖ the explanation Alpesh gave did not convince either Bolton or Drost.

Nevertheless, Drost concocted what he admitted was an ―optimistic‖ re-interpretation of

Alpesh‘s story, and on that basis he checked the final boxes and Wilmington Trust and

Johnson Lambert marked the 2007 Audited Financial Statements complete, nearly a year

after they set out to complete it.233

       These alleged facts are only examples, and perhaps they and the numerous other

relevant facts alleged in the Complaint conceivably could be explained away as

negligence, or perhaps gross negligence, on the part of Wilmington Trust and Johnson

Lambert.    One instance where they conceivably cross the threshold of ―scienter,‖

however, is in connection with those entities advising the SPI Entities‘ Boards at the

meetings in February and October 2009. Drost, Theriault, and (presumably) Kantner of

Wilmington Trust were in attendance at those Meetings, at which the Johnson Lambert

232
       See Compl. ¶¶ 165-175.
233
       Id. ¶¶ 204-209. I note also that when he was briefing McSoley McCoy after they
       were retained for the 2009 audit, Drost said that in trying to call ―Alpesh,‖ he
       didn‘t ―seem to have any success getting through, or even getting an opportunity
       to leave a message.‖ Id. ¶ 287. That was in May 2010. After two full years of
       communicating with ―Alpesh,‖ Drost still had a hard time getting in touch with
       him. Drawing all inferences in favor of the Receiver on the pending motions to
       dismiss, I cannot rule out the possibility that, on the facts alleged, she could show
       that Wilmington Trust and Johnson Lambert knew that something about this was
       extremely suspicious.

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audited financial statements were approved with little or no discussion. In connection

with the February 2009 Meeting and the 2007 Audited Financial Statements, Johnson

Lambert advised the directors in the Significant Matters Letters that the audit

irregularities already had been addressed. The facts alleged in the Complaint, however,

suggest that they knew otherwise—as evidenced, at least, by the fact that the same

difficulties came up the following year. The Jackson Letter further suggested that certain

procedures should be improved in connection with the bank account reconciliations. At a

later point, Wilmington Trust advised Jackson that they wanted to have direct access to

the bank accounts so that they could confirm balances without going through Jackson.

       Those suggestions and requests were ignored by Jackson, but neither Wilmington

Trust nor Johnson Lambert ever attempted to follow up with the other directors. Though

the situation in terms of the audit irregularities apparently did not improve between the

February 2009 Meeting and the October 2009 Meeting, Johnson Lambert did not send

another Significant Matters Letter or otherwise update the Boards. It is reasonably

inferable, therefore, that both Wilmington Trust and Johnson Lambert knew that the

directors were not informing themselves and not exercising their oversight responsibility,

when those Defendants arguably first presented the ―significant matters‖ as being less of

a problem than they actually were, and then allowed the directors to ignore the letters and

the suggestions contained within them. This knowing lack of follow-up directly created

the ―unreasonable process‖ and ―informational gaps‖ that are alleged to have led to the

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                                         234
Board‘s breaches of fiduciary duties.          Accordingly, I refuse to dismiss the claims

asserted by the Receiver against Wilmington Trust and Johnson Lambert for aiding and

abetting a breach of fiduciary duty.

       The situation is materially different with respect to McSoley McCoy.               It

reasonably might be inferred that they conducted their audit process in a negligent or

even grossly negligent manner because, like Johnson Lambert, McSoley McCoy

apparently relied on the mysterious Alpesh, and unquestioningly accepted the forged fax

copy of the confirmation form regarding the Key Man Policy without following up to

obtain the original of that document from Hartford Life. But, McSoley McCoy entered

the picture much later than Johnson Lambert, and the Complaint alleges that it largely

followed the process that Wilmington Trust laid out as being ―routine‖ for the SPI

Entities‘ audits. The critical link in the factual allegations regarding Wilmington Trust

and Johnson Lambert was their knowing failure to follow up on the original warnings

they provided to the Board in connection with the first audit, despite experiencing very

similar irregularities the next year. McSoley McCoy, however, was not around long

enough to have engaged in such a dereliction of their responsibilities.         Thus, the

Complaint fails to allege sufficient facts as to McSoley McCoy to support a reasonable

inference that it ―knowingly‖ participated in the Board‘s alleged breaches of fiduciary

duty. I therefore dismiss the aiding and abetting claim as it relates to McSoley McCoy.

234
       Rural Metro, 88 A.3d at 97-100.

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                               III.     CONCLUSION

       For the reasons stated in this Opinion, I dismiss the claims for breach of fiduciary

duty against Wilmington Trust and the Auditor Defendants for failure to state a claim.

The motion to dismiss the claim for breach of fiduciary duty against Kantner, however, is

denied. The claims for negligence and breach of contract as to Wilmington Trust and the

Auditor Defendants are dismissed on grounds of in pari delicto. I further conclude that

the claims against those Defendants for aiding and abetting a breach of fiduciary duty are

not subject to the in pari delicto defense, and that the claims in that regard against

Wilmington Trust and Johnson Lambert are well-pled. Accordingly, I deny the motion to

dismiss the aiding and abetting claims against Wilmington Trust and Johnson Lambert. I

grant the motion of McSoley McCoy, however, to the extent it seeks dismissal of the

aiding and abetting claim against it, because in that respect the Complaint fails to state a

claim upon which relief could be granted.

       In summary, I grant the motions to dismiss Counts 1 through 10. Count 11 is

dismissed as to Wilmington Trust, but not as to Kantner.235 I grant dismissal of Count 12

as to McSoley McCoy and Kantner, but not as to Wilmington Trust or Johnson Lambert.

       IT IS SO ORDERED.

235
       Count 11 also accuses Defendants James M. Jackson, King, and Davis of
       breaching their fiduciary duties. As those Defendants are not before me on the
       pending motions to dismiss, Count 11 is not dismissed as it relates to them.

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