Court Opinion

ID: 3151362
Source: CourtListenerOpinion
Date Created: 2015-11-02 20:02:30.563212+00
Date Added: 2024-06-11T12:15:31.642112
License: Public Domain

IN THE SUPREME COURT 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         §                      No. 204, 2015
LIQUIDATION, SPI-202, INC. IN      §
LIQUIDATION, SPI-203, INC. IN      §                      Court Below: Court of Chancery
LIQUIDATION, and SPI-204, INC. IN  §                      of the State of Delaware,
LIQUIDATION,                       §                      in and for New Castle County
                                   §
       Plaintiff Below-Appellant,  §                      C.A. No. 9306-VCP
                                   §
       v.                          §
                                   §
WILMINGTON TRUST SP SERVICES, §
INC.; JOHNSON LAMBERT & CO., LLP; §
JOHNSON LAMBERT, LLP; MCSOLEY §
MCCOY & CO.; and STEPHEN D.        §
KANTNER,                           §
                                   §
       Defendants Below-Appellees. §

                                   Submitted:     October 28, 2015
                                   Decided:       November 2, 2015

Before STRINE, Chief Justice; HOLLAND and VAUGHN, Justices; SMALLS, Chief
Judge; and WELCH, Judge,* constituting the Court en Banc.

                                            ORDER

         This 2nd day of November 2015, upon consideration of the parties’ briefs and the

record below, it appears to the Court that:

         (1) On this appeal, a receiver of an insolvent insurer seeks to appeal the Court of

Chancery’s decision to dismiss its claims for breach of contract and professional

*
    Chief Judge Smalls and Judge Welch sit by designation under Del. Const. art. IV, § 12.
negligence against Wilmington Trust, which the insurer retained as its captive manager in

Delaware and Johnson Lambert and McSoley McCoy, which the insurer retained to

prepare its audited financial statements. The receiver’s complaint alleges that the sole

stockholder and CEO of the insurer, James M. Jackson, engaged in pervasive fraud and

that the insurer was never adequately capitalized. Wilmington Trust, Johnson Lambert,

and McSoley McCoy are alleged to have knowingly been complicit in Jackson’s

behavior, by understanding that the insurer was not adequately accounting for its assets

and for knowingly turning a blind eye to the unacceptable state of affairs for several

years. For that reason, the receiver pled a count against these three defendants for aiding

and abetting a breach of fiduciary duty.          At the very least, the receiver alleged,

Wilmington Trust, Johnson Lambert, and McSoley McCoy breached their duty of care as

professional advisors to the insurer, and are responsible in tort and contract for resulting

damages.

       (2) The Court of Chancery dismissed the professional negligence and contract

claims, holding that they were barred by the doctrine of in pari delicto.1 By contrast, the

Court of Chancery did not dismiss the aiding and abetting claims against Wilmington

Trust and Johnson Lambert, reasoning that under Delaware law, the doctrine of in pari

delicto should, consistent with the recognized fiduciary exception to that doctrine, not bar

claims against professional advisors for aiding and abetting.2 By so holding, the Court of

1
 See Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 271, 319 (Del. Ch. 2015).
2
  See id. at 319–23. The Court of Chancery dismissed the aiding and abetting claim as to
McSoley McCoy for failure to state a claim upon which relief could be granted. Id. at 323. That
decision was not appealed.
                                              2
Chancery took into account various policy factors, such as the need to hold professional

advisors accountable for serious wrongdoing while avoiding a litigation-intensive

approach that would expose professional advisors to more than an optimal threat of

liability in situations when their clients had engaged in unlawful behavior.3

       (3) On appeal, the receiver’s main argument is that the Court of Chancery erred in

its application of the in pari delicto doctrine and should have: i) allowed the receiver to

raise all claims the insurer possessed and disregard the doctrine because the underlying

company was an insurer; and ii) allowed for an exception to the in pari delicto doctrine to

allow a company to bring claims of professional negligence or breach of contract

regardless of whether the economic damages at issue flow from unlawful behavior of the

company’s own managers. We do not embrace either argument. Rather, we agree with

the Court of Chancery’s careful analysis of this difficult area of the law.4

       (4) The balance the Court of Chancery struck between the need for accountability

of professional advisors and the costs of exposing professional advisors to potentially

excessive risks is a sensible one, and reflects the one chosen by sister states, such as New

York, whose laws are often involved in situations involving Delaware corporations.5

This harmony is beneficial and if it is to be disturbed, that decision is best made by the

General Assembly.

3
  Id. at 318–20.
4
  See id. at 308–20.
5
  See id. at 306–08 (explaining that New York law governed two previous in pari delicto cases in
the Court of Chancery, In re Am. Int’l Grp., Inc., Consol. Derivative Litig., 965 A.2d 763 (Del.
Ch. 2009), aff’d, 11 A.3d 228 (Del. 2011), and In re Am. Int’l Grp., Inc., Consol. Derivative
Litig., 976 A.2d 872 (Del. Ch. 2009), aff’d, 11 A.3d 228 (Del. 2011)).

                                               3
      NOW, THEREFORE, IT IS ORDERED that the well-reasoned decision of the

Court of Chancery of April 27, 2015 is AFFIRMED.

                                            BY THE COURT:
                                            /s/ Leo E. Strine, Jr.
                                            Chief Justice

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