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Bondi v. Citigroup, Inc.

423 N.J. Super. 377, 32 A.3d 1158 (App. Div. 2011)

CORPORATIONS; FRAUD — In an action for fraud and similar activities by a company against a third party, such as its bank, the third party may be protected by the in pari delicto doctrine, and the wrongs of a company insider will be imputed to the company unless the insider was acting solely for his or her own benefit and adversely to the interests of the company.

An Italian company’s financial collapse triggered the Italian government’s appointment of an administrator to oversee the company’s reorganization. The administrator sued, among others, one of the company’s investment banks. He accused the bank of facilitating, covering up, and profiting from various improper and illegal financial manipulations orchestrated by the company’s founder and by other insiders over a prolonged period of time. The administrator claimed that the financial manipulations allowed the company to artificially inflate its cash flow and value to hide its debt, resulting in billions of dollars in losses to creditors and shareholders.

The administrator charged the bank with fraud, aiding and abetting fraud, negligent misrepresentation, diversion of corporate assets, aiding and abetting fraudulent transfers, deepening insolvency, and participating in conspiracies. The bank filed a motion for summary judgment, claiming that the in pari delicto defense barred all claims against the bank. The lower court agreed that all of the administrator’s contract and tort claims, except for the aiding and abetting the looting of company funds and breach of fiduciary duty claims, were barred by that defense. The administrator appealed. The Appellate Division affirmed.

Under the in pari delicto doctrine, where there are two wrongdoers, a court won’t get involved based on a policy that denying relief to such parties will deter wrongdoing generally. There is an “adverse interest” exception, which holds that the wrongs of a corporate insider will not be imputed to the corporation if the insider acted solely for his own benefit and adversely to the interests of the corporation. In this case, the administrator argued that the corporate insiders acted solely for their own personal benefit and not for the benefit of the company. Therefore, their bad deeds should not be imputed to the company. If their wrongful conduct was imputed to the company, then the bank would have no defense under the doctrine.

The Court found that in order for the administrator to prevail, he needed to establish, as a matter of law, that the fraudulent actions of the corporate insiders constituted a total abandonment of their corporate responsibilities. In addition, the Court would have to find that, as a matter of law, no benefit accrued to the corporation through the structured transactions, securitized transactions or derivative transactions the bank was involved in with the company. Or, if there was any benefit, then it must have been so transitory as to be deemed illusory. The Court also noted that it would need to find that the corporate insiders and the bank bore equal responsibility for the underlying illegal actions. The administrator argued that the financing transactions facilitated by the bank could not be considered a benefit to the corporation. The Court disagreed.

According to the Court, in many cases, the insider looting leading to a company’s insolvency cannot be deemed a benefit to the company. However, in other cases, the mere fact that insider fraud bankrupted a company should not automatically dictate that along the way the company or its shareholders did not receive substantial benefits, even for a short period of time. Here, the Court found that it would be inequitable to bar the in pari delicto defense, the debtor was a very large company that was the subject of long-term insider dealing, some of which predated the bank’s involvement. Further, even though the evidence tended to show that the insiders’ conduct drove the company into bankruptcy, the circumstances suggested that the company did receive meaningful profits over a long period, and so the adverse interest exception did not apply.


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