16-350
In Re: Lehr Construction Corp.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order
filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
Procedure 32.1 and this court’s Local Rule 32.1.1. When citing a summary order in a
document filed with this court, a party must cite either the Federal Appendix or an
electronic database (with the notation “summary order”). A party citing a summary order
must serve a copy of it on any party not represented by counsel.
At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on
the 9th day of December, two thousand sixteen.
PRESENT:
ROBERT A. KATZMANN,
Chief Judge,
RALPH K. WINTER,
Circuit Judge,
SIDNEY H. STEIN,
District Judge.*
________________________________________
IN RE: LEHR CONSTRUCTION CORP.,
Debtor.
________________________________________
JONATHAN L. FLAXER, not individually
but solely in his capacity as Chapter 11 trustee
for Lehr Construction Corp.,
Appellant,
v. No. 16-350
* Judge Sidney H. Stein, of the United States District Court for the Southern District of New York,
sitting by designation.
1
PETER GIFFORD,
Appellee.
________________________________________
For Appellant: MICHAEL S. DEVORKIN (Daniel N. Zinman, on the
brief), Golenbock Eiseman Assor Bell & Peskoe
LLP, New York, NY.
For Appellee: JOSEPH ARONAUER, Aronauer & Yudell, LLP, New
York, NY.
For Amicus Curiae J. Maxwell Beatty and Richard I. Janvey (Adam L.
National Association of Rosen and Sheryl P. Giugliano, on the brief),
Bankruptcy Trustees: Diamond McCarthy LLP, New York, NY; Ronald R.
Peterson, Jenner & Block LLP, Chicago, IL (on the
brief).
Appeal from a judgment of the United States District Court for the Southern District of
New York (Woods, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the judgment of the district court is AFFIRMED.
Appellant Jonathan Flaxer, in his capacity as Chapter 11 trustee (the “Trustee”) of Lehr
Construction Corp. (“Lehr”), appeals from a judgment of the district court, which affirmed an
order of the U.S. Bankruptcy Court for the Southern District of New York granting appellee Peter
Gifford’s motion to dismiss the Trustee’s faithless servant claim. We assume the parties’
familiarity with the underlying facts, the procedural history of the case, and the issues on appeal.
In 2010, the Manhattan District Attorney’s Office discovered that Lehr was systematically
overbilling its clients. Public disclosure of the investigation led Lehr to file for Chapter 11
bankruptcy in February 2011. In May 2011, a grand jury indicted Lehr and several of its
employees, and Lehr was subsequently convicted on thirteen counts, including enterprise
2
corruption, a scheme to defraud, and grand larceny. Gifford was not indicted, though he entered
into a cooperation agreement with the Manhattan District Attorney’s Office. In February 2013, the
Trustee brought a faithless servant claim against Gifford under New York common law, seeking to
disgorge more than $1.2 million in compensation and legal fees based on Gifford’s participation in
the fraud. Gifford filed a motion for judgment on the pleadings pursuant to Federal Rule of Civil
Procedure 12(c), asserting, inter alia, the affirmative defense of in pari delicto. The bankruptcy
court granted the motion on the basis that the Trustee was in pari delicto with Gifford. The district
court affirmed on the same ground.
On appeal, the Trustee contends that an employee may not impute his conduct to his
principal to defend against the principal’s claims and thus may not assert in pari delicto as a
defense against his employer. Instead, according to the Trustee, only third parties may invoke
principles of imputation and the defense of in pari delicto to defend against claims brought by a
principal. To hold otherwise, the Trustee contends, would be irreconcilable with New York’s
faithless servant doctrine, which entitles a principal to disgorge a disloyal agent’s compensation
regardless of whether the agent’s “services were beneficial to the principal.” Feiger v. Iral
Jewelry, Ltd., 363 N.E.2d 350, 351 (N.Y. 1977); see also Phansalkar v. Andersen Weinroth & Co.,
L.P., 344 F.3d 184, 200 (2d Cir. 2003).
“A district court’s order in a bankruptcy case is subject to plenary review, meaning that this
Court undertakes an independent examination of the factual findings and legal conclusions of the
bankruptcy court.” In re Cacioli, 463 F.3d 229, 234 (2d Cir. 2006) (internal quotation marks
omitted). We review the grant of a motion for judgment on the pleadings made pursuant to Rule
12(c) de novo, “accept[ing] all factual allegations in the complaint as true and draw[ing] all
3
reasonable inferences in plaintiff’s favor.” In re Thelen LLP, 736 F.3d 213, 218 (2d Cir. 2013).
The Court may consider affirmative defenses on the basis of the pleadings, so long as “the defense
appears on the face of the complaint.” Official Comm. of Unsecured Creditors of Color Tile, Inc. v.
Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d Cir. 2003) (internal quotation mark omitted).1
The Trustee’s argument that in pari delicto and imputation arise only in the context of a
principal’s claim against a third party is belied by New York law. As the New York Court of
Appeals recently emphasized, “a fundamental principle that has informed the law of agency and
corporations for centuries” is that “the acts of agents . . . are presumptively imputed to their
principals.” Kirschner v. KPMG LLP, 938 N.E.2d 941, 950 (N.Y. 2010). “[A]ll corporate acts —
including fraudulent ones — are subject to the presumption of imputation.” Id. at 951. A narrow
exception to the presumption of imputation is the adverse interest exception, “where the
corporation is actually the victim of a scheme undertaken by the agent to benefit himself or a third
party personally, which is therefore entirely opposed (i.e., ‘adverse’) to the corporation’s own
interests.” Id. at 952. “Fraud on behalf of a corporation is not the same thing as fraud against it, and
when insiders defraud third parties for the corporation, the adverse interest exception is not
pertinent.” Id. (internal quotation marks and citation omitted). Moreover, the defense of in pari
delicto, which “mandates that the courts will not intercede to resolve a dispute between two
wrongdoers,” “applies even in difficult cases and should not be ‘weakened by exceptions.’” Id. at
950 (quoting McConnell v. Commonwealth Pictures Corp., 166 N.E.2d 494, 497 (N.Y. 1960)).
1
In deciding the Rule 12(c) motion, the bankruptcy court took judicial notice of documents
relating to the underlying criminal proceedings against Lehr and its employees. The Trustee does
not argue that these documents were not properly before the courts below.
4
While Kirschner involved claims against third parties, we are not free to disregard the
breadth of the New York Court of Appeals’ language, nor its stated intent to “remove any lingering
confusion” regarding the principles of in pari delicto and imputation “to the extent [its] law had
become ambiguous.” Id. at 959. Moreover, contrary to the Trustee’s position, New York courts
applying Kirschner have dismissed employers’ claims against their employees on the basis of an in
pari delicto defense. See Teneyck, Inc. v. Rosenberg, 957 N.Y.S.2d 845, 847–48 (N.Y. Sup. Ct.
2013), aff’d, 975 N.Y.S.2d 335 (1st Dep’t 2013); Mosionzhnik v. Chowaiki, 972 N.Y.S.2d 841,
847–48 (N.Y. Sup. Ct. 2013).2 Accordingly, we reject the Trustee’s contention that employees are
categorically barred from asserting an in pari delicto defense against their employers.3 Nor does
the adverse interest exception avail the Trustee, because the fraud in which Gifford participated
was committed on behalf of Lehr and not against it. See Kirschner, 938 N.E.2d at 952.
As for the Trustee’s contention that allowing an employee to assert an in pari delicto
defense against his employer inherently conflicts with the faithless servant doctrine, such conflict
would appear to arise only where the basis for the in pari delicto defense is the imputation of the
2
The Trustee filed a motion requesting that the Court take judicial notice of the briefs filed in
Teneyck and another case for purposes of verifying the Trustee’s contention that certain arguments
were not raised in those cases. Though Gifford opposes the Trustee’s motion, he does not dispute
that those arguments were not raised in those cases. Because the point is undisputed, we deny the
motion as moot.
3
The Trustee’s position on the application of imputation is drawn from §§ 5.03 and 5.04 of the
Restatement (Third) of Agency. See Restatement (Third) Of Agency §§ 5.03–04 (2006). But we
are bound in this case to apply the law of New York, not the law of the Restatement. The Trustee,
in his reply brief, cites Brown v. Poritzky, 283 N.E.2d 751 (N.Y. 1972), overruled on other
grounds, Lusenskas v. Axelrod, 614 N.E.2d 729 (N.Y. 1993), for the proposition that “[w]hen the
agent is a defendant in a suit brought by his principal, the agent cannot impute his negligence to the
principal.” Id. at 753. Brown is readily distinguishable from the instant circumstances, however,
because it was concerned with the imputation of negligent conduct — not intentional wrongdoing
— and because it did not involve a defense of in pari delicto.
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defendant’s misconduct. That is not the case here where the basis for the in pari delicto defense
was Lehr’s conviction on thirteen felony counts for a scheme that was overseen by Gifford’s
superiors — including several Lehr officers and department heads — and for which Gifford was
not convicted. Cf. Teneyck, Inc., 957 N.Y.S.2d at 848 (applying in pari delicto defense to faithless
servant claim where the plaintiff corporation had been convicted of the same crime for which it
sought to hold the defendant-agent accountable). Thus, we need not resolve under which
circumstances, if any, an employee may assert an in pari delicto defense against his employer
when the defense is based solely on imputation of his own misconduct.
The Trustee also appears to rely on federal bankruptcy law for the proposition that there is
an “insider” exception to an in pari delicto defense. But even assuming that New York courts
recognize or would recognize the federal exception — a question we do not resolve — it would not
apply here because Gifford was not an “insider” of Lehr in the relevant sense. See, e.g., In re
Bernard L. Madoff Inv. Sec. LLC, 458 B.R. 87, 123 (Bankr. S.D.N.Y. 2011) (“[I]t is well
established that the . . . in pari delicto rules do not apply to actions of fiduciaries who are insiders
in the sense that they either are on the board or in management, or in some other way control the
corporation.” (internal quotation marks omitted)).
Finally, the courts below committed no error in denying Lehr leave to amend. See Grullon
v. City of New Haven, 720 F.3d 133, 140 (2d Cir. 2013) (“Leave to amend may properly be denied
if the amendment would be futile.” (internal quotation marks and alteration omitted)). Though
6
Lehr contends that it could plead facts showing that it was less culpable than Gifford — such that
in pari delicto would not apply — any such argument would fail on the facts of this case.4
We have considered the Trustee’s remaining arguments and find in them no basis for
reversal. Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
4
In light of the foregoing analysis, certification to the New York Court of Appeals, as the Trustee
requests in the alternative, is not warranted in this case.
7