[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 05-12320 JANUARY 30, 2006
________________________ THOMAS K. KAHN
CLERK
D. C. Docket No. 02-03327-CV-TWT-1
OFFICIAL COMMITTEE OF UNSECURED CREDITORS
OF PSA, INC., et al.,
on behalf of PSA, Inc., et al.,
Plaintiff,
TRUSTEE DARRYL S. LADDIN,
of the ETS Creditors' Litigation Trust,
Plaintiff-Appellant,
versus
CHARLES EDWARDS, et al.,
Defendants,
LEGENDS COMMUNICATIONS, INC.,
SHELDON E. FRIEDMAN,
FRIEDMAN, DEVER & MERLIN, LLC,
PWH, INC.,
d.b.a. Friedman, Denver & Merlin, LLC
d.b.a. Sheldon E. Friedman,
KARLOVEC FINANCIAL, INC.,
RELIANCE TRUST COMPANY, PENSCO, et al.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(January 30, 2006)
Before CARNES, HULL and PRYOR, Circuit Judges.
PRYOR, Circuit Judge:
This appeal presents two issues, the first of which is an issue of first
impression in this Circuit: (1) whether the doctrine of in pari delicto bars a
trustee’s claims on behalf of a bankrupt debtor for violations of the Racketeer
Influenced and Corrupt Organizations Act; and (2) whether the trustee can
maintain a claim for aiding and abetting a breach of fiduciary duties under Georgia
law. See 11 U.S.C. § 541(a); 18 U.S.C. § 1964(c). Darryl S. Laddin is the trustee-
in-bankruptcy for ETS, which operated a massive Ponzi scheme that defrauded
thousands of investors of hundreds of millions of dollars. Laddin appeals an order
that dismissed his complaint, under RICO and Georgia law, against entities that,
Laddin alleges, assisted ETS in the operation of its fraudulent scheme. Because
the defense of in pari delicto bars recovery by a central and active violator of RICO
and Georgia courts do not recognize a claim for aiding and abetting a breach of
2
fiduciary duties, we affirm the dismissal of Laddin’s complaint.
I. BACKGROUND
In his complaint, Laddin alleged that in October 1994, Charles Edwards
formed ETS Payphones, Inc., a company that sold and leased-back payphones as
investment opportunities. “With Edwards at its helm, ETS devised [a] scheme”
where an investor paid a fixed sum to purchase a payphone, and ETS leased the
payphone back from the investor for a fee. “ETS represented itself as . . . a no loss
proposition” and induced individuals to purchase the phones. Although “ETS . . .
created marketing and promotional materials that promised returns . . . of 14% or
15%,” it consistently lost money on its payphone operations and continually had to
attract new investors to meet its obligations to existing investors. “[W]ith the sale
of each phone, ETS assumed a liability it could not satisfy.” The operation of the
sale-leaseback program was a Ponzi scheme that defrauded thousands of investors
of over $300 million. As the sole shareholder of ETS, Edwards transferred the
proceeds from ETS to himself or other companies he owned.
On September 11, 2000, ETS filed for bankruptcy. The bankruptcy court
allowed the creation of an Official Committee of Unsecured Creditors, and the
Debtors and Creditors’ Committee created the ETS Creditors’ Litigation Trust.
The committee appointed Laddin as trustee of the debtor estate.
3
Laddin sued several defendants, including Reliance Trust Co., PENSCO,
Inc., and Community National Bank, for (1) aiding and abetting a breach of
fiduciary duties under Georgia law, (2) violations of section 1962(c) and (d) of
RICO, 18 U.S.C. §§ 1962(c), (d), and (3) avoidance claims. Reliance Trust Co.,
PENSCO, Inc., and Community National Bank (collectively, IRA Custodians) are
large holders of individual retirement accounts, and Laddin alleged that these IRA
Custodians aided ETS in defrauding investors by funneling investor IRA funds
into ETS payphone investments. Laddin alleged that “[b]y failing to conduct
appropriate due diligence and/or ignoring the facts altogether,” “[t]he IRA
Custodians enabled thousands of investors to partake of the ETS scheme and
caused ETS to incur millions of dollars in additional debt.”
The IRA Custodians moved to dismiss Laddin’s complaint. They argued
that Laddin, as trustee, could not maintain a claim of aiding and abetting a breach
of fiduciary duties and the doctrine of in pari delicto, which provides that a
wrongdoer may not profit from his wrongful acts, barred Laddin’s claims. The
district court granted the motions to dismiss.
Before it addressed the merits of Laddin’s complaint, the district court
addressed Laddin’s standing to sue. The district court concluded that Laddin had
standing to bring claims on behalf of the debtor, ETS, but Laddin did not have
4
standing to assert claims on behalf of the creditors. The court reasoned that the
Creditors’ Committee did not have the authority to assign the claims belonging to
ETS creditors and the Trust Agreement did not authorize Laddin to bring claims on
behalf of creditors.
The district court also concluded that the doctrine of in pari delicto barred
Laddin’s complaint. The district court found that, under Georgia law, the
wrongdoing of Edwards as a sole shareholder was imputed to ETS, the debtor
corporation, under the “sole actor” rule. The court reasoned that, because the
“legal and equitable interests of the debtor” in bankruptcy are only as strong as the
debtor’s claim against defendants at the commencement of the bankruptcy, see 11
U.S.C. § 541(a), the doctrine of in pari delicto barred Laddin’s state law claims.
The district court also held that the doctrine of in pari delicto barred Laddin’s
claims under RICO. Laddin appeals the dismissal by the district court.
II. STANDARD OF REVIEW
This Court reviews de novo the ruling of the district court on a motion to
dismiss and construes the allegations in the complaint “in the light most favorable
to the plaintiff.” Jackson v. BellSouth Telecomms., 372 F.3d 1250, 1263 (11th
Cir. 2004). A motion to dismiss should not be granted unless “it appears beyond
doubt that the plaintiff can prove no set of facts in support of his claim which
5
would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45–46, 78 S. Ct. 99,
101 (1957).
III. DISCUSSION
Our discussion is divided into three parts. We first address the trustee’s
argument that his complaint is not subject to a defense of in pari delicto that might
have been asserted against the debtor. We then discuss whether the defense of in
pari delicto can be asserted against a plaintiff who asserts violations of the federal
RICO statute. We finally consider whether the trustee can maintain a claim under
Georgia law for aiding and abetting a breach of fiduciary duties.
A. The Trustee Is Subject to the Defenses that Were Available Against the Debtor.
The Bankruptcy Code provides that property of the debtor estate includes
“all legal or equitable interests of the debtor in property as of the commencement
of the case.” 11 U.S.C. § 541(a)(1). “Legal interests or equitable interests”
include any causes of action the debtor may bring. Official Comm. of Unsecured
Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 356 (3d Cir. 2001). A trustee, as
the representative of the estate, succeeds into the rights of the debtor-in-bankruptcy
and has standing to bring any suit that the debtor corporation could have brought
outside of bankruptcy. 11 U.S.C. § 323; O’Halloran v. First Union Nat’l Bank,
350 F.3d 1197, 1202 (11th Cir. 2003). The argument of the IRA Custodians that
6
the wrongdoing of ETS deprives Laddin of standing to assert claims against them
fails because “[a]n analysis of standing does not include an analysis of equitable
defenses, such as in pari delicto.” R.F. Lafferty & Co., 267 F.3d at 347. We agree
with the district court that Laddin had standing based on an alleged injury to the
debtor estate, see id. at 346–48, but Laddin’s standing to bring claims on behalf of
the debtor estate does not mean that the debtor’s wrongdoing is immaterial.
Laddin contends that his enforcement, as a trustee of the “legal interests or
equitable interests” of the debtor estate, is not subject to the doctrine of in pari
delicto. Laddin argues that, because the doctrine of in pari delicto depends on the
“personal malfeasance of the individual seeking to recover,” the wrongs of ETS
should not be imputed to him as the bankruptcy trustee. Laddin asserts that his
argument is supported by the legislative history to the Bankruptcy Code, which
explains that “[t]o the extent . . . an interest is limited in the hands of the debtor, it
is equally limited in the hands of the estate except to the extent that defenses which
are personal against the debtor are not effective against the estate.” 124 Cong. Rec.
32,399 (1978).
We need not resort to legislative history because the text of section 541(a) is
unambiguous, and “the language of our laws is the law.” CBS, Inc. v. Primetime
24 Joint Venture, 245 F.3d 1217, 1227 (11th Cir. 2001). Under the plain meaning
7
of section 541(a), the debtor estate includes all “legal or equitable interests of the
debtor as of the commencement of the case.” 11 U.S.C. § 541(a) (emphasis
added). “A bankruptcy trustee stands in the shoes of the debtor and has standing
to bring any suit that the debtor could have instituted” when the debtor filed for
bankruptcy, and there is no suggestion in the text of the Bankruptcy Code that the
trustee acquires rights and interests greater than those of the debtor. O’Halloran,
350 F.3d at 1202; see also 11 U.S.C. § 362(a). If a claim of ETS would have been
subject to the defense of in pari delicto at the commencement of the bankruptcy,
then the same claim, when asserted by the trustee, is subject to the same
affirmative defense.
Even if we considered legislative history, Laddin’s argument would fail.
The portion of the legislative history on which Laddin relies pertains to section
541(d), not section 541(a). Section 541(d) governs “[p]roperty in which the debtor
holds . . . only legal title and not an equitable interest, such as a mortgage secured
by real property . . . .” 11 U.S.C. § 541(d). The portion of the legislative history
quoted by Laddin is inapplicable to the interpretation of “property of the debtor
estate” under section 541(a). See 124 Cong. Rec. 32,399. In the law of
commercial paper, personal defenses are affirmative defenses that may not be
asserted against a holder-in-due-course. See U.C.C. § 3-305(a)(1), (2), (3) (stating
8
that a holder-in-due-course is subject to real defenses of duress, fraud in the
factum, infancy, insolvency, and legal incapacity); see also FDIC v. Wood, 758
F.2d 156, 160 (6th Cir. 1985); 6 Ronald A. Anderson, Anderson on the Uniform
Commercial Code § 3-305:103 (3d ed., rev. vol. 1998) (“Under the Negotiable
Instruments Law that preceded the Code, the defenses were divided into real and
personal defenses.”). In his complaint, Laddin does not assert any rights either as a
holder-in-due-course or under section 541(d). Laddin provides no support for his
assertion that in pari delicto is a personal defense that is excluded from the debtor
estate under section 541(a).
Our reading of the text of section 541(a) also comports with the purposes of
the Bankruptcy Code. See Demarest v. Manspeaker, 498 U.S. 184, 190–91, 111 S.
Ct. 599, 604 (1991) (stating that the text of the statute governs unless the result
would be “so bizarre that Congress could not have intended it” (internal quotations
and citations omitted)). Upon the commencement of a bankruptcy case, an
automatic stay freezes the rights of parties to the bankruptcy, both debtor and
creditors. 11 U.S.C. § 362(a). The automatic stay and the definition of the debtor
estate “place[] both temporal and qualitative limitations on the reach of the
bankruptcy estate.” Sender v. Buchanan (In re Hedged-Inv. Assocs.), 84 F.3d
1281, 1285 (10th Cir. 1996); see 11 U.S.C. § 541. Under Laddin’s erroneous
9
interpretation of section 541, a postpetition event, the appointment of a trustee,
could undermine the automatic stay and change the nature of the legal and
equitable interests of the debtor estate.
Laddin argues that his recovery would ultimately inure to the benefit of
innocent creditors instead of the wrongful debtor, but he fails to account for the
likelihood that individual creditors damaged by the debtor’s Ponzi scheme could
separately pursue claims against the IRA Custodians free from the bar of in pari
delicto. If Laddin were allowed to pursue the debtor’s claims, his recovery, on the
one hand, would become part of the bankruptcy estate to be apportioned among
creditors without regard to whether they were harmed by the IRA Custodians. See
11 U.S.C. §§ 507, 1129(b)(2) (stating that the plan of confirmation must be “fair
and equitable[] with respect to each class of claims or interests”). If creditors who
were harmed by the IRA Custodians, on the other hand, sued separately outside of
bankruptcy, then those creditors would not risk dilution through apportionment to
senior creditors or unharmed creditors of equal priority. See id. § 507 (prioritizing
classes of claims). Creditors whose legal interests were harmed by the IRA
Custodians could rightfully recover more outside of bankruptcy because they
would not compete with the trustee’s claims on behalf of the debtor estate.
We are not alone in concluding that the defense of in pari delicto may be
10
asserted against a bankruptcy trustee. Although this is an issue of first impression
in this Circuit, our sister circuits that have considered the issue have unanimously
concluded that in pari delicto applies with equal force to a trustee-in-bankruptcy as
a debtor outside of bankruptcy. See Grassmueck v. Am. Shorthorn Ass’n, 402
F.3d 833, 837 (8th Cir. 2005); Official Comm. of Unsecured Creditors v. R.F.
Lafferty & Co., 267 F.3d 340, 356–57 (3d Cir. 2001); Terlecky v. Hurd (In re
Dublin Sec.), 133 F.3d 377, 381 (6th Cir. 1997); Sender v. Buchanan (In re
Hedged-Inv. Assocs.), 84 F.3d 1281, 1285 (10th Cir. 1996); see also Official
Comm. of Unsecured Creditors of Color Tile v. Coopers & Lybrand, LLP, 322
F.3d 147, 158–66 (2d Cir. 2003) (applying the defense of in pari delicto to bar
Texas law claims brought by trustee-in-bankruptcy). Against this weight of
authority, Laddin urges us to chart a new course.
Laddin erroneously relies on a decision of the Seventh Circuit and the
perspective of a commentator to support his argument that in pari delicto does not
bar recovery by a bankruptcy trustee. See Scholes v. Lehmann, 56 F.3d 750, 754
(7th Cir. 1995); cf. Jeffrey Davis, Ending the Nonsense: The In Pari Delicto
Doctrine Has Nothing to Do with What Is § 541 Property of the Bankruptcy Estate,
21 Emory Bankr. Dev. J. 519, 542 (2005). Laddin argues that the Seventh Circuit
refused to apply in pari delicto to bar recovery for a receiver who brought a
11
fraudulent conveyance action under Illinois law, Scholes, 56 F.3d at 754, but
Laddin’s appeal is governed by the Bankruptcy Code, not the law of receiverships
and fraudulent conveyances under state law. See Knauer v. Jonathon Roberts Fin.
Group, Inc., 348 F.3d 230, 234–37 (7th Cir. 2003); In re Hedged-Inv. Assocs., 84
F.3d at 185 & n.5. Fraudulent conveyances also are an exception to the general
rule that the trustee takes the debtor estate as it is at the commencement of the
bankruptcy. Compare 11 U.S.C. § 544(b) (providing that trustees may void
prepetition fraudulent conveyances after the commencement of the bankruptcy)
with id. § 541(a) (providing that the debtor estate includes “all legal or equitable
interests of the debtor in the property as of the commencement of the case”
(emphasis added)). As for Laddin’s other persuasive authority, the legal
commentator makes the same flawed arguments about legislative history and the
Scholes decision that we have already rejected. See Davis, supra at 521–22,
538–39; see also Tanvir Alam, Fraudulent Advisors Exploit Confusion in the
Bankruptcy Code: How In Pari Delicto Has Been Perverted to Prevent Recovery
for Creditors, 77 Am. Bankr. L.J. 305 (2003).
Both the text and purposes of the Bankruptcy Code support the conclusion
of the district court that Laddin’s complaint is subject to the same defenses that
were available against a complaint filed by the debtor at the commencement of the
12
bankruptcy. “The equitable defense of in pari delicto is available in an action by a
bankruptcy trustee against another party if the defense could have been raised
against the debtor.” Grassmueck, 402 F.3d at 837 (citing R.F. Lafferty & Co., Inc.,
267 F.3d at 355–56, 358). The next questions involve whether the defense of in
pari delicto would have barred recovery by the debtor, ETS, under either the
federal RICO statute or Georgia law. We consider these questions in turn.
B. The Doctrine of In Pari Delicto Bars a RICO Claim by a Conspirator.
Laddin argues that the district court erroneously dismissed his RICO claims
because the defense of in pari delicto is not an available defense against the debtor.
Under RICO, “[a]ny person injured in his business or property by reason of a
violation of section 1962 of this chapter may sue . . . and shall recover threefold the
damages he sustains . . . .” 18 U.S.C. § 1964(c). Section 1962(c) of RICO states,
“It shall be unlawful for any person employed by or associated with any enterprise
. . . to conduct or participate . . . in the conduct of such enterprise’s affairs through
a pattern of racketeering activity or collection of unlawful debt.” Id. § 1962(c).
Conspiracies in violation of section 1962(c) are also prohibited. Id. § 1962(d).
The doctrine of in pari delicto is an equitable doctrine that states “a plaintiff
who has participated in wrongdoing may not recover damages resulting from the
wrongdoing.” Black’s Law Dictionary 794 (7th ed. 1999). This common law
13
defense “derives from the Latin, in pari delicto potior est conditio defendentis: ‘In
a case of equal or mutual fault . . . the position of the [defending] party . . . is the
better one.’” Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306,
105 S. Ct. 2622, 2626 (1985). The doctrine of in pari delicto is based on the
policy that “courts should not lend their good offices to mediating disputes among
wrongdoers” and “denying judicial relief to an admitted wrongdoer is an effective
means of deterring illegality.” Id. The issue whether this defense bars a complaint
under RICO is one of first impression for our Circuit.
The federal law of affirmative defenses governs the enforcement of causes
of action created by federal statutes. See O’Melveny & Myers v. FDIC, 512 U.S.
79, 84–85, 114 S. Ct. 2048, 2053 (1994). There is a paucity of federal caselaw
regarding whether the doctrine of in pari delicto bars a complaint under RICO, and
none of our sister circuits have squarely decided the issue. See Roma Constr. Co.
v. Arusso, 96 F.3d 566, 570 (1st Cir. 1996) (“Whether or not there exists such an
‘innocent party’ requirement is a question of first impression in this circuit and,
indeed, we are not aware of any cases anywhere that adopt such a requirement.”);
cf. Bontkowski v. First Nat’l Bank of Cicero, 998 F.2d 459, 462 (7th Cir. 1993)
(considering whether the doctrine of in pari delicto barred a RICO defendant for
purposes of equitable tolling).
14
In two cases, the Supreme Court has considered the application of the in pari
delicto doctrine in the enforcement of antitrust and securities laws. Bateman
Eichler, 472 U.S. 299, 105 S. Ct. 2622; Perma Life Mufflers, Inc. v. Internat’l Parts
Corp., 392 U.S. 134, 88 S. Ct. 1981 (1968). Although in both cases it declined to
apply the doctrine of in pari delicto, the Court explained that this or a related
doctrine might apply in other contexts. We consider each decision of the Supreme
Court for guidance in resolving this issue.
At first glance, the earlier decision of the Supreme Court, Perma Life
Mufflers, would appear to preclude the use of in pari delicto against a federal
RICO claim because the Court held “that the doctrine of in pari delicto, with its
complex scope, contents, and effects, is not to be recognized as a defense to an
antitrust action.” 392 U.S. at 140, 88 S. Ct. at 1985. The plaintiffs were
franchisees who alleged that the franchisor, its parent corporation, other
subsidiaries, and several individuals conspired to restrain trade and engage in
illegal price discrimination. Id. The Court cautioned against “invoking broad
common-law barriers to relief where a private suit serves important public
purposes,” and in the antitrust context, the Court explained that there is an
“overriding public policy in favor of competition.” Id. at 138–39, 88 S. Ct. at
1984. “A more fastidious regard for the relative moral worth of the parties would
15
only result in seriously undermining the usefulness of the private action as a
bulwark of antitrust enforcement.” Id. That first glance does not tell the whole
story, however.
The rest of the story in Perma Life Mufflers is that the franchisees were, in
the eyes of the Court, at worst, passive violators of the antitrust laws. Because “in
pari delicto literally means ‘of equal fault,’” the Court reasoned that the doctrine
should not “deny[] recovery to injured parties merely because they have
participated to the extent of utilizing illegal arrangements formulated and carried
out by others.” Id. at 138–39, 88 S. Ct. at 1985 (emphasis added). The Court
explained that the participation of the franchisees in the alleged antitrust
conspiracy “was not voluntary in any meaningful sense.” Id. at 139, 88 S. Ct. at
1985. Although the franchisees “sought the franchises enthusiastically[,] . . . they
did not actively seek each and every clause of the agreement.” Id. The franchisees
“alleged that they had continually objected to [the violative terms].” Id. Although
the Court held that in pari delicto did not bar the franchisees from recovery, it
explicitly left open the question whether complete involvement in an antitrust
violation, “wholly apart from the idea of in pari delicto,” would bar a plaintiff from
bringing an antitrust claim. Id. at 140, 88 S. Ct. at 1985.
The later decision of the Supreme Court in Bateman Eichler is much like the
16
earlier one in Perma Life Mufflers, because the Court refused to apply the doctrine
of in pari delicto to bar tippees from recovery for insider trading under federal
securities laws. Bateman Eichler, 472 U.S. 299, 105 S. Ct. 2622. The tippees
alleged that a securities broker and a company official had induced them to
purchase company stock by providing them with materially false insider
information. Id. at 301–02, 105 S. Ct. at 2624–25. The tippees alleged that they
suffered damages when the stock price fell as a result of the false information. Id.
As in Perma Life Mufflers, the holding in Bateman Eichler was limited,
because the Court concluded that the tippees were not active participants in the
alleged violation of federal law. The Court stated that, “in its classic formulation,
the in pari delicto defense was narrowly limited to situations where the plaintiff
truly bore at least substantially equal responsibility for his injury,” id. at 306–07,
105 S. Ct. at 2627, and the Court explained that “where a plaintiff truly bore at
least substantially equal responsibility for the violation, a defense based on such
fault . . . should be recognized.” Id. at 308–09, 105 S. Ct. at 2628 (emphasis
added). The Court then concluded that the face of the complaint did not reveal that
the tippees had engaged in wrongdoing. Id. at 311 n.21, 105 S. Ct. at 2629 n.21
(stating that “the complaint does not set forth sufficient facts to conclude” that the
tippees were in delictum because “it is uncertain whether [the tippee-plaintiffs] had
17
any basis to believe that [the tipper-defendant] . . . had violated his fiduciary
duties”).
The Court explained that “there are important distinctions between the
relative culpabilities of tippers, securities professionals, and tippees in these
circumstances.” Id. at 312–13, 105 S. Ct. at 2630. The Court did “not believe that
the tippee properly can be characterized as being of substantially equal culpability
as his tippers.” Id. at 314, 105 S. Ct. at 2631. The Court concluded that, because
the tippers in Bateman Eichler “masterminded this scheme to manipulate the
market . . . for their own personal benefit[] and . . . used the . . . respondents as
unwitting dupes,” the tippees were not equally culpable. Id.
The Court in Bateman Eichler expressed its desire to advance the policy goal
of the securities laws to protect “the investing public and the national economy
through the promotion of ‘a high standard of business ethics . . . in every facet of
the securities industry.’” Id. at 315, 105 S. Ct. at 2631 (citing SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 186–87, 84 S. Ct. 275, 280 (1963)).
Because “‘[t]he true insider or the broker-dealer is at the fountainhead of the
confidential information[,] . . . the most effective means . . . is to nip in the bud the
source of the information’” and allow tippees to recover from the fraudulent
tippers. Id. at 316, 105 S. Ct. at 2632 (quoting Nathanson v. Weis, Voisin,
18
Cannon, Inc., 325 F. Supp. 50, 57–58 (S.D.N.Y. 1971)). For that reason, the Court
explained that a tippee’s complaint should be barred “only where (1) as a direct
result of his own actions, the plaintiff bears at least substantially equal
responsibility for the violations he seeks to redress, and (2) preclusion of suit
would not significantly interfere with the effective enforcement of the securities
laws and protection of the investing public.” Id. at 310–11, 105 S. Ct. at 2629.
Under Perma Life Mufflers and Bateman Eichler, the application of the
defense of in pari delicto to causes of action created by federal statutes depends on
two factors: (1) the plaintiffs’ active participation in the violation vel non and (2)
the policy goals of the federal statute. See Pinter v. Dahl, 486 U.S. 622, 632–33,
108 S. Ct. 2063, 2071 (1988). Both of these factors support the application of the
in pari delicto doctrine in this appeal. We consider each factor in turn.
First, it is beyond doubt that the allegations of the trustee’s complaint render
ETS in active participation with the IRA Custodians. If anything, the conduct of
ETS was in majore delicto. Laddin alleged that “ETS devised the scheme and
promoted and marketed the sale and leaseback of payphones as investment
opportunities to individuals.” ETS also “control[led] all aspects of the operation,”
“created marketing and promotional materials,” and “promised returns . . . of 14%
19
or 15%” although it “assumed a liability it could not satisfy.” Although the IRA
Custodians allegedly “enabled thousands of investors to partake of the ETS scheme
and caused ETS to incur millions of dollars in additional debt,” ETS “devised the
scheme,” transferred funds from IRA accounts, and “with the sale of each phone, []
assumed a liability it could not satisfy.”
On appeal, Laddin fails to explain how the IRA Custodians violated RICO
while ETS was a passive bystander in their scheme to defraud. Laddin’s complaint
alleged that ETS was the hub of the Ponzi scheme to defraud investors. The
allegations in the complaint logically compel the conclusion that ETS had
“substantially equal responsibility for [its] injury.” Bateman Eichler, 472 U.S. at
308–09, 105 S. Ct. at 2628.
Second, the application of in pari delicto to bar Laddin’s complaint advances
the policy of civil liability under the federal RICO statute. Laddin argues that
plaintiffs should be allowed to recover to serve the deterrent purposes underlying
the civil liability provision of RICO regardless of whether the plaintiffs
participated in the wrongdoing. We disagree. Under RICO, “[i]t shall be unlawful
for any person employed by or associated with any enterprise . . . to conduct or
participate . . . in the conduct of such enterprise’s affairs through a pattern of
racketeering activity or collection of unlawful debt.” 18 U.S.C. § 1962(c)
20
(emphasis added). It would be anomalous, to say the least, for the RICO statute to
make racketeering unlawful in one provision, yet award the violator with treble
damages in another provision of the same statute. “Congress intended RICO’s
civil remedies to help eradicate ‘organized crime from the social fabric’ by
divesting ‘the association of the fruits of ill-gotten gains.’” Genty v. Resolution
Trust Corp., 937 F.2d 899, 910 (3d Cir. 1991) (quoting United States v. Turkette,
452 U.S. 576, 585, 101 S. Ct. 2524, 2529 (1981)). Laddin’s recovery under RICO
would not divest RICO violators of their ill-gotten gains; it would result in a
wealth transfer among similarly situated conspirators.
Laddin argues that some district courts and bankruptcy courts have held that
the doctrine of in pari delicto is not an available defense in federal RICO actions
because the public policy objectives of RICO are similar to those of the antitrust
laws, but Laddin’s reliance on these decisions is misplaced. See, e.g., Harper v.
AT&T, 54 F. Supp. 2d 1371 (S.D. Ga. 1999); Bieter Co. v. Blomquist, 848 F.
Supp. 1446 (D. Minn. 1994); In re Nat’l Mortgage Equity Corp., 636 F. Supp.
1138 (C.D. Cal. 1986). These courts have relied on Perma Life Mufflers to
conclude that the punitive and deterrent aspects of antitrust treble damages are
equally applicable in the racketeering context, In re Nat’l Mortgage Equity Corp.,
636 F. Supp. at 1156 (stating that the reasoning in Perma Life Mufflers is “equally
21
applicable to RICO treble damage actions”), but they misinterpret the holding of
Perma Life Mufflers. Because federal RICO violations, as a matter of law, require
affirmative wrongdoing rather than passive acquiescence, Perma Life Mufflers
does not preclude the defense of in pari delicto in the RICO context.
The Court in Perma Life Mufflers premised its holding on the passive
characteristics of antitrust participants. In that context, “participation [i]s not
voluntary in any meaningful sense” when antitrust violators do not “seek each and
every clause of the agreement,” but must accept questionably violative terms to
obtain an otherwise attractive business opportunity. Perma Life Mufflers, 392 U.S.
at 139, 88 S. Ct. 1985. Perma Life Mufflers explicitly left open the possibility that
a defense of active involvement could bar a complaint about an antitrust
conspiracy, and our sister circuits have accordingly barred antitrust claims where
the plaintiff was completely involved in the antitrust conspiracy. See THI-Hawaii,
Inc. v. First Commerce Fin. Corp., 627 F.2d 991, 995 (9th Cir. 1980) (holding that
there is “complete involvement” where “the illegal conspiracy would not have
been formed but for [the plaintiff’s] participation” and barring recovery by a
plaintiff who negotiated, prepared, and earned revenues from an exclusive sales
agreement with the defendant); Columbia Nitrogen Corp. v. Royster Co., 451 F.2d
3, 15–16 (4th Cir. 1971) (“[W]hen parties of substantially equal economic strength
22
mutually participate in the formulation and execution of the scheme and bear equal
responsibility for the consequent restraint of trade, each is barred from seeking
treble damages from the other.”); cf. Premier Elec. Constr. Co. v. Miller-Davis Co.,
422 F.2d 1132, 1138 (7th Cir. 1970) (“[W]e believe that Perma Life holds only that
plaintiffs who do not bear equal responsibility for creating and establishing an
illegal scheme, or who are required by economic pressures to accept such an
agreement, should not be barred from recovery simply because they are
participants.”).
In contrast with antitrust violations, a federal RICO violation requires
affirmative and deliberate participation. A violation of RICO requires that the
defendants “participated, either directly or indirectly, in the conduct of the affairs
of the enterprise . . . through a pattern of racketeering activity.” United States v.
Starrett, 55 F.3d 1525, 1541 (11th Cir. 1995); 18 U.S.C. § 1962(c). A “‘pattern of
racketeering activity’ requires at least two acts of racketeering activity.” 18 U.S.C.
§ 1961(5) (emphasis added); see id. § 1961(1) (defining “racketeering” as “any act
or threat involving murder, kidnapping, gambling, arson, robbery, bribery,” etc.).
The defendant also must “knowingly implement[]” and “mak[e]” decisions.
Starrett, 55 F.3d at 1548; see Reves v. Ernst & Young, 507 U.S. 170, 185, 113 S.
23
Ct. 1163, 1173 (1983) (holding that the defendant “participates” if he “directs” the
pattern of racketeering activity).
Because a complaint brought by ETS, outside of bankruptcy, against other
members of its RICO conspiracy would have been barred by the doctrine of in pari
delicto, Laddin is likewise barred from recovery within bankruptcy. Laddin’s
complaint is barred because ETS was an active participant in the Ponzi scheme and
the application of the defense of in pari delicto furthers the policy of the federal
RICO statute. The district court did not err when it dismissed Laddin’s claim for
treble damages under the federal RICO statute, because his recovery was barred
based on the face of his complaint.
C. Georgia Does Not Recognize a Claim for Aiding and Abetting a Breach of
Fiduciary Duties.
Laddin contends that the doctrine of in pari delicto does not bar his claims
for aiding and abetting a breach of fiduciary duties. We need not reach this issue
because we previously have held that Georgia courts have not recognized a cause
of action for aiding and abetting a breach of fiduciary duties. Munford v.
Valuation Research Corp., 98 F.3d 604, 613 (11th Cir. 1996); see also Monroe v.
Bd. of Regents of Univ. Sys. of Ga., 602 S.E.2d 219, 224 (Ga. Ct. App. 2004)
(“Georgia has never recognized a claim for aiding and abetting a breach of
fiduciary duty.”). “[W]e may affirm for any reason supported by the record, even
24
if not relied on by the district court.” Cochran v. U.S. Health Care Fin. Admin.,
290 F.3d 775, 778 n.3 (11th Cir. 2002). “Even assuming that Georgia courts will
someday recognize a cause of action for aider and abettor liability in the context of
a breach of fiduciary claim, the facts in this case do not warrant its creation now.”
Munford, 98 F.3d at 613. Because the bankruptcy trustee may only “bring any suit
that the debtor could have instituted had it not been thrown into bankruptcy,”
O’Halloran, 350 F.3d at 1202, the district court correctly dismissed Laddin’s claim
for aiding and abetting a fiduciary duty.
IV. CONCLUSION
The dismissal of Laddin’s complaint for federal RICO violations and aiding
and abetting a breach of fiduciary duties under Georgia law is
AFFIRMED.
25