California Court Signals Potential In Pari Delicto Doctrine Split With New York

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The common law doctrine of in pari delicto bars recovery by plaintiffs who share culpability for wrongdoings alleged in a complaint. Subject to certain exceptions, a corporate plaintiff’s claims are barred by the in pari delicto doctrine where its employees or agents participated in the alleged wrongdoing. In pari delicto defenses may be asserted where corporate plaintiffs assert claims against third parties that conspired with the corporation’s former employees or agents to harm the corporation and its shareholders.

Different jurisdictions have applied the in pari delicto doctrine in a variety of different ways, and have crafted various exceptions to the general rule. For example, some jurisdictions recognize exceptions to the general rule that acts by a corporation’s agents are imputed to the corporation. Recent decisions from courts in New York and California illustrate divergent approaches regarding the “imputation exception” to the in pari delicto defense. The New York Court Appeals (the state’s highest court) has held that the in pari delicto doctrine may bar claims unless the wrongful acts of an employee are shown to have been beyond the scope of his authority and adverse to the plaintiff’s interests. On the other hand, a recent decision from San Francisco Superior Court appears to allow such claims where at least some of the corporation’s officers or directors were not complicit in the wrongful acts. This appears to contradict New York’s stringent interpretation of the doctrine. Thus, practically speaking, California may be more preferable than New York for plaintiffs where some, but not all, of the plaintiff’s officers or directors committed or were complicit in wrongdoing relating to the lawsuit, to the arguable benefit of the company. Several types of disputes may hinge on this forum choice, including actions against a company’s auditors or financiers, and many types of litigation springing from litigation trusts in bankruptcy.

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