In pari delicto is an equitable defense asserted when a defendant claims that a plaintiff is equally at fault for the wrong that has befallen him. The doctrine is “rooted in the common-law notion that a plaintiff’s recovery may be barred by his own wrongful conduct.” Pinter v. Dahl, 486 U.S. 622, 632 (1988) (citing Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985)).

Historically, the doctrine served the public policy purposes of (1) deterring illegality by denying relief to an admitted wrongdoer and (2) keeping the courts out of disputes between wrongdoers.Kirschner v. KPMG LLP, 938 N.E.2d 941, 950 (N.Y. 2010). As one court observed, “no court should be required to serve as paymaster of the wages of crime, or referee between thieves. Therefore, the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them.” Id. (quoting Stone v. Freeman, 82 N.E.2d 571, 572 (N.Y. 1948)).

Applying the in pari delicto doctrine is relatively straightforward in a dispute between two obvious wrongdoers brought when their wrongful conduct turns sour. But what happens to the in pari delicto defense when one of the wrongdoers is replaced by a receiver who was not personally involved in the wrongdoing and who is specifically tasked with righting the corporate wrongs? When a corporate entity engages in wrongful conduct, it is not uncommon for a court to appoint a receiver to oversee the company’s affairs. State and federal receivership statutes and regulatory schemes aim to protect stakeholders and the public from the wake of insolvency and destruction caused by wrongful corporate conduct.

Under the usual parlance, such a receiver “stands in the shoes” of the entity that he or she is appointed to represent. The receiver is authorized to prosecute claims in the name of the entity. Conversely, the receiver usually is subject to the same defenses that would have been effective against the represented entity.

But does that apply to the in pari delicto defense? Would the policy reasons for the defense—deterring wrongdoing and preventing one wrongdoer from using the courts to collect from another—continue to be served once one of the wrongdoers is removed?1 

Some courts have answered these questions “yes,” holding that in pari delicto applies even after a receiver is appointed. Others have reached the opposite conclusion, holding that the so-called “public policy exception” to in pari delicto applies in this context.

A recent decision of the Delaware Court of Chancery, Stewart v. Wilmington Trust SP Services, Inc., 112 A.3d 271 (Del. Ch. 2015), examined these questions closely. The case is notable not only for the depth of its legal analysis, but also for the richness of its factual background. This article summarizes the state of the law on this issue and discusses Stewart’s contribution to that law in greater detail.

The Conflict in the Policy

Courts have struggled with whether to apply the in pari delicto doctrine as a defense to claims brought by receivers. On one hand, the policy reasons for the doctrine arguably are weakened or destroyed when a receiver takes over. As one court put it, the defense “loses its sting when the person who is in pari delicto is eliminated.” Scholes v. Lehman, 56 F.3d 750, 754-55 (7th Cir. 1995) (citations omitted).

Scholes involved a Ponzi scheme perpetrated using multiple corporate entities. Id. at 752. When the scheme inevitably crashed, a receiver was appointed to assume control of the corporate entities. Id. The receiver brought fraudulent conveyance claims against parties that had received transfers in furtherance of the illegal scheme. Id. at 753. The Seventh Circuit held that because the perpetrator of the Ponzi scheme had been removed and replaced with a receiver, in pari delicto no longer applied. Id. at 754. “The corporations were no more [the perpetrator’s] evil zombies. Freed from his spell, they became entitled to the return of moneys—for the benefit not of [the perpetrator] but of innocent investors—that [the perpetrator] had made the corporations divert to unauthorized purposes.” Id.

On the other hand, not all courts agree that the policy is destroyed by the receiver’s arrival. For example, the doctrine applies to receivers in New York despite any public policy arguments. “The principles of in pari delicto . . . , which are embedded in New York law, remain sound.” Kirschner, 938 N.E.2d at 959.

In Kirschner, the court considered whether New York would apply in pari delicto to bar a claim by a corporation against its outside auditors for failing to detect the corporation’s fraud. Id. at 949-50. The claims were being pursued by a litigation trustee appointed to prosecute claims on behalf of a defunct brokerage service. Id. at 946. The litigation trustee acknowledged that he stood in the shoes of the corporate wrongdoer, but he argued that he himself was not that wrongdoer. Id. at 958. Moreover, the litigation trustee argued that the equities favored him because any recovery he obtained would benefit the innocent creditors and would deter future malfeasance. Id.

The court was unconvinced by either of the litigation trustee’s arguments. First, the court noted that, while the creditors of the defunct company might benefit if in pari delicto did not apply, the creditors and other stakeholders of accused third parties, who also were innocent, would suffer. Id. Second, the court noted that the auditors were subject to liability for professional malpractice without the need to loosen the application of in pari delicto. Id. Public policy, therefore, did not weigh in favor of changing the law in New York. Other courts have applied Kirschner’s analysis in the context of a receiver appointed to deal with a Ponzi scheme. See In re Bernard L. Madoff Inv. Sec. LLC, 721 F.3d 54, 64-65 (2d Cir. 2013).

Scholes and Kirschner illustrate the public policy friction created when the in pari delicto defense is asserted against a receiver. Does the receiver, for better or worse, stand in the shoes of the culpable receivership entity? Or, has the receiver’s appointment freed the entity from an evil zombie spell so that the receiver can try to right the entity’s previous wrongs without application of the defense?

Stewart v. Wilmington Trust

The Delaware Court of Chancery examined these questions earlier this year. After thoroughly analyzing in pari delicto’s origin, the policy interests in play, and the law in sister jurisdictions, Stewart explained why Delaware’s in pari delicto doctrine would bar several claims brought by a receiver. A brief summary of Stewart’s context adds perspective on the court’s holding.

Factual Background

Stewart tells the story of how one bad actor allegedly used four related captive insurance companies2(collectively, “SPI”) as his evil zombies to defraud regulators, creditors, consultants, and auditors for years.

In order to domicile in Delaware, SPI was required to apply for authorization with the state’s Department of Insurance and to comply with a host of regulations. Stewart, 112 A.3d at 281. To assist it with these activities, SPI engaged Wilmington Trust for various “management services,” including bookkeeping and account reconciliation. Id. It also engaged accounting firms Johnson Lambert and McSoley McCoy to audit financial statements. Id. at 282, 288. The financial statements were submitted periodically to the Department of Insurance to confirm that SPI met minimum capital and reserve thresholds. Id. at 282-89.

SPI’s financial statements for 2007, 2008, and 2009 listed substantial assets that were, in reality, worthless. Id. at 282. These included a key man policy with a claimed cash value of around $700,000 and six bank accounts claimed to hold over $4.6 million. Id. at 282-83, 289. In fact, the key man policy had lapsed, and the bank accounts either were closed or held balances of only a few hundred dollars. Id. Despite these significant inconsistencies, however, the statements were audited and approved—repeatedly—by Johnson Lambert, McSoley McCoy, and Wilmington Trust.

How did the truth evade SPI’s auditors for so long? The account of the low-tech hijinks allegedly used to pull the wool over their eyes reads like an elaborate comedy of errors.

Stewart described how SPI’s founder repeatedly provided the auditors with carefully forged facsimiles that appeared to come from the insurance company that issued the key man policy. Id. at 283, 288. These facsimiles gave the illusion that the lapsed $700,000 key man policy was still in force. Id.

To prop up the false account balances, SPI’s founder allegedly went so far as to create fictitious bank employees “Alpesh” and “Rachel”—complete with sham contact information. Id. at 285. Someone identifying himself as “Alpesh” even called one of the auditors to explain away differences in SPI’s bank statements. Id. at 285-86. Auditors expressed frustration that “he caught me at a bad time and the reception was not good, so it was hard to hear him” and that, when attempting to call “Alpesh” back, they had no “success getting through, or even getting an opportunity to leave a message.” Id. at 286, 288.

The court summarized the colorful allegations: “The picture that emerges from the facts alleged is that [SPI’s founder’s] conduct did not pass the sniff test. Nevertheless, Wilmington Trust and the Auditor Defendants allegedly held their noses and looked the other way in order to get the audits finished, file the paperwork, collect their fees, and move on.” Id. at 300.

Eventually, Wilmington Trust was forced to concede that it had been duped. Id. at 289. It reported SPI to the Department of Insurance. Id.

Receivership and the Lawsuit

Once the jig was up and SPI’s insolvency was discovered, Delaware’s Insurance Commissioner was appointed as statutory receiver in liquidation for SPI. Id. In that capacity, she brought breach of contract, breach of fiduciary duty, negligence, and aiding and abetting breach of fiduciary duty claims on SPI’s behalf against Johnson Lambert, McSoley McCoy, Wilmington Trust, and others. Id. The gist of the receiver’s claims was that these outsiders should have discovered and exposed this fraud earlier. The receiver contended that their participation and approval made them complicit in the fraud.

The defendants moved to dismiss the claims, relying principally on the in pari delicto doctrine. Id. at 290. The Insurance Commissioner argued that the “public policy exception” to in pari delicto should apply. Id. at 304.Ultimately, the court rejected the Insurance Commissioner’s argument. It dismissed all claims against McSoley McCoy and all but one claim (aiding and abetting breach of fiduciary duty) against Johnson Lambert and Wilmington Trust. Id. at 323.

Analysis of the “Public Policy Exception”

Stewart began its analysis of in pari delicto with a summary of the “basics of the doctrine.” Id. at 302. Before reaching the public policy that the Insurance Commissioner claimed to vindicate, the court recognized that in pari delicto itself serves important public policy prerogatives: deterring wrongdoing and protecting judicial resources. Id. (citing In re Am. Int’l Grp., Inc., Consol. Derivative Litig., 976 A.2d 872, 882 n.21 (Del. Ch. 2009) (“AIG”); Berner, 472 U.S. at 306; and Stone, 82 N.E.2d at 571).

The conduct of SPI’s founder was outrageous. So, too, was the alleged “[holding] their noses and look[ing] the other way” complicity of the defendants. Id. at 300. On the egregious facts alleged, the public policy reasons for applying in pari delictowere obvious.

From that starting point, the Stewart court characterized the “public policy exception” as a weighing of competing interests. It applies “when another public policy is perceived to trump the policy basis for the doctrine itself.” Id. at 304 (quoting AIG, 976 A.2d at 888).

After distilling the “seemingly diffuse” case law on this exception, Stewart identified a unifying theme: The exception is recognized in cases involving statutory schemes that rely upon private rights of action for enforcement. Id. at 304-05 (citingPerma Life Mufflers, Inc. v. Int’l Parts Corp., 392 U.S. 134, 136 (1968); Pinter, 486 U.S. at 633; and Berner, 472 U.S. at 315). Thus, the competing interest was both well established and specifically furthered by the claim against which in pari delicto was being asserted. Id. The exception was unnecessary in other cases because “‘preclusion of suit would not significantly interfere with the effective enforcement’ of a statutory policy scheme.” Id. at 314 (quoting Berner, 472 U.S. at 311).

The Insurance Commissioner laid out compelling facts to support the public policy interests served by her claim. The Department of Insurance is the largest consumer protection agency in Delaware. Id. at 313. Like most other states, Delaware heavily regulates the insurance industry through an established statutory framework. Id. Captive insurers, in particular, are subject to a special chapter of the Delaware insurance code. Id. The assets of insurance companies domiciled in Delaware purportedly exceed $500 billion. Id.4

The court agreed that these facts showed the public interest “in keeping insurers solvent and in overseeing or facilitating the orderly disposition of insolvent or delinquent ones.” Id.

Ultimately, however, a close examination of Delaware’s insurance laws persuaded the court that the “public policy exception” did not apply. Id. The court explained that “the expansive and intricate statutory and regulatory framework governing Delaware-domiciled insurance companies arguably cuts against the Receiver’s position that in pari delicto should not apply, not in favor of it.” Id. (emphasis in original). The court noted that, unlike the statutes involved in cases that recognized the exception, Delaware’s insurance statutes provided no mechanism for enforcement by private right of action. Id. at 314.

By contrast, the statute conferred broad authority and powers on the Insurance Commissioner. Those included the power to administratively sanction auditors like Wilmington Trust, Johnson Lambert, and McSoley McCoy, and the power to promulgate regulations to achieve consumer protection and industry deterrence. Id.

The court summarized its holding: “Indeed, because of the highly regulated nature of insurance in this State, I do not consider it appropriate to undermine the policies advanced by the in pari delicto doctrine, when the purported benefits of doing so here appear to be achievable within the robust regulatory framework that already exists.” Id.


Stewart provides a practical and predictable line for reconciling the public policy conflict presented whenever in pari delicto is asserted against a receiver. By focusing on the role of private-right-of-action enforcement in the policy interest advanced by the receiver, the decision provides a touchstone in a “seemingly diffuse” area of the law. Stewart adhered to its rule, moreover, in the face of outrageous facts and an unquestionably compelling argument from the Delaware Insurance Commissioner.

It remains to be seen whether other courts will pick up Stewart’s reasoning and apply it in other contexts. Stewart’s reasoning, however, can help courts discern when receivers are stuck “standing in the shoes” of wrongdoing receivership entities and when receivers should be permitted to atone for the misconduct of freed “evil zombies.”


  1. This question has been largely settled in the context of a bankruptcy trustee based on the language of the bankruptcy code. Section 541(a)(1) defines the bankruptcy estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”  11 U.S.C. § 541(a)(1). Because the debtor’s legal or equitable interests at the commencement of the case are subject to any defenses available against the debtor, in general, courts have concluded that those defenses, including in pari delicto, are available against the trustee administering the bankruptcy estate. See, e.g.,Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 356-57 (3d Cir. 2001). The courts do not consider subsequent events, such as the appointment of the trustee, when applying in pari delicto.
  2. Stewart explained that a “captive insurance company” is, in general terms, “a business entity formed as a subsidiary of a non-insurance parent company for the purpose of insuring the parent’s business risk, or the risk of the parent’s affiliates or customers.” Stewart, 112 A.3d at 280. In the previous decade, captive insurance companies received increasingly favorable tax treatment, which made them attractive risk management and estate planning tools. See generally Gordon A. Schaller & Scott A. Harshman, Use of Captive Insurance Companies in Estate Planning, 33 Am. C. Tr. & Est. Couns. J. 252 (Spring 2008).
  3. In opposition to the motion, the receiver argued four exceptions to the doctrine: (1) the “adverse interest exception,” (2) the “fiduciary duty exception,” (3) the “public policy exception,” and (4) an “auditor exception” not previously recognized in Delaware. Stewart, 112 A.3d at 303-04, 315-18. Although the decision gave close, thorough, and insightful consideration to each of these, this article focuses on the “public policy exception” only.
  4. Although this fact was not reported in Stewart, Delaware held itself out as the world’s sixth-largest and the country’s third-largest domicile of captive insurers as of just a few weeks before the decision. See Del. Dep’t of Ins., Delaware Reports Another Record Year for Captive Growth (Feb. 19, 2015), available at (last accessed June 9, 2015).

*This article was originally published in the Summer 2015 Issue of the NCBA Antitrust & Complex Business Disputes Section Newsletter