New York's Appellate Division affirmed the dismissal of all claims brought by a litigation trustee on behalf of two investment funds against Citco Fund Services (Europe) B.V. and Citco (Canada) Inc., which were the administrators of those funds.
The funds had invested their assets with Bernard L. Madoff, who then defrauded the funds by concealing his theft of the funds' assets. The litigation trustee, on behalf of the funds, asserted numerous claims against the administrators based on allegations that the administrators should have detected Madoff's frauds. Prior representatives of the funds, however, had filed complaints stating that officers and directors of the funds, and thus the funds themselves, were also at fault for failing to detect Madoff's frauds. The administrators argued that the fault of the funds should be imputed to the litigation trustee, which a bankruptcy court had appointed to represent the funds. In the view of the administrators, the litigation trustee's tort claims against them were therefore barred by the New York doctrine of in pari delicto. That doctrine generally bars a plaintiff from recovering in tort against a defendant if the plaintiff is at least equally at fault as the defendant for the underlying alleged wrongdoing. The Appellate Division, First Department, agreed with the administrators.
In support of its ruling, the Appellate Division found that the trial court had properly considered statements made in derivative complaints filed by investors in the funds as informal judicial admissions by the funds. The litigation trustee had argued that the derivative plaintiffs' statements, which had charged officers and directors of the funds with wrongful failure to prevent Madoff's frauds, could not be attributed to the litigation trustee. The derivative complaints, however, were filed on behalf of the funds; the litigation trustee had been substituted as plaintiff in those very actions; the derivative plaintiffs and the litigation trustee were represented by the same law firm; and the litigation trustee had never disavowed the derivative plaintiffs' statements.