South-Western Legal Studies in Business

Trustees in Bankruptcy May Not Sue Parties Who Aided Fraud Committed by Bankrupt
Description Appeals court held that the rights of a trustee in bankruptcy to sue are the same as the rights the bankrupt had at the time of filing bankruptcy. Hence, the trustee may not sue parties who participated in a fraud committed by the bankrupt.
Topic Bankruptcy
Key Words RICO; Standing; In Pari Delicto
C A S E   S U M M A R Y
Facts Edwards owned ETS Payphones. In 1994 it offered investments in payphones. It was a Ponzi scheme that collapsed in 2000, costing investors over $300 million. ETS filed for bankruptcy. Laddin, trustee of the debtor estate, brought federal RICO racketeering claims against entities that he claimed assisted ETS in the scheme. The trial court dismissed the claims. Laddin appealed.

Affirmed. A trustee in bankruptcy has standing to bring RICO claims against those who may have aided and abetted in racketeering. The bankruptcy trustee stands in the shoes of a debtor and has standing to bring any suit that the debtor could have instituted when the debtor filed for bankruptcy. But the trustee has no greater rights and interests than those of the debtor. Since the debtor participated in wrongdoing, the doctrine of in pari delicto applies. He could not sue to recover damages from the wrongdoing, since he was part of it. Hence, the trustee faces the same bar to suing parties who may have helped in the fraud.

Citation Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145 (11th Cir., 2006)

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