Derivative Claims Based on Misconduct of Corporate Officers Barred by In Pari Delicto Doctrine

On June 4, 2020, Justice Cohen of the New York County Commercial Division issued a decision in Rutigliano v. Locantro, 2020 NY Slip Op. 31768(U), holding that derivative claims based on the misconduct of corporate officers were barred by the in pari delicto doctrine, explaining:

Plaintiffs unjust enrichment and conversion claims are asserted on behalf of, and in the name of, Absolute. Those claims are subject to the same defenses that would apply if the claims were made directly by Absolute.

The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers.

While a claim of in pari delicto sometimes requires factual development and is therefore not amenable to dismissal at the pleading stage, the doctrine can apply on a motion to dismiss in an appropriate case, such as where its application is plain on the face of the pleadings.

Here, Plaintiff's claim is that the individual defendants caused Absolute to undertake actions that were against its own (and Plaintiff's) interest. Specifically, Plaintiff alleges that Locantro and Romanoff, as officers of Absolute, used Absolute's assets to benefit EDM. Corporations are not natural persons; corporations act solely through the instrumentality of their officers. Thus, the actions of Locantro and Romanoff are imputed to Absolute, and Plaintiff has alleged that Absolute (i.e., the plaintiff unjust enrichment and conversion) wrongfully shared its assets with EDM.

The Court of Appeals' decision in Kirschner precludes Plaintiff's claim on behalf of Absolute against allegedly complicit outside parties such as EDM. Plaintiff, stepping into the shoes of Absolute, cannot bring these claims against EDM and EDM Electric for engaging in the activity in which Absolute, through Locantro and Romanoff, knowingly took part.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation--the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). Here, the derivative claims failed because the individual defendants' misconduct was attributed to the corporation and so a claim could not be brought on behalf of the corporation against them. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.