In the face of a vigorous dissent, the New York Appellate Division, First Department, applied the in pari delicto defense to sustain the dismissal of claims by a court-appointed receiver over the interests and property of a corporate entity run as a Ponzi scheme by its sole owner: Castleman v. Interactive Brokers LLC, 2026 NY Slip Op 05904 (1st Dep’t Decided Oct. 13, 2026).
The main issue in Castleman was whether the in pari delicto defense can be applied to bar a claim by a receiver appointed in an action instituted by the Commodity Futures Trading Commission (CFTC) against the corporate entity and its sole owner for running the Ponzi scheme. The lower court and the First Department in Castleman ruled that such a receiver was akin to bankruptcy trustees and other receivers who stand in the shoes of the fraudulent corporation and therefore was barred from asserted claims against an outside brokerage firm who allegedly aided the Ponzi scheme.
In Pari Delicto
My commentaries on the in pari delicto defense can be easily found under the topic heading “In Pari Delicto.” As explained, the essence of the in pari delicto doctrine is that a wrongdoer should not have the right to sue and seek claims against other alleged wrongdoers who may have enabled, aided or failed to prevent the very underlying wrongful conduct itself. The leading case in New York (which was the central foundational authority applied in Castleman) is the New York Court of Appeals decision in Kirschner v KPMG LLP, 15 N.Y.3d 446 (2010).
In Kirschner, the Court of Appeals explained the “doctrine’s full name is in pari delicto potior est conditio defendentis, meaning ‘[i]n a case of equal or mutual fault, the position of the [defending party] is the better one.’” The Court continued:
The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers. This principle has been wrought in the inmost texture of our common law for at least two centuries (see e.g. Woodworth v. Janes, 2 Johns.Cas. 417, 423 [N.Y.1800] [parties in equal fault have no rights in equity]; Sebring v. Rathbun, 1 Johns.Cas. 331, 332 [N.Y.1800] [where both parties are equally culpable, courts will not “interpose in favour of either”] ). The doctrine survives because it serves important public policy purposes. First, denying judicial relief to an admitted wrongdoer deters illegality. Second, in pari delicto avoids entangling courts in disputes between wrongdoers. As Judge Desmond so eloquently put it more than 60 years ago, “[N]o 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” (Stone v. Freeman, 298 N.Y. 268, 271, 82 N.E.2d 571 [1948] [internal quotation marks omitted] ).
Kirschner, 15 NY3d at 464 & n. 4 (footnote omitted).
Where shareholders seek to assert derivative claims on behalf of a corporation run by fraudulent employees, the wrongdoing of the employees is imputed to the corporation and since the shareholders in such actions stand in the shoes of the corporation itself, in pari delicto bars those claims. Courts have also reasoned that trustees appointed in bankruptcy to assert claims on behalf of debtor entities are also barred from bringing those claims under the in pari delicto doctrine. The issue in Castleman was whether a receiver appointed in the CFTC action should be equally barred from asserting claims that would ultimately benefit innocent investors defrauded into giving their money to the Ponzi-running fraudster who owned the corporate entity through which the scheme was run.
Castleman
In the underlying case, the CFTC filed a civil complaint in the United States District Court, Southern District of New York against the corporation and its sole owner and Chief Executive Officer, alleging that he operated the corporation as a Ponzi scheme. On the same day the CFTC complaint was filed, the district court appointed a temporary receiver (“Receiver”) for the defendant corporation and its affiliates and subsidiaries owned or controlled by the corporation and all customer funds and property and other assets traceable to customers in the possession of or under the control of the individual defendant owner. The Receiver was then continued permanently.
The Receiver later removed the corporation’s leadership, took control of the business, and commenced an action in New York Supreme Court against Interactive Brokers LLC (“Broker”) to recover damages, alleging causes of action for gross negligence, negligence, and aiding and abetting breach of fiduciary duty. The Receiver claimed that the Broker enabled the fraudster to perpetrate the Ponzi scheme and otherwise caused damage to the investors by failing to act timely and prudently in overseeing its investment accounts in which the fraudster deposited his funds.
The Broker moved to dismiss all claims as barred by in pari delicto, which was granted by the lower court. The First Department affirmed the dismissal on the Receiver’s appeal.
The First Department first reviewed the basic doctrine of in pari delicto (citations omitted):
The common law doctrine of in pari delicto “mandates that the courts will not intercede to resolve a dispute between two wrongdoers” … In other words, the doctrine bars a corporation engaged in wrongdoing from suing its co-conspirators on the grounds of negligence or fraud … . ” The justice of the in pari delicto rule is most obvious where a willful wrongdoer is suing someone who is alleged to be merely negligent” … . The notion that “a wrongdoer should not profit from his own misconduct is so strong in New York that we have said the defense applies even in difficult cases and should not be weakened by exceptions”.
The wrongdoer’s misconduct is not only imputed to the corporation through the bad acts of its officers … , but also to the corporation’s successors … [“The [wrongdoer’s] misconduct is imputed to the trustee because, as innocent as he may be, he acts as the [wrongdoer’s] representative”]).
The First Department then found that the Receiver’s claims were barred:
Plaintiff argues, and the dissent agrees, that the in pari delicto doctrine does not apply to plaintiff because he is not a derivative shareholder plaintiff or a bankruptcy trustee appointed pursuant to 11 USC § 541, but rather a receiver appointed pursuant to 28 USC § 3103. It is true that plaintiff, as a receiver, is not subject to section 541 of the Bankruptcy Code. Nevertheless, there is no significant difference between bankruptcy trustees and nonbankruptcy receivers for purposes of in pari delicto [citation omitted].
… Both bankruptcy trustees and federal receivers are representative fiduciaries who take control of the entity’s assets and pursue claims on its behalf for the benefit of innocent creditors or investors. There is thus no basis to differentiate bankruptcy trustees from receivers when applying in pari delicto.
The First Department went on to observe that in pari delicto has been applied to many types of receiver claims in general.
The First Department rejected the argument that the Receiver was merely seeking to assert claims that would benefit innocent investors –finding that allowing such claims would not only undermine the in pari delicto doctrine, but could result in innocent stakeholders of the Broker to risk harm.
The lone dissenting judge in Castleman maintained that the “equity” Receiver appointed in the CFTC action was different and distinguishable than the other receivers/trustees barred in other cases and that the claims of the innocent investors should be permitted to proceed there.
The lower court and both majority and dissent all agreed that the “adverse interest” exception to the in pari delicto doctrine did not apply insofar as the fraudster was the sole owner and wrongful actor who perpetrated the wrong through his corporation.
Commentary
The First Department’s decision in Castleman can be viewed as an expansion of the in pari delicto doctrine into a new type of receiver—the so-called “equity” receiver in CTFC actions—(as the dissent would maintain) or simply a firm application of the existing policy of the doctrine itself (as the majority observed). Either way, the decision shows that even in the face of egregious fraudulent conduct and damage to innocent victims, courts will not allow parties perpetrating fraud to benefit from the wrongdoing itself—even when imputing the wrongdoing would result in no remedy for those innocent third-parties.