Official Committee of Unsecured Creditors v. R.F. Lafferty & Co.

267 F.3d 340 (2001)

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Official Committee of Unsecured Creditors v. R.F. Lafferty & Co.

United States Court of Appeals for the Third Circuit
267 F.3d 340 (2001)

Facts

William Shapiro and his family (defendants) operated Walnut Equipment Leasing Company, Inc. (Walnut Leasing), which was owned by Walnut Associates, Inc. (defendant). Walnut Associates was in turn owned by Shapiro. Walnut Leasing experienced financial difficulties. The Shapiros organized Equipment Leasing Corporation of America (ELCOA) as a financing subsidiary. ELCOA raised capital by selling debt securities. Various other Shapiro-affiliated parties participated, including R. F. Lafferty Co., Inc. (Lafferty) (defendant). Walnut Leasing and ELCOA went bankrupt and filed for protection under Chapter 11. An official committee of unsecured creditors (the committee) (plaintiff) was appointed by the bankruptcy court. The committee initiated a civil action in federal district court, alleging that the Shapiro family operated a Ponzi scheme in which buyers of debt were fraudulently led to believe that ELCOA was a credible independent business. The defendants moved for dismissal, which was denied. The court held that a valid claim existed for deepening insolvency, but that the doctrine of in pari delicto operated to prevent the committee from asserting claims against third parties. The committee appealed. The United States Court of Appeals for the Third Circuit granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Fuentes, J.)

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