The doctrine of in pari delicto prevents a party from bringing suit to recover for wrongful conduct where the plaintiff participated in the conduct on which the claims are based. Grounded in equitable principles, the doctrine essentially stands for the proposition that the court will not aid a wrong doer who seeks to escape the consequences of its own acts.

This basic principle is at the center of the court’s recent ruling in In re Parmalat Sec. Litig., Master Docket 04 BD 1653 (S.D.N.Y), granting summary judgment in favor of auditor Grant Thornton and Bank of America. The case centers on the collapse of Parmalat S.p.A. Suits were filed by Dr. Enrico Bondi, the Extraordinary Commissioner of Parmalat in Italian reorganization proceedings and Parmalat Capital Finance Ltd (PCFL), a wholly owned subsidiary of Parmalat.

Parmalat, which began as a small dairy distributor in Italy, grew into an international giant. In the late 1980s as the company experienced difficulties and losses stemming from the acquisition of a company which collapsed in bankruptcy and from other difficulties. To ensure that the necessary capital could be raised, Parmalat and its outside auditor crafted schemes involving misleading transactions and off-shore entitles that gave the appearance of financial well being. Financial statements prepared by the company and approved by the auditors concealed those schemes. Billions of euros raised from the debt and equity markets kept the company afloat.

A key part of Parmalat’s financing was generated through subsidiary PCFL. It made over $1 billion in loans to related entities from funds raised in the securities markets. Defendant Bank of America became involved in these schemes, helping to raise about $800 million for the company. Despite these efforts, by late 2003 Parmalat experienced a liquidity crisis and could not pay bonds as they came due. In December 2003 the company filed for bankruptcy.

Both the Trustee and PCFL brought claims against, among others, Grant Thornton. The subsidiary also asserted claims against Bank of America. All defendants moved for summary judgment. In defending those motions, the Trustee conceded that any defenses that would have been available in an action by Parmalat can be asserted against him. PCFL took a different stance, claiming that because it is now controlled by a court appointed liquidator an in pari delicto defense based on its wrongful conduct is not available. The court rejected both positions in granting summary judgment in favor of the defendants.

The defense of in pari delicto essentially prevents the company from recovering for its own wrongful conduct. It is premised on the theory that corporations act only through its agents whose conduct is imputed to it. The acts however, must be committed within the scope of the agent’s employment. Where however, the corporate agent acts in his or her interest and not that of the company it is a different matter. Most states follow the rule that the conduct of the agent is imputed to the principal, if in some respects the acts are undertaken for the company. Stated differently, unless the agent totally abandons the principal’s interest – the so-called “adverse inference exception” –the conduct is imputed and the defense applies.

In this case, the court ruled there can be little doubt that Parmalat benefited by the transactions undertaken by the defendants. As a result of those transactions the company raised and spent millions of euros for corporate purposes. The actions of the company’s agents in this regard were clearly in furtherance of corporate purposes. To be sure, the agents also acted wrongfully and in their own interest, but this does not prevent the application of the defense.

Plaintiffs, however, argued that the key to the application of the adverse inference exception is the long term view of the effects on the corporation of the agent’s acts and the agents’ intent. The court rejected this theory. Rather, it is clear that an employee may steal from a company while also doing business for the company. This is what happened here. The transactions complained of are the issuance of financial statements, borrowing money and similar matters. There can be no doubt that while the agents may have benefited from these deals, they also benefited the company. Accordingly, the rule applies and summary judgment was granted in favor of defendants.