Business Law

Anderson v. Morgan Keegan & Co. (In re Infinity Business Group, Inc.) (4th Cir.)

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The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.), analyzing a recent decision of interest:


In a recent published opinion, the Fourth Circuit Court of Appeals (the Court) ruled that the defense of in pari delicto is applicable against a bankruptcy trustee pursuing litigation on behalf of the estate, whether the trustee is standing in the shoes of the debtor or in the shoes of a hypothetical lien creditor. Anderson v Morgan Keegan & Company (In re Infinity Business Group, Inc.), 2022 WL 1144625 (4th Cir. April 19, 2022).

To view the opinion, click here.


Debtor Infinity Business Group was in the business of pursuing collections on bad checks. Under the direction of its CEO as blessed by the board of directors, Infinity employed a “dodgy accounting practice” which booked as accounts receivable “anticipated receivables, including fees Infinity would be entitled to if it managed to collect a check” with certain discounting for uncollectible items (emphasis in the opinion). This accounting practice was inconsistent with generally accepted accounting principles but nevertheless was used to solicit institutional investors and incur debt. Infinity engaged Morgan Keegan as investment advisor to assist it in these solicitations. Morgan Keegan, however, was not responsible for Infinity’s financial records nor did it endorse the dodgy accounting practice, having been assured by Infinity that it could rely on the financial statements as accurate and complete.

The third parties from which Infinity sought investments or loans were dubious about its practices and would only do business with it on onerous financial terms. Infinity rejected those terms, limped along without adequate capital, then filed a chapter 7 bankruptcy in 2010. Infinity’s CFO and auditor pleaded guilty to federal criminal charges and civil enforcement proceedings were pursued against its top management in South Carolina where it operated.

The chapter 7 trustee filed an adversary proceeding against several management officials, its external auditor, and Morgan Keegan. All defendants defaulted except Morgan Keegan, against which the trustee pursued common law fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty (under Nevada law, where Infinity was incorporated) and federal securities fraud. After an eighteen day trial, the bankruptcy judge entered judgment for Morgan Keegan, finding that the trustee failed to prove the elements of any claims and also concluding that all of the trustee’s claims were barred by the affirmative defense of in pari delicto. The trustee appealed to the district court, which affirmed on both counts, and then to the Court, which also affirmed.


The legal issue addressed de novo by the Court was the application of the affirmative defense of in pari delicto. This doctrine embodies the equitable principle “that where parties are…equally in the wrong, no affirmative relief will be given to one against the other.” The Fourth Circuit has adopted the defense by precedent. The facts were not at issue: the debtor through its officers and management had engaged in unlawful practices with its dodgy accounting in an attempt to acquire investment and loans. Had Infinity sued Morgan Keegan, the defense would prevail. The Court here was tasked with determining whether such principle should bar a bankruptcy trustee, a representative of the estate’s innocent creditors, from recovering for the estate from third parties. The answer is “yes.”

A chapter 7 trustee is empowered, as a representative of the estate, to assert causes of action possessed by the debtor. However, when he does so, he “stands in the shoes of the debtor” and is subject to the same defenses as the debtor would face. The Court, relying on earlier precedent, concluded that if the doctrine of in pari delicto would have barred Infinity from prevailing against Morgan Keegan because of its own bad acts, the trustee was similarly barred. Therefore, to the extent the trustee was acting under Bankruptcy Code § 541, collecting property of the estate, the defense defeated his claim.

The new twist here was the trustee’s argument that he was asserting the rights of a hypothetical lien creditor under § 544 and therefore was not standing in the debtor’s shoes. The Court rejected that argument as well. The statute grants a trustee the powers of a hypothetical judgment lien creditor, such that if a creditor holds a lien against the debtor and could pursue a particular action on the debtor’s behalf, the trustee has that right. However, the Court concluded that when a bankruptcy trustee steps into the shoes of a hypothetical creditor who would itself stand in the shoes of the debtor in bringing a given action, the trustee is still subject to the same defenses as the debtor, including in pari delicto.

The trustee’s final argument was that the doctrine should be categorically inapplicable in cases involving fiduciary duties, urging the Court to adopt a holding by the Delaware Court of Chancery that in pari delicto “has no force in a suit by a corporation against its own fiduciaries” or those who might aid and abet such fiduciaries. He urged the Court to find that both South Carolina and Nevada, whose substantive law controlled the claims, would follow Delaware on that issue. However, he was unable to present either Nevada or South Carolina case law which leaned in that direction, so the Court refused to adopt that principle in this case.


Although this ruling is not surprising nor unique, it is certainly discouraging for trustees and creditors. More frequently than we would like to believe, prior to a bankruptcy filing management and others who owe a duty to a debtor have engaged in wrongful acts. When a trustee is prevented from pursuing valuable litigation on behalf of the estate and its innocent creditors because of the very wrongful actswhich took the debtor down to its creditors’ detriment, something seems wrong with this picture. The Court’s reasoning – that the trustee stands in the shoes of the debtor, subject to all defenses – has always seemed to me to ignore that the bankruptcy estate is a distinct entity from the debtor and thus should be treated differently. As this case highlights, the Delaware Court of Chancery has adopted a policy which would favor a trustee or other creditor representative to pursue wrongdoers unfettered by the doctrine of in pari delicto. Now it is up to other states to adopt that principle, which could apply whether the plaintiff is a bankruptcy trustee, a creditor’s committee in a chapter 11, or a state court receiver or similar representative of an estate for the benefit of creditors.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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