ICP Strategic Credit Income Master Fund Ltd. et al v. DLA Piper L.L.P. (US)

-1-
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
ICP STRATEGIC CREDIT INCOME FUND LTD., et al.,
Debtors in Foreign Proceedings.
)
)
)
)
)
)
)
Chapter 15 Case
No. 13-12116 (REG)
ICP STRATEGIC CREDIT INCOME MASTER FUND LTD.,
ICP STRATEGIC CREDIT INCOME FUND LTD., and
HUGH DICKSON and STEPHEN AKERS, solely in their
capacity as the Foreign Representatives and Joint Official
Liquidators of ICP Strategic Credit Income Fund Ltd. and ICP
Strategic Credit Income Master Fund Ltd.,
Plaintiffs,
v.
DLA PIPER LLP (US),
Defendant.
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Adversary Proceeding
No. 14-01835 (REG)
DECISION AND ORDER ON
MOTION TO DISMISS
APPEARANCES:
REID COLLINS & TSAI LLP
Counsel to Plaintiffs Joint Official Liquidators of
ICP Strategic Credit Income Fund Ltd. and
ICP Strategic Credit Income Master Fund Ltd.
One Penn Plaza, 49th Floor
New York, New York 10119
By: 	William T. Reid, IV, Esq. (argued)
Rachel Fleishman, Esq.
1301 S. Capital of Texas Hwy, C300
Austin, Texas 78746
By: 	Craig A. Boneau, Esq.
Joshua J. Bruckerhoff, Esq.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 1 of 40

-2-
GIBSON DUNN & CRUTCHER LLP
Counsel to Defendant DLA Piper LLP (US)
200 Park Avenue
New York, New York 10166-0193
By: 	Kevin S. Rosen, Esq. (argued)
Craig H. Millet, Esq.
Matthew S. Kahn, Esq.
ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE:
In this adversary proceeding under the umbrella of the jointly administered chapter 15
cases of foreign debtors ICP Strategic Credit Income Fund Ltd. (the “Feeder Fund”) and ICP
Strategic Credit Income Master Fund Ltd. (the “Master Fund,” and with the Feeder Fund, the
“Funds”), Plaintiffs Hugh Dickson and Michael Saville,1 in their capacity as the Foreign
Representatives and the Joint Official Liquidators of the Funds (the “Liquidators”), and the
Funds for whom the Liquidators act,2 assert claims against DLA Piper LLP (US) (“DLA
Piper”) for (1) aiding and abetting fraud; (2) aiding and abetting breaches of fiduciary duty;
and (3) “fraudulent trading” pursuant to section 147 of the Cayman Islands Companies Law
(the “Cayman Fraudulent Trading Claim”). DLA Piper moves to dismiss the complaint
under Fed.R.Civ.P. 12(b)(6).
For the reasons discussed below, the Court concludes that the Liquidators have
(though just barely) alleged claims for primary violations (as that expression is used in aiding
and abetting jurisprudence) of breach of fiduciary duties owed to the Funds. But the
Liquidators have not done so for fraud or fraudulent trading. The Court further concludes that
1 	In May 2015, Hugh Dickson and Stephen Akers, the individuals whom this Court had originally
recognized as the foreign representatives of the Funds in the umbrella chapter 15 case, advised this
Court that Mr. Akers had resigned, and upon order of the Cayman court had been replaced by Michael
Saville. See Umbrella Case ECF No. 61. This Court was not asked to formally amend the caption in
this adversary proceeding, but now considers Messrs. Dickson and Saville to be the Liquidators. Of
course, the real parties in interest on the plaintiff side are the Funds.
2 	For brevity, and consistent with the usage when trustees in the United States bring litigation on behalf of
their estates, the Court refers to all of the plaintiffs here as the “Liquidators.”
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 2 of 40

-3-
(assuming that the Liquidators could show substantial assistance by the delivery of routine
legal services if DLA Piper provided them knowing that it was doing something wrong) the
Liquidators have failed to plausibly allege the “knowledge” prong of the claim for aiding and
abetting breaches of fiduciary duty—that DLA Piper knew that it was assisting in a violation
of duty. And most obviously, the Liquidators are barred from recovery by the in pari delicto
defense under New York’s “Wagoner Rule.”
Accordingly, each of the claims must be, and is, dismissed.
Facts
Under familiar principles, for the purposes of determining this motion to dismiss (and
for that purpose only), the Court takes the allegations of the Complaint as true.3 The material
allegations of the Complaint, shorn of unnecessary repetition and conclusory statements,
follow.
1. Overview
The Liquidators allege that DLA Piper aided and abetted fraud and breaches of
fiduciary duty committed by the Funds’ investment manager 4 (also referred to as “collateral
manager”) ICP Asset Management LLC (the “Manager”),5 and Thomas Priore (“Priore”),
one of the Funds’ directors and the Manager’s majority owner. The Liquidators allege that
3 	But that is only as to the underlying facts upon which factual and legal conclusions rest; conclusory
statements and labels are not given the same weight, especially “[w]here ‘[g]eneral conclusory
allegations’ are belied by more specific allegations of the complaint.” See, e.g., Buchwald v. The Renco
Grp. (In re Magnesium Corp.), 399 B.R. 722, 768 (Bankr. S.D.N.Y. 2009) (Gerber, J.) (“MagCorp”).
4 	See Cmplt. ¶ 1.
5 	In each of the Complaint and their briefs, the parties refer to ICP Asset Management LLC as” ICP,” and
the Funds as the “SCIF Funds.” The Complaint was first filed in state court, before the parties knew of
the need to comply with this Court’s Case Management Orders, and, perhaps, of the difficulties readers
face in dealing with unfamiliar acronyms. In compliance with its Case Management Order in this case
(“Parties are not to use acronyms in briefs to describe name of parties … unless their meaning is
obvious,” Case Management Order #1, ECF No. 8, ¶ 28), the Court substitutes the more descriptive
“Manager” and “Funds.”
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 3 of 40

-4-
DLA Piper wrongfully assisted Priore and the Manager when Priore caused the Manager to
utilize—and the Liquidators allege “misappropriate”—over $36 million from the Funds to
meet obligations owed not by the Funds, but by Triaxx Funding High Grade I, Ltd. (“Triaxx
Funding”), another investment vehicle the Manager also managed.
As alleged in the Complaint, Triaxx Funding was a collateralized debt obligation6 that
purchased and held residential mortgage-backed securities. Barclays Bank PLC (“Barclays”)
funded Triaxx Funding’s purchase of those residential mortgage-backed securities. Barclays
funded the purchases as a margin lender; Triaxx Funding was required to make payments to
Barclays (i.e., was subject to “margin calls”) if the value of Barclays’ collateral—the
residential mortgage-backed securities—dipped below a specified level.7 In the event that
Triaxx Funding failed to meet a margin call, Barclays could liquidate the collateral and sell
the vast majority of Triaxx Funding’s assets to cover the debt.8
About half of the Funds’ net asset value was invested in Triaxx Funding.9 As the
investment manager of both the Funds and Triaxx Funding, the Manager received
management fees in proportion to the assets each had under management.
When the value of its residential mortgage-backed securities declined, Triaxx Funding
became subject to margin calls from Barclays. But Triaxx Funding did not have sufficient
funds to meet the margin calls. This, the Complaint alleges, led the Manager and Priore to
6 	Cmplt. ¶ 2 (“Triaxx Funding was a collateralized debt obligation…”). Based on the Court’s judicial
experience in this area and common sense (each of which the Court is required to utilize, see Ashcroft v.
Iqbal, 556 U.S. 662, 679 (2009)) (“Iqbal”), the Court believes that to be a misstatement. Rather, the
Court believes, Triaxx Funding was the issuer of collateralized debt obligations. But the distinction
does not materially affect the analysis that follows.
7 	The converse was also true. If the securities were valued above the threshold level, Barclays was
required to pay Triaxx Funding the “margin excess.” Triaxx Funding’s indenture trustee was
responsible for, amongst other things, valuing Triaxx’s residential mortgage-backed securities on a daily
basis.
8 	Cmplt. ¶ 2.
9 	Id. ¶ 3 (“approximately 50% of the … Funds’ net asset value was invested in Triaxx Funding”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 4 of 40

-5-
seek alternative ways for Triaxx Funding to meet the margin payments—in connection with
which the Manager and Priore allegedly “looked to [DLA Piper] for a solution.”10
2. The Players
(a) Plaintiffs—The Funds and the Liquidators
The Funds were incorporated in 2005 as exempted limited liability companies under
the Cayman Islands Companies Law. The Feeder Fund invested approximately $174 million
in the Master Fund, which the Master Fund then invested along with the contributions of its
two other shareholders.
About five years after their incorporation, the Funds were put into liquidation
proceedings in the Cayman Islands. Shareholders of the Feeder Fund filed a winding-up
petition in May 2010. The Cayman Islands Grand Court appointed Hugh Dickson and
Stephen Akers as the Joint Official Liquidators of the Feeder Fund, and removed the prior
management—the Manager and Priore. A few months later, the Master Fund’s shareholders
placed the Master Fund too in liquidation. Dickson and Akers again were appointed as Joint
Official Liquidators. Later, Saville took Akers’ place.
About three years after the Funds entered liquidation in the Caymans, the Liquidators
came to this Court seeking recognition of the Funds’ Cayman liquidation proceedings as
foreign main proceedings under Chapter 15 of the Bankruptcy Code. The Court granted
recognition in August 2013.
A few months later, the Funds and the Liquidators commenced this action in New
York State Supreme Court. In January 2014, DLA Piper removed the action to the United
10 	Id. ¶ 4.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 5 of 40

-6-
States District Court for the Southern District of New York. 11 Shortly after removal, the
District Court referred the case to the Bankruptcy Court.
(b) Defendant—DLA Piper
DLA Piper is a law firm with one of its several offices in New York City. DLA Piper
attorney Lucien White (“White”), based out of the firm’s New York City office, acted on
DLA Piper’s behalf in connection with the alleged wrongful activity.
(c) Other Players—Priore, the Manager and the Trustee
Though not named as defendants in this adversary proceeding, the Manager, Priore,
Barclays and the Trustee also had roles in connection with the allegations in the Complaint.
(i) The Manager
The Manager, a Delaware corporation, was based in New York. It was founded by
Priore, who was also the Manager’s president and chief investment officer. The Manager
served as an investment manager and “collateral manager” to both Triaxx Funding and the
Funds. Pursuant to an October 2006 Investment Management Agreement with the Master
Fund, the Complaint alleges, “[the Manager] owed [the Master Fund] the fiduciary duty to
invest [the Master Fund’s] assets in good faith and give [the Master Fund] ‘the benefit of its
best judgment and efforts in rendering services’. . . .” 12
(ii) Priore
Priore was a director of each of the Funds, owing each fiduciary duties. The Funds
also had two independent directors in the Cayman Islands, but these directors, the Complaint
alleges, were “unaware of Priore’s and the Manager’s wrongful acts” due to the Manager’s
and Priore’s concealment of them. If the independent directors had known of the wrongful
11 	See ICP Strategic Credit Income Master Fund Ltd. et al. v. DLA Piper LLP (US), 14-cv-351 (S.D.N.Y.
Jan. 17, 2014) (Hellerstein, J.), ECF No. 1.
12 	Cmplt. ¶ 26.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 6 of 40

-7-
activity, the Complaint alleges, “they could and would have taken action to stop the fraud on
the . . . Funds.” 13 Likewise, the Complaint alleges, the Funds also had innocent investors, also
unaware of the Manager’s and Priore’s wrongdoing, but had they known, they “could and
would have taken action to stop the fraud on the . . . Funds.”14 In fact, it was these innocent
shareholders who placed the Feeder Fund, and later the Master Fund, in liquidation
proceedings in the Caymans.
(iii) Barclays
As noted above, Barclays funded Triaxx Funding’s purchase of its residential
mortgage-backed securities. As discussed below, Barclays accepted payment from the Master
Fund (in lieu of Triaxx Funding) on the margin call obligations.15
(iv) The Trustee
A trustee acting in connection with the transactions that are the subject of the
Complaint at issue (the “Trustee”)—originally LaSalle, and later Bank of America—valued
the collateral posted by Triaxx Funding, and determined whether the value was below a
specified level (thus requiring a payment from Triaxx Funding to Barclays), or above it (thus
requiring a payment from Barclays to Triaxx Funding). Irrespective of a payment’s direction,
it would flow through the Trustee. The Trustee also was responsible for declaring events of
default, upon which Barclays could liquidate its collateral.
13 	Importantly, with respect to the in pari delicto defense discussed below, the Complaint is silent as to
what exactly the independent directors could and would have done.
14 	Again, the Complaint is silent as to what the innocent investors could and would have done.
15 	The Liquidators have also brought a separate action against Barclays, alleging principally that in
receiving payment that came from the Funds when the Funds were not obligors to Barclays, Barclays
was the recipient of fraudulent transfers. Though the complaints in the two actions plainly share
common background and in more than a few respects, common facts, they present different factual and,
especially, legal issues. Here the Court expresses no view as to the merits of the claims in the separate
Barclays action.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 7 of 40

-8-
3. The Transfers
At the heart of the Complaint are ten transfers, totaling $36.5 million (the
“Transfers”), by which the Manager and Priore caused the Funds to satisfy Triaxx Funding’s
margin call obligations to Barclays. As alleged in the Complaint, White acted wrongfully in
advising the Manager and Priore, and negotiating and drafting the documents necessary to
effectuate the Transfers.
Two such documents, referred to in the Complaint (and here) as the “Waiver Letter”
and the “Direction Letter,” were used in each of the ten transfers to secure the agreement of
Barclays (to avoid liquidation of the collateral) and the Trustee (to avoid declaration of an
event of default). In particular, the Waiver Letter documented Barclays’ agreement to accept
money from the Master Fund in lieu of payment from Triaxx Funding—and, though
conditionally, to waive Triaxx Funding’s obligation to pay. Importantly, the Complaint
asserts, the Waiver Letter reserved Barclay’s right to reinstate Triaxx Funding’s duty to pay
Barclays if the Master Fund brought a claw-back claim.
But the Waiver Letter solved only part of Triaxx Funding’s problem; the Trustee also
had to accept the payment to Barclays as satisfying Triaxx Funding’s payment obligation, thus
avoiding the declaration of an event of default. 	To this end, the Direction Letter was sent by
the Manager to the Trustee; it directed the Trustee to consider Triaxx Funding’s margin
obligation paid as a result of the Master Fund’s transfer of funds to Barclays. Upon execution
of these letters, Barclays and the Trustee agreed to take part in the Transfers.
With the groundwork for the Transfers in place, the Master Fund transferred
$36.5 million to Triaxx Funding, over a period of approximately 11 months, at a time when
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 8 of 40

-9-
the Funds had “tens of millions of dollars” in unpaid redemption requests from investors.16
From October 2008 through August 2009, Transfers were made from the Funds for margin
payments (an aggregate of approximately $35.26 million), interest payments to Triaxx
Funding’s noteholders (approximately $1.264 million), and DLA Piper’s legal fees
(approximately $180,000).17
In early 2010, some months after the transfers comprising the Transfers, Triaxx
Funding defaulted and Barclays foreclosed on its collateral anyway. But the Complaint
asserts that had Triaxx Funding defaulted earlier, before the ten Transfers, the Master Fund
would not have suffered losses as severely as it did in 2010. Thus, the Complaint alleges, the
Transfers exacerbated the loss suffered by the Funds.
The Complaint also alleges that although the Transfers were characterized at the time
as having been incident to a loan, such characterizations were false. The Complaint alleges
that “as White knew, there was no agreement from Barclays or Triaxx Funding to repay [the
Funds] and the only means [the Funds] had to seek repayment was litigation.” 18
DLA Piper’s allegedly false description of the Transfers as incident to a loan is alleged
to be an important element of DLA Piper’s aiding and abetting of Priore’s and the Manager’s
fraud and breaches of fiduciary duty. As set out in the Discussion below, key to these
allegations are DLA Piper’s knowledge of Priore’s and the Manager’s alleged wrongdoing,
16 	Cmplt. ¶ 112.
17 	With respect to the legal fees, the Complaint alleges further that none of DLA Piper’s invoices stated
how many hours White or other DLA Piper attorneys worked, or provided any detail of the work
performed (other than a general description that the work was done in connection with the above
Transfers), and that “[DLA Piper] billed Triaxx Funding as much as [the Manager] told [DLA Piper]
that it would pay.” Id. ¶ 72.
18 	Cmplt. ¶ 5.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 9 of 40

-10-
and DLA Piper’s knowing and substantial assistance to them. The Complaint’s allegations in
these respects are discussed in turn below.
4. Allegations of DLA Piper Knowledge
As alleged in the Complaint, White knew that the Manager and Priore caused the
transfer of the $36.5 million from the Master Fund to Barclays without the Master Fund
having an obligation to pay Barclays, and with neither Barclays nor Triaxx Funding19 having
any obligation to repay the Master Fund.20
As also alleged in the Complaint, DLA Piper knew not only that Barclays was not
obligated to repay the Master Fund, but also that Barclays recognized the impropriety of the
Transfers, as evidenced by a Barclays requirement that the Waiver Letter include “claw-back”
language, to protect Barclays from claims that it had received a fraudulent conveyance. This
language provided, in substance, that Barclays would waive Triaxx Funding’s margin
payment for only so long as neither the Master Fund nor any other person or entity made a
“claw-back” claim against Barclays. Thus, allegedly, DLA Piper knew that the Master Fund
could only seek repayment through litigation, and even then would have to battle the express
waiver obtained by Barclays.21
Further, the Complaint alleges, White knew that even if Triaxx Funding were
obligated through litigation or directed by the Manager to repay the Master Fund, Triaxx
Funding did not have the liquidity to do so, and White had no reason to believe that Triaxx
19 	See Cmplt. ¶ 105 (“White . . . was not aware of any agreement from Triaxx Funding’s trustee to repay
[the Master Fund] even if there was excess margin. White also knew that there was nothing in the
Triaxx Funding Indenture that directly gave [the Manager] the authority to direct Triaxx Funding’s
trustee to make any payments to [the Master Fund] in the event that there was excess margin.”).
20 	See, e.g., id. ¶ 5.
21 	See id.; see also id. ¶ 8 (“White was aware that even in the unlikely event that Triaxx Funding got
additional capital, the only way [the Funds] could seek repayment was through litigation because there
was no agreement in place directing Triaxx Funding, or Barclays for that matter, to repay [the Funds]
the principal amount transferred . . . .”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 10 of 40

-11-
Funding would ever have such liquidity, whether by way of a margin excess payment from
Barclays or otherwise.22
The Complaint also alleges, as relevant to DLA Piper’s knowledge, that the Master
Fund received no interest or fees for the use of its funds to cover Triaxx Funding’s margin
obligations;23 that DLA Piper was unaware whether the Funds had counsel in connection with
the Transfers;24 and that DLA knew that over $1 million of the Transfers went to paying
Triaxx Funding’s interest due to noteholders, and other expenses.25
The Complaint also alleges DLA Piper knew that the Transfers “made no commercial
sense,”26 and lacked “a good commercial reason.”27
Finally, in further support of its contentions that DLA Piper had the requisite
knowledge, the Complaint makes a number of additional, though conclusory and
argumentative, allegations:
22 	Cmplt. ¶ 8 (“White knew that Triaxx Funding had no liquidity to repay [the Funds] and he had no
reason to believe Triaxx Funding would get any additional funds.”). However, the Complaint also says
that DLA Piper “believe[d] it would not be unreasonable to take the position that” to “the extent that
[the Master Fund’s] advances are subsequently transferred by Barclays to the Trustee,” the Manager
could, though it was not obligated to, direct the Trustee “to transfer those advances back to [the Master
Fund] outside of the Priority of Payments under the [Triaxx Funding] Indenture.” Id. ¶ 85. Despite this
possible repayment mechanism, DLA Piper could not say it would “be unreasonable for [the Trustee],
any Noteholder or other interested party to take the position, either in or out of bankruptcy, that the cash
advances are Assets of Triaxx Funding and/or are subject to the Priority of Payments,” which would
require other creditors to be paid ahead of the Master Fund. Id.
23 	Id. ¶¶ 8, 91.
24 	See id. ¶¶ 29, 54, 101 (citing White’s SEC testimony in which he states that “[he] wasn’t representing
[the Funds]” and that he “wasn’t focus[ed] on [the Funds’] representation”).
25 	Id. ¶¶ 66, 70.
26 	See id. ¶ 8 (“White was aware that it made no commercial sense for [the Funds] to make the transfers.”).
27 	See id. ¶ 81 (“White . . . knew there was no loan agreement permitting [the Funds] to be repaid, there
was no good commercial reason for the funds to make the transfers, and . . . [the Funds] were faced with
protracted litigation to recover the money.”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 11 of 40

-12-
 	“[DLA Piper] attorney Lucien White . . . knew that Priore and [the Manager]
owed fiduciary duties to [the Funds], but nevertheless told them that they could
use money from [the Funds] to pay Triaxx Funding’s margin obligations.” 28
 	“Despite knowing that no loan agreement existed between [the Funds] and
Triaxx Funding or Barclays,” and that “there was no agreement in place
directing Triaxx Funding, or Barclays for that matter, to repay [to the Funds]
the principal amount transferred,” [DLA Piper] continued to assist “Priore and
the Manager in their breaches of fiduciary duty to the Funds.”29
 	At all times, [DLA Piper] was fully aware of the fiduciary duties owed by the
Manager and Priore to the [Funds], but chose to . . . facilitate [the Manager’s
and Priore’s] scheme.” 30
5. Allegations of DLA Piper Substantial Assistance
The Complaint does not allege that White acted in a role other than as an attorney, but
alleges a number of acts that White performed as an attorney that allegedly provided
substantial assistance to fraud and breaches of fiduciary duty. In that connection, the
Complaint alleges that:
 	“White . . . act[ed] as the point person in implementing [the Manager’s and
Priore’s] scheme” 31 by, among other things, “advis[ing the Manager] not to
28 	Id. ¶ 5.
29 	Id. ¶¶ 5, 8.
30 	Id. ¶ 16.
31 	Id. ¶ 6.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 12 of 40

-13-
use its own funds,” 32 and convincing Barclays and the Trustee “to accept [the
Funds’] money to cover [Triaxx Funding’s] margin obligation”;33
 	White then drafted the documents necessary to satisfy the concerns of Triaxx
Funding’s Trustee and Barclays;34
 	Without White’s help, the Manager and Priore would not have been able to
transfer $36.5 million from the Funds to Triaxx Funding;35 and
 	White made several misrepresentations, most of which involved his description
of the Transfers as “loans,” though, as discussed above, the Complaint alleges
that there was no right to repayment. 36
These representations, the Complaint alleges, were made in the process of allegedly
“silenc[ing] a potential whistle-blower”—Peter Woroniecki (“Woroniecki”), the Manager’s
Director of Fund Operations, who joined the Manager in February 2009 (four months after the
earliest of the Transfers, and six months before the last)—and in response to inquiries made
by an administrator of the Funds, GlobeOp Financial Services (Cayman) Limited (the
32 	See id. ¶ 81. DLA Piper argues that it was not DLA Piper that initially suggested or “advised” using
funds of an entity other than the Manager, but the Manager itself. If this adversary proceeding
continued beyond this point, DLA Piper could make this point, but of course the Court does not decide
disputed facts at this stage of the action.
33 	Id. ¶ 6.
34 	Id. ¶ 7 (“Specifically, White prepared: (i) a letter for Barclays to sign in which it agreed to accept
money from [the Master Fund] and waive Triaxx Funding's margin obligation but reserved the right to
reassert the obligation against Triaxx Funding if [the Master Fund] brought a claw-back claim (the
"Waiver Letter"); and (ii) a letter for the [the Manager] to send to [the Trustee] directing [the Trustee] to
consider Triaxx Funding's margin obligation paid as a result of [the Master Fund's] transfer of funds to
Barclays (the "Direction Letter”).”)
35 	See id. ¶ 8.
36 	See id. ¶ 5 (“White . . . told Priore and [the Manager] that they could characterize the transfers to
Barclays as a “loan”—meaning that [the Manager] could charge management fees to [the Funds] on the
purported investment—despite knowing that no loan agreement existed between [the Funds] and
Triaxx Funding or Barclays.”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 13 of 40

-14-
“Administrator”).37 With respect to both, White, in emails or phone calls, allegedly
misrepresented that the Transfers were loans, eventually satisfying each party’s concerns.
The Complaint also alleges that White made misrepresentations to the SEC during the
SEC’s investigation of the Manager and Priore, thus assisting the Manager and Priore in
concealing their fraudulent scheme. To this end, the Complaint alleges, White told the SEC,
among other things, that there was a repayment mechanism embedded in the transactions that
included the Transfers, and that he had not “review[ed] any documents relating to [the Master
Funds’] authority or ability to . . . . make the loan . . . .” 38
Finally, the Complaint alleges substantial assistance by reason of DLA Piper’s paying
itself using the funds DLA Piper allegedly helped misappropriate.39 In this connection, the
Complaint alleges, DLA Piper did not keep hours, and sometimes simply asked the Manager
what it should bill.40
6. The Claims
(a) 	Count 1—Aiding and Abetting Breaches of Fiduciary Duty
Based on those underlying facts, the Complaint asserts claims in its Count 1 for aiding
and abetting breaches of fiduciary duty. It starts with allegations directed at establishing the
requisite primary violations, alleging that the Manager and Priore breached their fiduciary
duties to the Funds by causing the Master Fund to transfer the $36.5 million to Barclays to
cover Triaxx Funding’s obligations. In connection with their alleged primary breaches of
fiduciary duty, the Complaint also alleges that the Manager and Priore:
37 	Cmplt. ¶ 11–12, 74–88, 89–92.
38 	Cmplt. ¶ 101, 104.
39 	Cmplt. ¶ 71.
40 	Cmplt. ¶ 72.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 14 of 40

-15-
 	made misrepresentations to the Funds’ Administrator;
 	left innocent stakeholders and independent directors in the dark; and
 	left redemption requests to the Funds unpaid while Triaxx Funding’s
obligations to Barclays were met, Triaxx Funding’s expenses (including
interest payments to noteholders and DLA Piper’s legal fees) were paid, and
the Manager received inflated management fees.
Then, the Complaint continues with allegations directed at establishing secondary
liability. It alleges that:
 	DLA Piper was aware that the Manager and Priore owed the Funds fiduciary
duties;
 	DLA Piper had “actual knowledge” of the $36.5 million in transfers to
Barclays, despite the Master Fund having no obligation to pay Barclays and
having “little to no prospect of repayment”; and
 	DLA Piper also was aware of (and, as noted above and below, allegedly
complicit in) the Manager’s and Priore’s misrepresentations of the Transfers to
the Funds’ Administrator, and the misrepresentation of the Transfers as a
“loan” on the Manager’s books.
Finally, the Complaint alleges, having this “actual knowledge” of the Manager’s and
Priore’s breaches of fiduciary duties, DLA Piper “substantially assisted” the Manager and
Priore by effectuating the Transfers as discussed above. In connection with effectuating the
Transfers, DLA Piper allegedly created false “loan” documents, “silenced” a whistleblower,
and made misrepresentations to the Funds’ Administrator.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 15 of 40

-16-
(b) 	Count 2—Aiding and Abetting Fraud
The Complaint’s Count 2 follows in similar fashion, but charging aiding and abetting
fraud, as contrasted to breach of fiduciary duty. The Complaint once again starts with
allegations directed at establishing the requisite primary violations, alleging that the Manager
and Priore defrauded the Funds, on substantially the same grounds that Count 1 alleges that
the Manager and Priore breached fiduciary duties owed to the Funds. Only a few words
change between Count 1 and Count 2 with respect to this; instead of saying that the Manager
and Priore “caused” the Master Fund to transfer $36.5 million to Barclays, Count 2 alleges
that the Manager and Priore “misappropriated” $36.5 million from the Funds. And instead of
asserting that the funds were used to cover Triaxx Funding’s “obligations,” Count 2 alleges
that the funds were used to pay not only Triaxx Funding’s obligations to Barclays, but also
interest on Triaxx Funding’s notes and other expenses.
Then, once again, the Complaint continues with allegations directed at establishing
secondary liability for aiding and abetting fraud. In Count 2, it alleges DLA Piper knew of the
Manager’s and Priore’s alleged fraudulent scheme in ways nearly identically to the way it
alleges DLA Piper knew of the Manager’s and Priore’s breaches of fiduciary duty is alleged in
Count 1. It also alleges DLA Piper’s “substantial assistance” to the Manager and Priore in
ways nearly identical to those by which it alleges them in Count 1.
(c) 	Count 3—“Fraudulent Trading” Under Cayman Law
(Cayman Islands Companies Law § 147)
The Complaint’s Count 3 asserts a cause of action under Cayman Companies Law
§ 147.41 It alleges, after repeating the allegations on which Counts 1 and 2 were based, that
41 	Section 147 of the Cayman Companies Law provides:
(1) If in the course of the winding up of a company it appears that any business of the
company has been carried on with intent to defraud creditors of the company or creditors of
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 16 of 40

-17-
the Manager and Priore “managed [the Funds] with the intent to defraud their creditors and
with fraudulent purposes,” causing the Master Fund to pay Triaxx Funding’s obligations
“knowing there was little to no chance of the money ever returning to [the Funds]. 42 The
Complaint asserts this claim in a fashion very similar to a claim for aiding and abetting under
U.S. law, by first alleging a primary violation of the Cayman law and then alleging knowledge
of fraudulent purposes and substantial assistance.43 The Complaint then alleges that because
DLA Piper “was a knowing and substantial participant in [the Manager’s] and Priore’s fraud,”
“the court may declare that DLA Piper is ‘liable to make such contributions’ to [the Funds’]
assets ‘as the Court thinks proper.’”44
Discussion
A. Pleading Standards
1. Rule 8 Requirements
Rule 8 applies to complaints generally. Fed. R. Civ. P. 8(a)(2) requires a short and
plain statement of the claim showing that the pleader is entitled to relief, in order to give the
defendant fair notice of what the claim is and the grounds upon which it rests.45 “While a
complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual
allegations, a plaintiff’s obligation to provide the grounds of his entitlement to relief ‘requires
any other person or for any fraudulent purpose the liquidator may apply to the Court for a
declaration under this section.
(2) The Court may declare that any persons who were knowingly parties to the carrying on of
the business in the manner mentioned in subsection (1) are liable to make such contributions, if
any, to the company’s assets as the Court thinks proper.
42 	Cmplt. ¶ 134.
43 	See id. ¶ 135.
44 	Id. ¶ 136 (quoting Cayman Law section 147).
45 	Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (“Twombly”) (internal citations and
quotations omitted).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 17 of 40

-18-
more than labels and conclusions, and a formulaic recitation of a cause of action’s elements
will not do.’” 46
Thus, to survive a motion to dismiss, a complaint must contain “allegations plausibly
suggesting (not merely consistent with)” an “entitlement to relief.”47 Unless a complaint
“raise[s] a right to relief above the speculative level,” it should be dismissed.48 Thus,
“conclusory allegations or legal conclusions masquerading as factual conclusions will not
suffice to prevent a motion to dismiss.”49
“Once a claim has been stated adequately, it may be supported by showing any set of
facts consistent with the allegations in the complaint.”50 However, “a complaint can be
dismissed for failure to state a claim pursuant to a Rule 12(b)(6) motion raising an affirmative
defense if the defense appears on the face of the complaint.”51 Furthermore, on a motion to
dismiss, a court may consider certain documents in addition to the complaint, including the
contents of any documents attached to the complaint or incorporated by reference, matters as
to which the court can take judicial notice, and documents in the possession of the non-
moving party (the Funds and the Liquidators here) or documents which the non-moving party
knew of or relied on in connection with its complaint.52
46 	Id. (internal citation omitted).
47 	Id. at 557.
48 	Id. at 555.
49 	Smith v. Local 819 I.B.T. Pension Plan, 291 F.3d 236, 240 (2d Cir. 2002) (quoting Gebhardt v. Allspect,
Inc., 96 F. Supp. 2d 331, 333) (S.D.N.Y. 2000).
50 	Twombly, 550 U.S. at 563 (citations omitted).
51 	Buckley v. Deloitte & Touche USA LLP, 2007 WL 1491403, *4, 2007 U.S. Dist. LEXIS 37107, *11
(S.D.N.Y. May 21, 2007) (Stein, J.) (citing Official Comm. of Unsecured Creditors of Color Tile, Inc. v.
Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d Cir. 2003)) (other internal citations omitted).
52 	See ABF Capital Mgmt v. Kidder Peabody & Co. (In re Granite Partners, L.P.), 210 B.R. 508, 514
(Bankr. S.D.N.Y. 1997) (Bernstein, C.J.).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 18 of 40

-19-
2. Rule 9 Requirements
Heightened pleading requirements, set forth in Fed. R. Civ. P. 9(b), apply to “any claim
that ‘sounds in fraud,’ regardless of whether fraud is an element of claim.”53 Thus Rule 9(b)
applies to claims of breaches of fiduciary duty consisting of fraud54 and, as relevant here, aiding
and abetting fraud; 55 aiding and abetting breaches of fiduciary duty (at least when such are
premised on fraud);56 and, by extension, of liability under Cayman Company Act § 147, which,
at least under the facts here, has similar conceptual underpinnings.
The more stringent standards of Fed. R. Civ. P. 9(b) require a party alleging fraud or
mistake to plead “with particularity the circumstances constituting fraud or mistake.”57
Though under Rule 9(b), knowledge or intent may be alleged generally, it still is necessary “to
allege facts that give rise to a strong inference of fraudulent intent.”58 Since Rule 9(b) is
intended “to provide a defendant with fair notice of a plaintiff’s claim, to safeguard a
defendant’s reputation from improvident charges of wrongdoing, and to protect a defendant
against the institution of a strike suit,”59 the relaxation of Rule 9(b)’s specificity requirement
for scienter “must not be mistaken for license to base claims of fraud on speculation and
53 	Matsumura v. Benihana Nat’l Corp., 542 F. Supp. 2d 245, 251-52 (S.D.N.Y. 2008) (Buchwald, J.)
(“Matsumura”) (quoting Rombach v. Chang, 355 F.3d 164, 166, 170 (2d Cir. 2004).
54 	In re Parmalat Sec. Litig., 501 F. Supp. 2d 560, 573 (S.D.N.Y. 2007) (Kaplan, J.) aff’d Pappas v. Bank
of Am. Corp., 309 Fed. Appx. 536 (2d Cir. 2009); Matsumura, 542 F. Supp. 2d at 252.
55 	Armstrong v. McAlpin, 699 F.2d 79, 92–93 (2d Cir. 1983); Lerner v. Fleet Bank, N.A., 459 F.3d 273,
292-93 (2d Cir. 2006).
56 	Matsumura, 542 F. Supp. 2d at 252 (applying Rule 9(b) to claims against an attorney for allegedly
aiding and abetting breach of fiduciary duty).
57 	Fed.R.Civ.P. 9(b) (emphasis added).
58 	Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (“Shields”), superseded by statute
(Priv. Sec. Lit. Reform Act, 15 U.S.C. § 78u) on other grounds, see Verdi v. Potter, 2010 WL 502959,
at *7, 2010 U.S. Dist. LEXIS 11053, at *26, n.6 (E.D.N.Y. Feb. 9, 2010) (Hurley, J.).
59 	Id. (quoting O’Brien v. Nat’l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (other internal
quotations omitted).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 19 of 40

-20-
conclusory allegations.” 60 To serve the purposes of Rule 9(b), the Second Circuit thus
requires plaintiffs to allege facts that give rise to a strong inference of fraudulent intent.61
The requisite “strong inference” of fraud may be established either (a) by alleging
facts to show that defendants had both motive and opportunity to commit fraud, or (b) by
alleging facts that constitute strong circumstantial evidence of conscious misbehavior or
recklessness.62
B. Choice of Law
Choice of law issues arise in four contexts in these cases—with respect to (1) claims
for primary violations of breach of fiduciary duty; (2) claims of primary violations of fraud;
(3) secondary violations of aiding and abetting breaches of fiduciary duty and fraud; and
(4) application of in pari delicto. The Court considers them in turn.
1. Allegations of Fiduciary Duty Primary Violations
For determinations of primary violations of fiduciary duty, the Court would normally
apply the “internal affairs” doctrine. This is a conflict of laws principle recognizing that the
law of the state (or other jurisdiction) of incorporation should have the authority to regulate a
corporation’s internal affairs—i.e., matters peculiar to the relations between the corporation
and, as relevant here, its officers and directors.63
The Court agrees with the Liquidators’ observation that the “internal-affairs doctrine
would have this Court look to the law of the state of incorporation, here the Cayman Islands,
60 	Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990).
61 	Id.
62 	Shields, 25 F.3d at 1128.
63 	See, e.g., Adelphia Commc’ns. Corp. v. Bank of Am., N.A. (In re Adelphia Commc’ns. Corp.), 365 B.R.
24, 39-41 (Bankr. S.D.N.Y. 2007) (Gerber, J.) (“Adelphia–Bank of America”), aff'd as to all but an
unrelated issue, 390 B.R. 80 (S.D.N.Y. 2008) (McKenna, J.).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 20 of 40

-21-
to analyze the breach of fiduciary duty. . . .”64 But the Court also agrees with the Liquidators’
point that on this particular issue, “there is no conflict between Cayman Islands’ and New
York’s breach of fiduciary duty law.” 65 Thus (and because there was no argument to the
contrary by defendant DLA Piper), the Court considers it unnecessary to undertake the
incremental burden of addressing Cayman law on this point, and applies New York law to the
extent a particular jurisdiction’s internal corporate governance law matters.
2. Allegations of Fraud Primary Violations
The law applicable to claims of fraud, by contrast, is determined by reference to choice
of law rules governing torts.66 “In tort cases, New York courts apply the law of the
jurisdiction with the greatest interest in regulating behavior within its borders or in having its
law applied.” 67 That is often the locale where harm was felt (which here, would be principally
New York). 68 But in this case one would come to the same conclusion if one were to look at
the locale of the allegedly wrongful conduct—once again, New York.
Here the parties agree that New York law should apply (or at least they rely on New
York law), and the Court sees the interests of New York as predominant with respect to the
claims of fraud. To the extent it matters, the Court applies New York law.
64 	Pl. Br. n.26.
65 	Id.
66 	See Official Comm. of Unsecured Creditors of Lois/USA, Inc. v. Conseco Fin. Servicing Corp. (In re
Lois/USA, Inc.), 264 B.R. 69, 17-108 (Bankr. S.D.N.Y. 2001) (Gerber, J.) (discussing choice of law
rules for fraud and other tort claims); see also Rosenberg v. Pillsbury Co., 718 F. Supp. 1146, 1150
(S.D.N.Y. 1989) ("While [a choice-of-law] provision is effective as to breach of contract claims, it does
not apply to fraud claims, which sound in tort.").
67 	LaSala v. UBS, A.G., 510 F. Supp. 2d 213, 230 (S.D.N.Y. 2007) (Haight, J.) (“LaSala”) (internal
quotations omitted).
68 	See id. at 232.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 21 of 40

-22-
3. Allegations of Aiding and Abetting (Secondary Liability)
Claims of aiding and abetting breaches of fiduciary duty rest in part on underlying
primary violations of duty that are subject to the internal affairs doctrine. For that reason,
there has been a conflict in the cases as to whether claims for aiding and abetting breaches of
fiduciary duty should be decided under the law of the jurisdiction of organization or more
traditional tort principles—under which the Court would look to the jurisdiction with the
greatest interests in the controversy.
But after analyzing the split of authority on the matter in Adelphia, this Court held (for
reasons stated at greater length in that opinion) that the conflicts principles applicable to torts
should apply.69 This caused the Court to hold in Adelphia that the aiding and abetting claims
should be determined under Pennsylvania law, where the injury was suffered, rather than
Delaware, under whose law the corporations were organized. The Court adhered to those
principles in a later decision, MagCorp, 70 and other courts, often citing Adelphia, did
likewise.71
Perhaps for those reasons, the parties do not dispute that the claims of aiding and
abetting fraud here should be decided under New York law. 72 And based on its earlier
69 	See Adelphia-Bank of America, 365 B.R. at 39-41.
70 	See MagCorp., 399 B.R. at 742-43 (“The jurisdiction with the greatest interest is that of the principal
place of business, where any injury as a consequence of any aiding and abetting would have been
suffered.”).
71 	See LaSala, 510 F. Supp. 2d at 230-231 & n.9; Silverman v. H.I.L. Assocs. Ltd. (In re Allou Distribs.,
Inc.), 387 B.R. 365, 395–96 (Bankr. E.D.N.Y. 2008) (Stong, J.); Laddin v. Belden (In re Verilink
Corp.), 405 B.R. 356, 381 (Bankr. N.D. Ala. 2009) (Caddell, J.).
72 	Both parties cite New York law exclusively when arguing the issues in their respective briefs. See, e.g.,
Pl. Br. at 9-18; Def. Br. at 21. While the Liquidators stated, during oral argument, that they were not
conceding the applicability of New York law to both aiding and abetting claims, they noted no conflict
between New York and Cayman Law on the issues. See Arg. Tr. at 35 (“[W]e do dispute that New
York Law applies to the aiding and abetting claim… But the point is there's no conflict between
Cayman and New York law on that point. Both jurisdictions have aiding and abetting claims, there was
no need to fight it.”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 22 of 40

-23-
decisions in Adelphia and MagCorp, the Court analyzes the aiding and abetting claims
accordingly.
4. In Pari Delicto
The two sides do, however, dispute the jurisdiction whose law should apply to the
consideration of DLA Piper’s in pari delicto defense. DLA Piper contends that New York
law should guide the Court’s consideration of in pari delicto and imputation. The Liquidators
contend that based on the internal affairs doctrine, Cayman, not New York, law should
apply.73 Alternatively, the Liquidators argue that even if the interests analysis test applies,
Cayman has a greater interest in the controversy, and thus that Cayman Law should apply.
But as to each of these issues, the Court agrees with DLA Piper. The Liquidators fail
to cite any case in which a court applied the law of the jurisdiction of organization, rather than
that with the greatest interests, in making an in pari delicto determination. And this Court has
previously done exactly the opposite. In Adelphia, the Court likewise faced issues as to the
application of in pari delicto. Choice of law there was important, because under the law of
Pennsylvania (the place where the injuries were suffered; where most of the wrongful conduct
took place; and which thus had the greatest stake in the controversy), in pari delicto would not
be a conclusive bar to recovery. But under Delaware and other states’ law, in pari delicto
would probably be a defense. This Court utilized interests analysis and then applied
Pennsylvania law, not Delaware law, in analyzing the in pari delicto defenses on motions to
dismiss. 74
73 	The Liquidators argue that as the predicate for their further contention that the wrongdoing of the agents
cannot be imputed to the Funds under Cayman law, and thus that the in pari delicto defense fails.
Because the Court concludes that Cayman law does not govern the in pari delicto defense, the Court
does not need to determine whether the Liquidators are right with respect to their reading of the Cayman
law.
74 	See Adelphia-Bank of America, 365 B.R. at 25-35.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 23 of 40

-24-
Similarly, in MagCorp, each of the two injured debtors was a Delaware corporation,
but (while the Court applied Delaware law to the claims against insiders based on their alleged
breaches of fiduciary duty), in analyzing the claims against the company’s counsel,
accountants and investment banker, the Court applied the Wagoner Rule--the in pari delicto
law of the State of New York.75
Finally, but very importantly, “in New York, in pari delicto is an affirmative
defense. . . .” 76 And “in this Circuit, the law governing an affirmative defense to a claim is
the same as the law governing the claim itself.”77 Since New York law applies to the claims
for aiding and abetting fraud and breach of fiduciary duty, the Court must apply New York
law to the in pari delicto analysis as well.
Nor, once it applies interests analysis, can the Court agree that Cayman has a greater
interest in the controversy. The Cayman court itself recognized that Counts 1 and 2 of the
Complaint “assert[ed] causes of action belonging to the Funds which arose under United
States law . . . .” 78 And in a somewhat different context (susceptibility to Cayman
jurisdiction), the Cayman court made observations relevant to the Cayman interest in the
controversy:
[DLA Piper] carries on its practice in the United States.
The firm does not have a presence in the Cayman
Islands. The damage suffered by the Funds resulted
75 	See MagCorp., 399 B.R. at 742, 758-766.
76 	Kirschner v. KPMG LLP, 15 N.Y.3d 446, 459, 912 N.Y.S.2d 512, 513, 938 N.E.2d 941, 946, n.3 (N.Y.
2010) (“Kirschner”); Cobalt Multifamily Investors I, LLC v. Shapiro, 857 F. Supp. 2d 419, 429 n.5
(S.D.N.Y. 2012) (Wood, C.J.) (“Cobalt”).
77 	Cobalt, 857 F. Supp. 2d at 434 (citing Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531,
1540–41 (2d Cir. 1997)).
78 	Pls.’ Statement of Supplemental Auth. ¶ 2.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 24 of 40

-25-
from acts committed in New York and advice given by a
lawyer working in the firm’s New York office. 79
Thus, once the Court applies interest analysis doctrine, New York has the greater interest in
this controversy, and New York Law should apply.
C. Sufficiency of the Pleadings
Count 1—Aiding and Abetting Breaches of Fiduciary Duty
The Complaint’s Count 1 charges DLA Piper with aiding and abetting breaches of
fiduciary duty by Priore and the Manager. The Court finds that Count 1—just barely—
satisfactorily alleges a primary breach of fiduciary duty. But the remainder of Count 1
(which must plead the requisite knowledge and substantial assistance) fails to pass muster
under Fed. R. Civ. Proc. Rule 8 or, especially, Rule 9.
1. Primary Violation
With respect to the requisite primary violation, the Court said the Complaint “just
barely” suffices because of the obvious potential defenses that appears in material part from
the face of the Complaint. As the Liquidators recognize in their Complaint, “approximately
50% of the … Funds’ net asset value was invested in Triaxx Funding.”80 It takes little in the
way of clairvoyance to anticipate the explanation for the Transfers. A Barclays liquidation of
its collateral upon Triaxx Funding’s default would wipe out 50% of the Funds’ net asset
value—a plainly dreadful result, which would demand consideration of preventative action.
With the benefit of its judicial experience,81 the Court sees the obvious defenses that
would come down the road—whether the Funds’ expenditure of $36 million to protect against
79 	Id. ¶ 7.
80 	Cmplt. ¶ 3.
81 	Iqbal stated, expressly, that “[d]etermining whether a complaint states a plausible claim for relief will
… be a context-specific task that requires the reviewing court to draw on its judicial experience and
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 25 of 40

-26-
an immediate loss of 50% of the Funds’ net asset value would be protected under the
“Business Judgment Rule,” and whether the documentation of the duty to repay the Funds
after the Transfers actually caused the Funds’ losses.
The Business Judgment Rule, as it exists under New York law, “bars judicial inquiry
into actions of corporate directors taken in good faith and in the exercise of honest judgment
in the lawful and legitimate furtherance of corporate purposes.”82 Thus if, after trial, if the
requirements of the Business Judgment Rule were satisfied, this Court would find it difficult
or impossible to find a primary violation of the breach of fiduciary duty here.83 The Court
supposes, however, that to the extent that the Liquidators can show that Priore or the Manager
authorized the transfers in the absence of good faith, disinterestedness, or due care, they may
be able to establish the requisite primary violation.84
Likewise, with the benefit of its judicial experience, the Court sees a future causation
issue--whether the Funds suffered the losses they did because Triaxx Funding’s duty to pay
the Funds back was inadequately documented (and that Triaxx Funding, managed by the same
Manager, might later contend that it really didn’t have a duty to pay the money back), on the
common sense.” 556 U.S. at 679. This Court has previously observed that “[i]f writing on a clean slate,
the Court would not have come to such a view, as it could lead to different conclusions on 12(b)(6)
motions, which are matters of law, depending on individual judges’ experience with the matters in
question.” Weisfelner v. Fund 1 (In re Lyondell Chem. Co.), 503 B.R. 348, 357 n.16 (Bankr. S.D.N.Y.
2014). But this Court went on to say that it would of course decide motions then before it in accordance
with the Supreme Court's directions in that regard. Id. The Court does likewise here.
82 	Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 393 N.E.2d 994 (N.Y.1979)
(“Auerbach”).
83 	See Fox v. Koplik (In re Perry H. Koplik & Sons, Inc.), 476 B.R. 746, 795 (Bankr. S.D.N.Y. 2012)
(Gerber, J.) (“Perry Koplik”), objections to proposed factual findings overruled but with adjustments in
factual findings made, 499 B.R. 276 (S.D.N.Y. 2013) (Castel, J.) (discussing New York’s Business
Judgment Rule and Auerbach in context of claims that defendants, who were closely held corporation’s
officers and directors, violated fiduciary duties owed to the corporation).
84 	See id. at 795-96 (noting scenarios under which the Business Judgment Rule would be inapplicable). Of
course, the Business Judgment Rule would be inapplicable not because (as we now know with the
benefit of hindsight) Barclays later came to liquidate the collateral anyway, but because the decision,
when made, was undeserving of the deference given under the Business Judgment Rule.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 26 of 40

-27-
one hand, or because Triaxx Funding later lacked the resources to do so, on the other.85 But
once again, the Court supposes that this obvious defense would be better dealt with after the
12(b)(6) stage.
For these reasons, the Court has great uncertainty, based on its judicial experience, as
to whether the Liquidators could overcome the Business Judgment Rule defense articulated by
the New York Court of Appeals in Auerbach, 86 or the causation defense recognized in Perry
Koplik and the cases upon which Perry Koplik relied. But the Court believes that it should not
foreclose, at the 12(b)(6) stage, debate as to whether these defenses could be overcome. The
allegations that Priore and the Manager were conflicted and took the action to protect the 50%
of the Funds’ assets at risk to maximize their management fees on the Triaxx Funding side,87
or to protect their reputations as skillful managers, are barely plausible at best—both because
of the hugely greater importance of the Funds assets at risk, and because the Manager received
management fees on the Funds’ side as well. 88 And the notion that Triaxx Funding, which
was “another investment vehicle that [the Manager] managed,”89 would have contested a duty
to repay indebtedness advanced to it by its affiliate (based on the decision of their common
85 	See id., at 805 (though corporate officers and directors failed to comply with duty of care when they
advanced millions to another company, American Tissue, without getting promissory notes, that did not
cause the Debtor’s loss; the problem resulted from “the inability of American Tissue to pay its
indebtedness back, rather than the Debtor's inability to prove the existence of the debt or to present a
negotiable instrument to collect upon it.”); accord id. at 778 n.177 (making same point in Summary of
Findings).
86 	That is particularly with respect to several of the Liquidators’ conclusory allegations, see Cmplt. ¶¶ 8,
81, that the transfers made “no commercial sense” and were done for “no good commercial reason.”
87 	See Cmplt ¶ 3 (“Priore knew that if Barclays foreclosed on the collateral, [the Manager] would lose the
management fees it received from Triaxx Funding.”)
88 	See id. (because approximately 50% of the Funds’ net asset value was invested in Triaxx Funding,
“Priore also knew that the foreclosure would diminish the management fees [the Manager] received
from the [Funds]”).
89 	Id. ¶ 1.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 27 of 40

-28-
manager, and of Priore, who was “[the Manager’s] majority owner”)90 is barely plausible as
well. But at this stage the Court is prepared to assume that the Liquidators have, albeit barely,
alleged action by Priore and the Manager that may not be entitled to those obvious defenses.91
2. Secondary Liability
But even assuming the possibility of a primary violation, and thus a breach, by Priore
or the Manager, of fiduciary duty, the Court finds the Liquidators pleading of the requisite
knowledge of wrongful conduct on the part of White—and hence DLA Piper—to be
inadequate.
a. Actual Knowledge
Though their Complaint is replete with rhetoric and conclusory allegations (neither of
which, under familiar principles, can be credited when determining the adequacy of a
complaint), the Liquidators essentially make two points. They contend (1) that the Master
Fund’s transfers to Barclays on account of Triaxx Funding’s margin obligation were done for
“no good commercial reason,” and (2) that the transfers did not result in loans. Assuming for
90 	Id.
91 	Underlying the entirety of the Complaint are the Liquidators’ allegations that the Funds’ advances to
Triaxx Funding were not really loans. Based, once again, on the Court’s judicial experience, the Court
finds these allegations difficult to believe, though it will accept them as true, albeit with considerable
skepticism, at this point. Over the years, the Court has seen numerous instances of corporate affiliates
paying obligations on behalf of other affiliates, or making inter-company loans. In the Court’s
experience, these loans or advances were often made with little or no documentation, but they
nevertheless gave rise to intercompany obligations—sometimes difficult to collect, because of the
insolvency of one of the affiliates, but nevertheless plainly there. Whether this was likewise the case
here, on the one hand, or was intended to be an exception to that practice, on the other, is something that
would normally not be decided at the 12(b)(6) stage.
One other concern underlies the Court’s decision to find the Liquidators’ allegations of a primary
violation plausible, albeit barely so. The Liquidators have made arguably separate and stronger
contentions, at least impliedly, that even if the Transfers were loans or effectively loans and created
indebtedness running from Triaxx Funding to the Master Fund or both of the Funds, repayment of the
indebtedness might be made more difficult by competing priority of payments demands on Triaxx
Funding, see Cmplt. ¶85, or by limitations in Triaxx Funding’s Indenture or other organizational
documents such that “Triaxx Funding could not accept a loan from [the Manager] or a [Manager]
affiliate,” id. at ¶ 44, or “painful mechanics.” Id. at ¶ 45. How important such concerns would be is
difficult to determine under Rule 12(b)(6).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 28 of 40

-29-
now, as the Court has just noted it will do, that these allegations might support claims of
breach of fiduciary on the part of Priore or the Manager, the allegations that surround them
fail adequately to plead that White knew they were doing anything wrong.
With respect to the first, the Liquidators’ allegations that White knew that the
Transfers “made no commercial sense” and lacked “a good commercial reason”92 —stated in
conclusory terms, without supporting evidentiary facts 93 —are implausible. Of course the
Transfers had a commercial reason—saving half of the Funds’ net asset value. What is
debatable is whether, on balance, the Transfers were wise, and in particular, whether putting
more of the Funds’ assets at risk to save the 50% of them that were subject to imminent
forfeiture was a smart business decision. But accepting one’s client’s view as to the business
decision to be made is not knowledge that one’s client was doing anything wrong. Nor are
there any evidentiary facts supporting the many conclusory allegations that White knew that
his clients were doing anything wrong.
With respect to the second, there are no allegations supporting the conclusion that
White believed that there was no duty on the part of Triaxx Funding to pay the advances back.
A belief of that nature would be wholly contrary to what one would expect based on judicial
experience and common sense. The Court accepts as satisfactorily pleaded the Liquidators’
allegations that limitations in the documents made common ways of documenting a loan
impractical or impossible, but it is way too much of a jump to draw from that the conclusion
that White never believed there was a loan, or, especially, that he knew of a theft.
Of course, attorneys providing legal services are not immune from claims that they
have aided and abetted breaches of fiduciary duty. But to make assert viable claims for such,
92 	Cmplt ¶¶ 8, 81.
93 	See id. ¶ 81.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 29 of 40

-30-
the plaintiff must show that the attorney knew more than the facts generally surrounding the
transaction,94 and that the attorney knew of the various steps in the transaction’s execution.
The allegations must show that the attorney knew that he or she was assisting something that
was wrong, and how that assistance facilitated wrongful conduct.95 Allegations of that
character are missing here.
b. Substantial Assistance
The issues as to the allegations of substantial assistance are close. There are no
allegations that White—and hence DLA Piper—had any role in the Transfers other than as
counsel performing ordinary legal services. There are no allegations that White proposed
using the Funds’ money for the margin calls (and indeed the Complaint affirmatively alleges
that the Manager and Priore made that decision alone96 ), or that White was involved in any
fashion with the actual taking of the money from the Funds.
Thus it is highly debatable whether the legal services that were provided here can be
regarded as rising to the level of substantial assistance. Once again, while lawyers are not
immune from liability for aiding and abetting wrongful conduct, courts must be wary of
regarding the attorney’s legal advice, or the attorney’s interfacing with others, as substantial
94 	Compare Oster v. Kirschner, 77 A.D.3d 51, 52-57, 905 N.Y.S.2d 69, 70-73 (1st Dep’t 2010) (failing to
dismiss complaint where counsel drafted offering memoranda which failed to disclose investment
managers’ criminal history, of which counsel was aware).
95 	See, generally, Kaufman v. Cohen, 307 A.D.2d 113, 125, 760 N.Y.S.2d 157, 169 (1st Dep't 2003) (“A
person knowingly participates in a breach of fiduciary duty when he or she provides ‘substantial
assistance’ to the primary violator. Substantial assistance occurs when a defendant affirmatively assists,
helps conceal or fails to act when required to do so, thereby enabling the breach to occur.”) (internal
citations omitted); Ferring B.V. v. Allergan, Inc., 4 F. Supp. 3d 612, 623-624 (S.D.N.Y. 2014) (Sweet,
J.) (“The tort of aiding and abetting breaches of a common law duty does not encompass a ‘should have
known’ standard; actual knowledge of ‘the primary violator's status as a fiduciary and actual knowledge
that the primary violator's conduct contravened a fiduciary duty’ is required.”) (citing Mazzaro de Abreu
v. Bank of Am. Corp., 525 F. Supp. 2d 381, 393 (S.D.N.Y. 2007) (McKenna, J.).
96 	See Cmplt. ¶¶ 46, 81.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 30 of 40

-31-
assistance in the absence of allegations establishing something more97 —as there is a
distinction between rendering “substantial assistance to the breach of duty, [as opposed] to the
person committing the breach.”98 The Liquidators’ calling White the “point person” for the
transaction,99 as a characterization for his communicating, on behalf of his client, in ways
lawyers routinely do, is difficult to justify as amounting to substantial assistance in the
absence of additional allegations suggesting how the communications to others were known
by the alleged wrongdoer to be assisting in a known breach of duty.100
But ultimately, the Court does not need to decide whether providing these routine legal
services rose to the level of providing “substantial assistance” because the requisite
knowledge of breach of duty was inadequately pleaded in any event.
Count 2—Aiding and Abetting Fraud
The Complaint’s Count 2 charges DLA Piper with aiding fraud by Priore and the
Manager. Though the Court has found that the Liquidators have alleged, albeit barely, a
primary violation of breach of fiduciary duty, they have not done likewise with a claim of
fraud, especially with the particularity that Rule 9(b) requires. 101 And once again, the Court
finds deficiencies in the Liquidators’ pleading of secondary liability, for failing to allege
97 	See CRT Invs., Ltd. v. BDO Seidman, LLP, 85 A.D. 3d 470, 472, 925 N.Y.S. 2d 439 (1st Dep’t 2011)
(holding that the plaintiffs failed to state a claim against accounting firm for aiding and abetting fraud-
“Substantial assistance, a necessary element of aiding and abetting fraud, means more than just
performing routine business services for the alleged fraudster. … The complaint fails to plead a factual
basis for inferring that BDO Seidman did anything more than perform the routine business of
auditing.”) (internal citation omitted).
98 	Chem-Age Industries, Inc. v. Glover, 652 N.W.2d 756, 775 (S.D. 2002).
99 	Cmplt. ¶ 6.
100 	Likewise, though the Liquidators allege, in conclusory terms, White’s assistance in “theft” from the
Funds, the Transfers would not be theft if there were a duty of repayment—and White’s
communications, incident to the services he provided, reflect his belief in that at the time.
101 	See Matsumura, 542 F. Supp. 2d at 252 (applying Rule 9(b) to claim against attorney for aiding and
abetting breach of fiduciary duty).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 31 of 40

-32-
knowledge on the part of White that he was assisting in an ongoing fraud. Thus this count too
must be dismissed.
1. Primary Violation
Turning first to the primary allegation of fraud, the Court sees a failure to make several
of the allegations necessary for a traditional showing of fraud102 —most obviously, a
representation of material fact, falsity, knowledge of falsity, and reliance. Nondisclosure103 is
the underlying theory. But, here too, critical allegations have not been pleaded—most
significantly, a duty to disclose and scienter104 —nor have the fraud claims been pleaded with
the particularity that Rule 9(b) requires.
The Complaint alleges that the Manager and Priore “fraudulently caused” and
misrepresented the nature of the payments from the Master Fund to Triaxx Funding. It does
so not by particularized facts establishing the existence of an underlying fraud, but by broad
and conclusory references to a “fraud,” “scheme,” “fraudulent scheme,” “plan,” or a
“misappropriation” of funds.105 Instead, in a conclusory fashion throughout the Complaint,
the Transfers are simply labeled as “fraudulent,” 106
102 	As stated in Kaufman v. Cohen, 307 A.D.2d at 119, “[t]o state a cause of action for fraud, a plaintiff
must allege a representation of material fact, the falsity of the representation, knowledge by the party
making the representation that it was false when made, justifiable reliance by the plaintiff and resulting
injury.” No effort was made to make a showing of this character.
103 	See id. at 119-120 (“a fraud may be predicated on acts of concealment where the defendant had a duty
to disclose material information . . . , provided the [defendant] fiduciary possesses the requisite intent to
deceive”).
104 	See Dembeck v. 220 Central Park South, LLC, 33 A.D. 3d 491, 492, 823 N.Y.S.2d 45, 47 (1st Dep’t
2006) (“Although a cause of action for fraud may be predicated on acts of concealment, there must first
be proven a duty to disclose material information”).
105 	See, e.g., Cmplt. ¶ 8 (“Pursuant to the plan, Priore and "[the Manager] caused [the Funds] to make ten
transfers to Barclays between October 2008 and August 2009 totaling over $36 million.”) (emphasis
added); id. ¶ 9 (“[I]n 2009, Priore’s and [the Manager’s] fraud broadened. . . . Priore and [the Manager]
misappropriated over $1 million from [the Master Fund] to pay interest on Triaxx Funding’s notes and
to [pay] [DLA Piper]’s legal bills.”) (emphasis added); id. ¶ 13 (“Despite Priore's and [the Manager's]
efforts to keep their scheme afloat”) (emphasis added); id. ¶ 55 ([DLA Piper ’s actions “permit[ted]
Priore and [the Manager] to execute the scheme to steal [the Master Fund’s] money . . . .”) (emphasis
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 32 of 40

-33-
The Complaint does not allege a duty on the part of Priore to make disclosure to the
other directors. Nor does it allege a duty on the part of the Manager to bring the Transfers
before the Board. The Complaint is especially lacking with respect to the Manager’s and
Priore’s alleged fraudulent intent. No fact or set of facts cited in Count 2 of the Complaint
gives rise to an inference, much less a strong inference, fraudulent intent on the part of Priore
or the Manager. Nor do the previous 128 paragraphs that are incorporated into Count 2
sufficiently address the intent of the alleged underlying wrongdoers.
The Complaint does, to be sure, assert that:
 	“Priore knew that if Barclays foreclosed on the collateral, [the Manager] would
lose the management fees it received from Triaxx Funding”; 107
 	“Priore also knew that the foreclosure would diminish the management fees
[the Manager] received”;108
 	“Priore knew that foreclosure meant that the Manager’s overall assets under
management would be substantially diminished . . . [as would the Manager’s]
ability to market itself as a significant player in the CDO market”;109
 	“Priore and [the Manager] wanted to maintain the appearance that they were
successfully managing Triaxx Funding and therefore, decided to
added); id. ¶ 95 (“[DLA Piper] billed for its role in Priore’s and [the Manager’s] scheme to defraud [the
Funds]”) (emphasis added); id. ¶ 114 (“As a result of [DLA Piper’s] knowing and substantial assistance
to Priore and [the Manager] to keep their fraudulent scheme going . . . .”) (emphasis added) .
106 	See Cmplt. ¶¶ 6, 40, 49, 113, 114, 123. As already noted, conclusory labels are insufficient to survive a
motion to dismiss. See Twombly 550 U.S. at 555; MagCorp, 399 B.R. at 768.
107 	Cmplt. ¶ 3.
108 	Id.
109 	Id.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 33 of 40

-34-
misappropriate almost $11 million from [the Funds] to pay Triaxx Funding’s
margin and interest obligations;110 and
 	Priore, the Manager and DLA Piper “knowingly carr[ied] on [the Funds’]
business in a fraudulent manner.” 111
But apart from their conclusory nature, these allegations do not make out a showing of fraud.
They do not even say who was defrauded, and what was concealed.
The expenditure of the $36.5 million may have been ill-advised, and Priore and the
Manager could have been conflicted if the alleged motivations for the Transfers—incremental
fees and reputation—trumped the motivation to protect the underlying investment. But there
are no allegations—especially those with specificity—supporting a claim of related fraud.
2. Secondary Liability
The Court further finds the allegations in the Complaint supporting secondary liability
on DLA Piper’s part for fraud to be equally, if not more, deficient. Once again, the Complaint
fails to forth facts underlying the allegation that White knew of a fraud or his participation in
one, or supporting the idea that he knew how his assistance was supporting the perpetration of
a fraud—a matter that is particularly challenging based on the delivery of legal services.112
Count 3—Cayman Islands Companies Law § 147
Though not identical to the claims of aiding and abetting fraud, section 147 of the
Cayman Islands Companies Law has overlapping requirements. Like the requirement for
110 	Id. ¶ 64.
111 	Id. ¶ 114.
112 	See Roni LLC v. Arfa, 72 A.D.3d 413, 414, 897 N.Y.S.2d 421, 422 (1st Dep’t 2010), aff'd, 15 N.Y.3d
826, 935 N.E.2d 791 (2010) (“[T]he allegation that the attorney defendants structured the transactions at
issue does not, without more, give rise to a reasonable inference that such professionals were aware” of
the fraudulent circumstances surrounding the transactions.); cf. Eurycleia Partners, LP v Seward &
Kissel, LLP, 12 N.Y.3d 553, 559-62, 883 N.Y.S.2d 147, 150-152, 910 N.E.2d 976, 979-981 (2009)
(affirming dismissal of complaint on motion based on insufficient factual allegations that law firm had
actual knowledge of fraud).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 34 of 40

-35-
establishing a primary violation incident to pleading a claim of aiding and abetting, Section
147 requires a showing that the Funds were “carried on with intent to defraud . . . . or for any
fraudulent purpose.” The Court has already discussed the failure to satisfactorily allege fraud.
And there are no allegations, particularly any meeting Rule 9(b) requirements, establishing the
requisite intent to operate the Funds with a “fraudulent purpose.”113 To the contrary, the
allegations show that the Funds’ purpose was benign, and that any wrongful conduct merely
impaired the Funds’ ability to achieve their entirely lawful purpose. And it is only once that
primary violation has been established that section 147 provides that the Court may impose
liability on “any persons who were knowingly parties to the carrying on of the [Funds] in the
manner” just described—similar, once again, to the secondary violation required in an aiding
and abetting claim. Here too, the Complaint alleges, at most, mismanagement, conflicts of
interest or other breach of fiduciary duty, but neither fraud nor operation with a fraudulent
purpose.114
Thus the Liquidators’ Cayman Fraudulent Trading Claim must fail as well.
D. In Pari Delicto
In its most important—and in some ways, strongest—point, DLA Piper further argues
that even if the Liquidators otherwise had satisfactorily pleaded claims for aiding and abetting
113 	This is so even if, as the Liquidators argue, see Pl. Br. at 38, “for any fraudulent purpose” is construed
broadly by the English courts.
114 	The Court has considered the Liquidators’ Notice of Supplemental Authority calling this Court’s
attention to the recent decision by Judge Glenn of this Court in Hosking v. TPG Capital Mgmt., L.P. (In
re Hellas Telecomms. (Lux.) II SCA), 2015 Bankr. LEXIS 2756, 2015 WL 4931412 (Bankr. S.D.N.Y.
Aug. 19, 2015) (“Hellas Communications”). But Hellas Communications dealt with other issues, and
is insufficiently close factually to affect the conclusions here. While the Court assumes it to be true that
the English statute invoked in Hellas Communications was nearly identical to the Cayman statute, the
allegations supporting the English law claims in Hellas Communications were not the same. DLA Piper
was not a party to the carrying on of the Funds’ business, and the Funds’ business was not alleged, or at
least adequately alleged, to have been carried on with an intent to defraud or any fraudulent purpose.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 35 of 40

-36-
breach of fiduciary duty or fraud, those claims would have to fail under the doctrine of in pari
delicto and the New York version of that doctrine, the Wagoner Rule. The Court agrees.
1. The In Pari Delicto Defense
The in pari delicto doctrine prevents a party from suing others for a wrong in which
the party participated or is deemed through imputation to have participated. The doctrine “has
been wrought in the inmost texture of [New York] law for at least two centuries.”115 The
Wagoner rule 116 applies this doctrine to successors in interest of wrongdoers, including
bankruptcy trustees and foreign liquidators.117
Here, unless an applicable exception applies, the alleged misconduct is imputed to the
Funds, and then imputed to the Foreign Liquidators.118 That forecloses the Funds from
115 	Kirschner, 15 N.Y.3d at 464 (internal citations omitted).
116 	This Court previously noted the tendency of Wagoner and its progeny to conflate the defense of in pari
delicto with standing, see MagCorp, 399 B.R. at 763, and noted that it would “welcome guidance by the
Circuit as to whether it continues to believe, in light of the matters discussed above, that Wagoner and
its progeny should continue to deny standing or apply in pari delicto when an innocent trustee has
displaced wrongdoing management.” Id. at 766. The Court additionally stated that it would similarly
welcome the views of the New York Court of Appeals. Id. Thereafter, each of the Circuit and the New
York Court of Appeals spoke further on the matter, with the latter clarifying that “in New York, in pari
delicto is an affirmative defense, not a matter of standing”—but is still appropriately “resolved on the
pleadings.” Kirschner, 15 N.Y.3d at 459 n.3. The Kirschner court also declined to make an exception
to the in pari delicto doctrine despite the trustee's urging that proceeds would “benefit blameless
unsecured creditors ... and shareholders.” After Kirschner, the Second Circuit has continued to apply
the Wagoner Rule to bar a trustee’s claims at the pleading stage. See In re Bernard L. Madoff Inv. Sec.
LLC., 721 F.3d 54, 65 (2d Cir. 2013) cert. denied sub nom. Picard v. HSBC Bank PLC, 134 S. Ct.
2895(2014) (“Early resolution is appropriate where (as here) the outcome is plain on the face of the
pleadings.”).
117 	See Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 825–26 (2d Cir. 1997)
(“Mediators”) (applying the doctrine to bankruptcy trustees). See also Wight v. BankAmerica Corp.,
219 F.3d 79, 86 (2d Cir. 2000) (regarding the Wagoner Rule as potentially applicable to English and
Cayman foreign liquidators).
118 	The Liquidators assert that the Wagoner rule is inapplicable here because “a Chapter 15 petition does
not establish an estate under section 541 of the Code.” Pl. Br. at 28 n.37. But the Court cannot agree.
Whether an estate has come into being under section 541 or not, the Liquidators still act as the
successors to the Funds, and, as noted above, the Second Circuit has considered the Wagoner Rule
applicable to Cayman liquidators. See Wight, 219 F.3d at 86-87 (“The Liquidators do not dispute that,
like the trustees of a bankruptcy estate, they stand in the shoes of the defunct corporation, and they do
not have standing to assert claims belonging to BCCI's depositors and creditors. … The rationale
underlying the Wagoner rule derives from the fundamental principle of agency that the misconduct of
managers within the scope of their employment will normally be imputed to the corporation.”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 36 of 40

-37-
recovering on secondary liability claims (including aiding and abetting) they might otherwise
have.119
2. Adverse Interest Exception
The Liquidators do not dispute that in pari delicto and imputation initially apply.
Instead, they urge the Court to rely on the “adverse interest exception” to the in pari delicto
defense. The Court turns to that exception now.
Preliminarily, however, the Court notes that the New York Court of Appeals is
generally loath to apply exceptions to in pari delicto,120 especially in the case of the adverse
interest exception.121
To come within the exception, the agent must have totally abandoned his principal's
interests and be acting entirely for his own or another's purposes. The exception cannot be
invoked merely because the agent has a conflict of interest or is not acting primarily for his or
her principal. As the Kirschner court stated:
This rule avoids ambiguity where there is a benefit to
both the insider and the corporation, and reserves this
most narrow of exceptions for those cases—outright
theft or looting or embezzlement—where the insider's
misconduct benefits only himself or a third party; i.e.,
where the fraud is committed against a corporation
rather than on its behalf. 122
Here, taking the Liquidators’ allegations as true, there was a benefit to both the insider
(Priore) and the corporation (the Funds). The Liquidators argue that Priore and/or the
119 	The Wagoner Rule does not impair the Liquidators’ rights to proceed against officers or directors who
acted wrongfully. See, e.g., Magcorp, 399 B.R. at 774.
120 	See Kirschner, 15 N.Y.3d at 464 (“[T]he principle 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.”) .
121 	See id. at 463-477 (discussing the rationale behind the narrow scope of the adverse interest exception in
the context of in pari delicto and imputation).
122 	Id. at 466-67 (internal citations omitted) (emphasis in original).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 37 of 40

-38-
Manager benefited from their conduct because that would protect management fees and their
reputations. But here the Funds benefited in a much more major way, and for the most part
much more than minimally. While the Court is inclined to agree that interest on the Funds’
advance to Triaxx Funding was only a modest benefit, the Funds received a very significant
benefit for the very reason the Transfers were made: the Transfers served to prevent Barclays
from foreclosing on collateral in which the Funds were heavily invested. The Court is
unpersuaded by the Liquidators’ contention that avoiding a foreclosure on a default that would
have destroyed “approximately 50% of the [] Fund’s net asset value”123 was too little of a
benefit to overcome the adverse interest exception.
Since the Funds benefited from the Transfers, the adverse interest exception does not
apply.
3. Sole Actor Exception to Adverse Interest Exception
For that reason, in analyzing Wagoner Rule issues, the Court does not need to consider
DLA Piper’s reliance on an exception to the exception.124 The Court notes, for the sake of
completeness, that the adverse interest exception to the in pari delicto doctrine contains, in
turn, its own exception, known as the “Sole Actor Rule.” The sole actor rule demands that in
pari delicto apply even where a principal’s agents totally abandons the interests of the
principal, and takes harmful, entirely unbeneficial, actions, so long as the agent is the sole
decision maker of the principal.125
As noted, the adverse interest exception is not applicable here, for reasons the Court
just addressed. But because the Manager and Priore were the sole decision-making agents of
123 	Cmplt ¶ 3.
124 	See Def. Br. at 2-3, 17-18.
125 	Mediators, 105 F.3d at 827.
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 38 of 40

-39-
the Funds, and thus were one and the same with the Funds, their bad acts would be imputable
to the funds even if the Adverse Interest Exception were to apply.
The Liquidators argue that the Sole Actor Rule here does not apply because the Funds
had innocent investors who assertedly could have stopped the alleged fraud.126 Though the
Court does not need to reach this contention (since it is so clear, given the avoidance of the
liquidation and resulting benefit), that the Adverse Interest Exception does not apply, the
Court notes, once again for the sake of completeness, that it cannot agree with the
Liquidators’ contentions in this respect either. The Liquidators failed to plead, with any
specificity, facts showing “how the wrongful conduct could have been stopped.”127 “The
touchstone of the innocent insider exception is control—whether the innocent person or
persons inside the corporation had the power to stop the fraud.”128 And here nothing is
alleged in the Complaint to support a finding that any of the investors had sufficient control of
the corporation to stop the Manager’s and Priore’s plans.129
Thus the Court concludes that apart from the Liquidators’ failure to satisfactorily plead
claims for aiding and abetting, DLA Piper must be dismissed, at the pleading stage, under its
in pari delicto defense.
Conclusion
Accordingly, DLA Piper’s motion to dismiss must be, and is, granted as to all three
Counts.
126 	See Pl. Br. at 34 (citing Cmplt. ¶ 119).
127 	MagCorp, 399 B.R. at 768 n.158.
128 	O’Connell v. Pension Fin. Servs (In re Arbco Capital Mgmt., LLP), 498 B.R. 32, 48 (Bankr. S.D.N.Y.
2013) (Chapman, J.).
129 	See Breeden v. Kirkpatrick & Lockhart (In re Bennett Funding Grp., Inc.), 336 F.3d 94, 101 (2d Cir.
2003) (“The trustee seems to believe that the Wagoner rule is defeated by a would-a, could-a, should-a
test but that is simply not the law.”).
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 39 of 40

-40-
SO ORDERED.
Dated: New York, New York 	s/Robert E. Gerber
September 15, 2015 	United States Bankruptcy Judge
14-01835-mkv Doc 22 Filed 09/15/15 Entered 09/15/15 10:25:38 Main Document
Pg 40 of 40