In October 1994, Charles Edwards formed ETS Payphones, Inc., to sell and lease pay phones as investment opportunities—an investor would buy a phone from ETS, which would lease it back. ETS promised returns of 14 to 15 percent but consistently lost money. To meet its obligations to existing investors, ETS had to continually attract new investors. Eventually, ETS defrauded thousands of investors of more than $300 million. Edwards transferred the funds from ETS to himself. In 2000, ETS filed a petition in a federal bankruptcy court to declare bankruptcy. Darryl Laddin was appointed trustee. On the debtor’s behalf, Laddin filed a suit against Reliance Trust Co. and others, alleging, among other things, that the defendants helped defraud investors by “ignoring the facts” and “funneling” the investors’ funds to ETS, causing it to “incur millions of dollars in additional debt.” Laddin sought treble (triple) damages.
(a) The defendants argued, in part, that the doctrine of in pari delicto, which provides that a wrongdoer may not profit from his or her wrongful acts, barred Laddin’s claim. Who should be considered ethically responsible for the investors’ losses? Explain.
(b) Laddin contended that his actions, as trustee on behalf of the debtor, should not be subject to the doctrine of in pari delicto because that doctrine depends on the “personal malfeasance of the individual seeking to recover.” The defendants filed a motion to dismiss Laddin’s complaint. Do you think that the court should rule in favor of Laddin or the defendants? Why?