The First District holds a bankruptcy trustee cannot assert claims against an attorney precluded by the doctrine of unclean hands.
MF’08 was a limited liability company whose sole managing member was another limited liability company dominated by Walter and Kelly Ng. Dennis Zentil represented MF’08. MF’08 promised investments in secured real estate loans, but in reality the funds were transferred to the Ngs. Zentil allegedly knew of MF’08’s fraudulent purpose and worked with the Ngs to conceal the true nature of its asset transfers.
MF’08’s liquidating bankruptcy trustee filed tort claims based on fraud against Zentil. The Court of Appeal affirmed the trial court’s sustaining of a demurrer without leave to amend based on the in pari delicto, or unclean hands, doctrine.
The Court of Appeal disagreed with the trustee she had standing to bring claims that MF’08 would be barred from pursuing. A bankruptcy trustee succeeds to claims held by the debtor as of the commencement of bankruptcy; later events, such as the ouster of a wrongdoer, may not be considered. The bankruptcy trustee stands in the shoes of the debtor, not as an innocent successor.
Although receivers appointed under different statutory schemes may raise issues not available to bankruptcy trustees, courts are limited under bankruptcy law to rights and obligations available to debtors at the commencement.
The Court held the wrongful acts of the Ngs were imputed to MF’08. Under California law, knowledge of an officer of a corporation within the scope of his duties is generally imputed to the corporation. Knowledge will not be imputed if an officer collaborates with outsiders to defraud the corporation, because an agent acting adverse to a principle will ordinarily not keep the principal properly informed. This exception is also subject to an exception: where the principal is owned and controlled by the agent, the agent’s fraud is imputed to the principal. This rule, the “sole actor doctrine,” treats principal and agent as one.
Civil Code § 2306 precludes an agent from acting with the principal’s authority if the third party knows or suspects the agent’s fraud. The Court disagreed with the trustee this precluded application of the sole actor exception. The statute applies to preclude claims by parties who transact with a corporation with knowledge an officer is openly using the corporation to obtain a personal benefit. Civil Code § 2306 limits an agent’s authority to act for the principal in a fraudulent manner. The sole actor exception applies when there is effectively no distinction between agent and principal and in that circumstance Civil Code § 2306 does not apply.
Comment: It is sensible to preclude a successor from asserting claims that a client cannot assert.