Bondi v. Citigroup Inc., A-2654-08T2; Appellate Division; opinion by Cuff, P.J.A.D.; decided and approved for publication December 22, 2011. Before Judges Cuff, Sapp-Peterson and Simonelli. On appeal from the Law Division, Bergen County, L-10902-04. [Sat below: Judge Jonathan Harris.] DDS No. 12-2-4664 [87 pp.]
Parmalat Finanziaria S.p.A. grew from a regional dairy in Italy producing and distributing milk and milk products to a multi-national corporation producing and distributing food products, including dairy products. Its growth was accomplished by acquiring other corporations and was financed by many multinational lenders, such as defendants Citigroup Inc. and Citibank, N.A. Parmalat’s collapse spawned a wide array of legal proceedings, including civil actions here and in Italy by lenders and investors and criminal prosecutions in Italy.
Dr. Enrico Bondi is the administrator appointed by the Italian government in the bankruptcy proceeding to oversee the reorganization of Parmalat. He filed this complaint against, among others, Citi, accusing it of facilitating, covering up and profiting from various improper and illegal financial manipulations orchestrated by Parmalat’s founder and key managers over a protracted period of time, which allowed Parmalat to artificially inflate company value and cash flow and to obscure debt that ultimately resulted in the loss of billions of dollars to corporate creditors and investors.
Bondi sought damages from Citi on 10 causes of action, including fraud, aiding and abetting fraud and constructive fraud, negligent misrepresentation, deepening insolvency, and participation in civil and RICO conspiracies. Citi filed a counterclaim accusing Bondi of fraud, negligent misrepresentation, conversion, and breach of warranties associated with certain securitization agreements.
All parties filed summary judgment motions. Focusing on the five key transactions that Bondi alleged Citi improperly facilitated, Judge Harris held that the in pari delicto doctrine barred all of Bondi’s tort and contract claims, except the claim that defendants had aided and abetted the Parmalat insiders’ larceny and looting of company funds and their breach of fiduciary duty to the company. He held that Italian law governed whether Bondi had standing to seek damages for deepening insolvency and that Bondi lacked standing to pursue these damages. He also dismissed the two breach-of-warranty claims. The jury returned a verdict against Parmalat on its remaining claim of aiding and abetting and returned a $431,318,824.84 verdict in favor of Citi on its counterclaims.
Held: The trial judge properly applied the in pari delicto affirmative defense to defeat all of Bondi’s claims against Citi except the claim that Citi aided and abetted larceny by Parmalat senior executives. Bondi was not entitled to pursue damages for deepening insolvency under Italian law, and deepening insolvency is not an independent cause of action in this state. Citi’s counterclaims are not barred by res judicata, the verdict on the conversion claim is supported by the record, and Citi has standing to sue for losses sustained by its subsidiaries.
Bondi had argued that the acknowledged fraudulent acts by corporate insiders were solely for their benefit and that, therefore, they had totally abandoned their responsibilities to the corporation, no benefit accrued to it from their actions, and thus the adverse-interest exception to the in pari delicto defense permitted his various claims against Citi. Citi responded that Bondi had committed acts that harmed it, it had no knowledge of the fraudulent escapades of the corporate insiders, and the transactions it funded were legal, untainted by fraud, and bestowed benefits on the corporation.
On appeal, Bondi argues that Judge Harris misapprehended New Jersey law. Relying on NCP Litigation Trust v. KPMG, L.L.P. , 187 N.J. 353 (2006) ( NCP I), he argues that no short-term devices to keep an insolvent business afloat can ever be considered a benefit to the corporation.
The panel explains that the Latin phrase “in pari delicto potior est conditio defendentis,” in pari delicto for short, refers to the common-law maxim that where the wrong of both parties is equal, the defendant’s position is stronger. Under New Jersey law, the party invoking the defense must establish that the party against whom the defense is asserted must have substantially equal responsibility for the underlying illegality to permit dismissal of claims asserted by the aggrieved party. An acknowledged exception to the doctrine is the adverse-interest exception under which the wrongs of an insider will not be imputed to the corporation if the insider acted solely for his own benefit and adverse to the interest of the corporation. The standard governing invocation of this exception is total abandonment.
The panel rejects Bondi’s reading of NCP I and says that, viewing the record in the light most favorable to him, the evidence overwhelmingly supports his contention that the insiders’ greed ultimately drove Parmalat to bankruptcy, but the proofs are far less definitive on the actual extent to which the company and any innocent shareholders did not profit from the agents’ wrongdoing. In fact, the circumstances suggest that the opposite is true, and that the company did receive meaningful gains over a protracted period.
The panel notes that it need not address whether the judge erred in dismissing his deepening insolvency cause of action due to its affirmance of the summary judgment in favor of Citi on its in pari delicto defense, but it does do so for the sake of completeness. It concludes that Judge Harris did not err in finding a conflict between Italian and New Jersey law, in holding that Italian law should apply, or in concluding that under Italian law Bondi lacked standing to pursue such damages.
The panel also rejects Bondi’s argument that Citi’s counterclaims for fraud, negligent misrepresentation and conversion are barred by New Jersey’s res judicata principles because Bondi failed to show that Citi’s bankruptcy claims were based on the same cause of action and sought the same relief as Citi’s counterclaims.
The panel also rejects Bondi’s contention that the trial judge should have granted him judgment as a matter of law on the Citi counterclaim for conversion. It finds that the facts showed that Bondi collected funds that belonged to Citi under the securitization program and asserted ownership over them.
Finally, the panel reject’s Bondi’s claim that the judgment should be reduced because Citi lacked standing to assert claims on behalf of its subsidiaries. It says acknowledged rules governing claims by and against corporate entities support Citi’s standing to prosecute the counterclaim. Moreover, the evidence established that the funds extended to Parmalat all originated from Citi and in New Jersey, a financial interest in the outcome of litigation is ordinarily sufficient to confer standing.
— By Judith Nallin
For appellant/cross-respondent — Kathleen M. Sullivan (DeCotiis, FitzPatrick & Cole; Sullivan, Peter E. Calamari, Steven G. Madison, Marc L. Greenwald and Sanford I. Weisburst, of the N.Y. bar, admitted pro hac vice (Quinn Emanuel Urquhart Oliver & Hedges); Michael R. Cole and Gregory J. Bevelock on the brief). For respondents/cross-appellants — John F. Baughman, of the N.Y. bar, admitted pro hac vice (Paul, Weiss, Rifkind, Wharton & Garrison) (Stern & Kilcullen, Paul, Weiss, Rifkind, Wharton & Garrison and Baughman; Baughman and Theodore V. Wells Jr. of counsel; Herbert J. Stern and Andrew Bosin on the brief).