Peterson v. Eide Bailly LLP

Filing 124

OPINION AND ORDER. Signed by the Honorable Sara L. Ellis on 4/5/2016. Mailed notice(rj, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
RONALD R. PETERSON, not individually
but as chapter 7 Trustee for the bankrupt
estates of Lancelot Investors Fund, L.P.,
Lancelot Investors Fund II, L.P., Lancelot
Investors Fund Ltd.,
Plaintiff,
v.
EIDE BAILLY, LLP,
Defendant.

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No. 10 C 8038
Judge Sara L. Ellis

OPINION AND ORDER
This is one of several suits brought by Ronald Peterson (the “Trustee”) as the bankruptcy
trustee for Lancelot Investors Fund, L.P., Lancelot Investors Fund II, L.P., and Lancelot
Investors Fund Ltd. (the “Lancelot Funds”), in which the Trustee seeks to recover the Lancelot
Funds’ losses resulting from a Ponzi scheme perpetrated by Thomas Petters. 1 In this action, the
Trustee seeks to recover from Eide Bailly, LLP (“Eide Bailly”), an accounting firm that was
hired in 2008 to audit the financial statements of Thousand Lakes, LLC (“Thousand Lakes”), a
special purpose vehicle through which the Lancelot Funds loaned money to Petters’ scheme.
The Trustee alleges that, in performing the audit, Eide Bailly made negligent misrepresentations
that are actionable under Minnesota law. Eide Bailly has moved for summary judgment based
on the in pari delicto defense—“the idea that, when the plaintiff is as culpable as the defendant,

1

Other actions brought by Peterson include Peterson v. McGladrey & Pullen, LLP, No. 10 C 274 (N.D.
Ill.) (the “McGladrey action”); Peterson v. Bell, No. 08-28225, Adv. No. 09-1252 (Bankr. N.D. Ill.);
Peterson v. Swiss Fin. Servs. (Bahamas), Ltd., No. 08-28225, Adv. No. 09-1283 (Bankr. N.D. Ill.);
Peterson v. Somers Dublin Ltd., No. 08-28225, Adv. No. 10-1980 (Bankr. N.D. Ill.); Peterson v. Winston
& Strawn LLP, No. 11 C 2601 (N.D. Ill.); and Peterson v. Katten Muchin Rosenman LLP, No. 12 C 3393
(N.D. Ill.).

if not more so, the law will let the losses rest where they fell.” Peterson v. McGladrey & Pullen,
LLP (McGladrey II), 676 F.3d 594, 596 (7th Cir. 2012). Eide Bailly contends that the court in
the McGladrey action already decided the relevant issues and issue preclusion bars the Trustee
from relitigating them here. Because the Court finds that issue preclusion applies, establishing
the in pari delicto defense, the Court grants Eide Bailly’s motion for summary judgment [109].
BACKGROUND
I.

The Present Action
A.

The Second Amended Complaint’s Allegations

Because Eide Bailly’s summary judgment motion relies on issues decided in the
McGladrey action, for background purposes, the Court takes the following allegations from the
Trustee’s second amended complaint: Gregory Bell formed the Lancelot Funds in 2002 to invest
in collateralized short-term trade finance notes (“SPV notes”) issued by Thousand Lakes. Bell
represented and managed the Funds through his management company, Lancelot Management.
Thousand Lakes, along with other Petters-controlled entities, purportedly engaged in the
business of acquiring and reselling consumer electronics to retailers such as Costco. Thousand
Lakes’ inventory of electronics stored in warehouses and accounts receivable from Costco and
its subsidiary, National Distributors, were to collectively serve as collateral for the SPV notes.
All transactions were well-documented, although it later turned out that the documents were
fabricated. Petters also put in place a lockbox arrangement giving the Funds control over the
bank account into which Costco was to wire payments for the goods, a mechanism intended to
provide the Funds with further investment protection.
In December 2007, Thousand Lakes did not make scheduled payments on the SPV notes.
Petters represented this was a temporary delay caused by Costco being late in paying Thousand

2

Lakes’ invoices. In January 2008, as the delay continued, Petters offered to exchange collateral
with the Funds, taking past due SPV notes collateralized by Thousand Lakes’ accounts
receivable from Costco and exchanging them for current SPV notes collateralized by Thousand
Lakes’ accounts receivable from Walmart or other retailers. Bell agreed to this proposal
conditioned on an audit. In February 2008, Petters agreed, retaining Eide Bailly to audit
Thousand Lakes. Bell then purchased new SPV notes, with Thousand Lakes using that money to
repay the past due SPV notes, engaging in what have been referred to as “roundtrip transactions”
between the Funds and Thousand Lakes.
On June 5, 2008, Eide Bailly issued an unqualified audit opinion, representing that the
2006 financial statements fairly represented Thousand Lakes’ then financial position and that at
the time of the audit, Thousand Lakes was a going concern. The Trustee seeks to hold Eide
Bailly liable for “failing to uncover that Thousand Lakes was a sham with no sales, no inventory
and no accounts receivable.” Doc. 73 ¶ 15. Specifically, the Trustee alleges that Eide Bailly
negligently represented to the Funds that “(1) Thousand Lakes’ financial statements fairly
presented its financial position as of December 31, 2006—a company with over $2 billion in
sales revenue and over $1 billion of collateral; and (2) Thousand Lakes was, as of June 5, 2008, a
real (not sham) company with substantial sales, inventory and accounts receivable.” Id. The
audit allegedly caused the Funds to continue making collateralized loans to Thousand Lakes after
June 5, 2008, totaling $326.15 million, filing UCC statements reflecting their secured collateral,
paying insurance premiums totaling $985,200.03 to insure their collateral, paying Swiss
Financial $124,055.94 for investment-related services, and paying Lancelot Management
$12,624,276 to manage the Funds.

3

The Trustee alleges that Bell was never a co-conspirator in Petters’ fraud and was
unaware of any significant problems, only learning of Petters’ scheme when the FBI raided
Petters’ office in September 2008. The Trustee admits, however, that Bell pleaded guilty to wire
fraud in 2009 because the roundtrip transactions concealed from the Funds’ investors that
Thousand Lakes’ payments were delayed by Costco’s payment delay.
B.

Procedural History

The Trustee filed this action on December 17, 2010. Eide Bailly moved to dismiss the
complaint based in part on the in pari delicto defense, but the Court declined to do so, finding
disputed issues of fact at the pleading stage. Doc. 36. Eide Bailly then filed an answer, asserting
in pari delicto among other affirmative defenses, specifically arguing that the Trustee could not
recover because the “Funds, by and through their management, engaged in fraudulent and/or
negligent acts or omissions in regard to the Funds’ investments, and thereby are at fault for their
own alleged injuries,” which conduct Eide Bailly contended is imputed to the Trustee. Doc. 37
at 20–21. The Trustee filed a Second Amended Complaint on December 19, 2013. The parties
agreed that Eide Bailly did not have to file an answer to the Second Amended Complaint. See
Doc. 76 at 2 n.1; Doc. 77 ¶ 4. The parties stipulated that Eide Bailly’s answer to the Amended
Complaint stands as the answer to the Second Amended Complaint and that Eide Bailly adopted
the affirmative defenses it raised in that answer as affirmative defenses to the Second Amended
Complaint. See Doc. 122. The Court stayed the proceedings pending the outcome of the appeal
in the McGladrey action, which the parties agreed would shed light on the application of the in
pari delicto doctrine in this case. See Doc. 95. After the Seventh Circuit’s decision in the
McGladrey action, the Court granted Eide Bailly leave to file the motion for summary judgment
that is the subject of this Opinion.

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II.

The McGladrey Action
In the McGladrey action, the Trustee sued three related accounting firms (collectively,

“McGladrey”), alleging that, in audits McGladrey performed in 2007 and 2008, McGladrey
failed to uncover Petters’ fraud between 2003 and 2007. See Peterson v. McGladrey & Pullen,
LLC (McGladrey III), No. 10 C 274, 2014 WL 1389478, at *1 (N.D. Ill. Apr. 8, 2014), aff’d,
Peterson v. McGladrey LLP (McGladrey IV), 792 F.3d 785 (7th Cir. 2015). McGladrey initially
filed a motion to dismiss based on the in pari delicto defense, which Judge Bucklo granted.
Peterson v. McGladrey & Pullen, LLP (McGladrey I), No. 10 C 274, 2010 WL 4435543 (N.D.
Ill. Nov. 3, 2010). In doing so, she found that the defense could be asserted against a bankruptcy
trustee. Id. at *3. She also refused to apply the “adverse interest” exception to the in pari delicto
doctrine, finding that the exception applies “only where the corporate officers ‘act entirely for
their own interests and the actions do not benefit the corporation.’” Id. at *4 (quoting Grede v.
McGladrey & Pullen LLP, 421 B.R. 879, 886 (N.D. Ill. 2009)). Because the Trustee’s complaint
alleged that the Funds benefitted from the alleged misconduct, Judge Bucklo concluded that the
adverse interest exception did not apply. Id. The Seventh Circuit vacated Judge Bucklo’s
decision, however, finding that the allegations of the complaint were sufficient to avoid dismissal
at the pleading stage. McGladrey II, 676 F.3d at 597. But in doing so, the Seventh Circuit noted
that “[t]he Trustee’s claims are subject to the same defenses that McGladrey could have asserted
had the Funds themselves filed suit,” including the in pari delicto defense, which was not
superseded by federal bankruptcy law. Id. at 596, 598–99. Additionally, the Seventh Circuit
reached the same conclusion as Judge Bucklo with respect to the adverse interest exception,
noting that “Bell was not stealing from the Funds, whether or not he was using them to snooker
people who had money to invest.” Id. at 599.

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Back in the district court, after the Trustee amended the complaint, McGladrey sought
summary judgment on the in pari delicto defense, contending that Bell’s “misconduct as the
Funds’ manager—including making false representations to potential investors about the ‘flow
of money’ among the entities involved in the investment program, and, later, engaging in a series
of fraudulent banking transactions in an effort to conceal Thousand Lakes’ delinquency on notes
held by the Funds—contributed to the Funds’ alleged losses.” McGladrey III, 2014 WL
1389478, at *3. The Trustee argued that in pari delicto was not applicable because Bell’s
misconduct amounted to “a different fraud” than the one he alleged McGladrey missed finding.
Id. But Judge Bucklo rejected this argument, determining that as long as McGladrey could show
that Bell “bears equal fault for the alleged injury, as compared to the fault the Trustee attributes
to [McGladrey],” McGladrey established the in pari delicto defense. Id. (quoting Knauer v.
Jonathon Roberts Fin. Grp., Inc., 348 F.3d 230, 233 (7th Cir. 2003)) (internal quotation marks
omitted). Judge Bucklo found that McGladrey established beyond dispute that Bell materially
misrepresented the flow of money, including with respect to the lockbox account, which
“allow[ed] Petters’ scheme to flourish.” Id. at *3–4. Additionally, Judge Bucklo found it
undisputed that as the Petters entities ran out of money and Thousand Lakes became delinquent
on the notes owned by the Funds, “Bell affirmatively went ‘in’ with Petters on a fraudulent,
‘secondtier Ponzi scheme,’” with this “intentional misconduct [by Bell] on behalf of the Funds
increas[ing] the Funds’ exposure to the losses that resulted when the Ponzi scheme ultimately fell
apart.” Id. at *4. As a result, “Bell’s involvement in the Petters scheme . . . amply establish[ed]
that Bell’s misconduct contributed to the Funds’ losses at least as significantly as the negligence
and recklessness with which the Trustee charg[ed] [McGladrey].” Id. This barred the Trustee
from recovering from McGladrey under the in pari delicto defense. Id.

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The Seventh Circuit affirmed, stating that the Funds “raised money via deceit, against an
auditor that negligently failed to detect a different person’s fraud.” McGladrey IV, 792 F.3d at
788. As Judge Bucklo did, the Seventh Circuit rejected the Trustee’s argument that the in pari
delicto defense only applies when the plaintiff and defendant commit the same misconduct,
noting that there was no Illinois case “saying that the in pari delicto defense applies only when
the two litigants have committed the same wrong, as opposed to one failing to mitigate the
consequences of the other’s wrong,” and that it had not been made aware of any Illinois case
recognizing liability under similar circumstances, regardless of the doctrine being applied. Id.
LEGAL STANDARD
Summary judgment obviates the need for a trial where there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56.
To determine whether a genuine issue of fact exists, the Court must pierce the pleadings and
assess the proof as presented in depositions, answers to interrogatories, admissions, and
affidavits that are part of the record. Fed. R. Civ. P. 56 & advisory committee’s notes. The party
seeking summary judgment bears the initial burden of proving that no genuine issue of material
fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d 265
(1986). In response, the non-moving party cannot rest on mere pleadings alone but must use the
evidentiary tools listed above to identify specific material facts that demonstrate a genuine issue
for trial. Id. at 324; Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir. 2000). Although a
bare contention that an issue of fact exists is insufficient to create a factual dispute, Bellaver v.
Quanex Corp., 200 F.3d 485, 492 (7th Cir. 2000), the Court must construe all facts in a light
most favorable to the non-moving party and draw all reasonable inferences in that party’s favor.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).

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ANALYSIS
Eide Bailly argues that, as in the McGladrey action, Bell’s misconduct prevents the
Trustee from recovering against it under the in pari delicto doctrine. Minnesota courts explain
that the doctrine “is based upon judicial reluctance to intervene in disputes between parties who
are both wrongdoers in equal fault.” 2 State by Head v. AAMCO Automatic Transmissions, Inc.,
199 N.W.2d 444, 448 (Minn. 1972); see also Christians v. Grant Thornton, LLP, 733 N.W.2d
803, 810 (Minn. Ct. App. 2007) (“In pari delicto operates to bar suits between two wrongdoers
who are at equal fault.”). The Trustee does not contest that the in pari delicto doctrine is
properly asserted against him, standing in the Funds’ shoes. See McGladrey II, 676 F.3d at 596,
598–99; Grassmueck v. Am. Shorthorn Ass’n, 402 F.3d 833, 836 (8th Cir. 2005) (“[T]he
equitable defense of in pari delicto is available in an action by a bankruptcy trustee against
another party if the defense could have been raised against the debtor.”); Christians, 733 N.W.2d
at 814 (“[C]ourts regularly consider in pari delicto defenses and act to bar trustee claims on that
basis despite the inevitable harm to creditors.” (citing Moratzka v. Morris (In re Senior Cottages
of Am., LLC), 482 F.3d 997, 1001 (8th Cir. 2007) (collecting federal bankruptcy cases applying
in pari delicto doctrine))).
Eide Bailly contends that the Court need not delve into the details of Bell’s misconduct or
how the in pari delicto defense operates in this action because those issues were already
conclusively decided against the Trustee in the McGladrey action. Therefore, according to Eide
Bailly, issue preclusion bars the Trustee from relitigating Bell’s misconduct or the applicability
2

Eide Bailly cites to both Minnesota and Illinois case law with respect to the in pari delicto doctrine,
representing that the Court need not engage in a choice of law analysis because both Minnesota and
Illinois recognize the doctrine and apply it in the same manner. See Doc. 110 at n.3. The Trustee argues
that Minnesota law differs from Illinois law with respect to the in pari delicto doctrine. Because the
Trustee’s negligent misrepresentation claim is brought under Minnesota law, the Court similarly
considers the in pari delicto defense under Minnesota law, although it will discuss whether there are any
relevant substantive differences between Minnesota and Illinois law below.

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of the in pari delicto doctrine here. For issue preclusion to apply, Eide Bailly must meet the
following elements: “(1) the issue sought to be precluded is the same as an issue in the prior
litigation; (2) the issue must have been actually litigated in the prior litigation; (3) the
determination of the issue must have been essential to the final judgment; and (4) the party
against whom estoppel is invoked must have been fully represented in the prior action.” 3 Adams
v. City of Indianapolis, 742 F.3d 720, 736 (7th Cir. 2014). Eide Bailly argues it has established
all the elements because (1) Judge Bucklo determined (and the Seventh Circuit affirmed) that
Bell engaged in misconduct that triggered the in pari delicto doctrine, (2) the issue was fully
litigated in the McGladrey action, (3) the issue was essential to the final judgment, and (4) the
Trustee and his counsel are the same here as in the McGladrey action. The Trustee responds that
issue preclusion cannot apply because the McGladrey action was decided under Illinois, not
Minnesota, law, which allegedly differs in its application of the in pari delicto doctrine, and that
the issue of comparative responsibility in the McGladrey action was different from that present
here. The Court will address the disputed issues in turn.
A.

Minnesota vs. Illinois Law

For issue preclusion to apply, the issue sought to be precluded must be the same as the
issue in the prior litigation with respect to both the facts and the law. Id.; 18 Wright, Miller, &
Cooper, Federal Practice & Procedure § 4425 (2d ed.) (“Identity of the issue is established by
showing that the same general legal rules govern both cases . . . . Preclusion should not apply if
there has been a change either in the facts or the governing rules.”). Here, the decisions
concerning the in pari delicto defense in the McGladrey action were made under Illinois law,
while Minnesota law applies to this action. There is some disagreement as to whether this
3

The Court looks to federal common law to determine the preclusive effect of the decisions in the
McGladrey action. Taylor v. Sturgell, 553 U.S. 880, 891, 128 S. Ct. 2161, 171 L. Ed. 2d 155 (2008).

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automatically defeats issue preclusion or whether the Court should consider whether relevant
differences exists between the state laws at issue. Compare Boomer v. AT&T Corp., 309 F.3d
404, 422 n.10 (7th Cir. 2002) (refusing to apply collateral estoppel where issue sought to be
precluded was decided under California law of unconscionability and present case involved
Illinois law without discussing whether the state laws were different); Estate of Melin v. Wash.
Nat’l Ins. Co., No. 14 C 1238, 2015 WL 1260137, at *4 (N.D. Ill. Mar. 17, 2015) (refusing to
apply collateral estoppel where Illinois law, not Florida law, governed present case and prior
decision was made under Florida law, without addressing whether differences existed between
the state laws), with In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1302 (7th Cir. 1995) (“If
there are relevant differences in state law, findings in one suit will not be given collateral
estoppel effect in others[.]”); Ga.-Pac. Consumer Prods. LP v. Four-U-Packaging, Inc., 701
F.3d 1093, 1102 (6th Cir. 2012) (applying issue preclusion to claims raised under Ohio state law
where prior decision was rendered under Arkansas state law, noting that the elements were
“nearly identical” and that Ohio “arguably places a higher burden of proof on plaintiffs,”
meaning that plaintiffs’ claims “would certainly fail” under the heightened standard if they failed
under the lower standard); Quixtar, Inc. v. Brady, 328 F. App’x 317, 323 n.4 (6th Cir. 2009)
(district court erred in stating that because prior case had been decided under a different state
law, “it necessarily did not decide the precise issue presented in the instant litigation”). One
court in this district refused to apply issue preclusion even where the state laws were shown to be
comparable, reasoning that the standards had not developed in the same way. See Wasau
Underwriters Ins. Co. v. United Plastics Grp., Inc., No. 04 CV 6543, 2010 WL 538544, at *5
(N.D. Ill. Feb. 10, 2010) (refusing to apply issue preclusion, noting that Illinois and Texas case
law had not “developed along identical paths” and that, although similar, the prior decision was

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made under Texas’ “highly probable” standard while Illinois used an “objectively foreseeable”
standard). In another district court case from this Circuit, the court acknowledged that courts
have applied issue preclusion where state laws are sufficiently similar but found plaintiffs had
failed to meet their burden of showing that the state laws there treated the issue decided in the
prior proceeding in the same or comparable way. See In re FedEx Ground Package Sys., Inc.
Emp’t Practices Litig., 712 F. Supp. 2d 776, 796–98 (N.D. Ind. 2010). Wright and Miller state
that the Court should “careful[ly] examin[e] . . . the controlling legal principles,” as this “may
show that the standards are the same, or that the fact findings have the same effect under either
standard, so that the same issue is presented by both systems of law.” 18 Wright, Miller, &
Cooper, Federal Practice & Procedure § 4417 (2d ed.). “So long as the same issue is presented,”
then, “preclusion is appropriate unless some special reason for relitigation arises from the nature
of the relationship between federal courts and state or foreign courts.” Id. Under this analysis,
with which the Court agrees having reviewed the divergent case law, issue preclusion may be
appropriate despite the fact that Illinois law governed the McGladrey action while Minnesota law
applies here. Thus, the Court must determine whether Minnesota and Illinois law differ as to the
material aspects of the in pari delicto doctrine.
The Trustee only argues that Minnesota law differs from Illinois law on the in pari
delicto doctrine in one respect, claiming that Minnesota requires mutual wrongdoing. 4
Specifically, the Trustee maintains that “[t]he plaintiff must be an active, voluntary participant in

4

As otherwise relevant to the issues at hand here, Minnesota also applies the adverse interest exception in
the same way the court applied it in the McGladrey action. Compare Christians, 733 N.W.2d at 810
(“The ‘adverse interest’ exception prevents imputation, however, if the individual’s conduct provides no
benefit to the corporation.” (citing Seventh Circuit case law)), with McGladrey I, 2010 WL 4435543, at
*4 (rejecting application of adverse interest exception because the complaint alleged that the Funds
benefitted from Bell’s alleged misconduct).

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the unlawful activity that is the subject of the suit.” 5 Doc. 114 at 11 (quoting Pinter v. Dahl, 486
U.S. 622, 636, 108 S. Ct. 2063, 100 L. Ed. 2d 658 (1988)). Aside from citing numerous nonbinding cases from other federal circuit courts of appeals, the Trustee cites Brubaker v. Hi-Banks
Resort Corp., a Minnesota appellate court case that noted that the in pari delicto doctrine is
“based on judicial reluctance to intervene in disputes between parties who are mutually involved
in wrongdoing.” 415 N.W.2d 680, 683 (Minn. Ct. App. 1987). 6 But a subsequent Minnesota
case clarified that Brubaker’s use of “mutual” means only that both parties involved in the
litigation are wrongdoers, not that both parties must have engaged in the same misconduct, as the
Trustee contends. In re Hansel, Bankr. No. 02-93495, Adv. No. 08-3177, 2012 WL 3113849, at
*11 (Bankr. D. Minn. June 15, 2012) (rejecting the argument made by the Trustee here that
mutual wrongdoing is required by Brubaker’s statement, citing to AAMCO, 199 N.W.2d at 448)).
Having reviewed the Trustee’s cases and conducted its own thorough review of Minnesota case
law, 7 the Court rejects the Trustee’s contention that Minnesota requires mutual wrongdoing for

5

In McGladrey III and McGladrey IV, the Trustee argued that Illinois also had a mutual wrongdoing
requirement. See McGladrey III, 2014 WL 1389478, at *3 (noting the Trustee’s argument that the
doctrine “is intended for situations in which the victim is a participant in the misconduct giving rise to his
claim” (quoting Williams Elecs. Games, Inc. v. Garrity, 366 F.3d 569, 574 (7th Cir. 2004)); McGladrey
IV, 792 F.3d at 787 (the Trustee “insists that the pari delicto doctrine in Illinois applies only when the
plaintiff and the defendant commit the same misconduct”). Judge Bucklo found (and the Seventh Circuit
affirmed) that a mutual wrongdoing requirement does not exist under Illinois law. McGladrey III, 2014
WL 1389478, at *3 (rejecting Trustee’s argument that in pari delicto defense applied only if Bell knew
there was no collateral supporting the SPV notes and no underlying sales, finding instead that all
defendants had to show was that “Bell ‘bears equal fault for the alleged injury,’ as compared to the fault
the Trustee attributes to defendants” (quoting Knauer, 348 F.3d at 233)); McGladrey IV, 792 F.3d at 788
(“The Trustee has not found any Illinois case saying that the in pari delicto defense applies only when the
two litigants have committed the same wrong, as opposed to one failing to mitigate the consequences of
the other’s wrong.”).
6
The Trustee also cites to Katun Corp. v. Clarke, 484 F.3d 972, 978 (8th Cir. 2007), which merely quotes
the same passage from Brubaker, for the proposition that Minnesota requires mutual wrongdoing for in
pari delicto to apply.
7
The Court found one Minnesota federal court case, decided prior to In re Hansel, that required mutually
wrongful activity for the in pari delicto doctrine to apply. See Duder v. Donaldson, Lufkin & Jenrette
Futures, Inc., No. CIVIL 4-85-602, 1986 WL 68626, at *6 (D. Minn. July 22, 1986) (in pari delicto
doctrine did not apply because plaintiff and defendant’s office manager “were not involved together in a

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in pari delicto to apply, instead finding that Minnesota and Illinois law do not differ on this
point. See id. at *11–12 (in pari delicto doctrine only requires that both parties be wrongdoers
and “does not require anything akin to conspiracy or collaboration with a high level of agreement
and understanding”); Christians, 733 N.W.2d at 814 (in pari delicto “operates to prevent
wrongdoers at equal fault from recovering against one another” and “does not require a finding
of fraud”). Therefore, the fact that the McGladrey decisions were made under Illinois law does
not prevent Eide Bailly from relying on issue preclusion to bar the Trustee from relitigating the
in pari delicto defense here.
B.

Comparative Responsibility

Alternatively, the Trustee argues that the issue of the Funds’ comparative responsibility
with Eide Bailly was not litigated in the McGladrey action, where the Trustee is seeking to
recover the post-June 5, 2008 expenses the Funds incurred after receiving Eide Bailly’s audited
report of Thousand Lakes’ financial statements. In the McGladrey action, the Trustee contends
that the issue was whether the Funds were at least as much at fault as McGladrey, which had
audited the Funds, not Thousand Lakes. But this is a distinction without a difference because
McGladrey III and McGladrey IV did not address McGladrey’s fault, instead only determining
whether the Funds’ misconduct was sufficient to preclude recovery in the face of alleged auditor
misconduct. See McGladrey IV, 792 F.3d at 787 (specifically noting that the district court did
not “consider[ ] whether McGladrey had failed to perform its duties”). Similarly, here, the Court
is considering the same issue, with the only difference being that Eide Bailly, not McGladrey,
scheme or transaction; rather their wrongs were separate events” and so they could not be said to have
been “participating in the same fraudulent scheme or transaction”). But Duder appears to be an outlier,
particularly in light of its age and subsequent developments in the law, both in Minnesota and across the
country. See In re Hansel, 2012 WL 3113849, at *11; Rogers v. McDorman, 521 F.3d 381, 389–90 (5th
Cir. 2008) (describing advocated for requirement of “mutual, simultaneous, and relatively equal” fault as
“outdated”); Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1090–91 (2d Cir. 1997) (rejecting
requirement that mutual fault requires the parties to have engaged in the same wrongdoing).

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made the alleged negligent misrepresentations in its audit. But comparative responsibility and
Eide Bailly’s liability does not play a role in the determination, preventing application of issue
preclusion here, because based on the Trustee’s allegations the Court may assume that the
Funds’ action were “at least equal in gravity to [Eide Bailly’s], if not a greater fault—for the
Trustee does not accuse [Eide Bailly] of fraud.” Id.; see also Christians, 733 N.W.2d at 814 (in
pari delicto and comparative fault defenses are “conceptually distinguishable and do not require
simultaneous resolution”); McGladrey III, 2014 WL 1389478, at *4 (“Bell’s misconduct
contributed to the Funds’ losses at least as significantly as the negligence and recklessness with
which the Trustee charges defendants.”).
The Trustee also appears to suggest that because the damages sought in the McGladrey
action and in this case are different, the issues resolved in the McGladrey action are not the same
as the ones to be resolved here. But the Trustee sought to recover operational expenses in the
McGladrey action, just as he does here, including for the post-June 5, 2008 time period.
Compare Doc. 73 ¶ 66, with Peterson v. McGladrey, No. 10 C 274, Doc. 143, ¶¶ 46, 49, 55, 58,
65, 68, 74, 77. Moreover, the Court is not considering a damages issue here, but rather whether
Bell’s misconduct outweighs any responsibility that may be attributed to Eide Bailly’s alleged
negligence. As the comparative responsibility issue is not relevant to the in pari delicto defense
and the damages issues do not differ, the Court finds no bar to the use of issue preclusion in this
case.
C.

Summary

In sum, the decisions from the McGladrey action concerning the in pari delicto defense
apply to this case. Specifically, then, it is established that Bell engaged in “intentional
misconduct on behalf of the Funds” that “increased the Funds’ exposure to the losses that

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resulted when the Ponzi scheme ultimately fell apart.” McGladrey III, 2014 WL 1389478, at *4
(detailing the roundtrip transactions in which Bell engaged); see also id. at *3–4 (discussing
Bell’s material misrepresentations about the lockbox account and the effect these representations
had on “allowing Petters’ scheme to flourish undetected”). McGladrey III’s findings, affirmed in
McGladrey IV, thus support the application of the in pari delicto defense to the Trustee’s claims
against Eide Bailly, where the Trustee alleges that, like McGladrey, Eide Bailly was negligent in
failing to discover the Ponzi scheme in its audit, even without having to address the truth of those
allegations. See Doc. 73 ¶ 15; Christians, 733 N.W.2d at 814–15 (court could presume
defendant’s negligence and still find that plaintiff was barred by in pari delicto from recovering
where plaintiff was at least equally responsible for the wrongdoing); McGladrey IV, 792 F.3d at
788 (in pari delicto applies “to a claim by the Funds, which raised money via deceit, against an
auditor that negligently failed to detect a different person’s fraud”). Consequently, under the in
pari delicto doctrine, the Trustee cannot recover the losses he asserts on the Funds’ behalf from
Eide Bailly.
CONCLUSION
For the foregoing reasons, the Court grants Eide Bailly’s motion for summary judgment
[109] and enters summary judgment for Eide Bailly. This case is terminated.

Dated: April 5, 2016

______________________
SARA L. ELLIS
United States District Judge

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