Flaxer v. Gifford (In re Lehr Construction Corp.)

Case Type:
Case Status:
16-350 (2nd Circuit, Dec 09,2016) Not Published

By summary order, the Second Circuit affirmed the District Court, explaining that the acts of agents are presumed to be imputed to their principals under New York law, and rejecting the Trustee's contention that employees are categorically barred from asserting the defense of in pari delecto against their employers.  The Court further found that Gifford's in pari delecto defense did not inherently conflict with New York's faithless servant doctrine because Gifford was not seeking to impute his own misconduct, but, rather Lehr's.

Procedural context:

Summary Order entered by the U.S. Court of Appeals for the Second Circuit, affirming judgment of of the District Court, which affirmed an Order of the U.S. Bankruptcy Court for the Southern District of New York, granting appellee Peter Gifford's motion to dismiss chapter 11 trustee's faithless servant claim under Rule 12(c) of the Federal Rules of Civil Procedure based on the defense of in pari delecto.


Lehr Construction ("Lehr") filed chapter 11 bankruptcy in February 2011, after the Manhattan District Attorney's office launched an investigation into Lehr's systematic overbilling of clients in 2010. In May 2011, Lehr and several of its employees were indicted and later convicted on thirteen counts, including enterprise corruption, a scheme to defraud, and grand larceny. Gifford was not indicted, although he entered into a cooperation agreement with the Manhattan District Attorney's office. 

The Chapter 11 Trustee filed a faithless servant claim against Gifford, seeking the disgorgement of $1.2 million to the bankruptcy estate. Gifford filed a motion for judgment on the pleadings under Rule 12 (c) of the Federal Rules of Civil Procedure, asserting the defense of in pari delecto. The Bankruptcy Court granted the motion on the basis that the Trustee was in pari delecto with Gifford, and the District Court affirmed on the same ground.

On appeal, the Trustee argued that (i) an employee is not entitled to assert the defense of in pari delecto against his employer, because an employee may not impute his conduct to his principal to defend against the principal's claims brought against him; (ii) the principles of imputation and the defense of in pari delecto should only be available to third parties to defend against a claim brought by a principal; and (iii) to hold otherwise, would be irreconcilable under New York's faithless servant doctrine. 



Present: Hon. Robert A. Katzman; Hon. Ralph K. Winter; Hon. Sidney H. Stein;

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