Equity Receivers Inherit Corporate In Pari Delicto Defenses: Investor Protection Does Not Override New York’s Imputation Rules

1. Introduction

The central question in Castleman v Interactive Brokers LLC was whether an innocent, court-appointed equity receiver could pursue tort claims against a financial institution when the corporation whose claims he asserted had itself participated in the underlying fraud. The First Department held that he could not: New York’s in pari delicto doctrine applies to a receiver asserting corporate claims just as it applies to a bankruptcy trustee or derivative shareholder plaintiff. The intended benefit to innocent investors does not change ownership of those claims or eliminate defenses against them.

David A. Castleman was appointed receiver in a Commodity Futures Trading Commission enforcement action involving EminiFX, Inc. and its sole owner and chief executive officer, Eddy Alexandre. The CFTC alleged that Alexandre operated EminiFX as a Ponzi scheme. The dissent further records that Alexandre ultimately pleaded guilty to commodities fraud and received a nine-year prison sentence.

Castleman sued Interactive Brokers LLC, referred to in the opinion as IBKR, for negligence, gross negligence, and aiding and abetting breach of fiduciary duty. He alleged that IBKR permitted Alexandre to trade with customer funds deposited into Alexandre’s personal brokerage account despite conspicuous warning signs, and that its handling of the account contributed to losses exceeding $7 million.

The appeal presented two principal issues: whether the receiver’s equitable appointment and investor-protection mandate exempted him from in pari delicto, and whether Alexandre’s diversion of corporate money supported the narrow “adverse interest” exception to imputation. The majority rejected both arguments. Justice Gesmer agreed that the adverse-interest argument did not independently resolve the case, but disputed the majority’s treatment of the receiver’s authority and representative capacity.

2. Background and Procedural Setting

The brokerage transactions

According to the complaint, Alexandre transferred at least $9 million from EminiFX into personal bank accounts and then into his personal IBKR account between December 2021 and January 2022. The identified brokerage deposits were $1 million, $2 million, and $6 million—dramatically larger than his previous deposits, which generally ranged from $10,000 to $20,000.

During this period, Alexandre sought to open an EminiFX corporate account and told IBKR that the money already deposited into his personal account would fund it. IBKR rejected the corporate application after Alexandre described EminiFX as an “investment club” and failed to supply sufficient basic information. Nevertheless, the complaint alleged, IBKR continued to permit trading with funds it knew belonged to EminiFX customers.

Castleman also alleged that IBKR recognized that Alexandre’s trading could attract exchange or regulatory scrutiny but responded by freezing only certain option positions. The alleged losses left $1,752,994.40 in the account as of July 6, 2022. These assertions concerning IBKR’s knowledge, conduct, and responsibility remained allegations; the appellate decision did not establish IBKR’s liability.

The receivership and dismissal

The federal court appointed Castleman temporary receiver in May 2022 and permanent receiver in June 2022. The orders authorized him to remove existing management, control receivership assets, protect customers, collect obligations, and bring litigation necessary to preserve or increase the estate’s value.

The language of those orders became pivotal. The majority understood Castleman to be asserting claims belonging to EminiFX. The dissent emphasized that his appointment also covered customer funds and property under Alexandre’s control, and that the permanent order separately identified customer-traceable “Alexandre Assets.”

IBKR moved to dismiss under CPLR 3211(a)(1), (a)(3), and (a)(7), provisions addressing documentary evidence, legal capacity to sue, and failure to state a cause of action. Supreme Court dismissed the complaint on in pari delicto grounds. The First Department affirmed that dismissal, without costs, and declined to reach the parties’ remaining arguments.

3. Summary of the Opinion

1. The receiver inherits defenses against corporate claims. Castleman’s personal innocence and federal appointment did not give him greater substantive rights than EminiFX possessed.
2. The identity of the beneficiaries does not determine claim ownership. Recovery intended for innocent investors remained recovery on corporate claims, as the majority characterized them.
3. Kirschner controls the New York-law analysis. The majority treated the Court of Appeals’ rejection of an innocent-stakeholder exception as equally applicable to equity receivers.
4. The sole-actor rule defeats the adverse-interest argument. Even assuming Alexandre’s conduct otherwise qualified as entirely adverse to EminiFX, his undisputed sole ownership prevented use of that exception.
5. The ruling does not decide IBKR’s underlying wrongdoing. The court resolved a threshold defense, not the sufficiency or truth of every allegation concerning negligence or assistance in the fraud.

Justice Gesmer would have reversed and remanded for consideration of IBKR’s other dismissal arguments. Her proposed disposition would have allowed further judicial examination, not established liability.

4. Precedents Cited and Their Influence

A. The controlling foundation: corporate wrongdoing and innocent successors

Kirschner v KPMG LLP

Kirschner v KPMG LLP (15 NY3d 446 [2010]) supplied the majority’s governing framework. It states that in pari delicto “mandates that the courts will not intercede to resolve a dispute between two wrongdoers,” and emphasizes the doctrine’s force when a willful wrongdoer seeks recovery from someone alleged to have been merely negligent.

More importantly, Kirschner rejected requests to alter New York’s imputation rules so that innocent creditors or shareholders could obtain broader recovery from outside professionals who allegedly assisted or failed to detect corporate fraud. The Court of Appeals considered both deterrence and the competing interests of innocent stakeholders. It declined to excuse the corporation’s stakeholders from the consequences of their agents’ misconduct while imposing corresponding consequences on the innocent stakeholders of outside professional firms.

The majority treated that reasoning as dispositive: replacing a bankruptcy trustee or derivative plaintiff with an equity receiver did not change the underlying corporate claim. The dissent distinguished Kirschner because it did not decide the powers of a federal nonbankruptcy receiver appointed with an express customer-protection mandate.

The opinion also discusses Kirschner v KPMG LLP (590 F3d 186 [2d Cir 2009]), the federal certification decision underlying part of the Court of Appeals proceeding. Its questions concerned the adverse-interest exception, including whether an insider’s intent to benefit himself or harm to the corporation sufficed. Justice Gesmer regarded those questions as secondary here because her analysis disputed imputation to this receiver in the first place.

In re Tribune Co. Fraudulent Conveyance Litig.

In re Tribune Co. Fraudulent Conveyance Litig. (10 F4th 147 [2d Cir 2021]) supported the proposition that corporate officers’ misconduct is imputed to the corporation and that, following Kirschner, a wrongdoing corporation or its successor generally cannot sue alleged participants in its wrongdoing for negligence. Its role was confirmatory: it demonstrated the Second Circuit’s understanding of settled New York law.

In re Bernard L. Madoff Inv. Sec. LLC

In re Bernard L. Madoff Inv. Sec. LLC (721 F3d 54 [2d Cir 2013]) reinforced the distinction between a representative’s personal innocence and the rights inherited from the represented entity. The Securities Investor Protection Act trustee could not pursue claims against financial institutions for participating in fraud orchestrated by the entity whose estate he represented, even though recoveries would benefit innocent creditors and shareholders.

The dissent stressed that a SIPA trustee receives powers analogous to those of a bankruptcy trustee. It therefore challenged the majority’s extension of that result to an equity receiver whose authority arose from a different statutory and equitable setting.

Bullmore v Ernst & Young Cayman Is.

Bullmore v Ernst & Young Cayman Is. (20 Misc 3d 667 [Sup Ct, NY County 2008]) rejected a liquidator’s contention that personal innocence and the benefit to innocent investors justified proceeding against an outside auditor. The majority cited its dismissal under both the Wagoner rule and in pari delicto. The dissent noted that the case involved a Cayman Islands corporate winding up and was not binding appellate authority.

B. The receiver’s powers and ownership of claims

Caplin v Marine Midland Grace Tr. Co. of New York

Caplin v Marine Midland Grace Tr. Co. of New York (406 US 416 [1972]) was used differently by the two opinions. The majority relied on its recognition that bankruptcy trustees perform functions similar to receivers. That functional similarity supported treating both as representative fiduciaries when applying defenses to corporate claims.

The dissent emphasized Caplin’s statutory limits: the reorganization trustee lacked authority to sue third parties on behalf of debenture holders. In her view, a decision concerning a trustee’s legislatively defined powers did not establish equivalent restrictions on an equity receiver whose duties were fashioned by the appointing court.

Commodity Futures Trading Comm. v Weintraub

Commodity Futures Trading Comm. v Weintraub (471 US 343 [1985]) supported the majority’s description of bankruptcy trustees as controlling estate interests and pursuing recovery for creditors. The dissent relied on the same decision, cited there as Commodity Futures Trading Commn. v Weintraub, to emphasize that a bankruptcy trustee occupies a role analogous to corporate management—a role she considered distinguishable from this receiver’s broader protective appointment.

Eberhard v Marcu

Eberhard v Marcu (530 F3d 122 [2d Cir 2008]) was another shared but contested authority. The majority cited it for the rule that a receiver has no greater rights or powers than the corporation itself. The dissent drew on its discussion of recovery from third-party transferees where a receivership entity is a creditor of the fraudulent principal, and its treatment of removing the wrongdoer from control.

The competing uses expose the case’s central distinction: the majority viewed this litigation as corporate tort claims subject to inherited defenses; the dissent saw an equitable recovery proceeding involving diverted customer assets after the fraudster’s removal.

Fleming v Lind-Waldock & Co. and Digital Media Solutions, LLC v South Univ. of Ohio, LLC

Fleming v Lind-Waldock & Co. (922 F2d 20 [1st Cir 1990]), quoted through Eberhard, supplied the “no greater rights or powers” formulation. Digital Media Solutions, LLC v South Univ. of Ohio, LLC (59 F4th 772 [6th Cir 2023]) reinforced the separate point that a receiver cannot pursue claims owned by others. Together, these authorities supported the majority’s refusal to equate protecting investors with ownership of investors’ personal claims.

Shearson Lehman Hutton, Inc. v Wagoner

Shearson Lehman Hutton, Inc. v Wagoner (944 F2d 114 [2d Cir 1991]) underlies the “Wagoner rule” discussed in the opinion. It concerns a trustee’s ability to pursue claims against third parties arising from wrongdoing in which the corporation participated. The majority referenced it through other authorities; the dissent stressed its bankruptcy setting.

Although the Wagoner rule and in pari delicto overlap in practical effect, they should not be treated as identical. The former is commonly framed as a restriction on trustee standing; the latter is a substantive defense. The actual appellate disposition here rested on in pari delicto.

The Greenwich litigation authorities

The dissent cited Walker, Truesdell, Roth & Assoc., Inc., Trustee of Greenwich Sentry, L.P. Litig. Trust v Globeop Fin. Servs. LLC (43 Misc 3d 1230[A], 2013 NY Slip Op 52318[U]), affirmed under the title New Greenwich Litig. Trustee, LLC v Citco Fund Servs. [Europe] B.V. (145 AD3d 16 [1st Dept 2016]). These decisions illustrated restrictions on trustees asserting corporate claims. Their significance to the dissent was comparative: she accepted those restrictions in their own setting but denied that they resolved this receiver’s distinct authority.

C. Cases applying the doctrine to receivers

Cobalt Multifamily Inv. I, LLC v Shapiro

Cobalt Multifamily Inv. I, LLC v Shapiro (857 F Supp 2d 419 [SD NY 2012]) involved a receiver’s claims against law firms alleged to have assisted investor fraud. The majority cited it to show that applying in pari delicto to receivers was not novel. The dissent stressed its focus on adverse interest and observed that the New York-law claims against particular defendants were dismissed under Wagoner, limiting its usefulness in answering her federal-equity argument.

Williamson v Pricewaterhousecoopers, LLP

The majority cited Williamson v Pricewaterhousecoopers, LLP (2007 WL 5527944 [Sup Ct, NY County, Nov. 7, 2007]) for the general application of in pari delicto to receivers and nonbankruptcy trustees outside fraudulent-conveyance claims.

The dissent, citing the decision as Williamson v PriceWaterhouseCoopers, LLP, emphasized that it concerned a receiver appointed under New York partnership legislation and included language permitting recovery by an innocent nonbankruptcy trustee solely for investors’ benefit. The disagreement concerned which qualification in that decision best fit this case.

Knauer v Jonathon Roberts Fin. Group, Inc.

Knauer v Jonathon Roberts Fin. Group, Inc. (348 F3d 230 [7th Cir 2003]) supported the majority’s position that a receiver standing in corporate shoes remains subject to in pari delicto when seeking tort damages from third parties allegedly responsible for enabling embezzlement.

The dissent cited the same decision as Knauer v Jonathan Roberts Fin. Group, Inc. and emphasized that the defendants there derived no benefit from the embezzlements. She contrasted that setting with the allegations here that IBKR knowingly assisted Alexandre’s misuse of customer funds. The majority nonetheless considered the receiver’s ownership of corporate claims controlling.

Myatt v RHBT Fin. Corp.

Myatt v RHBT Fin. Corp. (370 SC 391 [Ct App 2006]) involved a receiver seeking damages from a bank connected to a fraudulent corporation. The majority cited it as another receiver case applying the defense. The dissent distinguished the absence of evidence that the bank knowingly participated in the fiduciary breach and the nature of the recovery sought there.

D. Authorities supporting the dissent’s equitable approach

Jones v Wells Fargo Bank, N.A.; Scholes v Lehmann; and Javitch v Transamerica Occidental Life Ins. Co.

Jones v Wells Fargo Bank, N.A. (666 F3d 955 [5th Cir 2012]), Scholes v Lehmann (56 F3d 750 [7th Cir 1995]), and Javitch v Transamerica Occidental Life Ins. Co. (408 F Supp 2d 531 [ND Ohio 2006]) formed the dissent’s principal alternative foundation. She read them as recognizing that applying in pari delicto against an innocent receiver can undermine the receivership’s purpose, particularly after removal of the fraudster.

Scholes supplied the influential formulation that the defense “loses its sting” when the person responsible for the wrongdoing is eliminated. Javitch emphasized that an equity receiver’s duties are fashioned and may be modified by the appointing court. Jones supported evaluating the defense in light of the receivership’s investor-protection function.

The majority distinguished these authorities as arising under other states’ laws and circumstances not controlling under New York’s strict approach. The dissent disputed that characterization and regarded their receivership reasoning as directly relevant. Regardless of that disagreement, the majority held that they could not displace Kirschner.

Barkhouse v Dean

Barkhouse v Dean (2025 WL 2773069 [SD NY, Sept. 26, 2025]) was cited by the dissent for the proposition that removal of the wrongdoer can eliminate the equitable rationale for the defense, quoting Scholes. The majority did not accept removal of Alexandre as curing the defenses attached to EminiFX’s claims.

Securities & Exchange Commn. v Fischbach Corp. and Commodities Futures Trading Commn. v Rolando

Securities & Exchange Commn. v Fischbach Corp. (133 F3d 170 [2d Cir 1997]) and Commodities Futures Trading Commn. v Rolando (589 F Supp 2d 159 [D Conn 2008]) supported the dissent’s account of federal courts’ broad equitable powers in agency enforcement actions. They explained the federal court’s capacity to appoint receivers and supervise asset distributions, rather than independently deciding the availability of this New York tort defense.

Marrama v Citizens Bank of Massachusetts

Marrama v Citizens Bank of Massachusetts (549 US 365 [2007]) supplied the dissent’s contrast between bankruptcy’s fresh-start purpose and the Commodity Exchange Act’s public-interest and customer-protection objectives. This purposive comparison supported her argument that the two forms of fiduciary appointment should not automatically receive identical treatment.

E. Imputation, adverse interest, and sole ownership

Center v Hampton Affiliates

Center v Hampton Affiliates (66 NY2d 782 [1985]) defines the adverse-interest exception. An agent’s knowledge is not ordinarily imputed where the agent has totally abandoned the principal’s interests and acts entirely for personal or third-party purposes. Self-interest alone is insufficient: the required abandonment is complete.

546-552 W. 146th St. LLC v Arfa

546-552 W. 146th St. LLC v Arfa (54 AD3d 543 [1st Dept 2008]) supplied the decisive sole-actor rule. The adverse-interest exception does not apply where the wrongdoer was the entity’s sole owner or sole manager at the relevant time.

Because Alexandre’s sole ownership was undisputed, the majority did not need to resolve whether his risky personal-account trading otherwise satisfied the adverse-interest test. The dissent accepted imputation to EminiFX through sole ownership but considered that imputation irrelevant to her broader view of the receiver’s authority.

F. Procedural and background authorities

• Moore Charitable Found. v PJT Partners, Inc. (40 NY3d 150 [2023]) supported the dissent’s statement that complaint allegations are accepted as true on a dismissal motion. That principle does not prevent dismissal where an applicable defense defeats the pleaded claims as a matter of law.
• Teachers' Retirement Sys. of Louisiana v Pricewaterhouse Coopers LLP (998 A2d 280 [Del 2010]) was the derivative-action source of one certified question answered in Kirschner. The dissent contrasted its institutional shareholders with the individual investors harmed by EminiFX.
• The orders cited under Commodity Futures Trading Commision v Alexandre and Commodity Futures Trading Commission v Alexandre, together with CFTC v Alexandre (2025 WL 252435), documented the receivership’s powers and purpose. These were important case-specific sources of authority, not appellate precedents eliminating New York’s defense.

The references to Kirschner v FitzSimons, Picard v JPMorgan Chase & Co., and Picard v HSBC Bank PLC report subsequent Supreme Court review dispositions of cited federal decisions. Those denials or dismissals of certiorari do not themselves supply substantive reasoning endorsing the underlying rules.

5. Legal Reasoning

A. Claim ownership, not personal innocence, controls

The majority’s starting point was the legal identity of the claimant. Castleman was innocent, but he asserted claims the majority regarded as belonging to EminiFX. A representative succeeds to those claims with their existing limitations and defenses.

This separates two questions that might otherwise be conflated: who will receive recovered money, and who owns the right being enforced. An investor-protection distribution plan answers the first question. It does not necessarily answer the second.

The majority accordingly rejected the proposition that the receiver’s fiduciary obligation to maximize recovery enlarged the underlying substantive rights. His duty required him to pursue available assets and claims within the corporation’s legal boundaries.

B. The federal appointment did not create a New York-law exemption

The majority compared bankruptcy trustees’ authority under 11 USC §§ 541 and 323 with receivers’ authority under 28 USC §§ 3103 and 754. Both categories, it reasoned, control assets and pursue entity claims for creditors or investors. It also invoked 28 USC § 959 and authorities limiting a receiver to the represented entity’s rights.

The dissent emphasized a different framework: the Commodity Exchange Act, particularly 7 USC § 13a-1; the federal court’s inherent equitable powers; and the appointment’s references to 28 USC §§ 754, 959, and 1692 and Federal Rule of Civil Procedure 66. For her, the appointment created a customer-asset protective role beyond ordinary corporate succession.

The majority nevertheless resolved the appeal by characterizing these causes of action as corporate claims. Its holding should not be overstated as a comprehensive ruling on every power a federal receiver may possess, or as a general determination of federal preemption.

C. Removal of management did not erase inherited wrongdoing

The dissent regarded Alexandre’s removal as crucial because he could no longer benefit from recovery. The majority’s approach instead treated imputation as determining the legal position of the corporation and its successor. A later change of management did not cleanse these corporate tort claims of defenses arising from the earlier fraud.

This is the principal tension between the opinions: the majority used a relatively fixed succession rule, while the dissent emphasized the changed equities after judicial intervention.

D. Public policy did not justify revising the governing rule

The majority acknowledged the severity of investors’ losses but considered Kirschner to have already resolved the proposed innocent-beneficiary exception. It also declined to favor EminiFX’s innocent stakeholders over innocent stakeholders of IBKR.

The dissent questioned that equivalence. She emphasized investors who had entrusted life savings to a respected community and church member, the absence of identified endangered IBKR stakeholders, and the lack of comparable settlements or penalties providing deterrence against IBKR’s alleged conduct. The majority’s answer was institutional: these considerations did not authorize an intermediate appellate court to depart from the Court of Appeals’ framework.

E. Sole ownership made the adverse-interest factual dispute immaterial

Castleman argued that Alexandre’s diversion of money into personal accounts and reckless trading could show complete abandonment of EminiFX’s interests. The majority assumed, without deciding, that the allegations might otherwise suffice.

Sole ownership supplied the independent obstacle. Under the sole-actor rule, Alexandre’s identity as EminiFX’s sole owner prevented the receiver from using adverse interest to defeat imputation. Thus, no factual inquiry into the precise benefit of the trades was necessary to decide this appeal.

6. The Dissent’s Significance

Justice Gesmer’s disagreement was substantive, not merely sympathetic. She challenged the majority’s premise that Castleman necessarily acted only in EminiFX’s legal capacity. Her reading of the appointment distinguished a receiver for the corporation from a receiver for customer-traceable assets held by Alexandre.

That distinction explains her four principal objections: Kirschner had not decided this precise category of federal receivership; equity receivers derive flexible powers from their appointing courts; removal of the wrongdoer eliminated the risk of rewarding him; and applying the defense would neither deter Alexandre nor avoid a genuine dispute between two wrongdoers.

The dissent therefore preserves an alternative framework for future argument, centered on the particular appointment order, the ownership of the assets and claims, and the purpose of the enforcement proceeding. It is not, however, the governing rule established by this decision.

7. Potential Impact and Limits

Consequences for future receiver litigation

The decision provides direct First Department authority against a receiver-specific exemption from New York’s in pari delicto doctrine when the receiver asserts corporate tort claims. Pleading that litigation benefits innocent investors, emphasizing the receiver’s personal innocence, or removing fraudulent management will not by themselves overcome that defense.

Receivers will therefore need to distinguish carefully between corporate claims, claims independently owned by investors, and statutory or asset-recovery claims. Broad authority to commence litigation does not alone establish ownership of every potential cause of action.

Consequences for outside financial institutions and professionals

Brokers, banks, auditors, lawyers, and other outside actors may invoke this reasoning where a wrongdoing corporation’s successor seeks tort damages arising from the corporate fraud. The decision extends Kirschner’s practical protection beyond its familiar bankruptcy and derivative-action contexts.

That protection is not a declaration that outside institutions acted properly. Nor does it establish immunity from independently available investor claims, regulatory proceedings, or other legal remedies.

The decision’s boundaries

• It does not determine whether IBKR was negligent or knowingly assisted Alexandre.
• It does not adjudicate claims independently belonging to individual investors.
• It does not establish that every fraudulent-transfer or other statutory recovery action is barred.
• It does not hold that every federal receivership order creates identical powers.
• It leaves IBKR’s remaining dismissal arguments unresolved.

The narrowest formulation of the precedent is therefore important: an equity receiver asserting the wrongdoing corporation’s claims remains subject to New York’s imputation and in pari delicto rules, notwithstanding an innocent-investor purpose.

8. Complex Concepts Simplified

In pari delicto

Literally “in equal fault,” this doctrine generally prevents a participant in wrongdoing from obtaining judicial recovery from another participant over that wrongdoing. The opinion does not treat it as requiring a numerical comparison of fault.

Imputation

Treating an agent’s knowledge or misconduct as attributable to the organization for which the agent acts. This is the bridge between Alexandre’s fraud and the defense against EminiFX’s claims.

Standing in the corporation’s shoes

Enforcing the corporation’s rights rather than acquiring new, superior rights. The receiver inherits the claim together with defenses against it.

Adverse-interest exception

A narrow exception to imputation where the agent completely abandons the principal’s interests and acts entirely for himself or someone else.

Sole-actor rule

A rule preventing reliance on adverse interest when the wrongdoer is the entity’s sole owner or sole manager. It defeated the exception here because Alexandre owned all of EminiFX.

Equity receiver

A court-appointed fiduciary who preserves and administers designated property under judicial supervision. The dispute concerned whether that appointment changed the defenses attached to the claims asserted.

Adverse interest versus adverse inference

Although portions of the supplied dissent use “adverse inference,” the imputation exception at issue is the adverse-interest exception. An adverse inference ordinarily concerns drawing an unfavorable evidentiary conclusion, a different concept.

9. Conclusion

Castleman v Interactive Brokers LLC confirms that an equity receiver’s innocence and investor-protection mission do not enlarge the wrongdoing corporation’s tort rights under New York law. The majority applied Kirschner, treated the claims as EminiFX’s, and held that Alexandre’s sole ownership foreclosed the adverse-interest exception.

The enduring lesson is that claim ownership matters more than the intended beneficiary of recovery. The dissent identifies a substantial competing view of federal equity receiverships, but the operative decision affirms dismissal without deciding whether IBKR’s alleged conduct would otherwise support liability.