Robert Anderson, as Chapter 7 Trustee for Infinity Business Group, Inc. v. Morgan Keegan & Company, Inc., et al.

Bankruptcy trustees have the rights and powers of a hypothetical judgment lien creditor. 11 U.S.C. 544(a). Section 544(a) allows trustees to recover funds for the estate by “standing in the shoes” of such a creditor who can assert causes of action belonging to the debtor. Trustees exercise their powers under this section “without regard to any knowledge of the trustee or of any creditor.” Ibid. The circuit courts have sharply split on whether Section 544(a) insulates a trustee from the debtor’s knowledge. The Seventh and Fifth Circuits, and a Ninth Circuit Bankruptcy Appellate Panel, have held Section 544(a) shields a trustee from a debtor’s knowledge, even if state law provides otherwise. The Fourth Circuit, in contrast, held here that state law can subject a trustee to a debtor’s knowledge, notwithstanding the language of Section 544(a). This allows those who harm a debtor to raise the in pari delicto defense and deny recovery for innocent creditors. In pari delicto has deprived creditors of the opportunity to recover billions of dollars from third-party wrongdoers, and that toll will only grow if this issue is not addressed by this Court. The question presented is: Whether a bankruptcy trustee seeking recovery on behalf of creditors under 11 U.S.C. 544(a) is subject to the debtor’s knowledge.