Article courtesy of David Simonds, Edward McNeilly and Nathan Aspinall (Hogan Lovells)
Marshack v. JGW Solutions LLC (In re Litigation Practice Group PC), 23-01148 (Bankr. C.D. Cal. March 27, 2025)
The United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) recently held that a chapter 11 trustee could recover fraudulent transfers and preferences made to a third-party marketing firm under sections 544 and 548 of the Bankruptcy Code and under the California Uniform Voidable Transactions Act. The court further held that the defendant could not assert an in pari delicto defense against the trustee, as the trustee was acting on behalf of creditors and not the debtor.
The debtor, Litigation Practice Group P.C. (“LPG”), was a consumer debt resolution services firm that operated nationwide and solicited tens of thousands of clients through a network of marketing agents. In prior proceedings, the Bankruptcy Court determined that LPG operated a “significant criminal enterprise” before and after the petition date, resulting in the appointment of a chapter 11 trustee. The court described LPG’s business model as “unethical and most likely illegal,” including the use of marketing affiliates to solicit clients in exchange for a percentage of monthly fees, which were not held in client trust accounts but instead diverted for the personal benefit of LPG’s principals.
The chapter 11 trustee (the “Trustee”) commenced an adversary proceeding against JGW Solutions (“JGW” or the “Defendant”), one of LPG’s marketing affiliates, to avoid and recover transfers totaling $621,090.91 as fraudulent and $417,329.34 as preferential. The Trustee alleged that the payments were made pursuant to illegal “capping agreements” (i.e., illegal solicitation of clients) under California law and were not made in exchange reasonably equivalent value. The Defendant raised various defenses, including that the parties’ contractual arrangements were legitimate and, in the alternative, that any illegality was shared, invoking the in pari delicto doctrine.
LPG and JGW executed several agreements pursuant to which JGW received a percentage of legal fees for each client it referred to LPG. The Trustee argued that these arrangements violated California laws barring fee-sharing and solicitation of legal clients by unregistered agents or “cappers.” JGW admitted it was not registered as a lawyer referral service.
The Bankruptcy Court granted the Trustee’s motion for summary judgment, finding that the agreements between LPG and JGW were illegal contracts under California law and thus conferred no reasonably equivalent value on LPG. The Bankruptcy Court reasoned that because the contracts violated public policy – namely, prohibitions of unlicensed legal referrals – they were void and unenforceable. Moreover, under both federal and state fraudulent transfer statutes, LPG was insolvent at the time of all challenged transfers and JGW failed to present any evidence to the contrary.
Notably, the Bankruptcy Court held that the defendant’s in pari delicto defense failed as a matter of law. In pari delicto, a common law doctrine that bars a plaintiff from recovering if the plaintiff bears at least substantially equal responsibility for his injury, is inapplicable where a trustee exercises statutory avoiding powers for the benefit of creditors. The Bankruptcy Court emphasized that when a trustee sues under to avoid a fraudulent conveyance, the trustee stands in the shoes of unsecured creditors, not the debtor, enforcing their rights to recover assets fraudulently or preferentially transferred. Accordingly, the debtor’s wrongdoing cannot be imputed to the trustee, and thus the defense of in pari delicto is unavailable.
The Bankruptcy Court further held that the transfers from LPG to JGW – whether made directly or indirectly through other entities – constituted both actual and constructive fraudulent transfers, as LPG did not receive reasonably equivalent value for the transfers and there was evidence of intent to hinder, delay or defraud creditors. Finally, the Bankruptcy Court held that LPG made $417,329.34 in preferential transfers to JGW within the 90 days preceding the bankruptcy filing.
The Bankruptcy Court’s sweeping ruling in favor of the Trustee reinforces the principle that bankruptcy trustees, like federal receivers, act on behalf of creditors – not wrongdoers – and may not be subject to equitable defenses that might apply to the debtor itself.
