Knowledge

Is the claim a "goner"? The Wagoner rule lies in wait for Cayman officeholders seeking to assert standing to bring recovery claims in the United States.

The Wagoner rule

The "Wagoner rule", derived from Shearson Lehman Hutton Inc. v Wagoner, 944 F.2d 114 (2d Cir. 1991), is a principle which, for the purpose of this briefing, goes to the ('prudential' i.e. common law) standing of offshore officeholders to bring claims in the United States. Simply put by the judge in the eponymous case, the principle is that:

"when a bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors."

The rule is predicated on the (rebuttable, as there are exceptions) principles that management's wrongdoing is imputed to the company and that the trustee (or the liquidator if appointed in Cayman or the BVI) stands in the shoes of the company and is thus taken to have participated in the wrongdoing. The rule often goes hand in hand with the broader doctrine of in pari delicto (an affirmative defence), which is that wrongdoers cannot recover from third parties if they assisted in the wrongdoing. 

For Cayman Islands officeholders, the practical impact of the Wagoner rule is clearly significant: it can determine whether cross‑border recovery actions against U.S. based third parties survive a motion to dismiss. Three recent New York decisions, Trott v Deutsche Bank AG, Barkhouse v Dean and In re Endo International plc, illustrate how nuanced and fact‑sensitive the application of the rule has become since it came on to the scene (as far as those of us operating in the Cayman Islands are concerned) in Bullmore v Ernst & Young Cayman Islands.

Bullmore v Ernst & Young Cayman Islands ("Bullmore") (19 June 2008) Supreme Court, New York County Commercial Division

In this 2008 decision, the court applied the Wagoner rule and granted summary judgment in favour of the defendant, dismissing claims by Cayman-appointed liquidators against the auditors of a hedge fund for lack of standing because:

• the liquidators were to be treated as standing in the shoes of the hedge fund;
• the wrongdoing of the managers was imputable to the hedge fund, with the "adverse interest" exception not applying because what the managers did benefitted the hedge fund and could not be said to have been carried out purely in the managers' own interests (the adverse interest exception is a "narrow exception" to the Wagoner rule that rebuts the presumption that the acts and knowledge of an agent are imputable to the principal – it applies "where the wrongful acts of management are so adverse to the corporation that management is deemed to have totally abandoned the corporation, for its, or a third party's, sole benefit"); and
• there was no "cleansed entity" or "innocent successor" argument available. The court did not agree with the liquidators that the liquidation had effectively created a new entity, innocent of the wrongdoing perpetrated by the managers.

Thus, the liquidators were denied standing to pursue the claims and the motion to dismiss succeeded.

Barkhouse v Dean ("Barkhouse") (26 September 2025) United States District Court for the Southern District of New York 

Rejecting arguments that the Wagoner rule applied to deprive the Cayman/BVI liquidators of standing, the court in Barkhouse denied a motion to dismiss the liquidators' fraudulent-transfer and unjust-enrichment claims against a U.S. transferee connected to the 1MDB scandal. 

The court found the rationale deployed in Scholes v Lehmann (a 1995, Seventh Circuit, decision) persuasive. In that case, the judge found that once wrongdoers are displaced by independent fiduciaries, the corporation is no longer the wrongdoers' "evil zombie", the entity now in liquidation is no longer tainted, and that entity may pursue recovery for the benefit of creditors (not the entity itself), which the judge considered the avoidance claims were designed to achieve.

The court in Barkhouse was free to consider Bullmore if it so chose, but it did not.  

In re Endo International plc ("Endo") (29 September 2025) United States Bankruptcy Court for the Southern District of New York

Three days after Barkhouse, the Bankruptcy Court for the Southern District of New York decided Endo. The nuance of this case was that, while the application of the Wagoner rule was an issue, offshore officeholders were not involved. Rather, the plaintiff was the trustee of a Delaware statutory trust established to administer unsecured creditor claims in the bankruptcy of a range of Endo-affiliated debtor entities, one of which was incorporated in Ireland. 

The court applied New York choice of law principles and found that Irish law governed the trustee's claims for aiding and abetting relating to the Irish entity. The court then found that the Wagoner rule did not apply to defeat those claims. This was because the Wagoner rule was a construct of the Second Circuit/New York law and not mirrored in Irish law.

Trott v Deutsche Bank AG ("Trott") (30 September 2025) United States District Court for the Southern District of New York

A single day after Endo, Judge Ho gave judgment in Trott. In this case, Cayman-appointed liquidators over a Cayman debtor, Madison Assets LLC ("Madison"), had brought claims in New York for fraudulent trading under Section 147 of the Cayman Companies Act. The crux of the Defendant's motion to dismiss those claims was that the Wagoner rule applied. The liquidators had accepted that if it was applicable to their claims, they would be deprived of standing, given their acceptance that Madison had participated in the fraud.

Judge Ho held that the Wagoner rule applied because:

• The Wagoner rule was a federal prudential standing doctrine that applied (unlike in pari delicto which is a substantive rule of New York law) regardless of the law governing the underlying cause of action (thus differentiating, albeit not explicitly, from Endo). 
  
  The liquidators had argued that, as their claims were brought under a Cayman statute and were thus governed by Cayman law, Wagoner, being a creature of New York law, should not apply.
• Contrary to their argument that they were acting for the benefit of creditors, rather than the debtor company, the liquidators were to be taken to be asserting the company's rights. The liquidators still, therefore, stood into the shoes of the company.
  
  The liquidators had argued that Section 147 of the Companies Act provided them with a statutory cause of action which only they could bring, distinct to a claim brought by Madison (to which it was accepted that the wrongdoer's behaviour would be imputed). However, because the court had found (i) that the liquidators had constitutional standing to bring the claim because a Section 147 claim is not brought to compensate particular creditors but rather to cure a loss to the debtor company's assets overall, and (ii) that the liquidators had no interests other than those that related to Madison, the court found that through the Section 147 claim the liquidators were bringing an action on behalf of Madison.
• Comity did not trump federal jurisdictional doctrine, at least not in the Second Circuit.
  
  The liquidators had argued that depriving them of standing through Wagoner would set a dangerous precedent because foreign representatives' insolvency claims would be limited to only those claims that could be brought under domestic law.

Getting to grips with the divergence between Barkhouse/Endo and Trott

Barkhouse declined to apply the Wagoner rule, primarily due to the "cleansed entity" rule from Scholes. Endo found that Wagoner did not apply because it held that whether Wagoner bars recovery depends on whether governing substantive law presents a flat bar that justifies dismissal (which Irish law did not). 

Trott applied it decisively, treating it as a federal prudential rule of standing which applied to plaintiffs, whether foreign or domestic, bringing their claims in the Second Circuit, even if those claims were governed by a foreign law.

Barkhouse and Endo invoked comity. Trott recognised comity but found it could not override a federal rule such as Wagoner.

The quandary facing Cayman officeholders

A Cayman appointee can be forgiven for not knowing exactly what may await them if they seek to bring claims in the United States, particularly in the Second Circuit, which includes the Southern District of New York. Will they encounter a Trott situation where the Wagoner rule will be applied, regardless of which law governs the underlying claims? Will they be able to rely upon the "cleansed entity" exception? Will it be an uphill battle persuading the court that they are acting for the benefit of creditors only and should not be taken to stand in the shoes of the debtor entity to which management's wrongdoing has been imputed?

Recommendations

Given the uncertainty exposed by Barkhouse, Endo and Trott, Cayman officeholders should assume that their standing will be actively challenged in proceedings in the Second Circuit and should structure their claims accordingly from the outset. For example:

• If imputation exceptions are successful, the Wagoner rule can be avoided entirely. So, where wrongdoing was confined to rogue management acting entirely in their own interests, the adverse interest exception should be relied on so as to resist automatic attribution of wrongdoing to the company (and, in turn, the officeholders). 
• To maximise the ability to rely upon the Scholes theory of the "cleansed entity", one should structure a claim as a creditor-oriented asset recovery (fraudulent transfer/avoidance), rather than as a claim to cure loss to the debtor company. The court in Barkhouse was receptive to that approach once independent liquidators controlled the entity and denied the defendants' motion to dismiss. The appointment of independent liquidators should be clearly presented as severing the identity between the wrongdoers and the entity. However, while this argument was successful in Barkhouse, it was not accepted in Bullmore.
• In multi-jurisdictional matters, identify a non-New-York governing law with more favourable treatment of imputation of wrongdoing or in pari delicto. If the court prefers the reasoning in Endo over that in Trott, whether the claim survives a motion to dismiss will depend on the foreign law's Wagoner rule or in pari delicto equivalent.

For further information on standing, the Wagoner rule, and associated in pari delicto or ex turpi causa issues, please contact your usual Bedell Cristin contact or one of the contacts listed.