Cochran v. Dellfava
1987 N.Y. Misc. LEXIS 2373, 136 Misc.2d 38, 517 N.Y.S.2d 854 (1987)
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Rule of Law:
A party who knowingly participates in an illegal contract, such as a chain distributor scheme, cannot use the courts to recover their investment because their participation constitutes promotion of the illegal activity, placing them in pari delicto (in equal fault).
Facts:
- On January 13, 1987, the defendant held a meeting to persuade people to join a multi-level investment scheme called the 'airplane game'.
- The plaintiff attended the meeting and knew the game was illegal, but the defendant assured her that if they were caught, he would take all responsibility.
- After the meeting, the plaintiff gave $2,200 to a friend, who was also a participant, to join the game.
- The friend passed the plaintiff's money to the defendant, who in turn gave it to the 'pilot' at the top of the scheme's pyramid.
- At a subsequent meeting, the plaintiff learned she had been placed in a role she was unhappy with and asked the defendant for her money back.
- The defendant told her he had already passed the money to the pilot and that she should ask the pilot for it.
- The pilot refused to return the plaintiff's money, and the scheme ultimately failed, causing the plaintiff to lose her entire investment.
Procedural Posture:
- The plaintiff filed a civil action against the defendant in a trial court seeking the return of her $2,200 investment.
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Issue:
Does a participant in an illegal chain distributor scheme, who knows the scheme is illegal, have a cause of action in a civil court to recover their investment from another participant when the scheme collapses?
Opinions:
Majority - John R Schwartz, J.
No. A participant in an illegal chain distributor scheme cannot recover their investment in a civil action because their knowing participation makes them equally at fault under the law. The court held that the 'airplane game' is an illegal 'chain distributor scheme' under New York's General Business Law. The long-standing legal principle is that courts will not enforce illegal contracts or aid a party to one, a doctrine known as in pari delicto. While there is an exception for contracts that are merely malum prohibitum (wrong because prohibited) rather than malum in se (inherently evil), this exception requires the plaintiff to be significantly less culpable than the defendant. Here, the plaintiff knowingly entered an illegal scheme with 'larceny in her heart,' hoping to make a substantial illegal profit. By contributing money as a 'passenger,' she was 'promoting' the scheme by encouraging its continuation and providing the funds for the illegal payout. Therefore, she is equally at fault with the defendant, and the court will not act as a 'referee between thieves' by helping her recover her losses.
Analysis:
This decision affirms the strong public policy doctrine of in pari delicto, refusing to allow the courts to be used to settle disputes arising from illegal contracts. It establishes that even entry-level participation in a pyramid scheme, with knowledge of its illegality, constitutes 'promoting' the scheme, thus barring the participant from recovering losses. This broad interpretation of 'promotion' serves as a strong deterrent, as it removes any legal safety net for individuals who knowingly engage in such ventures, even if they end up as victims of the scheme's collapse. The case signals that courts will leave all knowing participants, regardless of their level of involvement or financial outcome, exactly where their illegal acts have placed them.
