The Whitlock Corp. v. Deloitte & Touche, L.L.P., 00-1718
Decision Date | 07 December 2000 |
Docket Number | No. 00-1718,00-1718 |
Citation | 233 F.3d 1063 |
Parties | (7th Cir. 2000) The Whitlock Corporation, formerly known as Apex Automotive Warehouse, L.P., Plaintiff-Appellant, v. Deloitte & Touche, L.L.P., Defendant-Appellee |
Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 2537--Rebecca R. Pallmeyer, Judge.
Before Easterbrook, Kanne, and Rovner, Circuit Judges.
In January 1995 Apex Automotive Warehouse, a wholesaler of auto parts, purchased from WSR Corporation the stock of Whitlock Corporation, a retailer of auto parts. As is common in transactions of this kind, the closing price was calculated on the basis of pro forma financial statements that the seller had prepared, and whose accuracy the seller warranted. See LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928 (7th Cir. 1988). These hastily prepared statements were to be followed up by a more complete estimate of the assets' value, to be performed by wsr's auditor Deloitte & Touche, with adjustments to the price made accordingly.
Within months Apex encountered financial distress as a result of the transaction, or at least with the price paid for the retail stores and their inventory, and in 1996 it entered bankruptcy, where it reorganized jointly with Whitlock and was merged into a single firm. (The surviving entity has the Whitlock name, but we use Apex in this opinion to avoid confusion.) wsr and Deloitte never tendered a post- closing report to facilitate a price adjustment. The adversary proceeding now before us represents an effort to recover from Deloitte, for the benefit of Apex's creditors, on the theory that Deloitte committed fraud by failing to alert Apex that the Whitlock stock had been overvalued. Apex has disavowed any claim under the federal securities laws, which include not only a one-year statute of limitations but also a three-year statute of repose, Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson 501 U.S. 350 (1991); Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990), and rests its hopes on the law of Illinois, which the parties agree supplies the rule of decision. For claims under Illinois law against accountants the statute of limitations is two years, 735 ILCS 5/13-214.2(a), commencing when the plaintiff "knew or reasonably should have known" not only of its injury but also that the injury may have had a wrongful cause. See Knox College v. Celotex Corp., 88 Ill. 2d 407, 415, 430 N.E.2d 976, 980 (1981). Apex added Deloitte to the adversary proceeding in May 1998, so if its claim accrued before May 1996 it has expired. Both the bankruptcy court, 1999 Bankr. Lexis 209 (Bankr. N.D. Ill. Mar. 9, 1999), and the district court, 2000 U.S. Dist. Lexis 2045 (N.D. Ill. Feb. 17, 2000), concluded that the statute of limitations has run and dismissed Deloitte as a defendant. A partial final judgment under Fed. R. Bankr. P. 7054 and Fed. R. Civ. P. 54(b) enables us to resolve Apex's appeal while its suit against wsr continues in the bankruptcy court.
Bankruptcy Judge Katz relied on three principal considerations when granting summary judgment to Deloitte. First, one of Apex's accountants sent its general partner a memorandum in April 1995 stating that "what they did to us was to intentionally mislead you as to how they would value the inventory." That memorandum showed strong suspicion, if not actual knowledge, of both injury and a wrongful cause, starting the period of limitations, the bankruptcy judge concluded. Second, Apex filed suit in October 1995 accusing both wsr and Deloitte of miscalculating the value of certain items that entered into the price Apex paid for the Whitlock stock. Again that suit (soon dismissed because Deloitte's presence as a defendant spoiled diversity of citizenship) revealed suspicion, if not actual knowledge. Third, on October 6, 1995, the president of Apex's general partner sent Deloitte a letter stating, among other things:
Apex's lawyers are continuing their investigation into whether wsr and/or Deloitte face liability for damages arising from (1) an adverse material change in the condition of the business; (2) breaches of representations and warranties with respect to wsr's financial statements; (3) other omissions, errors and irregularities in wsr's books, records and audited financial statements; and (4) other breaches of the Stock Purchase agreement.
This letter, the bankruptcy court concluded, showed that by October 1995 (10 months after the closing) Apex was on inquiry concerning both injury and causation; and because the Illinois statute of limitations starts to run when a reasonable person would have commenced an inquiry, the time for suit expired no later than October 1997. The district court agreed with these conclusions.
Apex's appeal is founded on two legal misconceptions. The first is that in bankruptcy (and diversity) cases federal courts follow state rules about the allocation of issues between judge and jury. They do not; federal rules always control in federal court. Mayer v. Gary Partners & Co., 29 F.3d 330 (7th Cir. 1994). Apex believes that Illinois favors jury decision of disputes about the commencement of the period of limitations. That may be so, but in federal court Fed. R. Civ. P. 56 provides that only a material dispute about an issue of fact requires trial; there is no preference for trial on a dispute that can be resolved by a judge using (materially) undisputed facts. Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Wallace v. SMC Pneumatics, Inc., 103 F.3d 1394, 1396 (7th Cir. 1997).
The second misconception is that the period of limitations starts defendant- by-defendant, rather than injury-by- injury. The period of limitations began to run against wsr no later than April 1995, when (as the accountant's letter of that month shows) Apex already believed that chicanery had occurred in the valuation of Whitlock's inventory. By then Apex not only knew of its injury (about which it learned promptly after the closing in January 1995) but also strongly suspected that its injury had a wrongful cause. But, Apex insists, the April 1995 letter is ambiguous: the word "they" in the...
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