Why Parmalat litigation v. Grant Thornton is like 0-0 soccer game

June 26, 2014

If it is possible for an appellate ruling on the jurisdiction of bankruptcy trustees’ claims against an auditor to be snicker-inducing, Judge Richard Posner‘s opinion Wednesday for the 7th U.S. Circuit Court of Appeals in Parmalat v. Grant Thornton is that decision.

Posner precedes his recounting of the history of this litigation — which involves claims by two bankruptcy trustees for the once fraud-wracked Italian dairy conglomerate against former auditor Grant Thornton — by noting that he would “simplify ruthlessly.” (I will try to follow his example.) Near the end of the ruling, after he describes the cases’ journey from Illinois state court through federal courts in New York and Illinois, he observes that the 7th Circuit’s decision to send the cases back to Illinois state court where they began will effectively end any hope of bringing the litigation to a close “before it a chance to exceed the length of the Trojan War.” Funny, right?

I’m writing this post as the United States soccer team is facing off against Germany, so soccer is on my mind. The Parmalat suits against Grant Thornton remind me of a scoreless soccer match. We’ve seen some great footwork from the lawyers on both sides — Quinn Emanuel Urquhart & Sullivan for the main Parmalat bankruptcy trustee, Diamond McCarthy for the Parmalat Capital trustee, and Winston & Strawn for Grant Thornton — but neither side has put the ball in the net for a goal. Posner’s instruction that the cases return to state court puts the litigation into sudden-death overtime.

The outcome of the match will have implications not just for Grant Thornton but for all auditors facing claims from former clients driven into bankruptcy by accounting shenanigans. Auditors are broadly protected from liability under the common law doctrine of in pari delicto (“equally in fault”), which holds that participants in wrongdoing can’t recover from fellow miscreants. Judge Posner himself wrote a landmark opinion about in pari delicto, Cenco v. Seidman & Seidman, in 1982; and Judge Frank Easterbrook recently reiterated, in the 7th Circuit’s 2012 decision in Peterson v. McGladrey and Pullen, that in pari delicto defenses are available to auditors sued under Illinois state law.

Grant Thornton has argued at almost every stage of these long-running cases that Parmalat’s claims are barred by in pari delicto. U.S. District Court Judge Lewis Kaplan in Manhattan –who took charge of the trustee suits after they were removed to federal court and transferred to the Parmalat multidistrict litigation — agreed with Grant Thornton, granting the auditor summary judgment in 2009. The 2nd Circuit, however, found that Grant Thornton was offsides and invalidated the goal. Okay, what the appeals court actually did was vacate Kaplan’s judgment and order the cases to be sent back to state court because federal courts should have abstained from asserting jurisdiction.

Grant Thornton asked the 2nd Circuit to reconsider, citing Easterbrook’s opinion in the Peterson case, but the 2nd Circuit declined. The auditor had better luck with U.S. District Judge John Darrah of Chicago, who received the cases from Kaplan and the 2nd Circuit. Darrah said there was no point in sending the litigation back to state court because the Parmalat trustees’ claims were barred by in pari delicto.

Posner’s opinion Wednesday addressed Darrah’s 2013 ruling. You might think that Grant Thornton would have had home field advantage, considering that both Posner and Easterbrook – authors of leading opinions upholding in pari delicto defenses — were on the 7th Circuit panel that heard the auditor’s case on May 27 (along with Judge David Hamilton). No such luck for Grant Thornton. In the 7th Circuit’s previous in pari delicto cases, Posner wrote, he and his colleagues were trying to predict how Illinois courts would interpret the doctrine – but they still can’t be certain of what the state high court would decide. State supreme courts in New Jersey, Pennsylvania and New York have reached different interpretations in recent years about how broadly in pari delicto defenses apply, and Illinois state courts have not weighed in, Posner said.

For that reason, the 7th Circuit told Judge Darrah to send the Parmalat cases to state court as he was directed to do two years ago by the 2nd Circuit. Now, said Parmalat trustee counsel Sanford Weisburst of Quinn Emanuel, it will be up to Cook County courts to decide whether its claims against Grant Thornton live or die. Grant Thornton counsel Linda Coberly of Winston & Strawn referred me to a corporate representative who sent an emailed comment: “Grant Thornton is confident that the Illinois state court will agree with both the Southern District of New York and the Northern District of Illinois’ determinations that Parmalat and its representatives cannot sue based on their own wrongdoing.”

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