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.