Whitlock Corporation v. Deloitte & Touche ( 2000 )

  • In the
    United States Court of Appeals
    For the Seventh Circuit
    No. 00-1718
    The Whitlock Corporation, formerly known
    as Apex Automotive Warehouse, L.P.,
    Deloitte & Touche, L.L.P.,
    Appeal from the United States District Court for
    Northern District of Illinois, Eastern Division.
    No. 99 C 2537--Rebecca R. Pallmeyer, Judge.
    Argued October 27, 2000--Decided December 7,
      Before Easterbrook, Kanne, and Rovner,
    Circuit Judges.
      Easterbrook, Circuit Judge. 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
      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
    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
    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
    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
    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 statement "what they did to
    us was to intentionally mislead you"
    could refer only to actors at wsr. It was
    in the dark for longer, Apex submits,
    about Deloitte’s role. Maybe so, but if
    Apex’s claim accrued in April 1995, then
    time started running with respect to all
    potentially responsible persons. See
    LeBlang Motors, Ltd. v. Subaru of
    America, Inc., 
    148 F.3d 680
    , 690-92 (7th
    Cir. 1998) (Illinois law); City National
    Bank of Florida v. Checkers, Simon &
    32 F.3d 277
    , 283-84 (7th Cir.
    1994) (Illinois law); Central States
    Pension Fund v. Navco, 
    3 F.3d 167
    , 171
    (7th Cir. 1993) (federal common law);
    Young v. McKiegue, 
    303 Ill. App. 3d 380
    708 N.E.2d 493
    , 500 (1st Dist.
    1999). Apex could have used the ensuing
    years to determine who was to blame, and
    of course it did not have to search hard
    to find Deloitte. Apex has not cited any
    decision by an Illinois court standing
    for the proposition that the statute of
    limitations for a single injury starts to
    run at different times against different
    potentially responsible persons. It does
    cite decisions by two federal district
    courts. See Antell v. Arthur Anderson
    LLP, 1998 U.S. Dist. Lexis 7183 (N.D. Ill.
    April 30, 1998); Ventre v. Datronic
    Rental Corp., 1996 U.S. Dist. Lexis 17501
    (N.D. Ill. Nov. 18, 1996). But Antell,
    which was rendered before LeBlang and
    Young (and failed to discuss either City
    National Bank or Navco), cannot be deemed
    authoritative, and Ventre held only that
    the commencement of the limitations
    period with respect to one injury does
    not start the time with respect to a
    different injury caused by a different
    person through a different fraudulent
    means. Apex’s claim concerns a single
    injury, the allegedly inflated price it
    paid for wsr’s stock in Whitlock.
      True enough, tolling rules may extend
    the time by different amounts with
    respect to different parties that have
    behaved differently, and Apex argues that
    Deloitte fraudulently concealed its role.
    See generally Cada v. Baxter Healthcare
    920 F.2d 446
     (7th Cir. 1990)
    (discussing the scope of both equitable
    tolling and equitable estoppel). Still,
    the claim against Deloitte accrued, and
    the clock began to tick, no later than
    April 1995. It has continued ticking,
    too, because Apex has adduced no evidence
    of "concealment," fraudulent or
    otherwise, by Deloitte. Simple denials of
    liability do not toll the period of
    limitations or estop the adverse party to
    rely on it. Singletary v. Continental
    Illinois National Bank, 
    9 F.3d 1236
    Cir. 1993). Apex does not contend that
    Deloitte spoliated evidence or lied in
    response to inquiries; rather its
    fraudulent-concealment theory is that
    Deloitte owed it a fiduciary duty, so
    that tolling continued until Deloitte
    came forward with the truth. On this
    view, the time to sue could be postponed
    until after the litigation was over, if
    Deloitte continued to deny culpability.
    That is not the function of the
    fraudulent-concealment principle; even a
    fiduciary is entitled to the benefit of
    the statute of limitations without a need
    to confess to wrongdoing. Although
    Illinois sometimes allows a fiduciary’s
    silence to toll a period of limitations,
    see Chicago Park District v. Kenroy,
    78 Ill. 2d 555
    , 562, 
    402 N.E.2d 181
    , 185 (1980), that possibility does
    Apex no good, for Deloitte was not its
    fiduciary. Apex did not hire Deloitte to
    look out for its interests in the
    transaction; Deloitte was wsr’s auditor,
    and Apex dealt with wsr at arms’ length.
    As part of the sale wsr and Apex jointly
    engaged Deloitte to perform certain
    auditing functions, but Deloitte could
    not sensibly have served as a fiduciary
    to both buyer and seller in the
    transaction, obliged to favor Apex’s
    position over wsr’s--and to favor wsr’s
    position over Apex’s at the same time.
      Deloitte may well have had contractual
    duties to both principals in the
    transaction, but adding the word
    "fiduciary" does not help us understand
    the nature of these duties or the period
    within which to initiate litigation about
    them. Deloitte served as an informational
    intermediary to a firm that was itself an
    expert in the auto parts business, so its
    silence about details that affected the
    calculation of the purchase price did not
    amount to fraudulent concealment. Apex
    hired a separate accountant to check on
    Deloitte’s work, a step that makes it
    even harder to see why Deloitte’s silence
    should postpone litigation. Moreover,
    Apex concedes that Deloitte was not its
    fiduciary at the time the first set of
    financial statements (before closing) was
    prepared, and it is these financials that
    Apex contends were fraudulent. Apex could
    not count on any duties Deloitte may have
    assumed with respect to later
    transactions or statements to induce a
    duty of candor with respect to documents
    prepared earlier. See Lagen v. Balcor
    274 Ill. App. 3d 11
    , 20, 
    653 N.E.2d 968
    , 975 (2d Dist. 1995).
      Nor did Deloitte’s occasional soothing
    assurances to Apex create an equitable
    estoppel that keeps the suit alive. As
    the bankruptcy court observed, none of
    the supposedly lulling statements on
    which Apex now relies occurred after
    October 1995; by then Apex and Deloitte
    had adversarial relations. Unless
    equitable estoppel postponed the time
    past May 1996, however, the suit is
    untimely. Like the bankruptcy and
    district courts, therefore, we find it
    unnecessary to decide whether some time
    could be excluded by equitable tolling.
    No view of the record would entitle Apex
    to the exclusion of enough time to make a