Court Opinion

ID: 2708501
Source: CourtListenerOpinion
Date Created: 2014-08-05 15:00:31.039705+00
Date Added: 2024-06-11T10:01:19.457925
License: Public Domain

In the

    United States Court of Appeals
                For the Seventh Circuit
                   ____________________
No. 13-2245
PARMALAT CAPITAL FINANCE LIMITED,
                                                Plaintiff-Appellant,

                                v.

GRANT THORNTON INTERNATIONAL and GRANT
 THORNTON S.P.A.,
                                  Defendants-Appellees.
                   ____________________

No. 13-2253
ENRICO BONDI,
                                                Plaintiff-Appellant,

                                v.

GRANT THORNTON INTERNATIONAL, et al.,
                                             Defendants-Appellees.
                   ____________________

       Appeals from the United States District Court for the
         Northern District of Illinois, Eastern Division.
        Nos. 04 C 6031, 06 C 47 — John W. Darrah, Judge.
                   ____________________

      ARGUED MAY 27, 2014 — DECIDED JUNE 25, 2014
               ____________________
2                                          Nos. 13-2245, -2253

   Before POSNER, EASTERBROOK, and HAMILTON, Circuit
Judges.
    POSNER, Circuit Judge. These appeals arise from litigation
relating to the collapse in 2003, following a decade of wild
growth and mounting losses, of a large Italian food and
dairy company named Parmalat. Parmalat entered bank-
ruptcy in Italy and Enrico Bondi was appointed “extraordi-
nary commissioner,” the Italian equivalent of a bankruptcy
trustee. The litigation is highly complex; we’ll simplify ruth-
lessly.
   In 2004 Bondi instituted in the bankruptcy court of the
Southern District of New York a proceeding under the since-
repealed section 304 of the U.S. Bankruptcy Code to “enjoin
the commencement or continuation of any action against
[Parmalat] with respect to property involved in” the Italian
bankruptcy proceeding. 11 U.S.C. § 304(b)(1)(A)(i) (re-
pealed); In re Parmalat Finanziaria S.p.A., No. 1:04-bk-14268-
rdd (Bankr. S.D.N.Y. June 22, 2004). The objective was to
consolidate the claims against the bankrupt company.
    A couple of months after the filing in New York, Bondi
filed a suit in the Circuit Court of Cook County, Illinois,
against Grant Thornton International, an accounting compa-
ny. Bondi v. Grant Thornton Int’l, No. 2004-L-009290 (Cook
County Law Div. Aug. 18, 2004). Two of its subsidiaries
were joined as defendants in the suit, but we can ignore
them for the most part and pretend there was just one de-
fendant, which we’ll call Grant Thornton. The suit charged
Grant Thornton with having contributed to the collapse of
Parmalat by conducting fraudulent audits of Parmalat’s
books in violation of Illinois tort law. Bondi stands in Parma-
Nos. 13-2245, -2253                                            3

lat’s shoes, so to simplify we’ll call the plaintiff Parmalat ra-
ther than Bondi.
    Parmalat’s suit is the earlier of the two cases before us.
The other, brought by a bankrupt subsidiary of Parmalat
named Parmalat Capital Finance Limited (the parties call it
PCFL), see Parmalat Capital Finance v. Grant Thornton Int’l,
No. 2005-L-013942 (Cook County Law Div. Dec. 9, 2005), is
materially the same as Parmalat’s case, at least so far as the
issues germane to the appeal, and was decided the same
way. So we’ll ignore its separate identity and pretend that
we have only two parties to deal with, Parmalat and Grant
Thornton.
    Before proceeding to the merits of the appeals, we need
to consider two jurisdictional wrinkles. One of the defend-
ants in both suits is Grant Thornton’s Italian subsidiary,
Grant Thornton S.p.A. (the parties call it Grant Thornton Ita-
ly). Although Parmalat’s claims against it remain pending in
the district court, Parmalat sought and obtained from the
district court an appealable judgment, under Fed. R. Civ. P.
54(b), against the other two Grant Thornton defendants, and
so their appeals are properly before us. PCFL, the plaintiff in
the second suit, abandoned its claim against the Italian sub-
sidiary and so was able to file a conventional appeal from a
final judgment. 28 U.S.C. § 1291. So we can proceed to the
merits of the appeals.
    Grant Thornton had removed the suit that Parmalat filed
in the Circuit Court of Cook County to the federal district
court for the Northern District of Illinois, pursuant to 28 U.S.
§ 1334(b). That section, so far as pertains to this case, confers
original though not exclusive federal jurisdiction over all
civil suits “related to cases under title 11” (the Bankruptcy
4                                            Nos. 13-2245, -2253

Code). The suit in the bankruptcy court in New York was a
suit to which the Illinois suit was related. The Judicial Panel
on Multidistrict Litigation therefore stepped in and trans-
ferred the suit in the Northern District of Illinois to the
Southern District of New York, so that the related suits
would be in the same district for pretrial proceedings. See 28
U.S.C. § 1407(a).
     Parmalat asked Judge Lewis A. Kaplan, the federal dis-
trict judge assigned to the case in the Southern District of
New York, to abstain from deciding the case. 28 U.S.C.
§ 1334(c)(2) provides that in the case of a proceeding, based
upon a state law claim (as was the suit that Parmalat had
filed in the Illinois state court) and (as also true of Parmalat’s
suit) “related to a case under title 11 but not arising under
title 11 … , with respect to which an action could not have
been commenced in a court of the United States absent juris-
diction under [section 1334(b)], the district court shall ab-
stain from hearing such proceeding if an action is com-
menced, and can be timely adjudicated in a State forum of
appropriate jurisdiction,” in this case the Cook County court.
    Judge Kaplan declined to abstain, Bondi v. Grant Thornton
Int’l, 322 B.R. 44 (S.D.N.Y. 2005), and in 2009 granted Grant
Thornton’s motion for summary judgment, on the ground
that the doctrine of in pari delicto (equally in fault) barred
Parmalat’s claim against the accounting company. In re Par-
malat Securities Litigation, 659 F. Supp. 2d 504, 530 (S.D.N.Y.
2009). Parmalat appealed and in February 2012 the U.S.
Court of Appeals for the Second Circuit vacated Judge
Kaplan’s decision and remanded the case with directions “to
transfer [it] to the Northern District of Illinois so that [the
case] can be remanded to Illinois state court,” i.e., the Cook
Nos. 13-2245, -2253                                            5

County court. Parmalat Capital Finance Ltd. v. Bank of America
Corp., 671 F.3d 261, 271 (2d Cir. 2012) (per curiam).
     Six weeks after the Second Circuit’s decision, this court in
Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th Cir.
2012), upheld an in pari delicto defense in a case also based on
Illinois law and seemingly quite similar to Parmalat’s case
against Grant Thornton. Grant Thornton had already filed a
petition for rehearing in the Court of Appeals for the Second
Circuit, and now supplemented it by directing the court’s
attention to our decision. To no avail. The court denied the
petition with no statement of reasons.
    As instructed to do by the court of appeals, Judge Kaplan
transferred the case back to the Northern District of Illinois
to remand it to the Cook County court. Judge John W. Dar-
rah, presiding at the remanded proceeding in the Northern
District, declined to remand it. He ruled that any doubt
about the Illinois law applicable to the remanded case had
been erased by our decision in Peterson v. McGladrey, and
that as a result it was clear that Grant Thornton had a valid
in pari delicto defense against Parmalat’s suit, so it would be a
waste of time to remand the case, nearly nine years old, to
the state court. Parmalat asks us to reverse Judge Darrah’s
decision, on the ground that the judge should have followed
the instructions from New York and remanded the case to
the Illinois state court.
    It is of course common for a court to apply the law of a
different jurisdiction from its own. The federal diversity ju-
risdiction is an example. The rules governing choice of law
provide many other examples. So one would expect that a
court (in this case the U.S. District Court for the Southern
District of New York) that had pending before it a number of
6                                          Nos. 13-2245, -2253

cases that had been transferred to it from other districts, and
were governed by the law of the states that contain those
districts, would simply apply the laws of those states to the
cases. And likewise that if that court transferred the case to
another federal court, in this case the Northern District of
Illinois, the transferee court would apply any governing
state law, in this case the law of Illinois. But section 1334(c)
of the federal judicial code, as we’ve seen, carves an excep-
tion for cases that, though removable to federal court (with-
out regard to diversity) because they are related to a bank-
ruptcy case, arise under state law. The federal court must
remand such a case to the state court if it “can be timely ad-
judicated … in a State forum of appropriate jurisdiction.” 28
U.S.C. § 1334(c)(2).
    The reason for this rule is that the only basis for removal
of such cases to a federal court is that they are related to a
bankruptcy proceeding; and so neither party has the kind of
interest that would ordinarily allow someone to litigate a
state law claim in federal court, such as concerns that a state
court might be biased in favor of the local adversary in a suit
in which the other party is from out of state (a diversity
case), Bank of U.S. v. Deveaux, 9 U.S. (5 Cranch) 61, 87 (1809)
(Marshall, C.J.); David L. Shapiro, “Federal Diversity Juris-
diction: A Survey and a Proposal,” 91 Harv. L. Rev. 317, 329–
30 (1977); cf. Henry J. Friendly, “The Historic Basis of Diver-
sity Jurisdiction,” 41 Harv. L. Rev. 483, 492–93 (1928), or that
the state law claim might overlap the federal claim in the
case and thus be within the federal district court’s supple-
mental jurisdiction. See United Mine Workers of America v.
Gibbs, 383 U.S. 715, 725 (1966); see also 28 U.S.C. § 1367; Exx-
on Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546, 558
(2005).
Nos. 13-2245, -2253                                            7

    At any rate, the rule is the rule; so provided the state
court adjudication would be “timely,” Judge Kaplan was re-
quired to abstain and the case had to go back to the state
court. Actually it doesn’t matter any more whether adjudica-
tion of Parmalat’s case by the Illinois state court system
would be timely. The Second Circuit ordered Judge Kaplan
to abstain and thus transfer the case back to the Northern
District of Illinois with directions to remand it to the Illinois
state court. If the abstention order stands, the order to re-
mand can’t be questioned, because it followed automatically
from the order to abstain and that order can’t be challenged
because 28 U.S.C. § 1334(d) provides with an immaterial ex-
ception that “any decision to abstain ... is not reviewable by
appeal or otherwise by the court of appeals … or by the Su-
preme Court of the United States.” (The “otherwise” pre-
sumably refers to mandamus or some other process used by
an appellate court, since the only reviewing bodies men-
tioned in the section are appellate courts.)
    The statute doesn’t say in so many words that an order to
abstain is not reviewable by another district court, but the
idea that a district judge has appellate authority denied to
the U.S. Supreme Court can’t be taken seriously. It would
imply that although the Supreme Court could not have re-
versed the Second Circuit’s decision ordering that the case
be returned to the Illinois state court, a district judge could
do so. And that in turn would imply that Judge Kaplan him-
self could have refused to obey the Second Circuit’s man-
date. If Judge Darrah could overrule it, why not Judge
Kaplan? Both are federal district judges.
    Federal district judges have appellate authority over de-
cisions by magistrate judges, bankruptcy judges, and certain
8                                          Nos. 13-2245, -2253

administrative law judges (administrative law judges in so-
cial security disability cases, for example), but not over deci-
sions by other district judges, let alone by courts of appeals.
A district judge is sometimes authorized to alter the conse-
quences of a decision that has been affirmed by an appellate
court, notably in collateral attacks on convictions or sentenc-
es. 28 U.S.C. § 2255; 18 U.S.C. § 3582(c). And he can invoke
Fed. R. Civ. P. 60(b) to set aside judgments even if they have
been affirmed. But such revisionary litigation is based on
events occurring after the judgment to be revised was en-
tered or on information obtained after that judgment. Noth-
ing has happened since the Second Circuit’s decision to justi-
fy a district court’s reopening and reversing it.
    Grant Thornton disagrees. It argues that our decision in
Peterson v. McGladrey, supra, which was not before the Sec-
ond Circuit when it ordered abstention, is a subsequent de-
velopment that demonstrates that remand to the Illinois
state court would not be “timely” after all, and so was not
required by 28 U.S.C. § 1334(c)(2), as the Second Circuit
would have realized had Peterson v. McGladrey been issued
before the reversal of Judge Kaplan. But that is wrong on
two counts. First, Grant Thornton had alerted the Second
Circuit to our decision, yet the petition for rehearing had
been denied anyway. That distinguishes the situation in this
case from that discussed in the passage in Barrow v. Falck, 11
F.3d 729, 731 (7th Cir. 1993), on which Grant Thornton relies,
where we said that “an appellate mandate does not turn a
district judge into a robot, mechanically carrying out orders
that become inappropriate in light of subsequent factual dis-
coveries or changes in the law.” The italicized word, which
is critical to the meaning of the quoted passage, can’t be ap-
plied to this case, given that our decision was drawn to the
Nos. 13-2245, -2253                                            9

Second Circuit’s attention before it ruled on the petition for
rehearing.
    Second, at least so far as relates to the present case Peter-
son v. McGladrey was not a novel decision. It reaffirmed Cen-
co Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir. 1982), de-
cided 30 years before the Second Circuit reversed Judge
Kaplan. A case quite like this one, Cenco had held that Illi-
nois tort law would apply the doctrine of in pari delicto to
prevent a corporation that engaged in fraud from shifting its
liability to independent auditors of the corporation who the
corporation argued had not only failed to detect the fraud,
but had been complicit in it. The fraud committed by the
corporation’s managers had to be imputed to the corpora-
tion because they were acting on its behalf (albeit unlawful-
ly), thus making the corporation in pari delicto with its audi-
tors. The fact that many of the corporation’s shareholders,
and thus potential beneficiaries of a judgment against the
auditors, were innocent of the fraud (though not all—the
managers were also shareholders, and the board of directors,
elected by the shareholders, had been negligent in failing to
detect the fraud) did not negate the auditors’ in pari delicto
defense.
    Parmalat’s suit against Grant Thornton is similar. Parma-
lat’s managers engaged in fraud designed to enrich Parmalat
(and therefore themselves); the auditors failed to detect the
fraud—may indeed have been complicit in it (or so Parmalat
argues); Parmalat wants to shift its liability to the auditors
(the Grant Thornton companies). Parmalat’s and Cenco’s
cases are thus similar, as Grant Thornton argues. But there is
a rub: our analysis in Cenco was not based on Illinois statuto-
ry or case law; for there was none that bore on the in pari de-
10                                         Nos. 13-2245, -2253

licto issue. We were trying to predict how the Supreme Court
of Illinois would decide such a case. We decided in Peterson
v. McGladrey to follow Cenco not because the Illinois courts
or legislature had adopted our decision, thus making it Illi-
nois law, but because “Cenco predicted that Illinois would
hold that fraud by corporate managers is imputed to the
corporation where ‘managers are not stealing from the com-
pany—that is, from its current stockholders—but instead are
turning the company into an engine of theft against outsid-
ers.’ Cenco, 686 F.2d at 454. Thirty years have passed, and no
court in Illinois has disagreed with this understanding.” Pe-
terson v. McGladrey & Pullen, LLP, supra, 676 F.3d at 599.
     We can’t be certain that Cenco so clearly dictates the re-
sult in this case that remanding the case to the Illinois state
court would be bound to produce gratuitous delay, making
abstention in favor of that court not “timely.” We can’t be
certain that the Supreme Court of Illinois would follow Cen-
co in all particulars relevant to Parmalat’s case. We’ve found
only one Illinois decision, and that of Illinois’s intermediate
appellate court rather than its supreme court, that treated, or
at least seemed to treat, Cenco as securely a part of Illinois
law: Holland v. Arthur Andersen & Co., 469 N.E.2d 419, 425–26
(Ill. App. 1984), which called Cenco “a leading case.” Id. at
425. Our cautious statement in Peterson v. McGladrey that no
court in Illinois has expressed disagreement with Cenco is
more accurate than Grant Thornton’s assertion that Cenco is
a correct interpretation of Illinois law. Cenco is not without
its critics. A few years ago the Supreme Court of Pennsylva-
nia, while complimenting Cenco as a “pioneering decision,”
followed up the compliment with criticisms. Official Commit-
tee of Unsecured Creditors of Allegheny Health Education & Re-
search Foundation v. PriceWaterhouseCoopers, LLP, 989 A.2d
Nos. 13-2245, -2253                                           11

313, 331–32 (Pa. 2010). And New Jersey’s supreme court,
while calling Cenco “the seminal case on this issue,” seems to
have rejected it altogether, see NCP Litigation Trust v. KPMG
LLP, 901 A.2d 871, 883–88 (N.J. 2006)—though New York’s
highest court has adopted it. See Kirschner v. KPMG LLP, 938
N.E.2d 941, 952–53 (N.Y. 2010).
    In short, the only reason for the Second Circuit to have
refused to send the case back to the Illinois state court would
have been that it would be a waste of time because Illinois
law recognizes an auditor’s in pari delicto defense and thus
exonerates Grant Thornton. But Peterson v. McGladrey didn’t
say that. It said that thirty years had left Cenco undisturbed
by Illinois cases—an observation that could have been made,
if Peterson v. McGladrey had not yet been decided, simply by
Shepardizing Cenco.
    Since nothing happened after the Second Circuit ordered
the case transferred to the Illinois state court that might have
justified Judge Darrah in disregarding the order, his action
was unauthorized—an exercise of de facto appellate authori-
ty prohibited by 28 U.S.C. § 1334(d). It also contravened the
Supreme Court’s warning that “transferee courts that feel
entirely free to revisit transfer decisions of a coordinate court
threaten to send litigants into a vicious circle of litigation.”
Christianson v. Colt Industries Operating Corp., 486 U.S. 800,
816 (1988).
    Not that we’re sure that the Second Circuit was correct to
decide that this case could be “timely adjudicated” in the Il-
linois state court system. In deciding it was, the court con-
sidered four “factors.” Parmalat Capital Finance Ltd. v. Bank of
America Corp., supra, 671 F.3d at 266. (For their origin, see
Bates & Rogers Construction Corp. v. Continental Bank, N.A., 97
12                                            Nos. 13-2245, -2253

B.R. 905, 908 (N.D. Ill. 1989); In re DeLorean Motor Co., 49 B.R.
900, 911 (Bankr. E.D. Mich. 1985); Lawrence P. King, “Juris-
diction and Procedure Under the Bankruptcy Amendments
of 1984,” 38 Vand. L. Rev. 675, 702 (1985).) These are how
much longer the case would take to resolve in the state judi-
cial system than in the federal system, the complexity of the
issues to be decided and which court could unravel that
complexity better, the status of the bankruptcy proceeding to
which the case relates, and whether remand to the state
court would prolong the bankruptcy proceeding. (As an
aside, we note that the third and fourth factors really seem to
be one, while the second is in form two but in actuality
one—which court system can better handle complex issues
that may arise in the case.)
    Regarding the first consideration, the Second Circuit not-
ed that of course there would be some additional delay.
Judge Kaplan had decided the case, on summary judgment,
in favor of Grant Thornton. So nothing remained for deci-
sion by him, whereas a remand to the Illinois state court
would entail a restart of the litigation from scratch, though
the litigation might end quickly if the state judge agreed
with Judge Kaplan’s analysis and forthwith entered sum-
mary judgment for Grant Thornton. But the Second Circuit
found no basis for thinking the added delay would be more
than a few months. The court, unsurprisingly, didn’t foresee
Judge Darrah’s refusal to comply with the court’s directive
to send the case back to the Illinois state court; as a result it is
now 28 months since the Second Circuit’s decision, and no
restart yet in the Illinois court.
   Regarding complexity, the Second Circuit said not unrea-
sonably that the Illinois state court system would provide a
Nos. 13-2245, -2253                                          13

more authentic resolution of issues, whether simple or com-
plex, because they are issues of Illinois law. And regarding
the impact on or of the bankruptcy proceedings in New
York, the court plausibly determined that it would be negli-
gible.
     If we knew that Judge Kaplan‘s opinion rejecting Parma-
lat’s claim against Grant Thornton would persuade the Illi-
nois courts, then affirming Judge Darrah would bring this
litigation to a close before it had a chance to exceed the
length of the Trojan War (10 years). But we can’t be certain
what the Illinois courts will do. And nowhere in its 85-page
brief does Grant Thornton contend that the problem illus-
trated by this case—the intricacies of the in pari delicto de-
fense in corporate suits against independent auditors—arises
frequently enough to justify the radical surgery that it asks
us to perform on the “no appeal” clause of section 1334(d).
Indeed, enforcing that clause strictly may minimize overall
delay in the decision of state-law cases related to bankruptcy
proceedings. Had Judge Darrah, as directed by the Second
Circuit, remanded the case two years ago to the Circuit
Court of Cook County, the litigation might well be at an end
rather than on the brim of restarting.
   We conclude that Judge Darrah was authorized to do
naught but remand the case (actually cases, but we’ve been
pretending there’s just one, for the sake of simplicity) to the
Cook County court. He must do so now.
    One loose end remains to be tied up. Remember that
there are actually three defendants in Parmalat’s suit, and
only two are covered by this appeal. The case against the
third, the Italian subsidiary, remains in the district court af-
ter having been transferred to New York and then trans-
14                                         Nos. 13-2245, -2253

ferred back. No final judgment has been entered in that third
case. Because the case is not before us, we can’t issue an or-
der in it. But obviously the district court should remand it to
the Cook County court, there to join the rest of Parmalat’s
suit plus PCFL’s companion suit.
                                   REVERSED AND REMANDED.