Court Opinion

ID: 3002903
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:35:41.300312+00
Date Added: 2024-06-11T15:03:19.640386
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 08-1981

T HE C ANCER F OUNDATION, INC. et al.,

                                                Plaintiffs-Appellants
                                  v.

C ERBERUS C APITAL M ANAGEMENT, LP et al.,

                                               Defendants-Appellees.

             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
           No. 07 C 4120—Joan Humphrey Lefkow, Judge.

    A RGUED JANUARY 15, 2009—D ECIDED M ARCH 19, 2009

 Before R IPPLE, M ANION, and E VANS, Circuit Judges.
  E VANS, Circuit Judge. In 1997, Martin Lapides was at
the center of a web of companies that were tanking.
With a multimillion dollar line of credit coming due, he
was forced to enter into a refinancing agreement that
meant he lost majority ownership of one of his companies,
Winterland. Winterland soon went bankrupt, setting off
a storm of financial harm. Ten years after losing control
2                                               No. 08-1981

of Winterland, Lapides, along with others who were
allegedly harmed by the takeover, filed suit against the
financiers involved in the meltdown under the Racketeer
Influenced and Corrupt Organization Act (RICO). The
district court found that the racketeering counts—the
only federal claims in the complaint—were untimely
and dismissed the suit. The plaintiffs now appeal.
  We begin by recounting the facts in the complaint, whose
allegations we accept as true since the district court
dismissed the complaint for failing to state a claim. Hol-
lander v. Brown, 457 F.3d 688, 690 (7th Cir. 2006).
Transcolor, one of Lapides’ companies, manufactured
and sold screen-printed shirts. The company was strug-
gling in 1996, operating at only 20 percent of its capacity.
Hoping to get the company out of this rut, Lapides
decided to purchase Winterland Concessions Company
through MML, Transcolor’s parent company (Lapides
had an ownership stake in MML as well). Winterland
held hundreds of licenses to print T-shirts of some well-
known rock stars—Madonna, Jimi Hendrix, and the
Doors to name a few. As part of this sale, Winterland
leased Transcolor’s unused equipment, providing Trans-
color with some much-needed revenue. Winterland then
turned to the defendants Gordon Brothers Group, Cerberus
Capital Management, and Madeleine for a cash infusion.
These defendants extended Winterland a short-term,
$23 million line of credit, secured by Winterland’s receiv-
ables, inventory, and licenses, as well as a personal guaran-
tee from Lapides himself.
 The line of credit turned out to be a disaster. With the
unpaid portions of the loan coming due, Winterland’s
No. 08-1981                                                3

financial situation was becoming increasingly precarious.
Winterland’s chief financial officer, Carl Kampel, met
with Gordon Brothers’ president and learned that Gordon
Brothers was targeting Winterland for a takeover. The
president of Gordon Brothers promised Kampel that if
the defendants got control of Winterland he could keep
his job and receive an equity stake in the company.
Kampel thought the offer was good and began surrepti-
tiously helping the defendants gain control. He sabo-
taged Winterland’s relationships with its suppliers and,
with the help of the defendants, stymied Winterland’s
efforts to find alternative financing. By the spring of 1997,
Lapides got wind of Kampel’s disloyalty and confronted
him. Kampel confessed to the agreement he had with
Gordon Brothers and was fired for his double-crossing.
But the damage was already done. Winterland could not
get its hands on alternative financing and so it was
forced to accept a deal with Gordon Brothers and
Cerberus, which extended the 1996 line of credit but gave
the financiers an 80 percent ownership interest in
Winterland. But all was not lost—Gordon Brothers and
Cerberus promised (although not in writing) that they
would stay out of Winterland’s operations for at least
one year.
  But Gordon Brothers and Cerberus allegedly (again,
everything we are saying comes from the plaintiffs, and
of course we don’t vouch for its accuracy) went back on
their word. In August 1997, just a few months after the
refinancing deal was inked, Gordon Brothers and Cerberus
placed Winterland in bankruptcy. And the bankruptcy
allegedly sparked a huge financial fallout. While in bank-
4                                             No. 08-1981

ruptcy, Winterland was relieved of its obligation to pay
its lease with Transcolor. By then, the lease payments
were Transcolor’s only source of revenue, so by 1998
Transcolor itself was forced into bankruptcy. Transcolor’s
bankruptcy meant that it could not make good on loans
it had received from Lapides and his other corporations,
like Valley Rivet. In 2000, Valley Rivet went under in the
wake of Transcolor’s bankruptcy, which imperiled its
holding company, VR Holdings, another company in
which Lapides had an ownership interest. Because of
Valley Rivet’s bankruptcy, VR Holdings could not fulfill
its pledge, made in 1998, to donate $80 million to the
Cancer Foundation.
   Transcolor’s bankruptcy was also bad news for the 21
individual plaintiffs named in this suit who held senior
secured notes originally issued by one of Transcolor’s
sister corporations, but upon which Transcolor eventu-
ally became jointly and severally liable. Those notes were
in default by 1998, and the trustee for the note holders
filed suit against Lapides, Transcolor, and the sister
corporation, seeking recompense. In 2001, during that
trial, Kampel testified that Gordon Brothers and Cerberus
had arranged to sell Winterland. Lapides lost that suit
and was found personally liable to the note holders for
$7 million.
  In July 2007, the plaintiffs began this suit by filing a
complaint which alleged that the defendants, along with
Kampel, conspired to wrest control of Winterland and
engaged in racketeering activity in furtherance of this
scheme. The defendants immediately questioned the
No. 08-1981                                                5

suit’s timeliness and responded by writing a letter to
plaintiffs’ counsel, explaining that they intended to
move for sanctions under Federal Rule of Civil Procedure
11 if the complaint was not withdrawn within the 21-day
safe-harbor period. See Fed. R. Civ. P. 11(c)(2). The plain-
tiffs did not withdraw their complaint and, true to
their word, the defendants moved for sanctions.
  Shortly after this motion was filed, and well outside the
safe-harbor period, the plaintiffs filed an amended com-
plaint, which tracked, for the most part, the factual allega-
tions in the first complaint. But the amended complaint
added that Gordon Brothers’ “ultimate intent to take
over Winterland was concealed from Lapides and
Winterland management until an article appeared in the
July 3, 2006 issue of Forbes magazine . . . .” Through that
article, Lapides allegedly learned that Third Avenue
Value Fund and its president, Martin Whitman (defendants
in this case), decided to invest and take over “small cap
companies” in 1997, the same year that Lapides lost con-
trol over Winterland. Third Avenue was introduced to
Winterland as a possible alternative lender when
Winterland was seeking refinancing to cover the line
of credit. Apparently, only after reading this article
Lapides realized that Third Avenue had been in cahoots
with Gordon Brothers, Cerberus, and Madeleine all along.
   The defendants felt that the new factual allegations
added nothing to the complaint and reiterated to plain-
tiffs’ counsel their belief that the suit was frivolous. This
time, before the safe-harbor period was up, plaintiffs’
counsel sought leave to withdraw from the case. Counsel
6                                               No. 08-1981

explained that he had recommended that the plaintiffs
withdraw the amended complaint, but they had refused
to do so. Counsel was granted leave to withdraw, and
the defendants then filed a second Rule 11 motion. The
plaintiffs eventually acquired new counsel who argued
that they did not fully appreciate the defendants’ con-
spiracy to take over Winterland until Lapides read the
Forbes article, which illuminated the fact that Third
Avenue was targeting small companies for takeovers. In
their reply, the defendants argued that the plaintiffs
mischaracterized the article and that, in any event, it
was irrelevant. The defendants also pointed out that
Lapides’ earlier efforts to seek judicial relief for
Winterland’s bankruptcy undermined the plaintiffs’
current attempts to disclaim knowledge of the con-
spiracy until 2006. In 1997, while Lapides was still
working there, Winterland sued Kampel for his disloyal
actions. Transcolor also sued Gordon Brothers, Cerberus,
and Madeleine for placing Winterland in bankruptcy
and rejecting their lease agreement, a suit that was dis-
missed in 2001. See In re Transcolor Corp. v. Cerberus Part-
ners, L.P., 258 B.R. 149 (Bankr. D. Md. 2001).
  The district court concluded that the suit was untimely,
reasoning that it was “abundantly clear from the face of
both the original and amended complaints that plaintiffs
were aware that they had been injured and aware of the
existence of the alleged conspiracy by 1997, or at the very
latest, by 2001.” Having dismissed the RICO claims, the
district court declined to exercise jurisdiction over the
state law claims raised in the complaint. The court, how-
ever, declined to impose sanctions on plaintiffs’ counsel.
No. 08-1981                                                 7

The plaintiffs, with the help of new appellate counsel,
appeal. The defendants have elected not to appeal the
order denying their request for sanctions.
   The statute of limitations for a civil RICO cause of action
is a fairly generous four years. It begins to run when
the plaintiffs discover, or should, if diligent, have dis-
covered, that they had been injured by the defendants.
Limestone Dev. Corp v. Village of Lemont, Ill., 520 F.3d 797,
800 (7th Cir. 2008). A plaintiff does not need to know that
his injury is actionable to trigger the statute of limita-
tions—the focus is on the discovery of the harm itself, not
the discovery of the elements that make up a claim.
Rotella v. Wood, 528 U.S. 549, 555, 558 (2000) (statute of
limitations begins running even if the plaintiff is unaware
of the pattern of racketeering activity). Dismissing a
complaint as untimely at the pleading stage is an
unusual step, since a complaint need not anticipate and
overcome affirmative defenses, such as the statute of
limitations. But dismissal is appropriate when the plain-
tiff pleads himself out of court by alleging facts sufficient
to establish the complaint’s tardiness. Hollander, 457 F.3d
at 691 n.1.
  We agree with the district court—it is clear from the
face of the amended complaint that it is hopelessly time-
barred. The RICO counts are based on the defendants’
alleged conspiracy to defraud the plaintiffs by wresting
control of Winterland and absconding with its assets.
This purported plot was complete by 1997, a decade
before this suit began. By that time, the defendants had
acquired an 80 percent ownership interest in Winterland
8                                                     No. 08-1981

and placed it into bankruptcy. Transcolor, without lease
payments from Winterland, went bankrupt in 1998, which,
in turn, prevented it from paying back debts owed to
the plaintiffs, including the 21 senior note holders. By
2000, the time of Valley Rivet’s bankruptcy, VR Holdings
determined that it could not fulfill its $80 million dona-
tion pledge to the Cancer Foundation. This suit was filed
in 2007, seven years after all these events transpired,
well outside the statute of limitations. The plaintiffs try
to get around these facts by noting that they were
unaware of the defendants’ racketeering conspiracy
until much later. But that’s beside the point—it is the
discovery of the injury, not the elements of a particular
claim, that gets the clock ticking. Rotella, 528 U.S. at 555.
  The plaintiffs also try to beat the statute of limitations by
claiming that they could not have known about Third
Avenue’s role in the conspiracy before reading the 2006
article in Forbes. Appellate counsel for the plaintiffs
retreated from this argument during oral argument, and
rightly so. The argument is ridiculous. For starters, it is
based on a misreading (and that’s being generous) of the
article.1 In the amended complaint, the plaintiffs contend
that the article states that Third Avenue, through its
president, Whitman, decided to start taking over “small
cap companies” back in 1997, the same year Winterland

1
  We consider the article, which the defendants submitted to
the district court, as part of the pleadings because it is a central
component to the complaint. See Venture Assoc. Corp. v.
Zenith Data Systems Corp., 987 F.2d 429, 431 (7th Cir. 1993).
No. 08-1981                                                 9

was targeted. The article says nothing of the sort. It actu-
ally describes Whitman as a cantankerous but savvy
investor, in the twilight of his career, who, on the advice
of one of his prodigies, decided to start a separate fund to
invest in, not take over, small capital projects. The picks
were focused on makers of small-scale semiconductor
equipment who had large cash stashes and solid balance
sheets. Nothing in the article suggests that Third Avenue
was interested in taking over companies, or even that
it was interested in investing in small companies like
Winterland, a highly leveraged T-shirt manufacturer. The
article is irrelevant. What’s more, even if the plaintiffs’
description of the article was accurate, it would do them
little good. The article’s late date does not change the
fact that the takeover of Winterland—the injury at the
heart of this suit—was a fait accompli by 1997.
  In an attempt to salvage at least part of the complaint, the
plaintiffs also contend that the senior note holders and
the Cancer Foundation did not plead themselves out of
court, since no facts show that they knew who injured
them until recently. This argument is unconvincing. The
senior note holders knew of their injury by 1998, when
their notes were in default. The following year, the
trustee filed suit against Lapides on their behalf, and in
that suit Kampel testified that Gordon Brothers and
Cerberus had arranged a sale of Winterland. The defen-
dants’ takeover of Winterland formed the factual back-
drop of the trustee’s suit. The plaintiffs argue that this
suit only shows that the trustee, not the note holders
themselves, knew who was at the bottom of the scheme.
But the senior note holders were not allowed to bury their
10                                               No. 08-1981

heads in the sand—to know you’ve been injured and
make no effort to find out by whom is the very laxity
that statutes of limitations are designed to penalize.
United States v. Duke, 229 F.3d 627, 630 (7th Cir. 2000). Even
the most cursory investigation would have uncovered
the trustee’s suit, leading back to the defendants. The
same is true for the Cancer Foundation. It claims to
have lost a donation, pledged in 1998, which was doomed
by Valley Rivet’s bankruptcy in 2000. Those events tran-
spired seven years before this suit began, well outside
the statute of limitations.
   The plaintiffs make one last-ditch effort to save their
case. They contend that even if they filed their suit outside
of the statute of limitations, the defendants should be
equitably estopped from raising the complaint’s timeli-
ness as a defense. Equitable estoppel, sometimes known
as fraudulent concealment, “suspends the running of the
statute of limitations during any period in which the
defendant took active steps to prevent the plaintiff from
suing . . . .” Barry Aviation Inc. v. Land O’Lakes Mun.
Airport Comm., 377 F.3d 682, 689 (7th Cir. 2004) (citations
omitted). Classic examples include hiding evidence,
destroying evidence, or promising not to plead the
statute of limitations. In re Copper Antitrust Litig., 436
F.3d 782, 790-791 (7th Cir. 2006). The plaintiffs claim
that the defendants lulled them into inaction when
Winterland—which was then controlled by Gordon
Brothers and Cerberus—sued Kampel in 1997. The plain-
tiffs contend that as the majority owners, the defendants
put their stamp of approval on the suit against Kampel,
posing as the good guys while hiding their own roles
in the conspiracy.
No. 08-1981                                                    11

   This argument is untenable. The suit hid nothing. In
fact, the complaint filed against Kampel formed the basis
of the present suit—pages from that complaint are re-
peated, almost word for word, in the amended com-
plaint.2 Both complaints lay out the plot to wrest control
of Winterland, including Gordon Brothers’ assurances
that, if they were successful in taking over the company,
Kampel would keep his job and get a personal stake in
the company. Far from preventing the plaintiffs from
suing on time, the suit paved the way for the plain-
tiffs’ present litigation. The plaintiffs’ claim that the defen-
dants’ malfeasance was somehow obscured by the suit is
further belied by their own conduct. Transcolor, one of
Lapides’ companies, suspected these defendants were
up to no good early on—it previously filed an unsuc-
cessful suit against Gordon Brothers, Cerberus, and
Madeleine for causing Winterland to file bankruptcy and
reject the lease, which was adjudicated by 2001. Transcolor
Corp., 258 B.R. 149. The present suit, which was filed
nearly six years after Transcolor’s suit was finished, is too
late.
    Accordingly, the judgment of the district court is AFFIRMED.

2
   We take judicial notice of the complaint in Winterland Con-
cessions Co. v. Kampel, No. 97-2147 (D. Md. 1997), which is part
of the public record and part of the record in this case. Anderson
v. Simon, 217 F.3d 472, 474-75 (7th Cir. 2000).

                              3-19-09