Court Opinion

ID: 4689991
Source: CourtListenerOpinion
Date Created: 2021-05-25 21:01:05.006531+00
Date Added: 2024-06-11T08:04:57.291496
License: Public Domain

In the

        United States Court of Appeals
                   For the Seventh Circuit
                       ____________________

No. 20-3378
RICHARD JEFFERSON DEIBEL,
                                                    Plaintiff-Appellant,

                                    v.

LARRY HOEG,* AARON HOEG, and ROGER STEFFEN,
                                   Defendants-Appellees.
                       ____________________

          Appeal from the United States District Court for the
           Southern District of Indiana, Indianapolis Division.
    No. 1:18-cv-03791-TWP-MJD — Tanya Walton Pratt, Chief Judge.
                       ____________________

         ARGUED MAY 11, 2021 — DECIDED MAY 25, 2021
                       ____________________

    Before EASTERBROOK, RIPPLE, and KANNE, Circuit Judges.

    * Counsel for appellees represents that Larry Hoeg died “shortly be-
fore this appeal was filed.” Fed. R. App. P. 43(a)(3) provides that the ap-
pellant may proceed as if the death had not occurred but that substitu-
tion of parties must be accomplished under Rule 43(a)(1) in the court of
appeals. Both sides have ignored this requirement. Unless within ten
days Deibel files an appropriate motion for substitution under Rule
43(a)(1) we will dismiss Larry Hoeg as a party.
2                                                  No. 20-3378

    EASTERBROOK, Circuit Judge. In 1986 Richard Deibel, Larry
Hoeg, and Roger Steﬀen founded a ﬁltration business, which
they organized as Hy-Pro Corporation. Deibel became its
president and received 2,500 shares, representing 12.5% of
the authorized stock. Deibel guaranteed Hy-Pro’s payment
of a $100,000 debt to a bank. Within a year Deibel demanded
that Larry Hoeg leave. When Hoeg refused, Deibel quit. He
held onto his stock even after withdrawing from manage-
ment.
    Litigation ensued in state court. The suit was sejled, but
the sejlement was not reduced to writing. Deibel insists that
the sejlement had two terms: Hy-Pro would pay $15,000 to
a corporation that Deibel controlled and arrange with the
bank to release his guarantee. Hoeg and Steﬀen assert that
the sejlement had three terms: the payment, the release, and
Deibel’s surrender of his shares. It is unusual for outsiders to
own stock in closely held corporations, so the third term of
the sejlement (as Hoeg and Steﬀen depicted it) is not sur-
prising. Soon the parties were back in state court, disputing
the terms on which they had sejled their dispute. For rea-
sons that this record does not reveal, Indiana’s judiciary
closed the case without sejling the sejlement’s terms.
    Almost 30 years later, Deibel ﬁled this federal suit to re-
new his contention that the sejlement allows him to retain
his shares. The source of his new interest is the fact that Hy-
Pro was sold in 2017 for more than $20 million, and a 12.5%
cut of that would exceed $2.5 million. The suit is governed
by Indiana law, which sets a two-year period of limitations
for claims of this kind. See Ind. Code §34-11-2-4. Unsurpris-
ingly, the district court dismissed the suit as untimely. 2020
U.S. Dist. LEXIS 211455 (S.D. Ind. Nov. 12, 2020). But Deibel
No. 20-3378                                                  3

maintains that he was still an investor when the ﬁrm was
sold in 2017—and, if not, that a ﬁrm’s refusal to recognize
someone as an investor is a “continuing wrong” so that he
can sue any time until the end of the universe. The district
court thought that these contentions have neither factual nor
legal support, and we agree with that conclusion.
    Since 30 years is more than an order of magnitude great-
er than the two years allowed by state law, we need not pin
down the exact date on which Deibel’s claim accrued. It is
enough to identify the years in which potentially important
events occurred. The sejlement dates to 1992. Deibel did not
return his shares, and the lawyer representing Hoeg and
Steﬀen told them that Hy-Pro could cancel Deibel’s stock if
he continued to hold the certiﬁcates. Hy-Pro did just that;
Deibel has not been on the company’s books as a sharehold-
er since 1992. He protested in state court that he (or his ﬁrm)
had not received the agreed $15,000; counsel for Hoeg and
Steﬀen sent a check for the money and again demanded the
return of Deibel’s shares. The state court closed the case in
1993 after a conference (which was not transcribed).
    In 1993 Deibel’s lawyer sent him a lejer telling him that
Hy-Pro no longer considered him to be a shareholder. Coun-
sel sent a similar lejer in 1995, adding that if Deibel disa-
greed with Hy-Pro’s action he could return to court. In 1997
Deibel sent Hoeg a lejer complaining about what Deibel
called the “conversion” of his stock. The same year Deibel
received a lejer from the Internal Revenue Service telling
him that Hy-Pro did not deem him a shareholder. That was
signiﬁcant because Hy-Pro was a Subchapter S corporation.
It had taken advantage of a provision permijing corpora-
tions with ten or fewer shareholders to be treated as equiva-
4                                                   No. 20-3378

lent to partnerships. A Subchapter S corporation does not
pay income tax, but it must report its proﬁt and allocate that
amount among the investors, who owe tax on their portions
whether or not the corporation pays dividends. Deibel had
been reporting himself to the IRS as one of Hy-Pro’s share-
holders but had not reported either actual or imputed in-
come, because Hy-Pro, which did not view him as a share-
holder after 1992, had not told him what to tell the IRS. (Sub-
chapter S corporations must provide their investors infor-
mation about taxable income on form K-1, which Deibel had
not received since 1993.) Deibel took the IRS’s advice and
stopped identifying himself as one of Hy-Pro’s investors. Af-
ter January 1998 he never tried to learn from Hy-Pro how
much income a 12.5% owner should report, and he did not
pay federal tax on any of Hy-Pro’s proﬁts.
   Twenty years after ceasing to report to the IRS as an in-
vestor in Hy-Pro, Deibel ﬁled this suit. The district court
concluded that his claim accrued no later than 1998, when he
stopped telling the IRS that he was a shareholder in Hy-Pro,
thus demonstrating knowledge that he no longer owned
stock in Hy-Pro.
    As Deibel sees it, corporations in Indiana lack the author-
ity to cancel shares that investors have not returned—and,
since a corporation can’t do so (“ultra vires,” Deibel calls it),
then Hy-Pro didn’t do so and he must still be a shareholder.
This is wishful thinking. People and corporations commit
legal errors all the time. The existence of an error is a reason
for litigation, not a reason why the error couldn’t have hap-
pened and therefore must not have happened. The record
shows that Hy-Pro removed Deibel from its shareholder list
in 1992. He took 26 years to sue, making this litigation far
No. 20-3378                                                    5

too late unless a corporation’s refusal to recognize someone
as an investor is treated as a continuing wrong.
   A continuing injury may exist without a continuing
wrong. If A kicks B in the shin, B may ache for days—but the
time to sue starts running with the kick, not the last tinge of
pain. See, e.g., United States v. Kubrick, 444 U.S. 111 (1979);
PiBs v. Kankakee, 267 F.3d 592, 595 (7th Cir. 2001). Monthly
kicks to the shin would be continuing wrongs—one tort per
kick, each with its own period of limitations—but a continu-
ing hurt from any given kick does not aﬀect the time to sue.
    Federal law distinguishes not only between continuing
injury and continuing wrong, but also between discrete
wrongs and cumulative wrongs. National Railroad Passenger
Corp. v. Morgan, 536 U.S. 101 (2002), illustrates the diﬀerence.
The Court held that each discrete act—say, a refusal to hire
someone—has its own period of limitations, even if the same
defendant commits a series of similar acts. But when it takes
multiple acts to add up to a single wrong—say, a course of
harassment that in the aggregate may create discriminatory
conditions of employment—the time to sue runs from the
last such act rather than the ﬁrst, because it takes multiple
similar events to justify litigation. See also Turley v. Rednour,
729 F.3d 645, 654–55 (7th Cir. 2013) (concurring opinion). In
Morgan’s framework, the cancellation of shares is a discrete
wrong, and the time for suit begins immediately.
   We have been using illustrations drawn from federal law,
and Indiana could take a diﬀerent approach. It doesn’t, as far
as we can see, but then it has never considered when a claim
based on a corporate freezeout accrues. (“Freezeout” is a
word often used to describe the exclusion of a minority in-
vestor.) Because Indiana is among the many states whose
6                                                         No. 20-3378

corporate law is based on the ABA’s Model Business Corpo-
ration Act, we looked at how other states using the model act
treat freezeouts. The dominant rule is that the claim accrues
when the exclusion occurs. Here’s a statement from the Su-
preme Court of New Hampshire:
    The Houle court determined that a cause of action for freeze-out
    arose at a speciﬁc time: when the defendant shareholders noti-
    ﬁed the plaintiﬀ shareholder of their decision to exclude him
    from a business venture. We concur with this reasoning and con-
    clude that the wrongdoing alleged by the petitioner in this case
    is not a continuing wrong.

Thorndike v. Thorndike, 154 N.H. 443, 447 (2006), citing Houle
v. Low, 556 N.E.2d 51, 53 (Mass. 1990). North Carolina
agrees. StraBon v. Royal Bank of Canada, 211 N.C. App. 78, 87
(2011) (the continuing-wrong doctrine does not apply be-
cause “the continued deprivation of shareholder rights and
nonpayment of dividends were not continual violations, but
rather ‘continual ill eﬀects’ of the conversion”). One state has
found Thorndike distinguishable when a course of oppressive
conduct occurs (a cumulative-violation situation). See Baur v.
Baur Farms, Inc., 780 N.W.2d 249 (Iowa App. 2010) (nonprec-
edential). None of the cases we have located treats a simple
freezeout as a continuing wrong, so we predict that Indiana
will not do so either.
   Deibel was injured in 1992 when Hy-Pro cancelled his
shares. The nature of that injury sank in no later than 1998.
Waiting another 20 years to complain is far too long.
                                                            AFFIRMED