Ritchie Capital Management, LLC v. McGladrey & Pullen, LLP
2019 IL App (1st) 180806-U
Ill. App. Ct.2019Background
- Plaintiffs are a group of investors/entities in the Lancelot hedge funds (which invested heavily in instruments tied to Petters); the Lancelot Funds filed bankruptcy beginning October 20, 2008 and a Chapter 7 trustee was appointed.
- The bankruptcy trustee sought to enjoin state-law suits against McGladrey (the auditors) as claims that belonged to the bankruptcy estate; the bankruptcy court in In re Lancelot Investors Fund, L.P. stayed at least some investor suits in 2009 and also relied on §105 powers; that injunction was dissolved September 15, 2015.
- Plaintiffs alleged McGladrey committed negligent/fraudulent auditing, negligent misrepresentation, breach of contract, aiding and abetting, conspiracy, and an Illinois Consumer Fraud Act violation arising from audits 2003–2008 (seeking very large damages in most counts).
- Plaintiffs waited to sue McGladrey until May 12, 2017. Defendants moved to dismiss under Ill. Sup. Ct. rules and §2‑619.1, arguing plaintiffs’ claims were barred by the two‑year limitations and five‑year repose under 735 ILCS 5/13‑214.2.
- The circuit court dismissed with prejudice on December 6, 2017, concluding plaintiffs should have sued when they were on notice in 2008 and that neither the Bankruptcy Code’s automatic stay nor any broad injunction tolled Illinois limitations; plaintiffs’ motion to reconsider was denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Bankruptcy Code automatic stay/statutory prohibition tolled Illinois limitations under 735 ILCS 5/13-216 | Lancelot bankruptcy triggered §362 automatic stay as to claims against McGladrey, so limitations tolled Oct 20, 2008–Sep 15, 2015 | Fisher and related precedent show automatic stay doesn’t reach non‑debtor third‑party claims like plaintiffs’—no statutory prohibition to trigger §13‑216 | Held: Automatic stay did not apply to these third‑party claims; §13‑216 not triggered by the bankruptcy filing. |
| Whether a bankruptcy‑court injunction or order (under §105) tolled limitations for all investors | The 2009 bankruptcy order effectively enjoined all investors from suing McGladrey until trustee finished; that order tolled the limitations period | The bankruptcy injunctions were case‑specific (applied to particular suits like McKinley/Tradex); no express order barred these plaintiffs’ claims, so no tolling | Held: No specific injunction or court order barred these plaintiffs’ suits; §105 injunctions are case‑specific and did not toll limitations here. |
| Whether plaintiffs were required to file (to give courts/trustee a chance to act) or were excused from filing due to risk of sanctions/void ab initio | Plaintiffs claim filing would have been void and risked sanctions under §362; thus they reasonably refrained from suing | Defendants say plaintiffs could have filed and allowed the bankruptcy court or trustee to intervene; other plaintiffs sued and were addressed case‑by‑case | Held: Plaintiffs had the option to file and seek prompt stay/relief; abstaining did not toll the statutes—failure to file meant limitations ran. |
Key Cases Cited
- Fisher v. Apostolou, 155 F.3d 876 (7th Cir. 1998) (automatic stay does not bar non‑debtor third‑party fraud claims; §105 injunction may be appropriate but is case‑specific)
- In re Lancelot Investors Fund, L.P., 408 B.R. 167 (Bankr. N.D. Ill. 2009) (bankruptcy court enjoined particular investor suits against McGladrey and relied on both §362 and §105 reasoning)
- Garbe Iron Works, Inc. v. Priester, 99 Ill. 2d 84 (Ill. 1983) (mechanics‑lien plaintiff excused from suing earlier where a necessary party was in bankruptcy; held not analogous here)