KDC Foods v. Gary, Plant, Mooty

KDC Foods, Inc. v. Gray, Plant, Mooty, Mooty & Bennett, P.A., No. 13-3678, --- WL --- (7th Cir. Aug. 15, 2014)
The Court held that the causes of action accrued when the debtor should have discovered the facts constituting the fraud and had sufficient information to make it aware of the need to investigate further. The Court found the the discovery should have occurred in April 2006 when the former counsel initially produced records showing the firm's relationship with the debtor's former CFO and the prior discussions about the possibility of an asset purchase by an entity he controlled. The Court reasoned that a these records sufficed to put a corporate actor like the debtor on notice of the existence of the facts underlying any potential fraud or conspiracy suit against the law firm. The Court also found that the record showed that the debtor actually had notice about the firm's potential liability no later than June 2006 when the debtor amended its petition to include the additional parties and counts.
Procedural context:
Appeal from the District Court for the Western District of Wisconsin granting summary judgment against bankruptcy estate on grounds that claims against its pre-petition counsel for common law fraud, conspiracy to commit theft by fraud, and civil conspiracy were barred by state statute of limitations; reviewed de novo.
After a Chapter 11 filing, an asset sale, and conversion to Chapter 7, debtor pursued suit for conspiracy to defraud against some of its officers and directors. In April 2006, the debtor's former counsel produced documents in the litigation that contained information about actions by and advice from that firm about certain shareholders and stock transactions, as well as options for a bankruptcy other transaction to facilitate acquisition of the debtor's assets by an entity controlled by the debtor's former CFO. In June 2006, the debtor added the former CFO and the asset purchaser as defendants, as well as fraud and conspiracy counts for relief. In September 2008, the debtor deposed the former attorneys and learned that they had been engaged by the asset purchaser in 2007 on unrelated matters. In 2010, the debtor prevailed against the CFO and others on civil conspiracy grounds. In July 2011, the attorney for the debtor's bankruptcy trustee recommended pursuing the former counsel by August 2011. A March 2012 demand to the law firm included a draft complaint. However, the debtor did not sue its former counsel until July 31, 2012. That action asserted that the law firm and attorneys engaged in a scheme with the debtor's former CFO to defraud the debtor from its assets by orchestrating pre-petition shareholder actions leading to an asset sale in Chapter 11 to an entity headed in part by the former CFO. The law firm defended on grounds that Wisconsin's applicable six year statute of limitations barred the suit. In response, the debtor claimed that it did not learn that the law firm was a potential conspirator until the June 2008 deposition when the former counsel disclosed representation of the asset purchaser.
Tinder, Hamilton, Kapala (sitting by designation)

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