After nearly three years of judicial ping pong and appeals by lawyers at Quinn Emanuel Urquhart & Sullivan representing Parmalat’s Italian bankruptcy trustee, Parmalat’s state law fraud and negligence claims against auditor Grant Thornton have been raised from the dead. In a per curiam ruling issued Tuesday, the U.S. Court of Appeals for the Second Circuit ruled that Manhattan federal district court judge Lewis Kaplan should have abstained from asserting jurisdiction over the litigation and must remand the Parmalat cases to state court in Illinois.
Judge Kaplan ruled in September 2009 that Parmalat’s claims against Grant Thornton LLP and Grant Thornton International were barred by the doctrine of in pari delicto, since Parmalat’s own officers were responsible for the massive fraud that brought the dairy conglomerate down in 2003. With Tuesday’s decision by the Second Circuit, that ruling is effectively tossed out the window, and Parmalat trustee Enrico Bondi and a Parmalat Cayman subsidiary can pursue their claims that Grant Thornton aided and abetted the fraud.
“We are very pleased with the decision, which reaffirms the position we took from the outset of the case-—namely that this matter belonged in the Illinois state courts,” said Quinn Emanuel’s Kathleen Sullivan, who represents Bondi.
Indeed, Sullivan has been arguing ever since Bondi’s case was removed to federal court in 2004 that it belonged in state court, and she pressed the issue twice before the Second Circuit, most recently at oral arguments in December opposite Grant Thornton counsel Linda Coberly of Winston & Strawn.
In the Second Circuit’s first ruling on the issue, in January 2011, the court found that Judge Kaplan gave too much weight to the complexity of the litigation and to the exigencies of Parmalat’s U.S. bankruptcy in refusing to remand the cases to Illinois, especially since the application of the in pari delicto doctrine to the case under Illinois state law was unclear.
Nevertheless, last September Judge Kaplan once again refused to let go of the cases, finding that transferring them to state court in Illinois would hold up the litigation and that his abstention was not mandatory.
The Second Circuit ordered Judge Kaplan to remand the cases on Tuesday, finding that he’d fixated on the question of “timely adjudication” in his rulings and had ignored much of the appellate panel’s earlier decision. “While some additional time will be expended by remanding these cases, that delay does not outweigh the substantial factors that militate in favor of abstention, namely the complexity of the state law issues, the deference owed to state courts in deciding state law issues where possible, and the minimal effect of the state cases on the federal bankruptcy action and on the administration of the underlying estates,” the court ruled.
We called Grant Thornton counsel Coberly of Winston & Strawn to ask what her client’s next steps would be, but she had no immediate comment. Grant Thornton sent us this statement: “We are confident that the state courts will agree with the federal district court’s determination, which was made after years of exhaustive discovery, that Parmalat and its representatives cannot sue based on their own wrongdoing.”
Parmalat subsidiary Parmalat Capital Finance Limited is represented by Diamond McCarthy. Strook & Strook & Lavan represents Grant Thornton International.
Sullivan and Coberly have quite the history of duking it in cases stemming from major fraud-induced bankruptcies. In October 2010 Coberly convinced the New York Court of Appeals that the in pari delicto doctrine barred another Sullivan client, Refco’s bankruptcy trustee, from bringing claims against Grant Thornton. “Indeed, the principle that a wrongdoer should not profit from his own misconduct is so strong in New York that we have said the defense applies even in difficult cases,” the court ruled in the Refco case. It’s too bad for Grant Thornton that Parmalat’s claims were brought under the laws of Illinois and not New York.