BofA Strikes Out in Pursuit of Bankrupt Firm

     (CN) – Bank of America cannot sue over an equipment maker’s bankruptcy that cost it $34 million, the 7th Circuit ruled, noting that “in court, as in baseball, three strikes and you’re out.”
     The manufacturer – consolidated companies Knight Industries, Knight Quartz Flooring and Knight-Celotex – filed for Chapter 11 bankruptcy after defaulting on the multimillion dollar loan in 2009.
     Bank of America claimed Knight’s directors and managers “looted the firm and that its accountants failed to detect the defalcations,” the federal appeals court noted.
     Knight accountants – Frost, Ruttenberg & Rothblatt and FGMK LLC – invoked protection under 225 ILCS 450/30.1, which “provides that an accountant is liable only to its clients unless the accountant itself committed fraud (which no one alleges here) or ‘was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action,'” the ruling states (parentheses in original).
     A federal judge dismissed all of the bank’s claims, however, finding that the third amended complaint did not plausibly allege that the accountants knew Knight’s “primary intent” was to benefit the bank.
     The 7 Circuit affirmed Thursday.
     “The client’s ‘primary intent’ is irrelevant when the client itself sues the accountant for malpractice,” Chief Judge Frank Easterbrook wrote for a three-person panel. “That led us to ask why the bank is the plaintiff. Why not the trustee in bankruptcy? A trustee inherits all of a bankrupt entity’s claims; a suit by the trustee would be treated just like a suit by Knight itself. But Knight was liquidated without the trustee advancing any claim against the accountants. We asked the bank’s lawyer at oral argument why it sued the accountants outside the bankruptcy rather than arranging for the trustee to bring the claim as part of the bankruptcy. The answer boiled down to the proposition that the bank wants everything for itself; it is unwilling to allow other creditors to lay hands on any money. The upshot of this attitude is that the claim fails outright. A share of some recovery would be better than 100 percent of nothing. But that’s the choice the bank made.”
     Defects in Bank of America’s amended complaints supplied a sufficient basis for dismissal of the claims, according to the eight-page ruling states.
     “The bank was not making progress toward an acceptable complaint; the district judge saw it become longer without becoming more specific,” Easterbrook wrote. “And the bank has not argued that it needed discovery to supply particulars. As Knight’s principal lender, and through the bankruptcy, the bank had ample access to Knight’s books and records.
     “Perhaps the bank could have shown, in its appellate briefs, that it is at last aware of the problem and able to fix the defects,” the ruling continues. “Yet the briefs are as maddeningly vague as the complaint. They go on and on about what defendants collectively did, without imputing concrete acts to specific litigants.”
     The panel called on the most fundamental rule of America’s Pastime to close the ruling.
     “The complaint that the District Court dismissed was the bank’s third try – and, at 87 pages, it was short on specifics though not on words,” Easterbrook wrote. “The bank insists that the district judge abused his discretion by dismissing the complaint with prejudice rather than allowing it to try again. But in court, as in baseball, three strikes and you’re out.”
     Under Rule 15(a), a party may amend its complaint “once as a matter of course,” according to the ruling.
     “After that, leave to amend depends on persuading the judge that an amendment would solve outstanding problems without causing undue prejudice to the adversaries,” Easterbrook added. “The bank was allowed to amend twice, and its lack of success in giving notice and framing a manageable suit allowed the district judge to conclude, without abusing his discretion, that this suit has reached the end of the road.”

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