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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Appellate Court Finds Plaintiffs' Claims Under Section 362 Not Automatically Stayed

By Rudolph J. Di Massa Jr. and Malcolm Bates
July 01, 2021

In Ritchie Capital Management v. McGladrey & Pullen, 2020 IL App (1st) 180806, 155 N.E.3d 597, reh'g denied (Apr. 29, 2020), appeal denied, 159 N.E.3d 935 (Ill. 2020), the Illinois Appellate Court affirmed a state trial court's order dismissing, as time-barred, a complaint filed more than nine years after the cause of action had accrued. In doing so, the appellate court found that the plaintiffs' claims had not been "automatically" stayed pursuant to Section 362 of the Bankruptcy Code. As a result, the statute of limitations applicable to those claims had not been tolled.

Background

In October 2008, a group of hedge funds known collectively as the "Lancelot Funds" filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. During the Chapter 7 case, several investors filed lawsuits related to the Lancelot Funds, seeking recovery from nondebtor third parties based on claims arising out of alleged professional malpractice. The Chapter 7 trustee administering the Lancelot Funds' bankruptcy estate opposed the investor actions under Section 541 of the Bankruptcy Code, arguing that the investors' claims against a group of accounting firms and their principals (collectively referred to herein as McGladrey) who had audited the Lancelot Funds pre-bankruptcy were property of the bankruptcy estate. The trustee asserted, therefore, that the investors' lawsuits were barred by operation of the automatic stay of Section 362 of the Bankruptcy Code. Nonetheless, one group of investors known as "McKinley" proceeded with its state court action against McGladrey for professional malpractice and negligent misrepresentation.

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