Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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INDEPENDENT TRUST CORP. v. STEWART INFORMATION SERVICES CORP. (January 6, 2012)

For much of the 1980s and 1990s, Intercounty Title Insurance Company provided real estate closing and title insurance services in the Chicago area to Stewart Information Services. Lawrence Capriotti and Jack Hargrove controlled Intercounty. Stewart agreed to insure the escrow account that Intercounty managed as part of its service. Unfortunately, Capriotti and Hargrove used the escrow funds to invest in various moneymaking schemes -- and lost a lot of money. The escrow fund was $26 million in the hole by 1989. Stewart found out and pressured Intercounty to fix it. Capriotti and Hargrove "fixed it" by funneling millions of dollars from trusts held by InTrust, of which they were also directors. Stewart and Stewart's customers benefited from this transfer. The Illinois Commissioner of the Office of Banks and Real Estate began an investigation in 1994 but did not learn of the transfers until 2000. The Commissioner put InTrust into receivership. The receiver recovered millions of dollars in civil suits against Capriotti, Hargrove, Intercounty, and ITI Enterprises. In 2010, the receiver brought a multi-count complaint against Stewart. In response to a motion to dismiss on statute of limitations grounds, the receiver relied on the doctrine of adverse domination in arguing that the statute of limitations was tolled before 2000. Judge Darrah (N.D. Ill.) dismissed the claims on limitations grounds. The receiver appeals.

In their opinion, Seventh Circuit Judges Flaum, Kanne, and Hamilton affirmed. The Court first two made preliminary points. One, although the statute of limitations is an affirmative defense and need not be anticipated by the complaint, Rule 12(b)(6) dismissal is appropriate if the complaint itself sets out all the elements of the defense. Two, the Court will apply state law with respect to the statute of limitations as well as tolling and equitable estoppel to this state law claim. In Illinois, the doctrine of adverse domination tolls the statute of limitations for a claim by a corporation against its officers and directors for the period in which the officers and directors were in control. Illinois applies the doctrine against co-conspirators of the directors as well. The Court rejected the receiver's argument that the doctrine applies even without proof of a conspiracy. The Illinois appellate Court, in Larney, held that a conspiracy claim was unnecessary but that proof of complicity between the director and the defendant was necessary. The Illinois Supreme Court has not yet spoken. The district court was correct to rely on Larney and not make its own prediction about what the highest Illinois court would do. The Court also was not persuaded to extend Larney. The Court next rejected the receiver's argument that he met the Larney test. In order to meet that test, the receiver had to plausibly suggest (under Twombly) that Stewart agreed to participate in a common scheme to commit an unlawful act. The receiver alleged that Stewart received monthly financial statements from Intercounty, that it was aware of the improper use of escrow funds, that it did not terminate its agreement with Intercounty, that it knew it was at risk as the fund’s insurer, and that it pressured Intercounty to fix the problem. But what he did not allege was an agreement between Stewart and Intercounty. Stewart's failure to step in does not amount to a conspiracy. The adverse domination doctrine does not apply to Stewart and the receiver's claims are barred. The receiver also complains about the district court's dismissal with prejudice without leave to amend. A district court should normally give leave to amend freely, particularly in light of decisions like Iqbal and Twombly. But the receiver has offered nothing meaningful to suggest that it could overcome the deficiencies in its complaint. The district court did not abuse its discretion.