In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 12‐2698
BANK OF AMERICA, N.A.,
Plaintiff‐Appellant,
v.
JAMES A. KNIGHT, et al.,
Defendants‐Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 303 — Robert W. Gettleman, Judge.
____________________
ARGUED JANUARY 25, 2013 — DECIDED AUGUST 8, 2013
____________________
Before EASTERBROOK, Chief Judge, and BAUER and KANNE,
Circuit Judges.
EASTERBROOK, Chief Judge. Bank of America lost about $34
million when Knight Industries, Knight Quartz Flooring,
and Knight‐Celotex (collectively Knight) went bankrupt. It
contends in this suit under the diversity jurisdiction that
Knight’s directors and managers looted the firm and that its
accountants failed to detect the defalcations. The parties
No. 12‐2698 2
agree that Illinois law supplies the rule of decision. The dis‐
trict court dismissed all of the Bank’s claims on the plead‐
ings. 875 F. Supp. 2d 837 (N.D. Ill. 2012).
Frost, Ruttenberg & Rothblatt, P.C., and FGMK, LLC,
were Knight’s accountants. They invoked the protection of
225 ILCS 450/30.1, which provides that an accountant is lia‐
ble only to its clients unless the accountant itself committed
fraud (which no one alleges here) or “was aware that a pri‐
mary intent of the client was for the professional services to
benefit or influence the particular person bringing the ac‐
tion” (§450/30.1(2)). The district court concluded that the
Bank’s complaint did not allege plausibly—see Ashcroft v.
Iqbal, 556 U.S. 662 (2009); Bell Atlantic Corp. v. Twombly, 550
U.S. 544 (2007)—that the accountants knew that Knight’s
“primary intent” was to benefit the Bank.
The complaint alleges that the accountants knew that
Knight would furnish copies of the financial statements to
lenders, including the Bank, but the district court observed
that auditors always know that clients send statements to
lenders (existing or prospective). The statute would be inef‐
fectual if knowledge that clients show financial statements to
third parties were enough to demonstrate that the client’s
“primary intent” was to benefit a particular lender. The dis‐
trict court cited Tricontinental Industries, Ltd. v. Pricewater‐
houseCoopers, LLP, 475 F.3d 824 (7th Cir. 2007) (Illinois law),
and Kopka v. Kamensky & Rubenstein, 354 Ill. App. 3d 930
(2004), for the proposition that an auditor’s ability to foresee
who would receive copies of a financial statement differs
from knowledge that a “primary intent” of the engagement
is to benefit potential recipients. Other cases support the
3 No. 12‐2698
same point. See, e.g., Builders Bank v. Barry Finkel & Associ‐
ates, 339 Ill. App. 3d 1 (2003).
The Bank recognizes that Tricontinental forecloses its
claim and asks us to overrule that decision. It is hard to see
what the Bank could gain from such a step. We can overrule
our own decisions but cannot change decisions of the state
judiciary. Kamensky and Builders Bank are as solidly against
the Bank’s position as anything in Tricontinental. For the Bank
to get anywhere, we would need not only to overrule Tricon‐
tinental but also to predict that the Supreme Court of Illinois
would repudiate decisions such as Kamensky and Builders
Bank from the state’s intermediate appellate court. Yet we
cannot see any reason to think that it would do so. Bank of
America does not point to anything the Supreme Court of
Illinois has written suggesting dissatisfaction with Triconti‐
nental, Kamensky, Builders Bank, and similar cases.
At oral argument, we asked the Bank’s lawyer what case
it principally relies on. The answer: Brumley v. Touche, Ross &
Co., 139 Ill. App. 3d 831 (1985). Brumley indeed holds that an
accountant can be liable to a client’s lenders, if the account‐
ant knows that the lenders might rely on the accountant’s
work. Brumley does not discuss §450/30.1, however, for the
very good reason that it hadn’t been enacted yet.
For many years Illinois followed the rule of Ultramares
Corp. v. Touche, 255 N.Y. 170 (1931) (Cardozo, C.J.), under
which accountants could not be liable to anyone other than
their clients. Brumley expands the set of persons who can re‐
cover from an accountant; §450/30.1, enacted the next year,
contracts it again—although the “primary intent” clause in
§450/30.1(2) allows suit by some third parties, while Ultra‐
mares cut off all third‐party claims. Decisions such as Builders
No. 12‐2698 4
Bank hold that accountants may be liable to third parties
when they know that the main reason a client engaged their
services was to have financial statements to present to poten‐
tial lenders. But Bank of America made its loans to Knight
before the accountant defendants prepared their reports. No
Illinois case holds that an auditor’s knowledge of an existing
loan demonstrates that the client’s “primary intent” in en‐
gaging the auditor’s services was to keep in the lender’s
good graces.
The client’s “primary intent” is irrelevant when the client
itself sues the accountant for malpractice. That led us to ask
why the Bank is the plaintiff. Why not the trustee in bank‐
ruptcy? 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 advanc‐
ing 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 out‐
right. A share of some recovery would be better than 100% of
nothing. But that’s the choice the Bank made.
“Why not use the bankruptcy process?” is a question that
runs through this litigation. The claims against defendants
other than the accountants, though phrased as contentions
concerning breach of fiduciary duties, unjust enrichment,
and so on, reduce to an allegation that the defendants ex‐
tracted funds from Knight while it was insolvent (or that
their extractions made it insolvent). The usual phrase for that
5 No. 12‐2698
conduct is fraudulent conveyance, and once again the trustee
could have pursued such a claim without encountering the
obstacles that led the district court to dismiss the Bank’s suit.
Our inquiry about why the Bank is pursuing an “unjust
enrichment” claim, rather than the trustee a fraudulent‐
conveyance claim under 11 U.S.C. §548, was met with the
declaration that nothing forecloses the Bank’s choice. True
enough, there’s no legal rule forbidding a creditor to seek a
recovery outside of a bankruptcy, but lots of legal rules make
it difficult. One of them, which the district court stressed, is
that a creditor can’t recover on behalf of a corporate borrow‐
er without using the form of a derivative suit, see Fed. R.
Civ. P. 23.1, which the Bank has not attempted to do. See
Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d
1339, 1349 (7th Cir. 1987); Mid‐State Fertilizer Co. v. Exchange
National Bank, 877 F.2d 1333 (7th Cir. 1989) (federal and Illi‐
nois law); Frank v. Hadesman & Frank, Inc., 83 F.3d 158 (7th
Cir. 1996) (Illinois law). A derivative suit, like a suit by the
trustee, would make recoveries available to all of the firm’s
investors; that’s what the Bank is trying to avoid.
The Bank can proceed in its own name to the extent that
it has an assignment of the claims the estate in bankruptcy
had against the directors and managers. And some (though
not all) of the Bank’s claims in this suit are included in an as‐
signment from the trustee. We need not determine just
which claims are included, because the district court dis‐
missed them as inadequately pleaded. The judge thought
that all of the Bank’s theories against everyone other than the
accountants depend on demonstrating that the defendants
committed fraud, and the judge held that the complaint
flunks the requirement of Fed. R. Civ. P. 9(b) that fraud be
No. 12‐2698 6
pleaded with particularity—which is to say, “the who, what,
when, where, and how: the first paragraph of any newspa‐
per story.” DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.
1990). The judge observed that the complaint “lumps all of
the defendants together, never describing which defendant
is responsible for what conduct or when each defendant par‐
ticipated in that unspecified conduct.” 875 F. Supp. 2d at 851.
According to the Bank, its claims do not depend on proof
of fraud, so Rule 9(b) is irrelevant. We need not decide, be‐
cause the problem the district court identified spoils the
complaint as a matter of normal pleading standards. Iqbal
and Twombly hold that a complaint must be dismissed unless
it contains a plausible claim. A contention that “the defend‐
ants looted the corporation”—without any details about who
did what—is inadequate. Liability is personal. An allegation
that someone looted a corporation does not propound a plau‐
sible contention that a particular person did anything wrong.
The Rules of Civil Procedure set up a system of notice plead‐
ing. Each defendant is entitled to know what he or she did
that is asserted to be wrongful. A complaint based on a theo‐
ry of collective responsibility must be dismissed. That is true
even for allegations of conspiracy. Although every conspira‐
tor is responsible for others’ acts within the scope of the
agreement, it remains essential to show that a particular de‐
fendant joined the conspiracy and knew of its scope. The
Bank’s complaint does not get even that far.
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. The Bank insists that the district judge
abused his discretion by dismissing the complaint with prej‐
7 No. 12‐2698
udice rather than allowing it to try again. But in court, as in
baseball, three strikes and you’re out.
The Bank was not making progress toward an acceptable
complaint; the district judge saw it become longer without
becoming more specific. And the Bank has not argued that it
needed discovery to supply particulars. As Knight’s princi‐
pal 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. Yet the briefs are as maddeningly vague as the
complaint. They go on and on about what defendants collec‐
tively did, without imputing concrete acts to specific liti‐
gants. Here’s a sample: “The Officers and the KE Board
caused and permitted the Knight Entities to make substan‐
tial, interest‐free, unsecured ‘loans’ and divert other assets to
KQF for no value and with the express recognition that such
liabilities would not be repaid. Additionally, they caused and
permitted the Knight Entities to incur substantial operational
expenses on behalf of KQF, including sales and marketing
support, management direction, and payment of employee
benefits and related support services. KQF never paid for
those services. Defendants caused the Knight Entities to
make these payments despite their admitted awareness of
the Knight Entities’ own liquidity crisis and related financial
troubles and without properly accounting for the related‐
party transfers.”
Rule 15(a) says that a party may amend its complaint
once as a matter of course. After that, leave to amend de‐
pends on persuading the judge that an amendment would
solve outstanding problems without causing undue preju‐
No. 12‐2698 8
dice to the adversaries. 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.
AFFIRMED