In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-‐‑1986
RONALD R. PETERSON, as Trustee for the estates of Lancelot
Investors Fund, Ltd., et al.,
Plaintiff-‐‑Appellant,
v.
MCGLADREY LLP, et al.,
Defendants-‐‑Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 10 C 274 — Elaine E. Bucklo, Judge.
____________________
ARGUED APRIL 16, 2015 — DECIDED JULY 7, 2015
____________________
Before BAUER, EASTERBROOK, and SYKES, Circuit Judges.
EASTERBROOK, Circuit Judge. Gregory Bell established five
mutual funds (“the Funds”), raised about $2.5 billion, and
invested most of the money in vehicles managed by Thomas
Petters, who said that he was financing Costco’s consumer-‐‑
electronics inventory. Instead he was running a Ponzi
scheme, which collapsed in September 2008. Both Bell and
Petters have been sent to prison for fraud (Bell threw in his
2 No. 14-‐‑1986
lot with Petters in 2008). Ronald Peterson was appointed as
the Funds’ trustee in bankruptcy to conserve what assets
remained and recover additional assets from solvent parties
who may have borne some of the fault.
Trustee Peterson has filed multiple suits, which have led
to three decisions (so far) by this court. Peterson v. McGladrey
& Pullen, LLP, 676 F.3d 594 (7th Cir. 2012) (McGladrey I); Pe-‐‑
terson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013); Pe-‐‑
terson v. Winston & Strawn LLP, 729 F.3d 750 (7th Cir. 2013).
The current appeal is McGladrey II.
McGladrey & Pullen (now known as McGladrey LLP)
was one of the Funds’ auditors. (There are other defendants;
we use McGladrey as the example to simplify the exposi-‐‑
tion.) It did not perform the sort of spot checks that would
have revealed that Petters had no business other than recy-‐‑
cling investors’ funds while skimming some off. Trustee Pe-‐‑
terson contends that McGladrey is liable to the Funds under
Illinois law for accounting malpractice; McGladrey insists
that, if it is culpable, so are the Funds, and that the doctrine
of in pari delicto blocks liability. We explained in McGladrey I
that this doctrine rests on “the idea that, when the plaintiff is
as culpable as the defendant, if not more so, the law will let
the losses rest where they fell.” 676 F.3d at 596. See also Pin-‐‑
ter v. Dahl, 486 U.S. 622 (1988).
We held three things in McGladrey I: (i) that McGladrey
cannot be liable to the Funds for failing to detect and reveal
what Bell himself knew; (ii) that at this stage of the litigation
Bell cannot be charged with knowing about Petters’s fraud
in 2006 and 2007, just because he joined it in 2008; and (iii)
that federal bankruptcy law does not supersede a state-‐‑law
in pari delicto defense. We remanded so that the district court
No. 14-‐‑1986 3
could resolve McGladrey’s defense after developing a factu-‐‑
al record about the state of Bell’s knowledge in 2006 and
2007.
Back in the district court, McGladrey took a new tack. In-‐‑
stead of trying to show that Bell was in on Petters’s scam be-‐‑
fore 2008, McGladrey contended that Bell had committed a
fraud of his own. The documents that the Funds sent to po-‐‑
tential investors represented that the money the Funds lent
to the Petters entities was secured by Costco’s inventory and
that repayment would be ensured by a “lockbox” arrange-‐‑
ment under which Costco would make its payments into ac-‐‑
counts that the Funds (rather than Petters) would control.
Bell has admitted that this is not how the arrangement
worked, and that he knew this from the outset. The money
in the accounts came, not from Costco, but from a Petters en-‐‑
tity known as PCI. This meant that the Funds had no assur-‐‑
ance that Costco was the source of the money placed in the
lockbox accounts, and no assurance that Petters would con-‐‑
tinue paying. Indeed, it was materially misleading to use the
word “lockbox,” which in commercial factoring is under-‐‑
stood as a device to ensure that third parties do not intercept
the merchant’s payments. Yet, Bell concedes, he caused the
Funds to lie to actual and potential investors, thinking (no
doubt correctly) that they would feel more secure if they be-‐‑
lieved that money came directly from Costco and that re-‐‑
payment was outside Petters’s control.
The district court concluded that the Funds’ misconduct
(the documents were issued in the Funds’ names and are
their responsibility, see Janus Capital Group, Inc. v. First De-‐‑
rivative Traders, 131 S. Ct. 2296 (2011)) was at least equal in
gravity to McGladrey’s, if not a greater fault—for the Trustee
4 No. 14-‐‑1986
does not accuse McGladrey of fraud. What’s more, the court
concluded, the Funds’ representations and McGladrey’s er-‐‑
rors (if any) led to the same loss: investors’ money went
down a rabbit hole. Either truth by the Funds (leading to
smaller investments), or McGladrey’s discovery of Petters’s
scam, would have protected the investors from loss during
2006 and 2007, when the Funds were growing rapidly. This
led the court to dismiss the suit against McGladrey and the
other defendants under the in pari delicto doctrine, without
considering whether McGladrey had failed to perform its
duties. Peterson v. General Electric Co., 2014 U.S. Dist. LEXIS
48688 (N.D. Ill. Apr. 8, 2014).
Trustee Peterson concedes that Bell and the Funds made
false statements to prospective investors (though the Trustee
denies that the falsity amounts to fraud). But he insists that
the pari delicto doctrine in Illinois applies only when the
plaintiff and the defendant commit the same misconduct. If
they commit different misconduct that contributes to a single
loss then, according to the Trustee, the pari delicto doctrine
drops out.
The Trustee does not refer to any case in Illinois stating
such a principle, however. He has found, and quotes, lots of
language saying that the doctrine applies when two parties
commit or abet a single wrong—see, e.g., Vine St. Clinic v.
Healthlink, Inc., 222 Ill. 2d 276, 297 (2006) (“the law will not
aid either party to an illegal act, but will leave them without
remedy as against each other”)—but he has not found any
decision holding or even saying in dictum that it applies only
when two parties participate in a single wrong.
As far as we can tell, Illinois regularly disallows litigation
between one wrongdoer (here, Bell and the Funds) and an-‐‑
No. 14-‐‑1986 5
other (here, McGladrey) whose acts may have added to the
loss or failed to reduce it. See, e.g., Gerill Corp. v. Jack L. Har-‐‑
grove Builders, Inc., 128 Ill. 2d 179, 206 (1989); Neuman v. Chi-‐‑
cago, 110 Ill. App. 3d 907, 910 (1982); Wanack v. Michels, 215
Ill. 87, 94–95 (1905). These decisions involve contribution or
equitable apportionment and do not use the phrase “in pari
delicto,” but they conclude that a wrongdoer cannot recover
compensation from a third party who may have made things
worse or missed a chance to avert the loss. Other decisions
in Illinois take the same view through still other language.
See Mettes v. Quinn, 89 Ill. App. 3d 77 (1980) (client cannot
recover from attorney for attorney’s advice to commit fraud,
when harm to plaintiff was the result of her own fraud); Rob-‐‑
ins v. Lasky, 123 Ill. App. 3d 194 (1984) (client cannot recover
from attorney for advice to establish residence outside of Il-‐‑
linois to avoid service of process).
The Supreme Court summed up the pari delicto doctrine
as comprising two principles: “first, that courts should not
lend their good offices to mediating disputes among wrong-‐‑
doers; and second, that denying judicial relief to an admitted
wrongdoer is an effective means of deterring illegality.”
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306
(1985) (footnote omitted). Both principles apply to a claim by
the Funds, which raised money via deceit, against an auditor
that negligently failed to detect a different person’s fraud.
(The Trustee is litigating on behalf of the Funds and is sub-‐‑
ject to all defenses McGladrey has against the Funds.)
All ways of looking at the subject lead to the same con-‐‑
clusion. The Trustee has not found any Illinois case saying
that the in pari delicto defense applies only when the two liti-‐‑
gants have committed the same wrong, as opposed to one
6 No. 14-‐‑1986
failing to mitigate the consequences of the other’s wrong.
And the Trustee has not found any case in Illinois recogniz-‐‑
ing liability under this situation, no matter what name ap-‐‑
plies.
Foreclosing all liability when two parties commit distinct
wrongs might seem to allow the failure of one safeguard to
knock out others. Corporate and securities law rely on both
managers and accountants to protect investors’ interests.
There would be a major gap in those bodies of law if, when
one turns out to be a scamp, then the other is excused from
performing his own duties, and investors are left unprotect-‐‑
ed. But that’s not the outcome of applying the pari delicto
doctrine to the Trustee’s suit. The Trustee stepped into the
shoes of the Funds, not the shoes of the investors. People
who put up money have their own claims.
Claims against Bell may not be worth much (he’s in pris-‐‑
on), and securities-‐‑law claims against the Funds for mis-‐‑
statements in the offering documents aren’t worth much ei-‐‑
ther (they’re bankrupt), but a claim against McGladrey may
offer some recompense, if the auditor was indeed negligent
or wilfully blind. See 225 ILCS 450/30.1(2); Tricontinental In-‐‑
dustries, Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824,
837–38 (7th Cir. 2007) (Illinois law); Kopka v. Kamensky & Ru-‐‑
benstein, 354 Ill. App. 3d 930, 935 (2004); Builders Bank v. Bar-‐‑
ry Finkel & Associates, 339 Ill. App. 3d 1, 7 (2003). Proceedings
on the investors’ claims have been stayed pending resolution
of the Trustee’s suit. It is time to bring the investors’ claims
to the fore.
AFFIRMED