Known Unknown: 7th Cir. Uses Heightened Discovery Rule for Wisconsin Businesses

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In a case decided last Friday, KDC Foods v. Gray, Plant, Mooty, Mooty & Bennett, P.A., No. 13-3678 (7th Cir. Aug. 15, 2014), the Seventh Circuit warned companies not to expect much leeway from statutes of limitation under Wisconsin law.

The court used a heightened discovery-rule standard—one that asks ”when a reasonable corporate actor would have had enough knowledge”—that accounts for the often greater sophistication of corporate litigants.

KDC Foods hired a new CFO in March 2004, only to see him leave eight months later. The CFO had enough time to engage a law firm for KDC, but days after he left, the law firm resigned, and KDC’s assets were sold in bankruptcy to First Products, Inc.—the former CFO’s new company.

KDC’s estate pursued litigation against various directors and officers for conspiracy to defraud the company by driving it into bankruptcy and then scooping up its assets at depressed prices. As part of that lawsuit, in early 2006, KDC requested and received (most of) the law firm’s file, including a number of documents arguably linking the law firm to an active role in the scheme. The former CFO and First Products were joined as defendants in June 2006.

But KDC did not file suit against the law firm until July 31, 2012. The new suit alleged that the firm had helped the then-CFO drive KDC out of business, asserting fraud and conspiracy claims. Judge Barbara Crabb of the Western District of Wisconsin applied Wisconsin’s six-year statute of limitations (Wis. Stat. § 893.93(1)(b)) to bar the claims.

The Seventh Circuit affirmed. In an opinion by Judge Tinder, the case turned on application of the discovery rule. When did the six-year period begin to run? Under Wisconsin law, the clock “began to run as soon as KDC had in its possession knowledge that would cause a reasonable person to think that a diligent investigation into [the law firm] was necessary.”

And when was that? KDC pointed to the September 2008 depositions of two lawyers at the firm, who disclosed that the firm had begun working for First Products in 2007 in unrelated matters. The Seventh Circuit disagreed. It found that the clock started ticking in April 2006, when KDC’s counsel received the law firm’s client file.

What was most striking was the court’s discussion of the discovery-rule standard. “[T]he degree of certainty that constitutes sufficient knowledge is variable, depending on the facts and circumstances of the plaintiff.” “[W]ith corporate players, a different quantum of expertise and knowledge is in play.”

The court refused to permit KDC “a more forgiving application of the discovery rule,” one that would require “initial suspicion” to trigger discovery.

Corporate litigants in Wisconsin should take note.

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Topics:  Discovery, Discovery Rule, Professional Liability, Statute of Limitations

Published In: Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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