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Adverse-Domination Doctrine Does Not Toll Statute of Limitations For Claims Committee Could Have Brought

In Gecker v. Estate of Flynn (In re Emerald Casino, Inc.), 2017 U.S. App. Lexis 14895 (7th Cir., August 11, 2017), the Chapter 7 trustee sued former casino officers, directors, and shareholders for, among other things, breaches of fiduciary duties in connection with the casino's loss of its gaming license. The breach of fiduciary duty cause of action accrued in 2001, but the Chapter 7 trustee did not sue until 2008, well-beyond the five-year statute of limitation under Illinois law. The Chapter 7 trustee argued that the statute of limitations was tolled under the adverse-domination doctrine, which tolls the statute of limitations for claims by a corporation against its officers and directors when the corporation is controlled by the wrongdoing officers or directors. The district court held that the adverse-domination doctrine was rebutted because the Chapter 11 creditor's committee had the knowledge, ability, and motivation to sue the directors and officers before the case was converted to Chapter 7, but elected not to do so. On appeal, the Chapter 7 trustee argued that the creditor's committee was unable to sue because it did not have derivative standing to assert the claims against the directors and officers. Further, the Chapter 7 trustee argued that the creditor's committee was not motivated to pursue the lawsuit because a sale of the gaming license was pending during the same time period. The Seventh Circuit rejected both arguments and affirmed the district court's decision. The fact that the bankruptcy court might have denied derivative standing to the creditor's committee was not sufficient to demonstrate that the creditor's committee was unable to sue. The Seventh Circuit also held that even if the creditor's committee lacked the motivation to sue, it did not alter the outcome because "would-be plaintiffs must live with their choice" and a plaintiff does not lack motivation to sue "just because its chosen course of action proved to be unsuccessful in the end."

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