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RESOLUTION TRUST CORP. v. KPMG PEAT MARWICK

February 17, 1994

RESOLUTION TRUST CORPORATION, Plaintiff,
v.
KPMG PEAT MARWICK, PEAT MARWICK MAIN & CO., PEAT, MARWICK, MITCHELL & CO., and RONALD L. FRISKE, Defendants.


ALESIA


The opinion of the court was delivered by: JAMES H. ALESIA

Before the court is defendants KPMG Peat Marwick, Peat Marwick & Main & Co., Peat Marwick, Mitchell & Co., *fn1" and Ronald L. Friske's Motion to Dismiss portions of plaintiff Resolution Trust Corporation's Complaint.

 I. BACKGROUND

 This lawsuit is brought by the Resolution Trust Corporation ("RTC") to recover damages in excess of $ 50 million allegedly caused by defendants' negligence, negligent misrepresentation, breach of contract, and breach of fiduciary duty in auditing Horizon Federal Savings Bank (formerly First Federal Savings and Loan Association of Wilmette) ("Horizon"). The Complaint states the audits were for the year ending December 31, 1982, and for periods ended August 31, 1983, through August 31, 1988. (Complaint P 1) According to the Complaint, on January 11, 1990, the Director of the Office of Thrift Supervision determined that Horizon was insolvent and appointed the RTC as receiver. The RTC "thereby succeeded to all rights, title, powers and privileges of Horizon." (Complaint P 7) The RTC further alleges that "in its corporate capacity [it] acquired pursuant to a contract of sale all professional liability claims previously held by the RTC as receiver," and now purports to bring suit in that corporate capacity. (Complaint P 8)

 The Complaint alleges, in short, that Peat Marwick mishandled the auditing of Horizon during that financial institution's ill-fated journey through the 1980s, and in fact is legally responsible for that fate. Defendant Ronald L. Friske is alleged to have been a partner in Peat Marwick, who served as engagement partner on the work performed in connection with the August 31, 1983, through August 31, 1988, audits. (Complaint P 14) The Complaint ultimately asserts four separate claims for relief for negligence, negligent misrepresentation, breach of contract, and breach of fiduciary duty.

 Defendants now move to dismiss (1) those portions of each claim for relief relating to Peat Marwick's engagements to audit the 1982 and 1983 financial statements of Horizon; (2) the first claim for relief (negligence) in its entirety; and (3) the fourth claim for relief (breach of fiduciary duty) in its entirety. The first attack on the Complaint is based on statute of limitations. The second attack on the Complaint is based on the Illinois Moorman doctrine, establishing that "purely economic losses are not recoverable in a negligence action." Jerry Clark Equipment, Inc. v. Hibbits, 245 Ill. App. 3d 230, 236, 612 N.E.2d 858, 862, 183 Ill. Dec. 931 (1993) (citing Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 435 N.E.2d 443, 61 Ill. Dec. 746 (1982)), appeal denied, 152 Ill. 2d 560, 622 N.E.2d 1208, 190 Ill. Dec. 891 (1993). The third attack is based on the assertion that an independent auditor cannot be held to owe a fiduciary duty toward its client.

  A Rule 12(b)(6) motion to dismiss for failure to state a claim may be granted if it is beyond doubt that the plaintiff is unable to prove any set of facts that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957). The court must take all well-pleaded facts as true, and must view them in the light most favorable to the plaintiff. Ellsworth v. City of Racine, 774 F.2d 182, 184 (7th Cir. 1985), cert. denied, 475 U.S. 1047, 106 S. Ct. 1265, 89 L. Ed. 2d 574 (1986). Plaintiff furthermore is entitled to all reasonable inferences that can be drawn from the Complaint. Id.

 II. STATUTE OF LIMITATIONS ISSUES

 Defendants' first attack on the face of the Complaint is directed at certain time periods of alleged activity that defendants assert are outside the statute of limitations. Specifically, defendants argue that Peat Marwick's Complaint as to audit work for 1982 and 1983 is untimely.

 Plaintiff takes no issue with defendants' interpretation of the statutory scheme of limitations. The conflict here is over (1) whether plaintiff's pleadings on statute of limitations are too conclusory; and (2) whether plaintiff has adequately put defendants on notice of its theory that the Illinois discovery rule saves the allegations regarding the 1982 and 1983 work. See Knox College v. Celotex Corp., 88 Ill. 2d 407, 416, 430 N.E.2d 976, 980-81, 58 Ill. Dec. 725 (1981). In Illinois the running of the period of limitations starts when "the injured person becomes possessed of sufficient information concerning his injury and its cause to put a reasonable person on inquiry to determine whether actionable conduct is involved." Id. Because these points are the substance of the disagreement, the court will rule on merely those issues.

 As far as the initial sufficiency of plaintiff's pleadings, federal, not Illinois pleading requirements apply to this case. See Hanna v. Plumer, 380 U.S. 460, 465, 85 S. Ct. 1136, 1141, 14 L. Ed. 2d 8 (1965) (in diversity action, federal courts apply federal procedural law); Cleland v. Stadt, 670 F. Supp. 814, 816 (N.D. Ill. 1987) ("In a diversity action, we assess the adequacy of the pleadings under federal law, rather than the stricter requirements of Illinois law."). The federal rules require merely a "short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a)(2). Nor are any special pleading requirements to be imposed except where such a requirement is found in the federal rules. E.g., Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 122 L. Ed. 2d 517, 113 S. Ct. 1160, 1163 (1993) (The particularity requirement of Rule 9(b) implies that the rules impose no other particularity requirements.); see also Triad Assocs., Inc. v. Robinson, 10 F.3d 492, 497 (7th Cir. 1993). To the extent the authority defendants attach to their opening brief required that a plaintiff plead "with particularity" the facts underlying the invoking of a discovery rule, that court's decision would not follow from subsequent precedent binding this court, and therefore does not serve as persuasive authority for this court. See RTC v. KPMG Peat Marwick, No. SA CV 92-125, slip op. at 5 (C.D. Cal. July 17, 1992) (attached as Exhibit A to Defendants' Memorandum in Support of Motion to Dismiss).

 Plaintiff maintains, and the court agrees, that under federal pleading standards it survives the motion to dismiss as to statute of limitations. On the tort claims, the Complaint alleges that Peat Marwick's negligent practices, negligent misrepresentations and breaches of fiduciary duty "were not and could not have been discovered more than two years prior to January 11, 1990, the date on which the RTC was appointed receiver of Horizon." (Complaint PP 78, 86, 98) These pleadings, read in the totality of the Complaint (even if conceivably in a vacuum they are legal conclusions), sufficiently plead plaintiff's theory of statute of limitations for defendants' audits of years 1982 and 1983. Furthermore, the discussion thus far assumes plaintiff must affirmatively plead its compliance with the statute of limitations, a requirement all but entirely rejected by the Seventh Circuit. Tregenza v. Great American Communications Co., 12 F.3d 717, 1993 WL 529968, at *1 (7th Cir. 1993) (dicta). Under Tregenza's approach, a conclusory pleading would be sufficient, because no pleading at all would be sufficient. Since Tregenza involved a case where, as here, inquiry notice triggered the running of the limitations period, id. at *5-6, it would follow that facts establishing the date of inquiry notice would not have to be plead under the logic of Tregenza.

 Defendants also argue, however, that plaintiff has pleaded itself out of court on the statute of limitations issue, which a plaintiff may do where it affirmatively pleads facts that establish the statute of limitations bars its claim. Tregenza, 12 F.3d 717, 1993 WL 529968, at *1; Early v. Bankers Life & Casualty Co., 959 F.2d 75, 79 (7th Cir. 1992). Here, defendants claim plaintiff has pleaded away its theory that the Illinois discovery rule saves the 1982 and 1983 allegations, by pleading facts that establish plaintiff was put on inquiry early enough that the period had run by the time the RTC succeeded to the claims asserted here. The court has examined the paragraphs of the Complaint defendants have marshalled in support of this theory, and concludes plaintiff has not pleaded itself out of court.

 Defendants' first example of plaintiff having pleaded itself out of court is paragraphs 20 and 21 of the Complaint. Defendants claim that since paragraph 20 alleges that outside counsel for Horizon certified that a merger became effective November 15, 1982, and paragraph 21 alleges that based upon Peat Marwick's advice Horizon adopted a merger date of August 31, 1992, Horizon must have been on notice of any negligence related to this merger advice. Plaintiff's theory, allowing the plaintiff all reasonable inferences from the Complaint, is that Peat Marwick's advice to adopt the August 31 merger date despite the actual effective date of November 15 breached Peat Marwick's duties to Horizon. It is conceivable that inquiry notice that Horizon's injury was wrongfully caused could have come later than 1982. Peat Marwick offers another example, paragraphs 36 and 39 of the Complaint, where plaintiff alleges deficiencies in the work product of Peat Marwick. Defendants assert that Peat Marwick's financial statements should have put Horizon on notice of problems in Peat Marwick's 1982 advice. Perhaps so, but the Complaint does not compel that conclusion without reference to outside facts. Paragraph 56 is a closer call. In paragraph 56 plaintiff alleges that Peat Marwick made certain deletions to its 1983 draft management letter that described material weaknesses in internal controls of Horizon. These deletions, paragraph 56 alleges, "were made at the insistence of Horizon's management." (Complaint P 56) Defendants therefore raise a seemingly valid point: How could Horizon have failed to discover its injury or that it was wrongfully caused until 1988 or later under these circumstances? The answer to defendants' question for these purposes lies in recalling that this is a Rule 12(b)(6) motion to dismiss. Plaintiff is entitled to the reasonable inference that the interaction of Peat Marwick and Horizon during 1983 involved representations by Peat Marwick, and that any changes to a draft, even if initially suggested by Horizon's ...


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