Appeal from the Circuit Court of Cook County. No. 97 CH 12129 (Transferred to Law Division) Honorable Sheldon Gardner, Judge Presiding.
The opinion of the court was delivered by: Justice Reid
The appellants, Prime Leasing, Inc. (Prime), and Wechsler & Co., Inc. (Wechsler), appeal the trial court's order which granted the defendants', Robert A. Kendig, David A. Brainard, Melvin J. Estrin, Abbey J. Butler, William A. Lemer, Harvey A. Fain, Alfred H. Kingon, Sheldon W. Fantle and C. Wayne Pyrant, motions to dismiss the plaintiffs' fourth amended complaint pursuant to sections 2-615 and 2-619 of the Illinois Code of Civil Procedure (735 ILCS 5/2-615, 2-619 (West 2000)). On appeal, the plaintiffs maintain their fourth amended complaint sufficiently pleads a cause of action for: (1) common law fraud, (2) negligent misrepresentation, (3) consumer fraud pursuant to the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 2000)), and (4) breach of fiduciary duty. For the reasons that follow, we affirm the decision of the trial court.
This matter arises out of the 1996 bankruptcy of Ben Franklin Retail Stores, Inc. (Ben Franklin). Ben Franklin consisted of a group of related corporations that were involved in various aspects of the "five and dime" retail business. Prime and Wechsler are creditors that were unable to collect their debts from Ben Franklin as a result of its bankruptcy.
Prime is a provider of financial services. Its services include the "leasing and rental of equipment, capital equipment and related items for commercial and marketing markets." Wechsler is a stock brokerage firm and during the relevant time period was a market maker and investor in Ben Franklin stocks and bonds.
Defendant Pyrant is a former credit manager at Ben Franklin and is represented by separate counsel on appeal. Defendant Brainard, the former senior vice president and chief financial officer of Ben Franklin, was never served and has never appeared in this action. Defendant Fantle is now deceased. Fantle's estate has neither been served with the appellants' fourth amended complaint nor has it filed an appearance in this action. The remaining six defendants, who were all former Ben Franklin directors, are represented by the same counsel and will be referred to herein as the Directors.
On December 23 1999, the appellants filed a six-count, fourth amended complaint which alleged: (1) fraud against Kendig, Brainard and Pyrant, (2) fraud against the Directors, (3) negligent misrepresentation against Brainard and Kendig, (4) negligent misrepresentation against the Directors, (5) consumer fraud, and (6) breach of fiduciary duty against the Directors.
The following statements represent the allegations made in the appellants' fourth amended complaint.
The appellants alleged that Wechsler purchased "several million dollars in Ben Franklin bonds" between 1995 and 1996. Before the purchase, Wechsler reviewed and relied on "publicly available financial information issued by [the] [d]efendants concerning Ben Franklin."
In the fall of 1995, on more than one occasion, Wechsler spoke with Brainard and Kendig, who was Ben Franklin's president, about the purported financial condition of Ben Franklin. Wechsler alleged that both Brainard's and Kendig's representations were materially false. The complaint states:
"Wechsler knew Ben Franklin's Revolving Credit Facility was asset based and secured by, among other things, short term accounts receivable. Kendig misrepresented to Wechsler Ben Franklin's net account receivables and availability under the Credit Facility and thus the true value and dating of the accounts receivable ***."
In November 1994, Ben Franklin loaned $4.94 million to Crafts Plus, Inc. (Crafts Plus), which evidenced a loan of $4.2 million and the conversion of $774,000 of accounts receivable owed to Ben Franklin. Crafts Plus began purchasing a significant amount of inventory from Ben Franklin, and in less than a year, over $6 million was past due.
The appellants maintained that the "[d]efendants should have disclosed the dating of the accounts receivable, should have set a reserve for bad debt for Crafts Plus, and should have disclosed that redating was authorized by management." The complaint alleged that the defendants' failure to disclose this information mislead the appellants as to the true value of Ben Franklin.
Prime entered into a merchandising management information system lease with Ben Franklin valued at $1.851 million, on May 7, 1996. Prime alleged that prior to entering into the leasing agreement, it "requested and received financial reports and other financial information *** from Ben Franklin and had additional conversations with Ben Franklin representatives regarding the financial condition of Ben Franklin." The complaint further states: "Brainard represented that all of the financial information provided to Prime was true and accurate. Based upon the financial reports given and the presentations made by the Ben Franklin representatives including Brainard, Prime approved and entered into the [l]ease with Ben Franklin."
The specific documents that Ben Franklin provided to Prime were Ben Franklin's Securities and Exchange Commission (SEC) form 10-Q for the nine-month period ending December 31, 1995, an internally prepared financial statement for the 11-month period ending February 28, 1996, hand-written comments from Brainard regarding what the company would report for the 12-month period ending March 31, 1996, and forecasted income and sales. The appellants alleged that "Ben Franklin supplied this documentation and information to Prime with the knowledge and consent of all [d]efendants."
The appellants allege that before the lease between Prime and Ben Franklin was executed or prior to Wechsler purchasing Ben Franklin bonds, Ben Franklin's financial reports were altered. Specifically, the financial reports were altered by "freshening" the dates of the accounts receivable and of inventory held by Ben Franklin and its wholly owned subsidiaries. "Freshening" consisted of the systematic, deliberate and/or reckless alteration of the "age" of accounts receivable, and also the alteration of the "age" of the inventory by selling year-old inventory to another Ben Franklin store and deeming it "new" in the second store on the company's financial reports.
The appellants alleged that the redating of accounts receivable was misleading and inconsistent with accounting practices and that Ben Franklin's failure to disclose this information was material to them. The appellants alleged that they were not provided a true and accurate picture of Ben Franklin's financial condition because of its practice of redating accounts receivable.
The appellants' fourth amended complaint states:
"The older an account receivable is, generally the less collectable it is. By redating accounts receivable, allowing the policy without adequate oversight, and ratifying such policy and nondisclosure *** each of the [d]efendants materially understated allowance for bad debt. The secret redating of large dollar amounts of receivables *** enabled the [d]efendants to extend the existence of Ben Franklin after its insolvency. In November 1996, after disclosure of its redating bec[a]me public, Ben Franklin adjusted its allowance for bad debt in connection with receivables from $1.4 million as of March 31, 1996 to $23.8 million as of September 30, 1996."
The complaint further alleged that prior to the execution of the lease between Prime, and before Wechsler purchased Ben Franklin bonds, "approximately $33.2 million of accounts receivable were in actuality over 75 days old, and, therefore, not likely to be collected."
The appellants alleged that Ben Franklin practiced freshening so as to enhance the appearance of the company's financial reports. Specifically, appellants maintained that Ben Franklin used financial reports to artificially inflate the financial condition of the company and thereby induce Prime to enter into the leasing agreement and to induce Wechsler to purchase Ben Franklin bonds. The appellants alleged that had they known of Ben Franklin's "undisclosed redating of inventory and invoices ...