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Board of Trustees of Cummunity College District No. 508 v. Coopers & Lybrand

December 18, 2003


The opinion of the court was delivered by: Justice Kilbride


Docket No. 94676-Agenda 10-May 2003.

The Board of Trustees of Community College District No. 508 (Board) sued the accounting firms of Coopers & Lybrand (Coopers) and Arthur Andersen (Andersen). The Board sought more than $50 million in compensatory damages, allegedly resulting from the failure of those firms to discover and report to the Board inappropriate investments made by Phillip R. Luhmann, the treasurer and chief financial officer of City Colleges of Chicago (City Colleges). The Board sought damages in tort from both Andersen and Coopers, jointly and severally, and also sought damages resulting from breach of contract from both firms. Prior to trial, Andersen settled with the Board and the Board filed an amended complaint seeking relief against only Coopers. The jury found damages on the tort claim in the amount of $23 million, reduced to $12.65 million because of the Board's contributory fault. The jury also awarded damages on the Board's contract claim. Both parties appealed.

The appellate court affirmed. 333 Ill. App. 3d 225. We granted Coopers' petition for leave to appeal (177 Ill. 2d R. 315), and the Board seeks cross-relief (155 Ill. 2d R. 318). We granted the American Institute of Certified Public Accountants leave to file a brief as amicus curiae in support of Coopers. 155 Ill. 2d R. 345. We now affirm in part and reverse in part, and remand the cause to the trial court with directions.


The Board is a body politic and corporate created under the Public Community College Act (110 ILCS 805/1-1 et seq. (West 1994)). The Board operates and manages the City Colleges of Chicago. City Colleges is a public agency and its investment policies must comply with the Public Funds Investment Act (Investment Act) (30 ILCS 235/1 et seq. (West 2002)). Accordingly, in 1988, 1990, and 1992, the Board adopted resolutions authorizing its treasurer to invest City Colleges' funds only in instruments permitted by the Investment Act. The resolutions provided that the funds should be invested only in securities guaranteed as to payment of principal and interest by the full faith and credit of the United States of America. The securities were required to be of a type that would mature or be redeemable before funds were needed, in the opinion of the treasurer, to provide for the Board's expenditures. The investment policy directed that securities should generally be purchased with the intent of holding to maturity so as to minimize interest rate risk. Despite this clear mandate, the treasurer, Luhmann, invested in securities not authorized by the resolutions. Further, he repeatedly engaged in a practice known as "pairing off" securities, buying a security and expecting to sell it for a profit before he was required to pay for it.

In February 1994, the Board chairman, Ron Gidwitz, learned that Luhmann had violated the City Colleges' investment policy and declared a "financial emergency." Luhmann was terminated, and the Board instructed City Colleges to sell the securities that did not comport with the investment policy as soon as prudently possible.

In its original complaint, the Board alleged that during fiscal years 1991, 1992, and 1993, Luhmann invested in securities not authorized by the Board's investment policy and in violation of the Investment Act. Andersen audited City Colleges' financial statements for the fiscal years 1991 and 1992. Coopers audited the financial statements for fiscal year 1993. The complaint alleged that the failure of the auditors to identify and report Luhmann's investment policy violations to the Board amounted to a breach of each firm's duty to comply with generally accepted accounting procedures. The Board claimed that if it had been informed of the investment policy violations, it would have taken steps to respond and avoided a dramatic decline in the value of the securities, claimed to be in excess of $50 million and not discovered until 1994. Thus, the conduct of both accounting firms was alleged to be the proximate cause of City Colleges' financial losses, and the prayer for relief sought recovery against both firms, jointly and severally.

Although Luhmann's investment policy violations occurred throughout the fiscal years in question, the investments resulting in the precipitous losses were not made until both Andersen and Coopers had completed their audits. Thus, the gravamen of the complaint was that if either auditing firm had informed the Board that the securities in the City Colleges' portfolio violated its investment policy, the Board would have ended those investment practices. Hence, the later investments that ultimately resulted in the claimed losses would not have occurred.

Andersen and the Board settled prior to trial. The trial court found the settlement to be in good faith. The Board filed an amended complaint, deleting all references to Andersen and the 1991 and 1992 audits, but identical in all other respects to the original complaint.

Coopers asserted the affirmative defense of comparative fault. However, prior to trial, the court ruled that pursuant to the "audit interference" doctrine, only conduct by the Board affecting Coopers' preparation of the audit could be considered. Thus, Coopers was not permitted to argue that extensive evidence of the Board's oversight of Luhmann's investment activities and its knowledge of possible violations of investment policy supported a finding of contributory fault.

At trial, Board chairman Ronald Gidwitz testified that Luhmann furnished the Board with regular summaries of the current status of City Colleges' investments at various times during the fiscal year. Five reports were furnished during fiscal year 1993, showing the investments Luhmann had made, including treasury, Government National Mortgage Association (GNMA) Securities, and other agency mortgage-backed securities. The reports reflected wide fluctuations in securities from quarter to quarter, indicating that securities were not being held to maturity. No objection was raised by the Board to this practice.

Gidwitz admitted that he knew some mortgage-backed securities were not being held to maturity. He testified that Luhmann told him he had sold treasury bonds prior to maturity. He admitted making "mental notes" of these matters, intending to discuss them with Luhmann, but he never spoke with either Luhmann or Coopers about any investment noncompliance.

On October 9, 1993, shortly before the audit was concluded, Luhmann told Coopers that there had been no significant change in the investment portfolio since June 30, 1993. At another meeting, Luhmann and City Colleges' acting controller, Michael Wagner, represented to the auditors that there had been no significant events or transactions since the fiscal year-end that should be considered for inclusion or disclosure in the financial statements and that there were no significant new commitments or contingencies since the end of the fiscal year. Despite these representations, Luhmann testified at trial that City Colleges' portfolio changed after June 1993, a fact confirmed by Coopers' expert witness, Professor John McConnell.

City Colleges also furnished Coopers with a representation letter dated October 15, 1993, signed by Wagner, stating that City Colleges was not aware of any "violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency" and that "no matters or occurrences have come to our attention to the date of this letter that would materially affect the financial statements and related disclosure for the year ended June 30, 1993." Gary Seidelman, Coopers' engagement partner, testified that Coopers delivered its audit report on October 16, 1993, and that it would not have done so without the representation letter in hand.

The jury heard expert testimony regarding the financial losses caused by Luhmann's investment practices. Dr. Lisette Cooper, the Board's expert, attributed nearly $65 million in losses to Coopers' failure to monitor compliance with the investment policy and to advise the Board of the noncompliance. Coopers disputed that any losses resulted from its failure to comply with applicable professional accounting standards.

However, Coopers' investment expert, Dr. John McConnell, concluded that financial losses on securities purchased by Luhmann after June 30, 1993, but before Coopers finished its audit, amounted to approximately $23 million.

The jury returned a verdict for the Board, and both sides appealed, asserting various grounds for relief. The appellate court affirmed judgment on the verdict, rejecting Coopers' argument that the trial court erred in applying the audit interference doctrine, and holding that Coopers was not entitled to a setoff for the Andersen settlement. 333 Ill. App. 3d at 239, 241.

The appellate court also rejected the Board's contentions that it was entitled to a judgment notwithstanding the verdict on the issue of comparative fault and that the jury was improperly instructed on that issue. 333 Ill. App. 3d at 243. Those holdings are assigned as error in the Board's application for cross-relief.


Coopers asserts that it was improperly restricted in its ability to present evidence of the Board's contributory negligence by the trial court's application of the audit interference doctrine. Coopers argues that the doctrine is inconsistent with principles of comparative fault. Whether Illinois law limits the defense of contributory fault in cases against accountants is a matter of first impression for this court. Since this issue presents a question of law, our review is de novo. Woods v. Cole, 181 Ill. 2d 512, 516-17 (1998).

A. The Audit Interference Doctrine

The audit interference doctrine was first adopted by a New York court in National Surety Corp. v. Lybrand, 256 A.D. 226, 9 N.Y.S.2d 554 (1939). The court in National Surety held that the negligence of an employer who hires an accountant to audit the business is a defense only when it has contributed to the accountant's failure to perform his contract and to report the truth. National Surety, 256 A.D. at 235, 9 N.Y.S.2d at 563. The audit interference doctrine as announced in National Surety was applied in Illinois in Cereal Byproducts Co. v. Hall, 8 Ill. App. 2d 331 (1956). In Cereal Byproducts, the appellate court held that contributory negligence could not be asserted by the auditor when there was no evidence that the client interfered with the audit. Cereal Byproducts, 8 Ill. App. 2d at 336.

National Surety and Cereal Byproducts were decided long before this court abolished the doctrine of contributory negligence as an absolute bar to recovery and replaced it with comparative fault in Alvis v. Ribar, 85 Ill. 2d 1, 24-25 (1981). The comparative fault rule adopted in Alvis was modified by statute in 1986 when the legislature provided for a limitation on recovery in tort actions, as follows:

"In all actions on account of bodily injury or death or physical damage to property, based on negligence, or product liability based on strict tort liability, the plaintiff shall be barred from recovering damages if the trier of fact finds that the contributory fault on the part of the plaintiff is more than 50% of the proximate cause of the injury or damage for which recovery is sought. The plaintiff shall not be barred from recovering damages if the trier of fact finds that the contributory fault on the part of the plaintiff is not more than 50% of the proximate cause of the injury or damage for which recovery is sought, but any damages allowed shall be diminished in the proportion to the amount of fault attributable to the plaintiff." Ill. Rev. Stat. 1987, ch. 110, par. 2-1116, codified at 735 ILCS 5/2-1116. *fn1

Since the 1986 version of statute, in effect at the time the Board's cause of action accrued, was applicable only to "actions on account of bodily injury or death or physical damage to property," it arguably was not applicable to tort actions where recovery for economic loss is allowed, including actions arising from negligent representations made by one who is in the business of supplying information for the guidance of others in their business transactions. See, e.g., Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 86 (1982) ("[t]ort theory is appropriately suited for personal injury or property damage ***[;] [t]he remedy for economic loss *** lies in contract").

Therefore, the "pure" comparative fault rule announced in Alvis remained applicable to tort actions for recovery of economic loss, such as accounting malpractice actions. See, e.g., Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 159 Ill. 2d 137, 164 (1994) ("[t]ort law has traditionally afforded an avenue of recovery for accountant malpractice").

In 1992, the legislature added section 30.2 to the Illinois Public Accounting Act (Accounting Act) (225 ILCS 450/30.2 (West 1994)) to provide that the statutory comparative fault modifications apply to tort actions against accountants. The 1992 version of section 30.2, in effect at the time the Board's cause of action accrued, provided in relevant part:

"Contributory Fault. Except in causes of action based on actual fraud or intentional misrepresentation, the principles of liability set forth in Sections 2-1116 and 2-1117 of the Code of Civil Procedure shall apply to all claims for civil damages brought against any person, partnership, corporation, or any other entity certified, licensed, or practicing under this Act, or any of its employees, partners, members, officers, or shareholders that are alleged to result from acts, omissions, decisions, or other conduct in connection with professional services." 225 ILCS 450/30.2 (West 1994), amended by Pub. Act 89-380, §5, eff. August 18, 1995.

Coopers argues that the effect of section 30.2 is to treat economic loss identically with personal injury or property damage. Thus, according to Coopers, application of the audit interference doctrine would frustrate the plain meaning of section 30.2 because not all contributory fault of a plaintiff that is a proximate cause of an economic loss could be asserted as a defense. Instead, only contributory fault that affected or interfered with the audit could be considered. The appellate court rejected this argument, holding that the Accounting Act and the Code do not clearly express the intent to abrogate the audit interference doctrine, a part of Illinois common law. 333 Ill. App. 3d at 240-41. We agree with the appellate court that the trial court did not err in applying the doctrine.

The audit interference doctrine clearly has a foundation in Illinois common law. In Cereal Byproducts, the appellate court relied on National Surety in rejecting a contributory negligence defense unrelated to the negligence of accountants conducting an audit. Cereal Byproducts, 8 Ill. App. 2d at 336. Common law rights and remedies may, however, be repealed by the legislature or modified by court decision. People v. Gersch, 135 Ill. 2d 384, 395-97 (1990). It is well established that legislation intended to abrogate the common law must be clearly and plainly expressed. Maksimovic v. Tsogalis, 177 Ill. 2d 511, 518 ...

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