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Freeman, Freeman and Salzman, P.C. v. Lipper

June 23, 2004

[5] FREEMAN, FREEMAN AND SALZMAN, P.C., EMPLOYEES' PROFIT SHARING PLAN; LEE A. FREEMAN, JR.; BRENA AND LEE A. FREEMAN, SR., CHARITABLE ANNUITY LEAD TRUST; ESTATE OF BRENA D. FREEMAN; BRENA D. FREEMAN CHARITABLE TRUST; LEE A. FREEMAN, JR., IRREVOCABLE FAMILY TRUST; AND LEE A. FREEMAN, JR. CHARITABLE TRUST, PLAINTIFFS-APPELLANTS,
v.
KENNETH LIPPER; LIPPER AND COMPANY, INC.;LIPPER AND COMPANY, L.P.; LIPPER HOLDINGS, LLC, DEFENDANTS, PRICEWATERHOUSE COOPERS, LLP, DEFENDANT-APPELLEE.



[6] Appeal from the Circuit Court of Cook County. Honorable Lee Preston, Judge Presiding.

[7] The opinion of the court was delivered by: Justice South

[8]  This appeal arises from an order of the circuit court of Cook County dismissing plaintiffs' claims against defendant, PriceWaterhouse Coopers, LLP, alleging professional malpractice and negligent misrepresentation, pursuant to section 2-615 of the Illinois Code of Civil Procedure (735 ILCS 5/2-615 (West 2002)).

[9]  The facts as alleged in the complaint are as follows: plaintiffs were investors and limited partners in Lipper & Company, Inc., Lipper & Company, L.P., and Lipper Holdings, LLC (collectively the Lipper Funds), and invested large sums of money in the Lipper Funds. According to their partnership agreements, the Lipper Funds were required to have their annual financial statements audited by a public accounting firm and to certify the value of each partner's capital account on an annual basis. Defendant PriceWaterhouse Coopers (PWC) was engaged for the purpose of auditing these financial statements and certifying the value of each partner's capital account. Its last report was issued sometime in March 2001. For each year from 1995 through 2000 (the years at issue), PWC audited and certified the value of each plaintiff's capital account; prepared each plaintiff's income tax form (Schedule K-1) from the audited numbers; and delivered theses audits and income tax forms to each plaintiff . These audit opinions represented that the securities owned by the Lipper Funds were valued at fair value in accordance with generally accepted accounting practices (GAAP), and that the audits had been performed in accordance with generally accepted auditing standards (GAAS).

[10]   In 2002, BDO Seidman (BDO) was hired to revalue the Lipper Funds and the limited partners' interests from 1995 through 2001. As a result of BDO's revaluation, the limited partners, including plaintiffs, learned that some of their accounts had been revalued to zero and that others had been reduced by nearly 50%. Plaintiffs subsequently filed suit against the Lipper Funds and PWC. PWC filed a section 2-615 motion to dismiss on the grounds that plaintiffs were not in privity with them, and that the action was barred by section 30.1 of the Illinois Public Accounting Act (225 ILCS 450/30.1 (West 2002)). On August 26, 2003, the trial court dismissed the claims against PWC with prejudice on the basis that PWC did not owe a duty to plaintiffs. This appeal followed.*fn1

[11]   The issue before this the court is whether the trial court erred in granting PWC's section 2-615 motion (735 ILCS 5/2-615 (West 2002)) on the basis that it owed no duty to plaintiffs sufficient to sustain a cause of action for accountant malpractice or negligent misrepresentation. According to its written order, the trial court granted PWC's motion to dismiss because plaintiffs did not state a cause of action for either malpractice or negligent misrepresentation as a third-party beneficiary. In its written order, the trial court based its decision upon Gallagher Corp. v. Russ, 309 Ill. App. 3d 192 (1999), which involved a suit by a corporation and its employee pension benefit plan against a licensed actuary who furnished certifications between 1988 and 1993 to a retirement plan established by the corporation for its employees.

[12]   A motion to dismiss under section 2-615 of the Illinois Code of Civil Procedure (735 ILCS 5/2-615 (West 2002)) challenges only the legal sufficiency of the complaint. Jarvis v. South Oak Dodge, Inc., 201 Ill. 2d 81, 85 (2002). The critical inquiry is whether the allegations of the complaint, when considered in a light most favorable to the plaintiff, are sufficient to state a cause of action upon which relief may be granted. Jarvis, 201 Ill. 2d at 86. In ruling on a section 2-615 motion, a court must accept as true all well-pleaded facts in the complaint and draw all reasonable inferences therefrom which are favorable to the pleader. American National Bank & Trust Co. v. City of Chicago, 192 Ill. 2d 274, 279 (2000). A cause of action should not be dismissed on the pleadings unless it appears that no set of facts can be proved which will entitle the plaintiff to recover. Loftus v. Mingo, 158 Ill. App. 3d 733, 738 (1987). We review the dismissal of a complaint under section 2-615 de novo. Jarvis, 201 Ill. 2d at 86.

[13]   Section 30.1 of the Illinois Public Accounting Act was enacted in 1986 and controls the liability of accountants to third parties not in privity of contract with them. Chestnut Corp. v. Pestine, Brinati, Gamer, Ltd., 281 Ill. App. 3d 719, 722 (1996). The Act provides:

[14]   "No person, partnership or corporation licensed or authorized to practice under this Act or any of its employees, partners, members, officers or shareholders shall be liable to persons not in privity of contract with such person, partnership or corporation, for civil damages resulting from acts, omissions, decisions or other conduct in connection with professional services performed by such person, partnership or corporation, except for:

[15]   (1) such acts, omissions, decisions or conduct that constitute fraud or intentional misrepresentations, or

[16]   (2) such other acts, omissions, decisions or conduct, if such person, partnership or corporation was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action; provided, however, for the purposes of this subparagraph (2), if such person, partnership or corporation (I) identifies in writing to the client those persons who are intended to rely on the services, and (ii) sends a copy of such writing or similar statement to those persons identified in the writing or statement, then such person, partnership or corporation or any of its employees, partners, members, officers or shareholders may be held liable only to such persons intended to so rely, in addition to those persons in privity of contract with such person, partnership or corporation." 225 ILCS 450/30.1 (West 2002).

[17]   This court has previously held that a third party may state a cause of action under the statute even though there is no writing. However, when the accountant writes to no one, the plaintiff must show the intent of the client and knowledge of the accountant of that intent. Chestnut Corp., 281 Ill. App. 3d at 724. Thus, we must examine the allegations of the complaint to determine whether plaintiffs' satisfied the primary intent rule.

[18]   In Gallagher, the case upon which the trial court relied, another division of this court found that the complaint in that case did not sufficiently meet the primary intent rule. While the complaint stated that the accountant, Russ, prepared the actuarial valuations "for the plaintiffs use" in determining the amounts necessary to meet the plan's funding obligations, the other allegations in the complaint contradicted the notion that Russ was engaged by its client with the primary intent or purpose of benefitting plaintiff; rather, his engagement was only for the benefit of the plan, not to protect plaintiff's financial health. Gallagher, 309 Ill. App. 3d at 198.

[19]   In order for us to determine whether the instant complaint sufficiently meets the primary intent rule, a detailed examination of those allegations pertaining solely to PWC is required.

[20]   Counts V and VI of the complaint were directed solely against defendant PWC. In count V, plaintiffs alleged that PWC committed professional malpractice by conducting its audits contrary to GAAS and GAAP, the professional standards that governed its audits. Plaintiffs argued that PWC breached its duty of care to the limited partners and that it knew that the limited partners relied on its audit reports. The complaint alleged that PWC sent to each partner, including all plaintiffs, a copy of each fund's financial statements and the related audit opinions, supplementary Schedule 1, which set forth the value of each partner's capital account based on the market value of each asset in the fund. The claims were that plaintiffs relied on ...


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