The opinion of the court was delivered by: Justice Garman
JUSTICE GARMAN delivered the judgment of the court, with opinion.
Justices Freeman, Thomas, Karmeier, and Burke concurred in the judgment and opinion.
Justice Theis concurred in part and dissented in part, with opinion, joined by Chief Justice Kilbride.
¶ 1 On July 6, 2009, plaintiffs Shahid R. Khan, his wife, Ann C. Khan, and various of their business entities filed a multicount complaint in the circuit court of Champaign County against defendants for losses incurred in connection with a series of investment strategies entered into in 1999 and 2000, a primary purpose of which was to create artificial tax losses for plaintiffs. Instead, the Internal Revenue Service (IRS) disallowed the resulting tax losses and determined that plaintiffs owed back taxes, penalties, and interest. Pertinent to this consolidated appeal, defendants Deutsche Bank AG, Deutsche Bank Securities, Inc., David Parse, and Grant Thornton filed motions to dismiss pursuant to sections 2-615 and 2-619 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619 (West 2008)). The section 2-619 motions alleged that plaintiffs' action was time-barred. The trial court granted the motions and entered an order under Supreme Court Rule 304(a), finding no just reason to delay enforcement or appeal of its rulings. Ill. S. Ct. R. 304(a) (eff. Feb. 26, 2010). The appellate court reversed and remanded. 408 Ill. App. 3d 564. This court granted defendants' petitions for leave to appeal (Ill. S. Ct. R. 315 (eff. Feb. 26, 2010)) and consolidated the cases for review.
¶ 3 Plaintiffs' 11-count complaint sought damages for breach of fiduciary duty, negligence/professional malpractice, negligent misrepresentation, disgorgement, rescission, declaratory judgment, breach of the duty of good faith and fair dealing, fraud, violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, breach of contract, and civil conspiracy. Plaintiffs alleged that defendants, pursuant to a common scheme, advised plaintiffs to undertake certain investment strategies, referred to as the 1999 Digital Options Strategy and the 2000 COINS Strategy. According to plaintiffs, defendants advised them that the investment strategies could yield a substantial profit and also legally minimize plaintiffs' federal and state income tax liability. Plaintiffs alleged that defendants knew or should have known that the investment strategies would not yield such profits or tax benefits because defendants knew that the IRS was investigating the same or substantially similar transactions and had concluded that the transactions were illegal tax shelters. Defendants did not inform plaintiffs of these facts; rather, plaintiffs alleged, defendants' primary motive in pitching their scheme was to exact significant fees and commissions from plaintiffs. Plaintiffs further alleged that they were unknowledgeable and unsophisticated concerning tax laws and tax-advantaged investment strategies and that they relied on their trusted legal, accounting, and tax advisors for comprehensive legal, accounting, tax, and investment advice.
¶ 4 Following is a brief summary of the factual allegations of plaintiffs' complaint. A fuller statement of the facts is contained in the appellate court opinion.
¶ 5 The 1999 Digital Options Strategy
¶ 6 In 1999, plaintiff Shahid Khan was involved in negotiations to purchase a Canadian company owned by Japanese investors. The investors requested that Khan pay them the sale proceeds in Japanese yen. As Khan had no experience with foreign currency, he sought a referral to any potential advisors with foreign currency trading experience. He was referred to Paul Shanbrom, a tax partner at BDO Seidman (BDO). At a meeting, Shanbrom suggested that Khan invest in the 1999 Digital Options Strategy. Shanbrom advised Khan that BDO's tax professionals had devised tax-advantaged investment plans that would provide an above-average rate of return and minimize tax obligations and that the 1999 Digital Options Strategy was completely legal. Shanbrom recommended defendants David Parse and Deutsche Bank to execute the options, representing that Parse and Deutsche Bank had special expertise in foreign currency investments. He also told Khan that he would receive a legal opinion from an independent law firm that would confirm the propriety of the 1999 Digital Options Strategy, protect Khan in the event of an IRS audit, and prevent the IRS from assessing plaintiffs with penalties in the unlikely event of an audit. Shanbrom recommended the law firm of Jenkens & Gilchrist to provide this opinion. Shanbrom set up a conference call in which he, Khan, and Parse discussed foreign currency trading. During the call, Shanbrom and Parse reiterated what Shanbrom had earlier told Khan about the legality of the 1999 Digital Options Strategy. Neither Shanbrom nor Parse informed Khan that the foreign currency digital options were simply private bets with Deutsche Bank as to where the underlying foreign currencies would be on a particular date and time and that Deutsche Bank controlled the outcome. Plaintiffs alleged that, unbeknownst to them, Deutsche Bank was able to control the outcome of the options because the contract with plaintiffs gave Deutsche Bank the power to choose the particular spot rate it wished to use on the designated date and time. According to plaintiffs, Deutsche Bank designed the options so that they would expire "out of the money" and be rendered worthless. Thus, plaintiffs lost the $350,000 premium they paid to Deutsche Bank, which plaintiffs alleged was defendants' plan all along. Based upon the representations of Shanbrom and Parse, Khan decided to invest in the 1999 Digital Options Strategy. To that end and in accordance with defendants' instructions, Khan formed various legal entities to carry out the investment strategy.
¶ 7 Plaintiffs alleged that defendants made material misrepresentations and omissions on which plaintiffs relied to their detriment and that defendants intentionally deceived plaintiffs for the purpose of persuading them to invest in the 1999 Digital Options Strategy.
¶ 8 We quote below the appellate court's explanation of how the 1999 Digital Options Strategy worked:
"The Khans entered into a private contract with Deutsche Bank whereby the Khans, through SRK Wilshire Investments (Wilshire Investments), bought from Deutsche Bank a long option on foreign currency and sold to Deutsche Bank a short option. Thus, there came into existence an opposing pair of options, one long and the other short. These options were designed to cancel each other out. The strike prices of the two options were only a fraction of a penny apart, and the premium that the Khans paid Deutsche Bank for the long option, though large, was almost entirely offset by the premium Deutsche Bank agreed to pay the Khans for the short option (almost but not quite: the Khans paid a net premium to Deutsche Bank of $350,000, the difference between the $35 million that the Khans paid for the long option and the $34,650,000 that Deutsche Bank agreed to pay them for the short option). Because the strike prices of the opposing options were so close together and because Deutsche Bank, as the calculation agent, had the right to select the applicable spot rate from a range of currency rates, it was a virtual certainty that the transaction would be close to a wash-Deutsche Bank would see to that.
So, pursuant to this scheme that was calculated to be a wash on the investment side (and, as we will explain, a loss on the tax side), the Khans formed the necessary business entities and transferred assets between them, all under the guidance of BDO. On November 17, 1999, the Khans formed Wilshire Investments and SRK Wilshire Partners (Wilshire Partners). On November 24, 1999, through Wilshire Investments, the Khans bought and sold the opposing options, which had expiration dates of December 23, 1999. On November 26, 1999, Wilshire Investments contributed its interest in the as-of-yet unexpired options to Wilshire Partners as a capital contribution. On December 10, 1999, Wilshire Partners purchased a quantity of Canadian dollars as an investment. On December 23, 1999, both the long option and the short option terminated 'out of the money': the options became worthless, based on the spot rate that Deutsche Bank chose. Of course, both the Khans and Deutsche Bank got to keep the premiums they had paid each other, but Deutsche Bank's premium was $350,000 greater than the premium it had paid to the Khans (or Wilshire Investments). On December 27, 1999, the Khans contributed their interest in Wilshire Partners to Wilshire Investments, causing the dissolution and liquidation of Wilshire Partners. As a distribution in liquidation of Wilshire Partners, all of the investments in foreign currency were distributed to Wilshire Investments.
Consequently, for tax purposes, the Khans' interest in Wilshire Investments had a basis equal to the amount they had paid to Deutsche Bank for the long option, but that amount supposedly was not offset as a result of the assumption by Wilshire Investments of the Khans' obligation to Deutsche Bank on the short option, perhaps on the theory that the short option was only a contingent liability. [Citation.] In other words, the long option counted for purposes of the basis the Khans had in Wilshire Investments, but the short option, which greatly reduced the economic significance of the long option, supposedly did not count. Upon the disposition of the Khans' partnership interest in Wilshire Investments, the expensive long option had expired 'out of the money' and had lost all its value, so the Khans claimed a tax loss equal to the premium they had paid for the long option, even though (because of the offsetting short option) they had not really incurred an economic loss in that amount." 408 Ill. App. 3d at 571-72.
¶ 9 The 2000 COINS Strategy
¶ 10 Plaintiffs alleged that in June 2000, aware of Khan's displeasure at losing money on the 1999 Digital Options Strategy, Shanbrom told Khan of another BDO investment strategy that Shanbrom claimed had been designed to provide an even better chance at making a profit than the 1999 Digital Options Strategy and, at the same time, provide clients with the same positive tax benefits found in the 1999 Digital Options Strategy. The same procedure was followed for the 2000 COINS Strategy as had been implemented on the 1999 Digital Options Strategy. Jenkens & Gilchrist would issue an opinion letter confirming the legality of the tax advantages of the 2000 COINS Strategy. Shanbrom again referred Khan to David Parse and Deutsche Bank to implement the plan. Khan had telephone conversations with Parse and a representative of Jenkens, who assured him of the legality of the 2000 COINS Strategy and that the foreign currency digital options were designed in a way to provide Khan with a good chance of making a profit while also legally reducing his taxes. Plaintiffs alleged that the purpose of the promotion by defendants of the 2000 COINS Strategy was to generate large fees from plaintiffs. Based upon the advice and representations of defendants, Khan decided to engage in the 2000 COINS Strategy. The 2000 COINS Strategy was a variation on the 1999 Digital Options Strategy. Again, we quote the appellate court's explanation of how the 2000 COINS Strategy worked:
"On September 29, 2000, using Deutsche Bank as the counterparty, Wilshire Investments bought and sold offsetting pairs of options tied to foreign-currency exchange rates during specified periods in the future, with extremely close strike prices and a spot rate to be chosen by Deutsche Bank in its sole discretion. The cost of the long option, though large, was mostly (but not entirely) offset by the premium Wilshire received on the sale of the short option. On October 18, 2000, pursuant to BDO's instructions, Wilshire Investments made a capital contribution of these option positions to a partnership formed specifically for purposes of the 2000 COINS Strategy, Thermosphere FX Partners, LLC (Thermosphere). Supposedly, the long option counted toward the basis, without any offset by the short option. On December 6 and 11, 2000, the strike prices on the opposing options were met, with the result that the gain on one option was, roughly speaking, matched by the loss on the other option. The options now were worthless, requiring an adjustment in plaintiffs' basis in Thermosphere. On December 15, 2000, Thermosphere purchased foreign currency. Plaintiffs requested to be redeemed out of Thermosphere, and on December 18, 2000, plaintiffs' entire capital balance was redeemed, and a portion of the foreign currency that Thermosphere had purchased was distributed to them. On December 27, 2000, plaintiffs sold the foreign currency and subsequently claimed an ordinary loss." 408 Ill. App. 3d at 574.
¶ 11 Plaintiffs alleged in their complaint that defendants failed to disclose to Khan that Deutsche Bank retained virtually unlimited discretion to determine whether the investments would pay out and, therefore, could ensure that they would not pay out. Plaintiffs also alleged that defendants failed to disclose that the investments had no reasonable possibility of a profit in excess of the substantial fees plaintiffs paid to Deutsche Bank.
¶ 12 In December 1999, the IRS issued Notice 1999-59, entitled "Tax
Avoidance Using Distribution of Encumbered Property." Plaintiffs alleged that this notice advised taxpayers that transactions wholly lacking in economic substance for the purpose of generating tax losses were not allowable for federal income tax purposes. Plaintiffs alleged that based upon this notice, defendants knew or should have known that the IRS would conclude that the purported losses from the 1999 Digital Options Strategy and the 2000 COINS Strategy were improper and not allowable for tax purposes. Nonetheless, defendants intentionally failed to disclose this information to plaintiffs. In August 2000, the IRS issued Notice 2000-44, entitled "Tax Avoidance Using Artificially High Basis." According to plaintiffs, this notice described transactions similar to the 1999 Digital Options Strategy and the 2000 COINS Strategy and indicated that any losses from such transactions were not allowable as deductions for federal income tax purposes. Plaintiffs alleged that despite the clear import of these IRS notices, defendants failed to advise plaintiffs that the purported losses arising from the 1999 Digital Options Strategy and the 2000 COINS Strategy were not allowable for tax purposes and that plaintiffs would be exposed to substantial penalties if they claimed the losses on their tax returns. Instead, defendants improperly represented to plaintiffs that they did not have to disclose the 1999 Digital Options Strategy on their 1999 federal tax returns. In fact, plaintiffs alleged, defendants had failed to register either the 1999 Digital Options Strategy or the 2000 COINS Strategy as tax shelters with the IRS, despite the fact that such registration was required. In addition, the opinion letters issued by Jenkens & Gilchrist verifying the legitimacy of the purported losses generated by the 1999 Digital Options Strategy and the 2000 COINS Strategy specifically advised plaintiffs that the analysis used by the IRS in Notice 1999-59 was inapplicable to plaintiffs. Plaintiffs alleged that, based on defendants' advice, they filed their 1999 and 2000 tax returns and included the purported losses from the investment strategies.
¶ 13 Plaintiffs alleged that in late 2001 and early 2002, the IRS offered the tax amnesty program, whereby taxpayers who disclosed their involvement in transactions such as the 1999 Digital Options Strategy and the 2000 COINS Strategy could avoid penalties without conceding liability for back taxes or interest. Defendants advised plaintiffs not to participate in the amnesty program. Plaintiffs alleged that the failure to advise them to participate in the program resulted in plaintiffs being assessed substantial penalties and interest that would have been waived had they participated in the amnesty program.
¶ 14 The trial court granted the section 2-619 motions to dismiss filed by Deutsche Bank, Parse, and defendant Grant Thornton, an accounting firm that had prepared Thermosphere's tax returns. The court found that plaintiffs suffered injury in 1999 through 2001 when they paid fees to Deutsche Bank and paid for the opinion letters from Jenkens & Gilchrist. The court noted that plaintiffs had engaged trial counsel in May 2003, who retained an independent accounting firm to assist with the pending IRS audits. The court found that due diligence would have discovered the IRS notices referred to above, which would have put plaintiffs on notice that the tax shelters were illegal. The trial court also granted defendants' section 2-615 motions to dismiss plaintiffs' claim for breach of fiduciary duty, finding that plaintiffs had failed to adequately plead a breach of fiduciary duty and that, in any event, they had disclaimed the existence of such a duty in the written transaction confirmations signed after the trades were made. The trial court relied on an affidavit and the transaction confirmations that were attached to the section 2-615 motions to dismiss. The trial court also granted the motions as to plaintiffs' claim for negligent misrepresentation based upon its finding that plaintiffs had failed to plead the existence of a fiduciary relationship.
¶ 15 The appellate court reversed and remanded. As to the statute of limitations issue, the court found that the limitations period does not begin to run until the IRS makes a formal assessment of the taxpayer's tax liability or the taxpayer agrees with the IRS to pay additional taxes, penalties, or interest. 408 Ill. App. 3d at 602. On the breach of fiduciary duty issue, the appellate court acknowledged the affidavit and contractual documents containing the disclaimers that were attached to the section 2-615 motions to dismiss, but it found that a preagency fiduciary duty existed as a matter of law between the parties based upon this court's decision in Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33 (1994), and that the contractual disclaimers were voidable due to the Deutsche defendants' failure to disclose material facts to Khan concerning the nature of the options transactions and the nondeductibility of the tax losses. Id. at 593-94. The appellate court also found that plaintiffs had adequately pleaded a cause of action for negligent misrepresentation. Id. at 595. As to Grant Thornton, the appellate court concluded that the trial court erred in granting its section 2-619 motion to dismiss. The court found that plaintiffs' action was timely under the statute of repose found in the accounting malpractice statute of limitations. Id. at 611.
¶ 17 I. Statute of Limitations-The Deutsche Defendants
¶ 18 A section 2-619 motion to dismiss admits as true all well-pleaded facts in the complaint, together with all reasonable inferences gleaned from those facts. Wackrow v. Niemi, 231 Ill. 2d 418, 422 (2008). When ruling on a section 2-619 motion to dismiss, a court interprets all pleadings and supporting documents in the light most favorable to the nonmoving party. Id. A reviewing court applies de novo review to a trial court's ruling on the motion. Id.
¶ 19 The parties agree that the five-year statute of limitations contained in section 13-205 of the Code of Civil Procedure (Code) (735 ILCS 5/13-205 (West 2008)) applies in this case. That section provides that all civil actions not otherwise provided for "shall be commenced within 5 years next after the cause of action accrued." The heart of the parties' dispute concerns the date on which the limitations period began to run. Deutsche Bank and David Parse (hereafter, Deutsche defendants) argue that the statute of limitations in tort actions begins to run when a plaintiff's cause of action accrues and that plaintiffs' cause of action accrued in 1999 and 2000 when they paid fees to Deutsche Bank for the 1999 Digital Options Strategy and the 2000 COINS Strategy.
¶ 20 The statute refers to the accrual of the cause of action. A cause of action "accrues" when facts exist that authorize the bringing of a cause of action. Thus, a tort cause of action accrues when all its elements are present, i.e., duty, breach, and resulting injury or damage. Brucker v. Mercola, 227 Ill. 2d 502, 542 (2007). A mechanical application of the statute of limitations, however, may result in the limitations period expiring before a plaintiff even knows of his or her cause of action. To ameliorate the potentially harsh results of such an application, this court has adopted the "discovery rule," the effect of which is to postpone the start of the period of limitations until the injured party knows or reasonably should know of the injury and knows or reasonably should know that the injury was wrongfully caused. Witherell v. Weimer, 85 Ill. 2d 146, 156 (1981); Nolan v. Johns-Manville Asbestos, 85 Ill. 2d 161, 170-71 (1981). At that point, the burden is on the injured person to inquire further as to the possible existence of a cause of action. Witherell, 85 Ill. 2d at 156.
¶ 21 This court has noted that the discovery rule formulated by this court: "is not the same as a rule which states that a cause of action accrues when a person knows or should know of both the injury and the defendants' negligent conduct. Not only is such a standard beyond the comprehension of the ordinary lay person to recognize, but it assumes a conclusion which must properly await legal determination. [Citation.] Moreover, if knowledge of negligent conduct were the standard, a party could wait to bring an action far beyond a reasonable time when sufficient notice has been received of a possible invasion of one's legally protected interests. [Citation.] Also, such a rule would seem contrary to the underlying purpose of statutes of limitations, which is to 'require the prosecution of a right of action within a reasonable time to prevent the loss or impairment of available evidence and to discourage delay in the bringing of claims.' [Citations.]
We hold, therefore, that when a party knows or reasonably should know both that an injury has occurred and that it was wrongfully caused, the statute begins to run and the party is under an obligation to inquire further to determine whether an actionable wrong was committed. In that way, an injured person is not held to a standard of knowing the inherently unknowable [citation], yet once it reasonably appears that an injury was wrongfully caused, the party may not slumber on his rights. The question of when a party knew or reasonably should have known both of an injury and its wrongful cause is one of fact, unless the facts are undisputed and only one conclusion may be drawn from them." Nolan, 85 Ill. 2d at 170-71.
¶ 22 Along these same lines, this court has noted that the term "wrongfully caused" as used in the discovery rule does not connote knowledge of negligent conduct or knowledge of the existence of a cause of action. That term must be viewed as a general or generic term and not as a term of art. Knox College v. Celotex Corp., 88 Ill. 2d 407, 416 (1981). In addition, this court has "never suggested that plaintiffs must know the full extent of their injuries before the statute of limitations is triggered. Rather, our cases adhere to the general rule that the limitations period commences when the plaintiff is injured, rather than when the plaintiff realizes the consequences of the injury or the full extent of her injuries." Golla v. General Motors Corp., 167 Ill. 2d 353, 364 (1995).
¶ 23 The Deutsche defendants argue that plaintiffs' claim is that they were defrauded into investing millions of dollars in the investment strategies. To that end, plaintiffs paid Deutsche Bank over $1 million in fees, which plaintiffs allege was part of the fraud. The Deutsche defendants argue that the tax-related damages were merely additional consequences of the alleged wrongdoing and the fact of these later damages does not postpone the accrual of plaintiffs' claim. Alternatively, the Deutsche defendants argue that the limitations period began to run, at the latest, in May 2003, when plaintiffs hired independent tax counsel, who should have discovered through the exercise of due diligence the IRS notices advising that artificial losses from tax shelters similar to the ones at issue here would be disallowed. The appellate court rejected this argument, concluding that until an assessment or settlement with the IRS, there was no actual harm and hence no accrual of a cause of action, even if, by May 2003, Khan knew that defendants had given him false advice.
¶ 24 Plaintiffs disagree that the statute of limitations began to run in 1999 or 2000. They argue that the Deutsche defendants concealed the fact that plaintiffs would never make a profit on their investment because they did not inform plaintiffs that Deutsche Bank, as calculation agent, maintained complete control over the outcome of the transactions. According to plaintiffs, Deutsche Bank could always pick a spot rate that would ensure that the options expired "out of the money." This would enable Deutsche Bank to pocket the spread between what plaintiffs paid and received from buying and selling the paired options.
¶ 25 Taking as true the well-pleaded facts of plaintiffs' complaint, they have alleged that the Deutsche defendants and others entered into a conspiracy to conceal the true nature of the investment strategies and that they failed to reveal the degree of control Deutsche Bank had over the outcome of the transactions. A reasonable inference from these allegations is that plaintiffs did not know and could not reasonably have discovered the wrongful nature of their injury in 1999 or 2000. The same is true with respect to the purported tax benefits of the investment strategies. The Deutsche defendants argue that plaintiffs should have been alerted by IRS notices issued in 1999 and 2000 that any losses generated by the investment strategies would likely not constitute allowable tax losses. Plaintiffs allege, however, that the Deutsche defendants themselves were aware of the IRS notices and, despite knowing that the alleged tax-reducing investment strategies would likely be disallowed by the IRS, continued to advise plaintiffs to the contrary. Plaintiffs allege that the Deutsche defendants used purportedly reputable law firms such as Jenkens & Gilchrist to provide plaintiffs with purportedly independent legal opinions concerning the tax-related bona fides of the investment strategies, but that, in fact, the opinions provided to plaintiffs were nothing more than "fill in the blank" boilerplate opinions and that Jenkens & Gilchrist was a coconspirator with the Deutsche defendants in the investment schemes. Plaintiffs alleged that the Jenkens & Gilchrist opinion provided to them for the 1999 Digital Options Strategy affirmatively stated that the 1999 IRS notice was inapplicable to the transactions at issue. The opinion provided in connection with the 2000 COINS Strategy stated that the 2000 IRS notice was "more likely than not legally inapplicable." Plaintiffs thus alleged that the Deutsche defendants affirmatively misrepresented both the content and significance of the IRS notices.
¶ 26 Plaintiffs further alleged that in 2001 and 2002, when the IRS announced an amnesty program for those who had claimed tax losses associated with transactions similar to the investment strategies, the Deutsche defendants, in furtherance of their conspiracy, advised plaintiffs not to participate. Plaintiffs alleged the reason for this advice was that one of the conditions of participation required the taxpayer to disclose to the IRS the identities of the individuals and entities who were involved in the marketing, sale, or implementation of the investment strategies, or who received a fee, and that the Deutsche defendants feared disclosure to the IRS of their involvement in the investment strategies. Taking plaintiffs' well-pleaded factual allegations as true, together with reasonable inferences therefrom, we conclude that while a portion of plaintiffs' ...