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James Riley, Not Individually, But ) Solely In His v. Sikich Llp

November 14, 2012

JAMES RILEY, NOT INDIVIDUALLY, BUT ) SOLELY IN HIS CAPACITY AS SPECIAL LITIGATION COUNSEL, ON BEHALF OF THE ) ESTATE OF BUDGET FINANCE CORPORATION, A REORGANIZED DEBTOR, PLAINTIFF,
v.
SIKICH LLP, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge

MEMORANDUM OPINION

This matter is before the court on Defendant Sikich LLP's (Sikich) and Defendant V. Gregory McKnight's (McKnight) motion for judgment on the pleadings or, alternatively, for partial judgment on the pleadings. For the reasons stated below, the motion is denied.

BACKGROUND

Plaintiff, solely in his capacity as Special Litigation Counsel, on behalf of the Estate of Budget Finance Corporation (Budget), a Reorganized Debtor, alleges that from 2007 through 2009, Budget was in the business of providing various loans to individuals and small businesses. Pursuant to two engagement letters (Contracts), Sikich allegedly audited, prepared opinion letters, and rendered other accounting services to Budget in the fiscal years ending July 31, 2007 (FY2007), and July 31, 2008 (FY2008). McKnight was allegedly the partner at Sikich in charge of providing services to Budget. In auditing, preparing opinion letters, and rendering other accounting services to Budget in FY2007 and FY2008, Defendants allegedly violated generally accepted accounting principles (GAAP) in breach of the Contracts. For example, Defendants allegedly listed automobiles that were not owned by Budget as assets on Budget's financial statements. Defendants also allegedly listed various receivables on Budget's financial statements that Budget had no actual interest in or would never collect upon. In addition, Defendants allegedly improperly estimated Budget's ability to collect on various loans.

Plaintiff alleges that Defendants' actions allegedly resulted "in a significant overstatement of [Budget's] assets and net worth." (Compl. Par. 14(g)). Plaintiff also alleges that Defendants "issued an unqualified opinion letter for [FY2007] and [FY2008] when Defendants knew or should have known that the value of the corporation was significantly overstated, and Budget was likely to become insolvent in a short period of time." (Compl. Par. 14(h)). Budget allegedly sustained direct financial losses due to the alleged improper use of certain corporate funds and assets and due to Budget's payment to Defendants for their allegedly improper accounting services. Budget also allegedly continued to operate longer than it should have, which allegedly caused Budget and its investors and creditors to sustain greater financial losses than they would have sustained absent Defendants' alleged conduct.

Budget filed for Chapter 11 bankruptcy on August 19, 2009, in the United States Bankruptcy Court of the Northern District of Illinois (Bankruptcy Action). Plaintiff was approved as Special Litigation Counsel in the Bankruptcy Action, and on August 16, 2011, Plaintiff filed an adversary complaint against Defendants. Plaintiff includes in his complaint breach of contract claims (Count I) and professional negligence/financial malpractice claims (Count II). On January 17, 2012, the court granted Defendants' motion to withdraw the reference of the adversary proceeding. Defendants subsequently answered the complaint and now move for judgment on the pleadings.

LEGAL STANDARD

A party is permitted under Federal Rule of Civil Procedure 12(c) (Rule 12(c)) to move for judgment on the pleadings after the parties have filed the complaint and the answer. Fed. R. Civ. P. 12(c); Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998). The courts apply the Federal Rule of Civil Procedure 12(b)(6) (Rule 12(b)(6)) motion to dismiss standard when ruling on Rule 12(c) motions. Guise v. BWM Mortgage, LLC, 377 F.3d 795, 798 (7th Cir. 2004); Northern Indiana, 163 F.3d at 452. Thus, to defeat a motion for judgment on the pleadings, "[a] complaint must always . . . allege 'enough facts to state a claim to relief that is plausible on its face.'" Limestone Development Corp. v. Village of Lemont, Ill., 520 F.3d 797, 803 (7th Cir. 2008)(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)(noting that "the old formula-that the complaint must not be dismissed unless it is beyond doubt without merit-was discarded by the Bell Atlantic decision")).

In ruling on a motion for judgment on the pleadings, the court must "accept as true all well-pleaded allegations," Forseth v. Village of Sussex, 199 F.3d 363, 364 (7th Cir. 2000), and "view the facts in the complaint in the light most favorable to the nonmoving party. . . ." Northern Indiana , 163 F.3d at 452 (quoting GATX Leasing Corp. v. National Union Fire Ins. Co., 64 F.3d 1112, 1114 (7th Cir. 1995)). The main difference between a Rule 12(b)(6) motion and a Rule 12(c) motion is that a Rule 12(b)(6) motion may be filed before the answer to the complaint is filed, whereas a Rule 12(c) motion may be filed "after the pleadings are closed but within such time as not to delay the trial." Id. at 452 n. 3 (citing Fed. R. Civ. P. 12(c)).

DISCUSSION

Defendants argue that they are entitled to judgment on the pleadings because Plaintiff cannot show causation or damages and because Plaintiff lacks standing to bring the claims asserted. Defendants also argue, in the alternative, that they are entitled to partial judgment on the pleadings regarding the issue of who prepared Budget's financial statements and the measure of damages permitted under the contract entered into between Budget and Sikich in 2007 (2007 Contract).

I. Causation

Defendants argue that Plaintiff cannot show causation because, according to Defendants, it is undisputed that Defendants did not prepare Budget's financial statements or direct the use of Budget's corporate assets. In support of their argument, Defendants contend that the Contracts conclusively establish that Budget prepared its own financial statements for FY2007 and FY2008, thus destroying causation. The Contracts were attached to the complaint, and thus the court may consider them in ruling on the instant motion. See Northern Indiana, 163 F.3d at 452-53 (indicating that the court must rule on a Rule 12(c) motion based upon a review of the pleadings alone, and that the pleadings include the complaint, the answer, and any written instruments attached as exhibits, such as affidavits, letters, contracts, and loan documentation). However, the Contracts do not conclusively establish that Budget was solely responsible for its financial statements, since they leave open the possibility that Defendants could "perform additional services not contemplated by [the Contracts]." (Mot. Ex. A, 17). Perhaps recognizing this, Defendants attached to their motion for judgment on the pleadings an affidavit addressing the issues of causation and damages, sworn by Robert Reuland (Reuland), Budget's former CEO and President. However, the court may not consider Reuland's affidavit without converting the instant motion into a motion for summary judgment brought pursuant to Federal Rule of Civil Procedure 56. See Fed. R. Civ. P. 12(d)(stating that if the court considers matters outside the pleadings, the motion "must be treated as one for summary judgment under Rule 56," and "[a]ll parties must be given a reasonable opportunity to present all the material that is pertinent to the motion"); see also, e.g., Northern Indiana, 163 F.3d at 453 n. 5. The court declines to convert the instant motion into a Rule 56 motion for summary judgment, and therefore neither Reuland's affidavit nor the substantial volume of rebuttal evidence offered by Plaintiff will be considered by the court in ruling on the instant motion.

In addition, not only do the Contracts fail to establish that Budget was solely responsible for its financial statements, the issue of who prepared Budget's financial statements is not dispositive given the allegations in the complaint. Plaintiff alleges that Defendants audited Budget's financial statements, prepared opinion letters, and rendered other accounting services to Budget. Plaintiff also alleges that, in doing so, Defendants violated GAAP, and that Defendants' violations of GAAP caused Budget financial harm in various ways. Such facts are sufficient to state breach of contract and professional negligence/financial malpractice claims in this case. Further, the court notes that it is axiomatic that Defendants would not "rely" on the very financial statements that they were charged with auditing, as Defendants suggest, since that would defeat the entire purpose of performing an audit. See Fehribach v. Ernst & Young LLP, 493 F3d 905, 910 (7th Cir. 2007)(stating that "[t]he purpose of an audit report is to make sure the audited company's financial statements . . . correspond to reality, lest they either have been doctored by a defalcating employee or innocently misrepresent the company's financial situation"). In this case, Plaintiff contends that there were ...


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