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Lutkauskas v. Ricker

Court of Appeals of Illinois, First District, Fourth Division

September 30, 2013

ANTHONY LUTKAUSKAS, TAXPAYER FOR AND ON BEHALF OF LEMONT-BROMBEREK COMBINED SCHOOL DISTRICT 113A, Plaintiff-Appellant,
v.
DR. TIMOTHY RICKER, ROBERT BECKWITH, JOHN WOOD, DR. MARY GRICUS, LISA WRIGHT, KEVIN DOHERTY, DAVID LEAHY, GWEN O'MALLEY, SUE MURPHY, AL ALBRECHT, UNDERWRITERS AT LLOYD'S, LONDON, KNUTTE ASSOCIATES P.C. AND OTHER PERSONS WHOSE NAMES ARE NOT YET KNOWN, Defendants-Appellees.-LAURA REIGLE, DUANE BRADLEY, LOUIS EMERY, AND JANET HUGHES, TAXPAYERS FOR AND ON BEHALF OF LEMONT BROMBEREK COMBINED SCHOOL DISTRICT 113A, Plaintiffs-Appellants,
v.
DR. TIMOTHY RICKER, ROBERT BECKWITH, JOHN WOOD, DR. MARY GRICUS, LISA WRIGHT, KEVIN DOHERTY, DAVID LEAHY, GWEN O'MALLEY, SUE MURPHY, AL ALBRECHT, UNDERWRITERS AT LLOYD'S, LONDON, KNUTTE ASSOCIATES P.C. AND OTHER PERSONS WHOSE NAMES ARE NOT YET KNOWN, Defendants-Appellees.

Rehearing denied November 18, 2013

Held [*]

The trial court’s dismissal of a complaint against two employees of a school district and seven members of the school board alleging that section 20-5 of the School Code was violated when money from the district’s working cash fund was spent without a school board resolution approving the transfer of funds from the working cash fund was affirmed, since plaintiffs failed to allege that the money was spent for anything other than legitimate school expenses, and in the absence of such allegations, plaintiffs did not have standing under section 20-5 to recover, on behalf of the district, money transferred without a board resolution.

Appeal from the Circuit Court of Cook County, Nos. 11-CH-35191, 10- CH-53428, 10-CH-53429; the Hon. LeRoy K. Martin, Jr., Judge, presiding.

Natalie Brouwer Potts, of Center for Open Government, Law Offices of IIT Chicago-Kent College of Law, and Clinton A. Krislov, of Krislov & Associates, Ltd., of Chicago, for appellants.

Raymond J. Jast and Kimberly E. Blair, both of Wilson, Elser, Moskowitz, Edelman & Dicker LLP, of Chicago, for appellee Certain Underwriters at Lloyd's London.

Thomas F. Falkenberg, Alyssa M. Reiter, and Kirstin B. Ives, all of Williams Montgomery & John Ltd., of Chicago, for appellee Knutte & Associates, P.C.

Edward M. Kay, Paige M. Neel, and Mark J. Sobczak, all of Clausen Miller P.C., for appellee Timothy Ricker.

Justino D. Petrarca, Kevin B. Gordon, and James A. Petrungaro, all of Scariano, Himes & Petrarca, Chtrd., of Chicago, for other appellees.

JUSTICE EPSTEIN delivered the judgment of the court, with opinion. Justice Fitzgerald Smith concurred in the judgment and opinion. Justice Pucinski dissented, with opinion.

OPINION

EPSTEIN, JUSTICE

¶ 1 In this consolidated appeal, five taxpayer plaintiffs, acting on behalf of the Lemont Bromberek Combined School District 113A, seek reversal of the circuit court's dismissal of their claims brought against two school district employees, seven school board members, the district's accounting firm, and the district's surety. Plaintiffs alleged that the district employees and board members violated section 20-5 of the School Code (105 ILCS 5/20-5 (West 2010)) when they engaged in or permitted a pattern of spending money from the district's working cash fund without a school board resolution approving the transfer of funds from the working cash fund. For the reasons that follow, we affirm.

¶ 2 BACKGROUND

¶ 3 Article 20 of the School Code

¶ 4 Plaintiffs' complaints center on a violation of article 20 of the School Code, which authorizes certain school districts to create working cash funds. See 105 ILCS 5/20-1 (West 2010). The working cash fund allows a district to "have in its treasury at all time sufficient money to meet demands thereon for expenditures for corporate purposes" before the district receives taxes designated for those purposes. Id. In other words, "the purpose of the working cash fund is to provide a reserve upon which school districts may draw in anticipation of tax collections." In re Application of Walgenbach, 104 Ill.2d 121, 125 (1984). To fund the working cash fund, the district "may incur an indebtedness and issue bonds as evidence thereof" (105 ILCS 5/20-2 (West 2010)) or may levy taxes (105 ILCS 5/20-3 (West 2010)). Money from the working cash fund "may be used by the school board for any and all school purposes and may be transferred in whole or in part to the general funds or both of the school district and disbursed therefrom in anticipation of the collection of taxes lawfully levied for any or all purposes." 105 ILCS 5/20-4 (West 2010). When the district receives taxes as anticipated, "the fund shall immediately be reimbursed therefrom until the full amount so transferred has been retransferred to the fund." Id. Under Section 20-5 of the School Code, the board must pass a resolution directing the transfer of monies from the working cash fund:

"Moneys in the working cash fund shall be transferred from the working cash fund to another fund of the district only upon the authority of the school board which shall from time to time by separate resolution direct the school treasurer to make transfers of such sums as may be required for the purposes herein authorized." 105 ILCS 5/20-5 (West 2010) Section 20-5 sets forth specific information to be contained within the resolution (e.g., "the taxes in anticipation of which [a] transfer is to be made and from which the working cash fund is to be reimbursed"). See id.

¶ 5 Section 20-10 allows a school district to abate the working cash fund at any time, by adoption of a resolution, and "direct the transfer at any time of moneys in that fund to any fund or funds of the district most in need of the money." 105 ILCS 5/20-10 (West 2010). Similarly, section 20-8 allows a district to abolish its working cash fund, by adoption of a resolution, and "direct the transfer of any balance in such fund to the educational fund at the close of the then current school year." 105 ILCS 5/20-8 (West 2010).

¶ 6 Original Taxpayer Complaints

¶ 7 On December 17, 2010, four taxpayer plaintiffs filed two separate, but nearly identical, lawsuits, which were subsequently consolidated into one action. Hughes brought the first complaint and Reigle, Bradley, and Emery brought the second. The lawsuits named as defendants the district superintendent, the district treasurer, and seven school board members (collectively, the district defendants) in their individual capacities.

¶ 8 Plaintiffs alleged that the district defendants violated section 20-5 of the School Code, when they repeatedly transferred (or allowed the transfer of) money from the district's working cash fund without board resolution. Plaintiffs alleged that between 2007 and 2010, the district spent in excess of the amounts allocated to a number of individual funds that provide capital for the district's annual activities. To make up for shortfalls in these funds, the district drew money from the working cash fund. Plaintiffs further alleged that the district defendants never reimbursed the working cash fund, and instead the school board passed resolutions to abate and abolish the working cash fund. On December 2, 2009, members of the board passed a resolution to partially abate the working cash fund in the amount of $4, 849, 442, leaving a remainder of $643, 500. On April 28, 2010, the board approved a resolution to abolish the working cash fund, with the money to be permanently transferred to the education fund.

¶ 9 Plaintiffs sought relief under section 20-6 of the School Code, which provides:

"Any member of the school board of any school district to which this Article is applicable, or any other person holding any office, trust, or employment under such school district who wilfully violates any of the provisions of this Article shall be guilty of a business offense and fined not exceeding $10, 000, and shall forfeit his right to his office, trust or employment and shall be removed therefrom. Any such member or other person shall be liable for any sum that may be unlawfully diverted from the working cash fund or otherwise used, to be recovered by such school district or by any taxpayer in the name and for the benefit of such school district in an appropriate civil action; provided that the taxpayer shall file a bond for all costs and be liable for all costs taxed against the school district in such suit, and judgment shall be rendered accordingly. Nothing herein shall bar any other remedies." 105 ILCS 5/20-6 (West 2010).

Under the authority of section 20-6, plaintiffs sought an order declaring the district defendants forfeit their offices and employment with the district, assessing a $10, 000 statutory fine against each of the district defendants, and entering judgment against the defendants personally for "an amount sufficient to make [the district] whole and replace the public funds shown by the evidence to have been unlawfully diverted" from the working cash fund.

¶ 10 Along with these claims, plaintiffs brought a single count for "accountant negligence" against the district's former accountant, Knutte and Associates, alleging that Knutte issued clean audit reports, but knew or should have known of the district defendants' transfer of funds in violation of the School Code. Plaintiffs also brought claims against an entity affiliated with Certain Underwriters at Lloyd's London (Underwriters), the surety that bonded the school treasurer. Plaintiffs alleged that the surety was obligated to pay damages caused to the district by the treasurer's "failure to faithfully discharge the duties of his office according to law."

¶ 11 On July 27, 2011, the circuit court struck the claims against the district defendants with leave to replead. Judge Novak ruled that plaintiffs did not have standing to seek criminal penalties prescribed in section 20-6, and as to any civil recovery, the court ruled that the allegations were insufficient to allege a violation of section 20-5. The court dismissed the claims against Knutte with prejudice, finding that plaintiffs did not have standing to bring the claim. Pursuant to Illinois Supreme Court Rule 304(a) (eff. Jan. 1, 2006), the court ruled that there was no just cause to delay appeal of the claim against Knutte. The surety was apparently not properly named as a defendant, and plaintiffs later voluntarily dismissed their complaints against the improperly named entity.

¶ 12 The First Amended Consolidated Complaint and the Lutkauskas Complaint

¶ 13 On August 29, 2011, plaintiffs filed a first amended consolidated complaint, again alleging that the district defendants violated article 20 of the School Code, but adding a breach of fiduciary duty claim against the district defendants. Plaintiffs restated their claims against the properly named entity for the surety, Underwriters at Lloyd's. On October 11, 2011, a fifth taxpayer plaintiff, Lutkauskas, filed his complaint, which was later consolidated with the other two taxpayer complaints. The Lutkauskas complaint was identical to the first amended consolidated complaint of the other plaintiffs, but added new claims against Knutte for accounting malpractice, negligence, breach of fiduciary duty, and aiding the district defendants in violating the School Code.

¶ 14 Both the amended consolidated complaint and the Lutkauskas complaint provided additional detail regarding the alleged illegal transfer of funds. Specifically, plaintiffs alleged "[i]t appears that the District monies, though specifically appropriated to specific funds/purposes, were held in a commingled account. Thus, when money was spent beyond the legal appropriation for a particular fund, it actually drained or diverted the Working Cash Fund, without the appropriate Board Action and documentation for such dispersions." The complaint also cited email correspondence among the district defendants purporting to show that they were aware that the working cash funds were being used between 2007 and 2010 without board resolutions approving any transfers.

ΒΆ 15 On March 15, 2012, the district defendants and Underwriters at Lloyd's moved to dismiss plaintiffs' first amended consolidated complaint and the Lutkauskas complaint. Knutte filed a motion to dismiss the Lutkauskas complaint. The trial court granted these motions. While the defendants asserted various bases on which to dismiss the complaints, Judge Martin ruled that plaintiffs' complaint failed to state a claim and the district defendants had legislative immunity. Judge Martin also stated that plaintiffs were "basically arguing a windfall" and that "nothing in the complaint would tell the reader that money was used for some purpose other than for school purposes." As a result, the court ruled that Underwriters at Lloyd's had no liability as surety ...


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