United States District Court, N.D. Illinois, Eastern Division
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Valley Bank, Plaintiff,
CROWE HORWATH LLP, Defendant.
MEMORANDUM OPINION AND ORDER
Honorable Edmond E. Chang United States District Judge.
Federal Deposit Insurance Corporation (FDIC-R), as receiver
for Valley Bank (Valley), filed this lawsuit against Crowe
Horwath LLP, alleging accounting malpractice, gross
negligence, and negligent misrepresentation. R. 1,
Compl. The claims arise out of Valley's loss
of around $21 million, allegedly caused by Crowe's
malpractice in auditing the consolidated financial statements
of Valley's holding company, River Valley Bancorp, Inc.
(RVBI) in 2010 and 2011. Id. ¶ 1. Crowe moves
to strike, Fed.R.Civ.P. 12(f), the FDIC-R's jury demand
and request for punitive damages, arguing that neither the
jury demand nor punitive damages are available. R. 17,
Def.'s Motion to Dismiss. Crowe also moves to dismiss
Counts Two (negligence) and Three (negligent
misrepresentation) of the complaint under Federal Rule of
Civil Procedure 12(b)(6). Id. For the reasons
discussed below, the motion to strike is denied and the
motion to dismiss is granted in part and denied in part.
deciding a motion to dismiss, the Court must “accept
all well-pleaded facts as true and draw reasonable inferences
in the plaintiffs' favor.” Roberts v. City of
Chi., 817 F.3d 561, 564 (7th Cir. 2016). For the years
2010 and 2011, Crowe was the independent auditor of Valley
Bank, a full-service bank that engaged in commercial and
consumer lending. Compl. ¶¶ 14, 21-22. Valley was a
subsidiary of RVBI, a holding company that also held two
other banks around the country. Id. ¶ 15.
Valley's Chairman and CEO, Larry C. Henson, pursued
aggressive growth strategies. Id. ¶ 16. In
April and May 2009, Valley's regulators warned the Board
that the bank's financial condition had sharply
deteriorated due to the too-aggressive growth strategies.
Id. ¶ 17. In September 2009, Valley entered
into a Cease and Desist Order (Consent Order) with the FDIC,
which required Valley to, among other things, maintain
specific capital ratios. Id. ¶ 18. The Consent
Order remained in effect throughout Crowe's audits.
Id. Henson did not comply with the Consent Order,
but rather engaged in a scheme to hide Valley's true
financial condition. Id. ¶ 19.
October 2010, Crowe entered into an engagement letter with
RVBI, under which Crowe was to conduct audits of RVBI and its
subsidiaries, including Valley, for the year-ended December
31, 2010. Compl. ¶ 21. Crowe executed the 2010 audit and
issued a Report of Independent Auditors in March 2011.
Id. In June 2011, Crowe entered into another
engagement letter with RVBI, this time to conduct audits of
RVBI and its subsidiaries, including Valley, for a two-year
period. Id. ¶ 22. Crowe executed the 2011
audit, which included a restatement of Valley's 2010
financial statements, and issued a Report of Independent
Auditors in May 2012. Id. Crowe started the audit of
Valley's 2012 financial statements, but never finished
it, because Crowe was terminated after a dispute with Valley
over the bank's Allowance for Loan and Lease Losses
(ALLL) methodology. Id. ¶¶ 23, 65. The
2010 and 2011 reports certified that the financial statements
fairly presented Valley's financial position for those
years in conformity with Generally Accepted Accounting
Principles (GAAP). Id. ¶¶ 21-22.
Valley's external auditor, the FDIC-R alleges, Crowe had
a duty to determine whether Valley's financial statements
fairly presented the bank's financial position. Compl.
¶ 25. Crowe also had a duty to obtain a reasonable
assurance that the financial statements were free from
material misstatement due to error or fraud. Id.
Federal regulations required Valley to be audited by an
independent Certified Public Accountant, and Crowe knew that
Valley and its regulators would rely on the audit opinions
and comparative financial statements that Crowe issued.
Id. ¶¶ 26-27. The FDIC-R alleges that
Crowe knew Valley had inadequate internal controls, ignored
known fraud risks in its performance of the 2010 and 2011
audits-even when the risks were realized and identified-and
issued unqualified opinions despite knowing about
Valley's manipulation of its financial statements.
Id. ¶¶ 2-3, 5-6, 53. As a result, from
2011 to 2013, Henson was able to continue to originate and
fund $21 million in loans that violated the 2009 Consent
Order. Id. ¶¶ 3, 61, 67. Ultimately,
Henson's scheme continued until regulators discovered it
and forced Henson to resign in June 2013. Id.
¶¶ 3, 24. According to the FDIC-R, if Crowe had
performed its audits in accordance with professional
standards, then it would not have issued opinions without
qualifiers, and Henson's scheme to mask Valley's
deteriorating financial condition would have been discovered
as much as two years earlier, which would have prevented
further harm to the bank. Id. ¶¶ 5-7, 67.
the Illinois Department of Financial and Professional
Regulation closed Valley in June 2014, it appointed the
FDIC-R as receiver for Valley. Compl. ¶¶ 8, 14. The
FDIC-R brings this suit against Crowe, alleging accounting
malpractice, gross negligence, and negligent
misrepresentation. Id. at 21-25. Crowe moves to
strike the FDIC-R's jury demand and request for punitive
damages, and to dismiss the FDIC-R's gross negligence and
negligent misrepresentation claims. Def.'s Mot. to
Dismiss. at 1.
Standards of Review
moves to strike the FDIC-R's jury demand and request for
punitive damages under Rule 12(f). R. 18, Def.'s Mot. to
Dismiss Br. at 4-7. Under Rule 12(f), a district court
“may strike from a pleading an insufficient defense or
any redundant, immaterial, impertinent, or scandalous
matter.” Fed.R.Civ.P. 12(f); see also Delta
Consulting Grp., Inc. v. R. Randle Const., Inc., 554
F.3d 1133, 1141 (7th Cir. 2009). Motions to strike are
usually disfavored. See Heller Fin., Inc. v. Midwhey
Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989). Motions
to strike are appropriate, however, if they expedite
litigation, and sometimes striking a jury demand might do
that. See, e.g., Talbot v. Robert Matthews Distrib.
Co., 961 F.2d 654, 664 (7th Cir. 1992) (allegations may
be stricken if the matter bears no possible relation to
controversy); see also DeliverMed Holdings, LLC v.
Medicate Pharm. Inc., 2012 WL 345380, at *2 (S.D. Ill.
Feb. 1, 2012) (noting that the “pending motion to
strike, if meritorious, may expedite the case by removing
unwarranted jury demands.”). Requests for relief may
also be stricken when they seek relief that is not
recoverable as a matter of law. Delta Consulting Grp.,
Inc., 554 F.3d at 1142. “The party moving to
strike has the burden of showing that the challenged
allegations are so unrelated to plaintiff's claim as to
be devoid of merit, unworthy of consideration, and unduly
prejudicial.” Pavlik v. FDIC, 2010 WL 3937621,
at *1 (N.D. Ill. Oct. 5, 2010) (cleaned up).
also moves to dismiss the FDIC-R's claims for negligence
and negligent misrepresentation under Rule 12(b)(6).
Def.'s Mot. to Dismiss Br. at 8-10. Under Federal Rule of
Civil Procedure 8(a)(2), a complaint generally need only
include “a short and plain statement of the claim
showing that the pleader is entitled to relief.”
Fed.R.Civ.P. 8(a)(2). This short and plain statement must
“give the defendant fair notice of what the …
claim is and the grounds upon which it rests.” Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(alteration in original) (cleaned up). The Seventh Circuit
has explained that this rule “reflects a liberal notice
pleading regime, which is intended to ‘focus litigation
on the merits of a claim' rather than on technicalities
that might keep plaintiffs out of court.” Brooks v.
Ross, 578 F.3d 574, 580 (7th Cir. 2009) (quoting
Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514
motion under Rule 12(b)(6) challenges the sufficiency of the
complaint to state a claim upon which relief may be
granted.” Hallinan v. Fraternal Order of Police of
Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009).
“[A] complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is
plausible on its face.'” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 570). These allegations
“must be enough to raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555.
The allegations that are entitled to the assumption of truth
are those that are factual, rather than mere legal
conclusions. Iqbal, 556 U.S. at 678-79.
Motion to Strike
argues that the FDIC-R's jury demand and request for
punitive damages must be stricken because Valley-and the
FDIC-R standing in its shoes as receiver-is a party or
third-party beneficiary to the 2010 and 2011 engagement
letters and thus is bound by the provisions that waive a jury
demand and bar ...