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Atlas v. McCann

Court of Appeals of Illinois, First District, Fourth Division

July 26, 2019


          Appeal from the Circuit Court of Cook County No. 13 L 7057 Honorable Patrick J. Sherlock, Judge Presiding.

          Attorneys for Appellants: John S. Xydakis, of the Law Offices of John S. Xydakis, of Chicago, for appellants.

          Attorneys for Appellees: Kimberly E. Blair, Joseph J. Stafford, and Adam T. Ernette, of Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, of Chicago, for appellees.

          JUSTICE REYES delivered the judgment of the court, with opinion. Justices Gordon and Burke concurred in the judgment and opinion.


          REYES, JUSTICE

         ¶ 1 Marshall Atlas (Marshall) and Arlene Atlas (Arlene), a married couple, were in the business of purchasing delinquent real estate tax certificates from local governments. Judith Berger (Berger) was their employee. Marshall and Arlene operated their business through three companies: (1) HBZ Inc. (HBZ), which was partially owned by Arlene and Berger; (2) TAFH LLC (TAFH), which was partially owned by Marshall, Arlene, and Berger; and (3) Salta Group, Inc. (Salta), which was owned solely by Marshall.

         ¶ 2 Berger allegedly embezzled funds from HBZ, TAFH, and Salta, which resulted in significant legal and financial difficulties for Marshall, Arlene, and their companies, including Salta's bankruptcy. Marshall, Arlene, HBZ, and TAFH (collectively plaintiffs) filed an action in the circuit court of Cook County, alleging their accountants should have discovered Berger's embezzlement. Salta was not named as a plaintiff due to its pending bankruptcy proceedings and is not a party to this appeal. The defendants were (1) Berger, and (2) plaintiffs' accountants, the "Mayer defendants." The Mayer defendants fall into three categories: (i) Mayer Hoffman McCann, P.C. (Mayer), which is the firm that contracted to perform accounting services for plaintiffs and which plaintiffs alleged is liable for its employees' acts and omissions under the theory of respondeat superior; (ii) CBIZ, Inc. (CBIZ) and CBIZ MHM, LLC (CBIZ MHM), which are affiliates of Mayer and which plaintiffs alleged are liable for their employees' and Mayer's acts and omissions under theories of respondeat superior and joint enterprise liability; and (iii) Robert Wilneff (Wilneff), Maria Crawford (Crawford), and Justin Biagi (Biagi), who are the individual accountants employed by Mayer, CBIZ, and/or CBIZ MHM, and who performed the accounting services for plaintiffs.

         ¶ 3 Plaintiffs appeal the order of the circuit court of Cook County dismissing their accounting malpractice claims asserted in their third amended complaint (amended complaint)-the operative complaint in this matter-against the Mayer defendants pursuant to sections 2-619(a)(5) and (9) of the Code of Civil Procedure (Code) (735 ILCS 5/2-619(a)(5), (9) (West 2014)). Plaintiffs had previously appealed the circuit court's order granting the Mayer defendants' motion to dismiss the amended complaint in Atlas v. Mayer Hoffman McCann, P.C, 2016 IL App (1st) 151472-U. This court dismissed the appeal for lack of appellate jurisdiction because the circuit court had dismissed only the counts in the amended complaint against the Mayer defendants, and the two counts against Berger remained pending. Id. In addition, the dismissal order did not contain language sufficient to confer appellate jurisdiction pursuant to Rule 304(a). Id. Upon remand, plaintiffs filed a motion for leave to file a fourth amended complaint against the Mayer defendants, which the circuit court denied. The Mayer defendants then requested, and were granted, a Rule 304(a) finding as to the order dismissing the accounting malpractice claims asserted in the amended complaint.

         ¶ 4 On appeal, plaintiffs contend that the circuit court committed reversible error when it dismissed their accounting malpractice claims against the Mayer defendants because they: (1) are liable to plaintiffs pursuant to the Illinois Public Accounting Act (Act) (225 ILCS 450/30.1 (West 2014)); (2) failed to professionally provide all of their accounting services; and (3) improperly refuted the allegations of the amended complaint based on the exhibits attached to the motion to dismiss. Plaintiffs further argue the circuit court erred in denying them leave to file a fourth amended complaint. For the reasons that follow, we affirm.

         ¶ 5 I. BACKGROUND

         ¶ 6 Marshall and Arlene were in the business of purchasing delinquent real estate tax certificates, which created liens on a property, from local governments. They operated this business through their companies, HBZ, TAFH, and Salta (a non-party) (the companies). Berger was employed in an administrative capacity by the companies and did not participate in the actual running of the business.

         ¶ 7 The companies financed the purchase of tax certificates with bank loans, which were personally guaranteed by Marshall and Arlene. The companies would then post the tax certificates as collateral. When the homeowners finally paid their past-due taxes, the companies would redeem the tax certificates from the local governments, which would repay the companies their purchase price, plus interest and fees. The interest and fees were in excess of the amount of interest the companies owed to the banks. The companies would then use the money to repay the banks and keep the balance as profit. The business thus involved purchasing tax certificates and pledging them as collateral for loans with which to purchase additional certificates.

         ¶ 8 The amended complaint set forth four counts against the Mayer defendants for: (I) violation of the Act; (II) professional negligence; (III) willful and wanton professional negligence; and (IV) breach of fiduciary duty. None of the claims asserted by plaintiffs against the Mayer defendants sounded in breach of contract. The amended complaint further set forth two counts against Berger for negligence and conversion (counts V and VI), however, these last two counts are not relevant to this appeal. The amended complaint was premised on the following allegations.

         ¶ 9 Since 1998, Mayer or its predecessor prepared quarterly audits for Salta and performed additional accounting work for Salta, HBZ, and TAFH, including bookkeeping and preparing financial statements, compilation reports, and tax returns. The Mayer defendants also prepared the personal income tax returns for Marshall and Arlene. In the Salta audits, the Mayer defendants consistently reported that the companies' financial statements fairly represented their financial position and were in conformity with generally accepted accounting principles (GAAP). Marshall and Arlene relied on the Salta audits-along with the financial statements and compilation reports prepared by the Mayer defendants for Salta, HBZ, and TAFH-and continued to personally guarantee the banks' loans. Unbeknownst to plaintiffs, however, for numerous years Berger had been providing the banks with duplicate tax certificates that had already been redeemed or had been used as collateral for other loans. Berger would then redeem the original tax certificates and convert the funds for her own use. As a result, the companies' lenders called the loans and Marshall and Arlene's guarantees, seized plaintiffs' collateral, and foreclosed on Marshall and Arlene's home.

         ¶ 10 Plaintiffs alleged that through the Salta audits, the Mayer defendants should have identified numerous misrepresentations which were contained in the financial statements of all three companies. The amended complaint, however, did not allege that the Mayer defendants provided auditing services to HBZ or TAFH. According to plaintiffs, the Mayer defendants breached the following duties which plaintiffs characterized as "standard auditing procedures": (1) to compare the tax certificates to the banks' records and identify any discrepancy in the companies' records; (2) to obtain and compare evidence from various government entities regarding the tax certificates to the companies' records; (3) to determine whether the tax certificates had been redeemed or had expired; (4) to determine whether the companies returned the proceeds from the redeemed tax certificates to the lending banks; (5) to uncover potential mistakes in the companies' books; and (6) to assess the susceptibility of the companies' financial statements to fraud. Plaintiffs alleged these duties extended to Marshall and Arlene because the Mayer defendants knew the couple relied upon the financial statements and compilation reports for the companies, as well as the Salta audits, in order to determine whether to guarantee the loans. The amended complaint further alleged that the breach of these duties by the Mayer defendants proximately caused plaintiffs' damages.

         ¶ 11 Regarding Berger, plaintiffs alleged that, without their knowledge or consent, she was lining her own pockets at the expense of the plaintiffs and was "secretly acting adversely to Plaintiffs and entirely for her own purposes." As a result of her willful and malicious conversion of the funds, plaintiffs suffered damages. Plaintiffs further alleged that Berger had a duty to act reasonably in maintaining accurate records from the companies and that her failure to do so proximately caused them damages. No exhibits were attached to the amended complaint.

         ¶ 12 The Mayer defendants filed a motion to dismiss counts I-IV of the amended complaint pursuant to section 2-619.1 of the Code (735 ILCS 5/2-619.1 (West 2014)). In addition to arguing that plaintiffs' allegations were insufficient and were an attempt to state a malpractice action based on auditing services for Salta, the Mayer defendants asserted a myriad of grounds for dismissal pursuant to section 2-619 of the Code. First, they contended that pursuant to section 2-619(a)(9), their liability to plaintiffs was precluded under section 450/30.1 of the Act (225 ILCS 450/30.1 (West 2014)), which provides that accountants are not liable to individuals or entities not in privity of contract with them, unless the accountant was aware the client intended for the services to benefit a third party; but if an accountant identifies any individuals who are intended to rely on the services and notifies the client and the individuals in writing, then the accountant is liable only to the client and the individuals identified. The Mayer defendants specifically ...

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