Board of Trustees v. Coopers & Lybrand
| Decision Date | 29 July 2002 |
| Docket Number | No. 1-01-2947.,1-01-2947. |
| Parties | The BOARD OF TRUSTEES OF COMMUNITY COLLEGE DISTRICT NO. 508, COUNTY OF COOK, State of Illinois, Plaintiff-Appellee and Cross-Appellant, v. COOPERS & LYBRAND, L.L.P., Defendant-Appellant and Cross-Appellee. |
| Court | United States Appellate Court of Illinois |
Reuben L. Hedlund, James W. Joseph, Erin H. Walz, Sarah J. Deneen, Hedlund, Hanley, Koenigsknecht & Trafelet, Chicago (Steven J. Roeder, Freeborn & Peters, of counsel), for Plaintiff-Appellee.
Jeffrey R. Tone, Linton J. Childs, Asheesh Goel, David A. Gordon, Sidley, Austin, Brown & Wood, Chicago, for Defendant-appellant.
Plaintiff City Colleges of Chicago (City Colleges) sued defendant Coopers & Lybrand, L.L.P. (Coopers), for professional negligence and breach of contract resulting from an audit of City Colleges. The jury returned a verdict in favor of City Colleges for $23 million reduced by 45% for plaintiff's comparative negligence, and $378,000 for breach of contract. Coopers appeals claiming that: (1) City Colleges failed to prove causation; (2) it is entitled to a new trial because the trial court erred in instructing the jury and allowing improper witness testimony and the verdict was against the manifest weight of the evidence; and (3) in the alternative, it is entitled to a setoff for the full amount of a settlement between City Colleges and another auditor.
City Colleges cross-appeals alleging that this court must set aside the jury's verdict of contributory negligence and the damages verdict for the breach of contract claim.
We affirm.
On November 10, 1992, City Colleges contacted Coopers and requested that it submit a proposal for auditing City Colleges' books. Coopers submitted a proposal that included a comprehensive audit for the fiscal years of 1993, 1994 and 1995. The audit proposal was customized for City Colleges and indicated Coopers' expertise in auditing governmental entities, especially colleges. The audit proposal specifically mentioned that "investments" would be included in its review; however, there were no details related to the procedure to be employed relative to the investments. City Colleges' fiscal year begins on July 1 and ends on June 30. On April 1, 1993, City Colleges' board of directors (Board) resolved that it would retain Coopers as its auditor for 1993 to 1995. Coopers began its field work in September of 1993 and completed its audit on or about October 15, 1993. Coopers issued and approved City Colleges' financial statements for the period beginning July 1, 1992, and ending June 30, 1993.
In February of 1994, the Board's chairman, Ron Gidwitz, testified that he was made aware of a "financial emergency" arising out of Dr. Philip Luhmann's investment practices. Dr. Luhmann was the treasurer appointed by the Board and later terminated as a result of his investing practices. The Board contacted Coopers, financial advisors, legal counsel and the Illinois Community College Board. After analyzing the financial emergency, City Colleges determined that Dr. Luhmann had violated City Colleges' investment policy. Dr. Luhmann had been engaging in a practice known as "pairing off" securities. When Dr. Luhmann paired off the securities, he purchased the security with the expectation that he could sell the security for a profit before he had settled its purchase. When the interest rates went down, the treasurer could repurchase the security at a profit. If the interest rates increased, the treasurer would have to wait until the rates fell to a level that would allow him to complete the pair off. The investment policy of City Colleges was to hold securities to maturity to minimize interest rate risks. After discovering this investment practice, the Illinois Community College Board instructed City Colleges to sell the securities that did not comport with the investment policy as soon as it was prudent to do so.
City Colleges filed a complaint at law against Arthur Andersen, its previous auditor, and Coopers alleging that both auditors were professionally negligent and in breach of their respective contracts. The compliant stated that the auditors, inter alia, failed to detect and notify the Board of illegal, inappropriate and highly risky investments. The complaint further stated that if the auditors had exercised their duties of professional due care, they would have disclosed in their reports and advised the Board of the treasurer's activity. If so informed, the Board would have taken the necessary steps to bring the investments into compliance with the investment policy and avoid the losses suffered as a result of the policy violation.
Arthur Andersen settled with City Colleges prior to trial. Coopers elected to proceed to trial. At trial, City Colleges introduced evidence of Dr. Luhmann's investment policy violations and testimony from certain members of the Board indicating what action they would have taken had they been made aware of the violations. City Colleges also called experts that testified to the issue of damages suffered by City Colleges, professional negligence and breach of contract. Coopers presented evidence and testimony by experts to support its position relative to the damages, professional negligence and breach of contract. The trial lasted nearly a month.
At the conclusion of the trial, the jury returned a verdict in favor of City Colleges on the professional negligence count for $23 million. The jury also assigned negligence on behalf of the plaintiff at 45%, thereby reducing City Colleges' recovery to $12,650,000. The jury further found in favor of City Colleges on the breach of contract claim and awarded City Colleges $378,000.
The defendant claims that it is entitled to judgment n.o.v. because City Colleges failed to prove causation. In support of its claim, Coopers argues: (1) there was no competent evidence of proximate causation; (2) there was no competent evidence of loss causation; and (3) collateral estoppel precludes the jury from finding that Coopers' audit caused City Colleges' damages. In support of Coopers' first contention, it claims that the limited testimony offered regarding causation was far too speculative to prove proximate causation. Specifically, Coopers cites the testimony of three members of the board of directors.
James Dyson testified at trial that had he been advised by Coopers that Dr. Luhmann was investing City Colleges' money in violation of the Board's policy, he would have made whatever changes that Coopers recommended. Ronald Gidwitz testified that if Coopers had informed him of Dr. Luhmann's investment practices, the Board would not have tolerated it and that it would have "cleared up" the situation. Terry Newman testified that he would have pursued any information that indicated improper investment by Dr. Luhmann.
When determining whether a directed verdict or a judgment n.o.v. is proper, the reviewing court must follow established standards. Maple v. Gustafson, 151 Ill.2d 445, 453, 177 Ill.Dec. 438, 603 N.E.2d 508 (1992). A directed verdict or a judgment n.o.v. is properly entered in those limited cases where all of the evidence, when viewed in its aspect most favorable to the opponent, so overwhelmingly favors the movant that no contrary verdict based on that evidence could ever stand. Maple, 151 Ill.2d at 453, 177 Ill.Dec. 438, 603 N.E.2d 508. In ruling on a motion for a judgment n.o.v., a court does not weigh the evidence, nor is it concerned with the credibility of the witnesses; rather, it may only consider the evidence, and any inferences therefrom, in the light most favorable to the party resisting the motion. Mizowek v. DeFranco, 64 Ill.2d 303, 309-10, 1 Ill. Dec. 32, 356 N.E.2d 32 (1976).
In our view, the testimony as to proximate causation was not too speculative. The jury in this case heard the testimony of three members of City Colleges' Board and two former members of the Board. Michael Mayo was the chairman of the finance committee at the time of the Coopers audit and a former trustee. Ronald Grzywinski was the trustee responsible for the adoption of the Board's investment policy. Mayo, Grzywinski and the other members testified as to the action they would have taken if Coopers had indicated any deviation from the investment policy. Also, City Colleges presented evidence that it had acted on other issues brought to its attention by Coopers and made changes in areas such as its purchasing practices.
Coopers further argues that the "courts" have uniformly found the testimony of board members, in similar situations, insufficient to prove proximate causation, citing In re Hawaii Corp., 567 F.Supp. 609, 627 (D.Haw.1983) and Drabkin v. Alexander Grant & Co., 905 F.2d 453, 456 (D.C.Cir.1990). We note, however, that In re Hawaii Corp. was a bench trial where the trial court determined, as the finder of fact, that the testimony of the board in that case was unreliable. In re Hawaii Corp., 567 F.Supp. at 627. We do not read that case as holding that such evidence is inadmissible.In the instant case, the jury determined that the testimony given by the Board was reliable. The Drabkin case is distinguishable because the auditor issued a "going concern" and the directors did not act even though reports of its tax problems appeared in the Wall Street Journal. During that trial, one director testified that the board "could" have declared bankruptcy earlier if it had known about a tax delinquency. (Emphasis in original.) Drabkin, 905 F.2d at 456-57.
Although this type of testimony is unusual, courts have allowed the testimony of board members as to what their actions would have been if auditors had informed them of certain inadequacies. See Seafirst Corp. v. Jenkins, 644 F.Supp. 1152, 1156-57 (W.D.Wash.1986) (...
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Board of Trustees of Community College District No. 508 v. Lybrand
...The jury also awarded damages on the Board's contract claim. Both parties appealed. The appellate court affirmed. 333 Ill. App.3d 225, 266 Ill.Dec. 493, 775 N.E.2d 55. We granted Coopers' petition for leave to appeal (177 Ill.2d R. 315), and the Board seeks cross-relief (155 Ill.2d R. 318).......