Cashman v. Coopers and Lybrand

• Decision Date: 10 November 1993
• Docket Number: No. 2-92-1473,2-92-1473
• Citation: 251 Ill.App.3d 730,191 Ill.Dec. 317,623 N.E.2d 907
• Parties: , 191 Ill.Dec. 317 Joan CASHMAN et al., Plaintiffs-Appellants, v. COOPERS AND LYBRAND, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 907

623 N.E.2d 907

251 Ill.App.3d 730, 191 Ill.Dec. 317

Joan CASHMAN et al., Plaintiffs-Appellants, v. COOPERS AND LYBRAND, Defendant-Appellee.

No. 2-92-1473.

Appellate Court of Illinois Second District.

Nov. 10, 1993.

Rehearing Denied Dec. 13, 1993.

Edward T. Joyce (argued), Richard S. Reizen, James X. Bormes, Joyce and Kubasiak, P.C., Chicago, for Joan Cashman, Robert Stotler, Steven Elkow, Terry Roggensack, James Mulka, Edwin Hansen, Morris Fox, Edwin Stotler, Mary Stotler, Robert Ferber, Bruce Payne, Nathan Yorke, Homer Grain Co., Busboom Grain Co., Susan Bartosch, John Horne, Deborah Horne, Antonio Cabezas, Amable Rosario, Jaime Acosta.

William M. Graham, Thomas L. Sbertoli, Graham, Graham & Sbertoli, Ltd., Libertyville, Arthur W. Aufmann, Joyce and Kubasiak, P.C., Paul A. Castiglione, Edward T. Joyce, P.C., Chicago, for plaintiffs appellants.

Harold C. Wheeler, Alexander S. Vesselinovitch, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, William R. Maguire (argued), Hughes, Hubbard & Reed, New York City, for Coopers & Lybrand.

George A. Davidson, Hughes, Hubbard & Reed, New York City.

Presiding Justice INGLIS delivered the opinion of the court:

Plaintiffs, a group of shareholders and some former directors and officers of Stotler Group, Inc. (SGI), appeal from an order of the circuit court of Lake County which dismissed their complaint under section 2- Plaintiffs alleged that the accountants served as independent public accountants for SGI and its subsidiaries, including Stotler and Company (Stotler), which was a futures commission merchant (FCM). The accountants allegedly audited the financial statements of SGI and its subsidiaries for the periods ending December 31, 1988, and December 31, 1989, and issued unqualified opinions that those financial statements fairly represented SGI's financial condition. According to plaintiffs' complaint, the accountants' audit reports were given to plaintiffs, SGI, Stotler, the Securities Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and others. Plaintiffs claim that the rules of the American Stock Exchange as well as the terms of certain engagement letters between the accountants and SGI required the accountants to provide SGI's shareholders with copies of their opinions.

[191 Ill.Dec. 318] 615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1992)). Plaintiffs had sued Coopers & Lybrand, an accounting firm (the accountants), alleging breach of contract, negligence and fraud. The circuit court dismissed plaintiffs' third amended complaint based on a lack of standing and for failure to state a claim for breach of contract. We affirm.

The accountants' reports stated that the audits were properly performed and noted specifically that SGI's subsidiaries had exceeded minimum net capital levels imposed by the SEC and the CFTC. Plaintiffs allege that during the course of auditing SGI and its subsidiaries the accountants "became familiar with SGI's management information systems, computer programs, accounting policies, regulatory net capital requirements, revenue recognition policies, public filings, press releases, internal controls and personnel." They also claim that the accountants "became familiar with SGI's internal auditing systems and [were] aware of material accounting weaknesses and internal control weaknesses which caused SGI's books and records to not accurately reflect SGI's accounts."

Plaintiffs claim that CFTC regulations require FCMs like Stotler to maintain net capital equal to 4% of customers' segregated funds. Net capital is the amount by which an FCM's current assets exceed liabilities. Plaintiffs allege that as of December 31, 1989, in order to correct a net capital problem, Stotler transferred certain noncurrent capital assets worth about $13 million to SGI in return for SGI assuming a like amount of Stotler's liabilities. Stotler remained secondarily liable for the liabilities assumed by SGI.

According to plaintiffs, the accountants concluded that the above transfer corrected Stotler's net capital deficiency. However, plaintiffs claim that CFTC regulations prohibited Stotler from excluding contingent liabilities when computing net capital. Federal regulators subsequently declared Stotler to be in violation of its net capital requirements and the CFTC filed an administrative complaint against Stotler. Stotler settled the dispute and agreed to a permanent trading ban and the revocation of its registration as an FCM. The SEC filed a complaint against Stotler which also was settled. Part of the settlement agreement required revocation of Stotler's registration as a government securities broker-dealer.

Plaintiffs allege that when the above facts became publicly known, the price of SGI's stock fell from a high of approximately $13.75 per share in 1989 to $0 per share in August 1990. SGI declared bankruptcy in August 1990. Plaintiffs claim that SGI would have corrected the net capital problem if the accountants had brought it to the attention of SGI's management. They allege that SGI did not have sufficient time to remedy the problem after it was informed of the problem's existence by government regulators. Plaintiffs claim that they were damaged because they were not afforded an opportunity to minimize their loss on their purchase of SGI stock. They state that if the accountants had spotted the problem, plaintiffs could have demanded that SGI remedy the problem and could have sold their stock if it was not taken care of to their satisfaction. Plaintiffs allege that they lost the value of their investment in SGI's stock, and that their Specifically, plaintiffs allege that the accountants breached the contract with SGI, as to which plaintiffs were third-party beneficiaries, that the accountants were negligent in performing their services, and that the accountants recklessly misrepresented the financial condition of SGI and its subsidiaries knowing that the plaintiffs would rely on the audit reports. As noted, the circuit court dismissed the plaintiffs' complaint for lack of standing and for failure to state a breach of contract claim. The plaintiffs filed a timely appeal.

[191 Ill.Dec. 319] damages are separate and distinct from the damages incurred by SGI and Stotler.

STANDING

In this court, the plaintiffs argue that they have standing to prosecute their claims because the accountants owed contract and tort duties to both SGI and the plaintiffs, and because the accountants caused direct injury to both SGI and to the plaintiffs. The plaintiffs state that they are not complaining of the diminution in the value of their shares of stock, but are suing for the lost opportunity to make a fully informed investment decision regarding their continued ownership of SGI stock.

The accountants argue on appeal that the plaintiffs' claims are in fact claims for the diminution in the value of their stock, are thus derivative, and were properly dismissed. The accountants also argue that they did not owe any direct duty to the plaintiffs and that the plaintiffs have failed to allege a separate and distinct injury required to maintain an independent action. Whether a party has standing to sue is a question of law (Kohls v. Maryland Casualty Co. (1986), 144 Ill.App.3d 642, 644, 98 Ill.Dec. 847, 494 N.E.2d 1174) which we review de novo (Uhwat v. Country Mutual Insurance Co. (1984), 125 Ill.App.3d 295, 302, 80 Ill.Dec. 618, 465 N.E.2d 964).

The shareholder standing rule

"is a longstanding equitable restriction that generally prohibits shareholders from initiating actions to enforce the rights of the corporation unless the corporation's management has refused to pursue the same action for reasons other than good-faith business judgment. [Citation.] There is, however, an exception to this rule allowing a shareholder with a direct, personal interest in a cause of action to bring suit even if the corporation's rights are also implicated." (Franchise Tax Board v. Alcan Aluminum Ltd. (1990), 493 U.S. 331, 336, 110 S.Ct. 661, 665, 107 L.Ed.2d 696, 704.)

The plaintiffs cite Zokoych v. Spalding (1976), 36 Ill.App.3d 654, 344 N.E.2d 805, in support of their argument. Zokoych states:

"Where there is no showing that plaintiff himself had been injured in any capacity other than in common with his fellow stockholders, the cause of action belongs to the corporation [citation], and a stockholder may not seek relief on his own behalf. However, this general principle has no application where the wrongful acts are not only against the corporation but are also violations of a duty arising from a contract or otherwise, and owed directly by the wrongdoer to the stockholders. [Citation.] A suit brought by a stockholder upon a personal claim is by its nature distinguishable from a proceeding to recover damages or other relief for the corporation. [Citation.] Not every allegation of wrongdoing is a Simon-pure charge of individual injury, but a court must preliminarily determine if the 'gravamen' of the pleadings states injury to the plaintiff upon an individual claim as distinguished from an injury which indirectly affects the shareholders or affects them as a whole." (Zokoych, 36 Ill.App.3d at 663, 344 N.E.2d 805.)

The plaintiffs rely on both Zokoych and the case of Mann v. Kemper Financial Cos. (1992), 247 Ill.App.3d 966, 187 Ill.Dec. 726, 618 N.E.2d 317. Each case is distinguishable.

In Zokoych, the plaintiff, who was one of two stockholders in a small tool company, sued the second stockholder and others alleging that the second stockholder did not return the plaintiff's pledged stock in the company in breach of an agreement between them, removed the plaintiff as president of the company and stopped paying his salary, and removed the company's equipment from its premises. (Zokoych, 36 Ill.App.3d at 657, 344 N.E.2d 805.) The plaintiff claimed that he was deprived of collecting debts the company owed to him, that his business...