County of Cook v. Bear Stearns & Co., Inc.

• Decision Date: 03 June 2005
• Docket Number: No. 97022.,97022.
• Citation: 215 Ill.2d 466,831 N.E.2d 563
• Parties: THE COUNTY OF COOK ex rel. Robert F. RIFKIN et al., Appellants, v. BEAR STEARNS & COMPANY, INC., et al., Appellees.
• Court: Illinois Supreme Court

831 N.E.2d 563

215 Ill.2d 466

THE COUNTY OF COOK ex rel. Robert F. RIFKIN et al., Appellants, v. BEAR STEARNS & COMPANY, INC., et al., Appellees.

No. 97022.

Supreme Court of Illinois.

June 3, 2005.

Clinton A. Krislov, Jason P. Stiehl, Chicago, for appellants.

Richard A. Devine, State's Attorney, Chicago (Patrick T. Driscoll, Jr., Paul A. Castiglione, Patrick M. Blanchard, Julie Ann Sebastian, Assistant State's Attorneys, of counsel), for appellant County of Cook.

Eric H. Grush, Chicago (A. Robert Pietrzak, Nicholas P. Crowell, Martin B. Jackson, New York, New York, of counsel), of Sidley, Austin, Brown & Wood, L.L.P., for appellee Bear Stearns & Co.

Stanley J. Parzen, James C. Schroeder, of Mayer, Brown, Rowe & Maw, L.L.P., Chicago, for appellee Ernst & Young, L.L.P.

Justice KILBRIDE delivered the opinion of the court:

This case presents questions of whether plaintiffs have standing to assert a cause of action on behalf of Cook County under article XX of the Code of Civil Procedure (735 ILCS 5/20-101 et seq. (West 1998)), and whether plaintiffs have standing to assert common law claims on behalf of the County. The circuit court of Cook County dismissed the complaint, finding article XX unconstitutional to the extent it conferred authority on private citizens to file derivative claims on behalf of the County. We allowed plaintiffs' direct appeal pursuant to Supreme Court Rule 302(a) (134 Ill.2d R. 302(a)). We now affirm and hold: (1) the State's Attorney has the exclusive power to represent the County in litigation when the County is the real party in interest; (2) section 20-104(b) of article XX is unconstitutional to the extent it purports to confer standing on private citizens to sue when the County is the real party in interest; and (3) plaintiffs' common law claims do not lie when no claim is made that a public official is responsible for the alleged injury, and only the State's Attorney has the authority to assert those claims.

I. BACKGROUND

In March 2001, plaintiffs, Robert F. Rifkin, Raymond G. Scachitti, and Patrick J. Houlihan, taxpayers and residents of Cook County, filed a putative class action seeking to recover, on behalf of the County, overcharges made by Bear Stearns & Company in connection with advance refunding bond transactions in 1992. Bear Stearns was the lead underwriter for the County's issuance of bonds to refinance, at lower interest rates, certain municipal bonds previously issued by the County. The case was essentially a reassertion of pendent state claims dismissed in an earlier suit filed in the United States District Court for the Northern District of Illinois. That dismissal was affirmed on appeal. See Rifkin v. Bear Stearns & Co., 248 F.3d 628 (7th Cir.2001).

An advance refunding bond transaction is a financial investment vehicle allowing the sale of new bonds and the use of the proceeds to purchase securities. These securities are then held in a defeasance escrow to assure future payment of outstanding bonds that cannot presently be redeemed because the call provisions are for a future date. According to the complaint, federal law restricts the overall yield local governments can earn on securities placed in a defeasance escrow. By charging more than market value, Bear Stearns reduced, or "burned," the yield on the securities and kept the profit. The complaint alleges the "burn" violates IRS regulations requiring securities to be purchased at market value and any profit resulting from positive arbitrage be paid to the United States Treasury. If this is not done, the refunding bonds may lose tax-exempt status. The complaint claims that in the 1992 transaction, Bear Stearns overcharged the County by approximately $249,000.

The complaint sought relief against Bear Stearns under sections 20-102 and 20-103 of article XX (735 ILCS 5/20-102, 20-103 (West 1998)). Section 20-102 provides that any person who receives fraudulently obtained public funds, whether or not that person has committed the fraud, must refund the money. 735 ILCS 5/20-102 (West 1998). Section 20-103 provides that a person who receives compensation benefits or remuneration "to which he is not entitled, or in a greater amount than that to which he is entitled" shall be liable to repay those amounts and, in addition, is liable for civil penalties, including treble damages. 735 ILCS 5/20-103 (West 1998). A common law claim was also asserted against Bear Stearns for fraudulently representing to the County that it was paying fair market value for the securities and that the escrow accounts would not produce positive arbitrage. The complaint also sought consequential damages against Bear Stearns for breach of its underwriting contract, or for rescission and restitution.

The complaint sought common law relief against the accounting firm Ernst & Young (Ernst), engaged to verify the accuracy of the escrow account for the County. Plaintiffs allege Ernst breached its contract by submitting a false or recklessly inaccurate verification and that it committed accountant malpractice by failing to exercise reasonable care or competence while completing its verification, resulting in a misstatement of the yield on the securities in the escrow fund.

Common law breach of contract claims were also asserted against Public Sector Group, Inc. (PSG), and Seaway National Bank of Chicago (Seaway). PSG and Seaway were engaged by the County to provide financial advisory services in connection with the refunding bonds. The complaint alleged they failed to monitor and verify the accuracy of the amounts charged to the County for services and securities, and failed to disclose to the County that it paid more than fair market value for securities purchased for the defeasance escrow.

The complaint also asserted a common law breach of fiduciary duty claim against all defendants, alleging that as investment advisors to the County, all defendants were, as a matter of law, fiduciaries to the County. Plaintiffs claim defendants violated their fiduciary duties by failing to monitor and inform the County of markups on the securities issued in the advanced refunding transaction.

The complaint did not allege that the County or any County official was in any way complicit in the alleged misrepresentations or fraud. On the contrary, plaintiffs alleged that defendants' fraudulent concealment of the marked-up price of the securities "was intended to, and did in fact, prevent the County from knowing either that it had claims against the Defendants or the true facts underlying those claims."

In their prayer for relief, plaintiffs sought class certification, compensatory and treble damages, rescission of contracts and restitution, attorney fees and expenses, and equitable relief, including imposing a constructive trust on or otherwise restricting defendants' assets to ensure plaintiffs an effective remedy.

On March 23, 1999, prior to filing the original suit in federal court, plaintiffs' counsel sent by certified mail a letter to the Cook County State's Attorney, giving notice of his intent to file suit, as required by section 20-104(b) of article XX (735 ILCS 5/20-104(b) (West 1998)), for overcharges incurred by Cook County in connection with the 1992 bond issue, and demanding that the State's Attorney pursue any and all claims stemming from overcharges in the bond issue transactions. Section 20-104(b) provides:

"Notwithstanding any other provision in this Section, any private citizen residing within the boundaries of the governmental unit affected may bring an action to recover the damages authorized in this Article on behalf of such governmental unit if: (a) the citizen has sent a letter by certified mail, return receipt requested, to the appropriate government official stating his intention to file suit for recovery under this Article and (b) the appropriate government official has not, within 60 days of the date of delivery on the citizen's return receipt, either instituted an action for recovery or sent notice to the citizen by certified mail, return receipt requested, that the official has arranged for a settlement with the party alleged to have illegally obtained the compensation or that the official intends to commence suit within 60 days of the date of the notice. A denial by the official of the liability of the party alleged liable by the citizen, failure to have actually arranged for a settlement as stated, or failure to commence a suit within the designated period after having stated the intention in the notice to do so shall also permit the citizen to commence the action.

For purposes of this subsection (b), `appropriate government official' shall mean (1) the Attorney General, where the government unit alleged damaged is the State; (2) the corporation counsel where the government unit alleged damaged is a municipality with a population of over 500,000; and (3) the chief executive officer of any other local government unit where that unit is alleged damaged.

Any private citizen commencing an action in compliance with this subsection which is reasonable and commenced in good faith shall be entitled to recover court costs and litigation expenses, including reasonable attorney's fees, from any defendant found liable under this Article." 735 ILCS 5/20-104(b) (West 1998).

Article VII, section 4(b), of the Illinois Constitution of 1970 designates the president of the Cook County board as the chief executive officer of the County. The notice was not sent, in the manner required by the statute, to John H. Stroger, Jr., who was then the president of the Board of Commissioners of Cook County.

The State's Attorney did not respond to the notice, and plaintiffs filed suit in federal court, asserting a federal claim as well as all the state claims later presented in the circuit court of Cook County. The County appeared in the lawsuit, but did not originally file any pleading attacking the complaint. The defendants filed motions to dismiss...