Courtney v. Pritzker

Opinion

First Division February 22, 2010

No. 1-07-1656

JOHN W. COURTNEY, MARY FOERNER, ) Appeal from the FRANCES T. LAX, LAWRENCE M. GREEN, ) Circuit Court of ANNE MACKAY, as executor for the ) Cook County Estate of IRENE L. KORTAS, KENNETH ) NEWTON and DAVID PIECUCH, on behalf of ) themselves and all others similarly ) situated, ) ) Plaintiffs-Appellants, ) ) v. ) No. 06 CH 02085 ) PENNY S. PRITZKER, THOMAS J. PRITZKER, ) ALVIN DWORMAN, COAST-TO-COAST FINANCIAL ) CORPORATION, NEAL T. HALLERAN, ) WILLIAM C. BRACKEN, MONTE KURS, ) NELSON L. STEPHENSON, GLEN MILLER, ) MARC A. WEISMAN, STEVEN MANN, ) WALTER F. RUSNAK and ERNST & YOUNG LLP, ) Honorable ) Philip L. Bronstein Defendants-Appellees. ) Judge Presiding

PRESIDING JUSTICE HALL delivered the opinion of the court:

This suit is brought by a class of former depositors of

Superior Bank FSB (Superior Bank), who lost money on deposits

exceeding the $100,000 federally insured limit when the bank

failed and was placed in receivership by the Federal Deposit

Insurance Corporation (FDIC). Suit was filed against several

defendants: the bank's officers and directors; the bank's

auditor, Ernst & Young LLP; as well as the bank's holding

company, Coast-to-Coast Financial Corporation (CCFC), and several

of CCFC's principals, which included Penny S. Pritzker, Thomas J. No. 1-07-1656 Pritzker, and Alvin Dworman.1

Plaintiffs filed their initial complaint in the circuit

court in January 2002. In the complaint, they alleged violations

of the Illinois Consumer Fraud and Deceptive Business Practices

Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 2002)),

and the Illinois Public Accounting Act (Accounting Act) (225 ILCS

450/0.01 et seq. (West 2000)). Defendants removed the matter to

the federal district court after plaintiffs amended the complaint

by adding a federal civil claim under the Racketeer Influenced

and Corrupt Organizations Act (RICO) (18 U.S.C. §§1961 through

1968 (2000)).

In federal district court, plaintiffs filed a five-count

fourth amended complaint alleging in count I that defendants

violated the Consumer Fraud Act by "providing false financial

statements regarding the financial condition of the bank and

erroneous legal advice regarding FDIC insurance coverage"; in

count II that CCFC and Ernst & Young violated RICO (18 U.S.C.

§1962(c) (2000)), by withdrawing funds from the bank under cover

of false financial statements approved by Ernst & Young; in count

III that Ernst & Young violated the Accounting Act (225 ILCS

450/30.1 (West 2000)) by knowingly or negligently approving

financial statements that drastically overstated the value of the

bank's assets; and in count IV that Ernst & Young knowingly aided

and abetted CCFC's RICO violation. See Courtney v. Halleran, No.

1 Plaintiffs dropped their claims against Dworman.

-2- No. 1-07-1656 02 C 6926 , slip op. at 1-2, 2004 WL 2095674 (N.D. Ill. September

14, 2004) (Courtney I).

In count V, plaintiffs sought a declaration that a 2001

settlement agreement in which the FDIC settled the bank's claims

against CCFC's principals for $460 million was null and void

because it would divert the bank's assets (proceeds from Ernst &

Young settlement) to CCFC in violation of the priority scheme for

distribution of the bank's assets established by section

1821(d)(11)(A) of the Financial Institutions Reform, Recovery,

and Enforcement Act of 1989 (12 U.S.C. §1811 et seq. (2000)

(FIRREA). See (Courtney I); Courtney v. Halleran, No. 02 C 6926,

slip op. at 4, 2005 WL 241471 (N.D. Ill. February 1, 2005)

(Courtney II).

In September 2004, the federal district court dismissed

plaintiffs' federal claims with prejudice and declined to

exercise supplemental jurisdiction over the state-law claims,

dismissing those claims without prejudice. Courtney I, slip op.

at 8. The district court dismissed the two RICO counts (II and

IV) with prejudice, finding that plaintiffs lacked standing to

bring these claims because the injuries they suffered were

derivative of the injuries the bank itself suffered and therefore

the claims must be brought by the FDIC on plaintiffs' behalf or

through a derivative suit after unsuccessful demand upon the

FDIC. Courtney I, slip op. at 7.

The district court also determined that plaintiffs' request

-3- No. 1-07-1656 for injunctive and declaratory relief in count V was not ripe for

decision because at the time there was no actual or pending

settlement that would cause Ernst & Young funds to be

distributed. See Courtney I, slip op. at 8; Courtney II, slip op.

at 4.

In December 2004, the FDIC and Ernst & Young agreed to a

settlement wherein the FDIC agreed to release all claims against

Ernst & Young in exchange for $125 million. At a hearing before

the court on January 27, 2005, the FDIC indicated that it would

not pay out any amounts due on account of the Ernst & Young

settlement until February 7, 2005, due to unresolved issues

remaining in the litigation. Courtney II, slip op. at 2-3.

In February 2005, the district court denied plaintiffs'

motion for reconsideration of counts II and IV of the fourth

amended complaint for the same reasons it originally dismissed

those counts. Then, after granting the plaintiffs' motion to

reconsider count V on the ground that payments from the Ernst &

Young settlement were imminent, thereby making the issue of the

legality of the distribution scheme agreed upon in the 2001

settlement ripe for consideration, the court denied plaintiffs'

request to enjoin disbursal of funds from the Ernst & Young

settlement.

The court determined that pursuant to section 1821(j) of the

FIRREA (12 U.S.C. §1821(j) (2000)), it was precluded from

granting the requested injunctive relief because the FDIC would

-4- No. 1-07-1656 be acting pursuant to its enumerated powers as conservator and

receiver when it honored the terms of the 2001 settlement in

disbursing the funds received from the Ernst & Young settlement.

Courtney II, slip op. at 5-7.

On January 31, 2006, plaintiffs refiled their state-law

claims in the circuit court for violations of the Consumer Fraud

Act and Accounting Act, adding a claim for commercial bad faith.

In a decision dated May 7, 2007, the Seventh Circuit Court

of Appeals, in Courtney v. Halleran, 485 F.3d 942 (7th Cir.

2007), affirmed the district court's decision of February 2005,

which had denied plaintiffs' motion for reconsideration of the

dismissed RICO counts (II and IV), and denied the request for

injunctive relief in count V.

On May 16, 2007, the circuit court granted defendants'

motions dismissing plaintiffs' state-law claims. The court

granted Alvin Dworman's motion to dismiss for lack of personal

jurisdiction pursuant to section 2-301 of the Code of Civil

Procedure (Code) (735 ILCS 5/2-301 (West 2006)). The court

dismissed all of plaintiffs' claims with prejudice for lack of

standing pursuant to section 2-619 of the Code (735 ILCS 5/2-619

(West 1996)). The circuit court also dismissed plaintiffs'

claims under the Consumer Fraud Act and Accounting Act with

prejudice pursuant to section 2-615 of the Code (735 ILCS 5/2-615

(West 1996)).

Plaintiffs were given two weeks to advise the circuit court

-5- No. 1-07-1656 as to whether they would seek leave to amend to cure the section

2-615 dismissals. On June 4, 2007, plaintiffs advised the

circuit court that they would not seek leave to amend their

complaint and instead proceeded with this appeal. We affirm.

ANALYSIS

Plaintiffs first contend the circuit court erred in

dismissing their complaint with prejudice for lack of standing

pursuant to section 2-619(a)(9) of the Code (735 ILCS 5/2-

619(a)(9) (West 2002)). The standard of review on appeal from a

ruling granting a section 2-619(a)(9) motion to dismiss is de

novo. Travis v. American Manufacturers Mutual Insurance Co., 335

Ill. App. 3d 1171, 1174, 782 N.E.2d 322 (2002).

As a general rule, depositors, as a class, lack standing to

pursue claims against bank officers and directors accused of

causing a bank to fail, because the cause of action belongs to

the bank or its receiver and not to the depositors, whose

injuries are generally indistinguishable from one another and

derivative of the injuries suffered by the bank. See, e.g., Adato

v. Kagan, 599 F.2d 1111, 1117 (2d Cir. 1979) ("As a general rule,

wrongdoing by bank officers that adversely affects all depositors

creates a liability which is an asset of the bank, and only the

bank or its receiver may sue for its recovery").

The rationale for this rule is that permitting individual

depositors to bring actions for such injuries would invariably

lead to a multiplicity of suits and potentially impair the rights

-6- No. 1-07-1656 of other creditors and claimants with superior interests. In re

Sunrise Securities Litigation, 916 F.2d 874, 887-88 (3d Cir.

1990). An exception to the rule exists where an individual

depositor suffers an injury that is distinct from the injury

suffered generally by all depositors. Adato, 599 F.2d at 1117.

Plaintiffs have attempted to circumvent the "standing"

obstacle by styling their claims as purported direct claims for

consumer fraud and negligent misrepresentation. Plaintiffs

contend that defendants violated the Consumer Fraud Act by

fraudulently inducing them to deposit funds into their accounts

by providing false financial statements regarding the financial

condition of the bank and erroneous legal advice regarding FDIC

insurance coverage. Plaintiffs further maintain that Ernst &

Young violated section 30.1 of the Accounting Act (225 ILCS

450/30.1 (West 2000)), by knowingly or negligently approving

financial statements overstating the value of the bank's assets

with the knowledge that plaintiffs would rely on these statements

in deciding whether to deposit their funds with the bank.

In assessing whether a claim is direct or derivative, courts

look beyond the labels employed by counsel and instead examine

the body of the complaint. In re Sunrise Securities Litigation,

916 F.2d at 882. Here, the essence of plaintiffs' complaint is

that they lost the uninsured portions of their deposits because

the defendants looted the bank's assets and drove the bank into

insolvency, all while misleading plaintiffs and other investors

-7- No. 1-07-1656 into believing that the bank was financially stable. The claims

set forth in plaintiffs' complaint are derivative in nature.

Plaintiffs fail to allege an injury (lost deposits) which

was separate and distinct from that suffered by other depositors

or an injury involving a depositor which existed independently of

the bank. Plaintiffs alleged that all depositors relied on the

same explicit or implicit fraudulent misrepresentations or

omissions concerning the solvency of the bank and FDIC deposit

insurance.

Such claims are derivative in nature and belong to the FDIC

in its corporate capacity as receiver for the failed bank. See

Downriver Community Federal Credit Union v. Penn Square Bank, 879

F.2d 754, 764-65 (10th Cir. 1989) (any remedy for fraudulent

representations that affects or potentially affects all creditors

of bank, belongs to the receiver who asserts such claims for the

benefit of all creditors); Adato, 599 F.2d at 1117 ("wrongdoing

by bank officers that adversely affects all depositors creates a

liability which is an asset of the bank, and only the bank or its

receiver may sue for its recovery"); Hamid v. Price Waterhouse,

51 F.3d 1411, 1420-21 (9th Cir. 1995) (depositors lacked standing

to bring claims against individuals and firms accused of causing

banks to fail); see generally M. Smith & B. Lee, Uninsured-

Depositor Litigation: an Emerging Threat to Directors and

Officers of Troubled Banks?, 14 No. 18 Andrews Sec. Litig. & Reg.

Rep. 1 (January 13, 2009).

-8- No. 1-07-1656 The plaintiffs, as depositors, lacked standing to assert

causes of action properly belonging to the FDIC in its corporate

capacity as receiver. Therefore, the trial court properly

dismissed plaintiffs' complaint for lack of standing pursuant to

section 2-619(a)(9) of the Code.

In light of our determination regarding plaintiffs' lack of

standing to maintain this action, we need not consider the other

contentions raised by the parties. Tarkowski v. Scott, 79 Ill.

App. 3d 787, 790, 398 N.E.2d 891 (1979). Accordingly, for the

reasons set forth above, the judgment of the circuit court of

Cook County is affirmed.

Affirmed.

GARCIA and LAMPKIN, JJ., concur.

-9-