Courtney v. Pritzker

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.
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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
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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
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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
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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
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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
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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).
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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.
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