Bank of America (“Bank”) lost about $34 million when Knight Industries went bankrupt. In the Bank’s lawsuit under federal diversity jurisdiction, it was alleged that Knight’s directors and managers looted the company and that its accountants neglected to detect the fraud. The parties had agreed that Illinois law applied. The district court dismissed all of the Bank’s claims on the pleadings on a motion.
The accounting firm, Frost, Ruttenberg & Rothblatt, P.C. were Knight’s accountants.The accountants sought to invoke the protection of Illinois law under 225 ILCS 450/30.1, which provides that an accountant is liable only if the accountant himself/herself committed fraud or “was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action.” The district court here concluded that the bank’s complaint did not allege plausibly that the accounts knew that Knight’s “primary intent” was to benefit the bank.
The lawsuit alleged that the accountants knew that Knight furnished copies of the financial statements to its lenders, including the Bank. But the district court judge observed that auditors always know that clients send statements to lenders (existing or prospective). The statute would be ineffectual if knowledge that clients show financial statements to third parties were enough to demonstrate that the client’s “primary intent” was to benefit a particular lender.
The district court cited Tricontinental Industries, Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824 (7th Cir. 2007) and Kopka v. Kamensky & Rubenstein, 354 Ill.App.3d 930 (2004) for the proposition that an auditor’s ability to foresee who would receive copies of a financial statement differs from knowledge that a “primary intent” of the engagement is to benefit potential recipients.
The district court reached the conclusion that the Bank’s complaint did not allege that the accountants knew that Knight’s “primary intent” was to benefit the Bank.
The court of appeals stated that the only way for the Bank to get around the liability prohibition would be for the Bank to have arranged for the suit to be filed by the Knight bankruptcy trustee, rather than the Bank itself. The Bank did not want to have other Knight creditors to receive the benefit of any potential recovery it made available. The panel noted that the cases of Iqbal and Twombly required the dismissal of a complaint if it lacked a plausible claim and that the Bank’s claim that the “defendants looted the corporation” was inadequate without more supporting details.
In this case, the panel rejected the Bank’s contention that the district court abused its discretion when it dismissed the complaint with prejudice. It was noted that this dismissal was the third attempt by the Bank to file an appropriate complaint that complied with the pleading requirement. Accordingly, the U.S. Court of Appeals affirmed the decision of the district court dismissing Bank of America’s lawsuit with prejudice.
Bank of America, N.A. v. James A. Knight, et al., No. 12-2698 (7th Cir. U.S. Court of Appeals, August 8, 2013).
Kreisman Law Offices has been handling business litigation matters, commercial litigation and disputes between businesses and corporations, partnerships and other entities for more than 37 years in and around Chicago, Cook County and its surrounding areas, including Flossmoor, Glencoe, Wilmette, Skokie, Chicago (Humboldt Park), Chicago (Logan Square), Elmhurst, Wheaton, St. Charles, Aurora, Chicago (Lakeview), Arlington Heights, Brookfield, Lincolnwood, Lisle, Palos Heights, and Palatine, Ill.
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