THIRD DIVISION
June 23, 2004

JUSTICE SOUTH delivered the opinion of the court:

This appeal arises from an order of the circuit court of Cook County dismissing plaintiffs' claimsagainst defendant, PriceWaterhouse Coopers, LLP, alleging professional malpractice and negligentmisrepresentation, pursuant to section 2-615 of the Illinois Code of Civil Procedure (735 ILCS 5/2-615 (West 2002)).

The facts as alleged in the complaint are as follows: plaintiffs were investors and limitedpartners in Lipper & Company, Inc., Lipper & Company, L.P., and Lipper Holdings, LLC (collectivelythe Lipper Funds), and invested large sums of money in the Lipper Funds. According to theirpartnership agreements, the Lipper Funds were required to have their annual financial statementsaudited by a public accounting firm and to certify the value of each partner's capital account on anannual basis. Defendant PriceWaterhouse Coopers (PWC) was engaged for the purpose of auditingthese financial statements and certifying the value of each partner's capital account. Its last report wasissued sometime in March 2001. For each year from 1995 through 2000 (the years at issue), PWCaudited and certified the value of each plaintiff's capital account; prepared each plaintiff's income taxform (Schedule K-1) from the audited numbers; and delivered theses audits and income tax forms toeach plaintiff . These audit opinions represented that the securities owned by the Lipper Funds werevalued at fair value in accordance with generally accepted accounting practices (GAAP), and that theaudits had been performed in accordance with generally accepted auditing standards (GAAS).

In 2002, BDO Seidman (BDO) was hired to revalue the Lipper Funds and the limited partners'interests from 1995 through 2001. As a result of BDO's revaluation, the limited partners, includingplaintiffs, learned that some of their accounts had been revalued to zero and that others had beenreduced by nearly 50%. Plaintiffs subsequently filed suit against the Lipper Funds and PWC. PWCfiled a section 2-615 motion to dismiss on the grounds that plaintiffs were not in privity with them, andthat the action was barred by section 30.1 of the Illinois Public Accounting Act (225 ILCS 450/30.1(West 2002)). On August 26, 2003, the trial court dismissed the claims against PWC with prejudiceon the basis that PWC did not owe a duty to plaintiffs. This appeal followed.⁽¹⁾

The issue before this the court is whether the trial court erred in granting PWC's section 2-615 motion (735 ILCS 5/2-615 (West 2002)) on the basis that it owed no duty to plaintiffs sufficient tosustain a cause of action for accountant malpractice or negligent misrepresentation. According to itswritten order, the trial court granted PWC's motion to dismiss because plaintiffs did not state a cause ofaction for either malpractice or negligent misrepresentation as a third-party beneficiary. In its writtenorder, the trial court based its decision upon Gallagher Corp. v. Russ, 309 Ill. App. 3d 192 (1999),which involved a suit by a corporation and its employee pension benefit plan against a licensed actuarywho furnished certifications between 1988 and 1993 to a retirement plan established by the corporationfor its employees.

A motion to dismiss under section 2-615 of the Illinois Code of Civil Procedure (735 ILCS5/2-615 (West 2002)) challenges only the legal sufficiency of the complaint. Jarvis v. South OakDodge, Inc., 201 Ill. 2d 81, 85 (2002). The critical inquiry is whether the allegations of the complaint,when considered in a light most favorable to the plaintiff, are sufficient to state a cause of action uponwhich relief may be granted. Jarvis, 201 Ill. 2d at 86. In ruling on a section 2-615 motion, a court mustaccept as true all well-pleaded facts in the complaint and draw all reasonable inferences therefromwhich are favorable to the pleader. American National Bank & Trust Co. v. City of Chicago, 192 Ill.2d 274, 279 (2000). A cause of action should not be dismissed on the pleadings unless it appears thatno set of facts can be proved which will entitle the plaintiff to recover. Loftus v. Mingo, 158 Ill. App.3d 733, 738 (1987). We review the dismissal of a complaint under section 2-615 de novo. Jarvis,201 Ill. 2d at 86.

Section 30.1 of the Illinois Public Accounting Act was enacted in 1986 and controls the liabilityof accountants to third parties not in privity of contract with them. Chestnut Corp. v. Pestine, Brinati,Gamer, Ltd., 281 Ill. App. 3d 719, 722 (1996). The Act provides:

"No person, partnership or corporation licensed or authorizedto practice under this Act or any of its employees, partners, members,officers or shareholders shall be liable to persons not in privity ofcontract with such person, partnership or corporation, for civil damagesresulting from acts, omissions, decisions or other conduct in connectionwith professional services performed by such person, partnership orcorporation, except for:

(1) such acts, omissions, decisions or conduct that constitutefraud or intentional misrepresentations, or

(2) such other acts, omissions, decisions or conduct, if suchperson, partnership or corporation was aware that a primary intent ofthe client was for the professional services to benefit or influence theparticular person bringing the action; provided, however, for thepurposes of this subparagraph (2), if such person, partnership orcorporation (I) identifies in writing to the client those persons who areintended to rely on the services, and (ii) sends a copy of such writing orsimilar statement to those persons identified in the writing or statement,then such person, partnership or corporation or any of its employees,partners, members, officers or shareholders may be held liable only tosuch persons intended to so rely, in addition to those persons in privityof contract with such person, partnership or corporation." 225 ILCS450/30.1 (West 2002).

This court has previously held that a third party may state a cause of action under the statuteeven though there is no writing. However, when the accountant writes to no one, the plaintiff mustshow the intent of the client and knowledge of the accountant of that intent. Chestnut Corp., 281 Ill.App. 3d at 724. Thus, we must examine the allegations of the complaint to determine whether plaintiffs'satisfied the primary intent rule.

In Gallagher, the case upon which the trial court relied, another division of this court found thatthe complaint in that case did not sufficiently meet the primary intent rule. While the complaint statedthat the accountant, Russ, prepared the actuarial valuations "for the plaintiffs use" in determining theamounts necessary to meet the plan's funding obligations, the other allegations in the complaintcontradicted the notion that Russ was engaged by its client with the primary intent or purpose ofbenefitting plaintiff; rather, his engagement was only for the benefit of the plan, not to protect plaintiff'sfinancial health. Gallagher, 309 Ill. App. 3d at 198.

In order for us to determine whether the instant complaint sufficiently meets the primary intentrule, a detailed examination of those allegations pertaining solely to PWC is required. Counts V and VI of the complaint were directed solely against defendant PWC. In count V,plaintiffs alleged that PWC committed professional malpractice by conducting its audits contrary toGAAS and GAAP, the professional standards that governed its audits. Plaintiffs argued that PWCbreached its duty of care to the limited partners and that it knew that the limited partners relied on itsaudit reports. The complaint alleged that PWC sent to each partner, including all plaintiffs, a copy ofeach fund's financial statements and the related audit opinions, supplementary Schedule 1, which setforth the value of each partner's capital account based on the market value of each asset in the fund. The claims were that plaintiffs relied on PWC's audit opinions in the preparation of their taxes and indetermining whether they should continue investing in the Lipper Funds, and that they were harmedeconomically by those decisions.

Count VI, based on negligent misrepresentation, set forth similar allegations. To support theirallegations of negligent misrepresentation, plaintiffs alleged that PWC made false materialmisrepresentations in its audit reports for the years 1995 to 2000, and it knew or should have knownthat its representations were false. Plaintiffs also alleged that PWC supplied those false representationsto them, knowing that they would rely on them. Plaintiffs claimed that they suffered significantinvestment losses as a result of relying on PWC's false audit reports.

Plaintiffs contend that they are entitled to bring suit under section 30.1 of the Illinois PublicAccounting Act (225 ILCS 450/30.1 (West 2002)) because PWC prepared valuations of its capitalaccounts and sent those valuations, along with its audits, to each limited partner personally. Plaintiffsalso contend that the trial court erred by failing to consider that section in its determination.

Plaintiffs are correct in their assertion that section 30.1 applies to their suit under both themalpractice and negligent misrepresentation counts against PWC, and that the trial court applied thewrong standard. In its written order, the trial court stated that plaintiffs failed to "sufficiently allegeDefendant PWC owed a duty to Plaintiff[s] in this case." However, the correct standard as enunciatedin section 30.1 is not whether PWC owed a duty to plaintiffs but whether it was aware that it was aprimary intent of its client, Lipper, that its professional services would benefit or influence plaintiffs.

Paragraph 6 of plaintiffs' complaint indicates that they sought to recover their investment lossesfrom PWC, which audited the Lipper Funds and repeatedly certified the funds' financial condition from1995 to 2000, and that PWC negligently misrepresented that the Lipper Funds' financial statementswere fairly presented in accordance with GAAP.

Paragraph 21 of the complaint alleged that PWC's New York office audited the financialstatements of the Lipper Funds from 1995 to 2000 and issued clean audit opinions on those financialstatements; that it also issued clean audit opinions on each investment partner's capital accounts forthose years; and that PWC addressed and sent its clean audit opinions to the partners who invested inthose funds, including plaintiffs.

Paragraph 44 alleged that PWC represented in each of its annual audit opinions that it hadconducted an audit in accordance with GAAS and that the financial statements of the Fixed IncomeFund and Lipper Convertibles and the related Schedule 1 were fairly stated in accordance with GAAPas of each year ending December 31, 1995, 1996, 1997, 1998, 1999 and 2000; and that each ofPWC's representations was false.

Paragraph 45 alleged that PWC is in the business of supplying audit opinions to investors forguidance with their investment decisions; PWC knew that plaintiffs would rely upon PWC's auditopinions, the funds' audited financial statements and the related schedules; and that plaintiffs did rely onPWC's representations in the audit opinions, the audited financial statements and related schedules indeciding to invest in and continue to reinvest in Lipper Convertibles and the Fixed Income Fund.

Paragraph 46 alleged that plaintiffs, relying on defendants' representations that their investmentaccounts were growing each year, continued to invest in the Lipper Funds.

Paragraph 48 alleged that PWC prepared federal income tax Schedules K-1 for plaintiffs andthe limited partners each year; that each Schedule K-1 purported to reflect each partner'sproportionate share of the partnership's net income for the year, as well as each partner's capitalaccount balance at the beginning and end of each year; and that PWC representations as to thepartners' capital accounts in each Schedule K-1 were false because they were based on falsevaluations.

Paragraph 49 alleged that plaintiffs relied on the information in the Schedules K-1 each year inpreparing their tax returns and in paying taxes on their proportionate share of the net realized andunrealized gains as reflected in the increase in the market values of the securities held by the partnership;and because those market values were materially overstated, plaintiffs overpaid income taxes for theyears 1995 to 2000 as a result of PWC's misrepresentations.

Paragraph 50 alleged that PWC knew that its audit reports, the Lipper Funds' audited financialstatements, the supplementary Schedule 1 and the income tax Schedule K-1 were used by plaintiffs forthe purpose of making investment decisions and paying income taxes; PWC knew that plaintiffs wouldrely on the information in those reports to make investment and reinvestment decisions and to determinetheir income taxes; and that by directly addressing its audit reports with the audited financial statements,Schedules 1 and Schedules K-1 to plaintiffs, PWC confirmed its understanding that plaintiffs wererelying on and benefitting from that information prepared and disseminated by PWC.

Count V (paragraphs 94 through 108), alleged (among other things) that PWC issued auditopinions on the Lipper Funds' financial statements and certified to the partners of each of those fundsthat the financial statements fairly presented the financial condition of each of those funds in accordancewith GAAP, and that PWC conducted each of its audits in accordance with GAAS; that PWC owedplaintiffs a duty to conduct its audits in accordance with applicable professional standards and toexercise reasonable care in the conduct of its audits because it knew plaintiffs were relying on PWC'saudit reports and the audited financial statements in making investment decisions concerning the LipperFunds; and PWC also knew that plaintiffs were relying on the Schedules K-1 prepared by PWC incalculating income taxes.

Count VI (paragraphs 109 through 110) alleged that PWC knew or should have known that itsrepresentations that it had conducted audits in accordance with GAAS and financial statements inaccordance with GAAP were false; PWC was in the business of supplying audit reports to investors forguidance in their business transactions and intended to supply this information to plaintiffs, knowing thatplaintiffs would rely on those representations in deciding to invest in and continuing to reinvest in theLipper Funds.

Based upon those allegations and factual inferences, which must be taken in the light mostfavorable to plaintiffs, PWC knew that its audit reports and other financial statements were beingprepared for the benefit of the Lipper Funds investors, and those allegations are sufficient to state acause of action for both malpractice and negligent misrepresentation upon which relief can be grantedunder section 30.1 of the Illinois Public Accounting Act.

For the foregoing reasons, we reverse the judgment of the circuit court and remand for furtherproceedings consistent with this opinion.

Reversed and Remanded.

HOFFMAN, P.J., specially concurs.

KARNEZIS, J., specially concurs.
 

PRESIDING JUSTICE HOFFMAN, specially concurring:

I agree with my colleagues and find that the plaintiffs pled legally sufficient causes of action againstPrice Waterhouse Coopers, LLP (PWC) for accounting malpractice and negligent misrepresentation, and,as a consequence, the trial court's order dismissing counts Five and Six of their complaint must be reversedand the cause remanded for further proceedings. I write separately to set forth my reasons for soconcluding and to articulate what I believe is the proper way to raise section 30.1 of the Illinois PublicAccounting Act (Act) (225 ILCS 450/30.1 (West 2002)) in defense of an action against an accountantbrought by parties with whom the accountant is not in privity.

PWC filed a section 2-615 (735 ILCS 5/2-615 (West 2002)) motion seeking the dismissal ofcounts Five and Six of the plaintiffs' complaint which asserted common law malpractice and negligentmisrepresentation claims against it. As such, the only issue before the court was whether the factualallegations in the counts under attack, when considered in the light most favorable to the plaintiffs, weresufficient to state causes of action upon which relief can be granted. Vernon v. Schuster, 179 Ill. 2d 338,344, 688 N.E.2d 1172 (1997).

Both counts Five and Six of the plaintiffs' complaint are predicated on allegations of negligence onthe part of PWC. To be legally sufficient, complaints alleging negligence-based torts must set out factsestablishing a duty owed by the defendant to the plaintiff, a breach of that duty, and an injury proximatelyresulting from that breach. Gallagher Corp. v. Russ, 309 Ill. App. 3d 192, 197, 721 N.E.2d 605 (1999). The elements of breach of duty and damage are not at issue in this case. "The determination of the duty --whether the defendant and the plaintiffs stood in such a relationship to one another that the law imposedupon the defendant an obligation of reasonable conduct for the benefit of the plaintiffs -- is an issue of lawfor the determination of the court." Pelham v. Griesheimer, 92 Ill. 2d 13, 18-19, 440 N.E.2d 96 (1982).

In Brumley v. Touche, Ross & Co., 123 Ill. App. 3d 636, 642, 463 N.E.2d 195 (1984) (BrumleyI), the court held that an accountant owed a duty to third parties who relied upon his reports or opinionsif the accountant "was acting at the direction of or on behalf of his client to benefit or influence [the] third-party." The issue was further clarified in a subsequent decision involving the same parties. See Brumleyv. Touche, Ross & Co., 139 Ill. App. 3d 831, 487 N.E.2d 641 (1985) (Brumley II). In Brumley II, thecourt determined that "to be sufficient plaintiff's complaint must allege facts showing that the purpose andintent of the accountant-client relationship was to benefit or influence the third-party plaintiff." Brumley II,139 Ill. App. 3d at 836.

My reading of counts Five and Six of the plaintiffs' complaint leads me to conclude that they allegefacts which, when considered in their light most favorable to the plaintiffs, are sufficient to satisfy thepleading requirements necessary to establish the element of duty in negligence-based claims against anaccountant by a non-client third-party as set out in Brumley I and Brumley II. The plaintiffs have alleged,inter alia, that: the Lipper Funds were required to have their annual financial statements audited by a publicaccounting firm and to certify the value of each partner's capital account; PWC was engaged for thepurpose of auditing the financial statements and certifying the value of the capital accounts; PWC addressedits opinions and sent them directly to each partner along with a schedule setting forth the value of theindividual partner's capital account; and PWC knew that the partners would rely upon the audited financialstatements and related schedules, including the ones showing the value of their individual capital accounts,for the purpose of making investment decisions and paying income taxes. When these allegations are takenas true, and all reasonable inferences therefrom are drawn in favor of the plaintiffs (see Your StylePublications, Inc. v. Mid Town Bank and Trust Co. of Chicago, 150 Ill. App. 3d 421, 424, 501 N.E.2d805 (1986)), they could support the conclusion that, in rendering its professional services, PWC was actingat the direction of the Lipper Funds for the purpose of benefitting or influencing the plaintiffs as partners inthose funds. Further, the plaintiffs have alleged that they relied upon the financial statements audited byPWC and the schedules setting forth the value of their capital accounts.

In moving to dismiss counts Five and Six of the plaintiffs' complaint, PWC relied exclusively uponthe provision of section 30.1 of the Act which provides, in relevant part, that an accountant is not liable toa person not in privity of contract unless the accountant was aware that a primary intent of its client wasfor the accountant's professional services to benefit or influence the particular person bringing the action. See 225 ILCS 450/30.1 (West 2002). PWC argued that counts Five and Six of the plaintiffs' complaintfailed to contain allegations of fact satisfying the requirements of section 30.1 and, therefore, they weredeficient as a matter of law.

My colleagues find that the allegations in the plaintiffs' complaint and the inferences which must bedrawn therefrom do in fact support the conclusion that PWC knew that its audit reports and other financialstatements were being prepared for the benefit of the partners of the Lipper Funds and that a primary intentof the Lipper Funds was for PWC's professional services to benefit or influence the plaintiffs as partners. Based upon the reasons I have already set forth, I agree with that conclusion. However, I do not believethat the plaintiffs were required to allege knowledge on the part of PWC of the intent of the Lipper Fundsin order to sufficiently plead actions for malpractice or negligent misrepresentation.

Accounting malpractice and negligent misrepresentation are common law causes of action. InBrumley I and Brumley II, this court fixed the circumstances under which an accountant owes a duty to anon-client third-party who relies upon the accountant's reports or opinions. When the legislature enactedsection 30.1 of the Act, it created no new duties on the part of accountants to persons with whom they arenot in privity of contract. Rather, that section of the Act provides that an accountant will not be liable foracts under circumstances which otherwise would have fallen within their common law duty. As such,section 30.1 creates a defense to certain actions against accountants by persons with whom they are notin privity which, when properly pled by the accountant, may act to bar a plaintiff's right to recovery. Myanalysis in this regard is akin to the treatment accorded the provisions of the Local Governmental andGovernmental Employees Tort Immunity Act (745 ILCS 10/1-101 et seq. (West 2002)). See Bubb v.Springfield School District 186, 167 Ill. 2d 372, 377-78, 657 N.E.2d 887 (1995); Ramirez v. Village ofRiver Grove, 266 Ill. App. 3d 930, 932, 641 N.E.2d 7 (1994). The defense is affirmative in nature and,therefore, should be the defendant-accountant's obligation to plead and prove. See Albers v. Breen, 346Ill. App. 3d 799, 806, 806 N.E.2d 667 (2004).

I believe that, in order to state a good and sufficient negligence-based action against an accountant,a non-client third-party need only comply with the pleading requirements set forth in Brumley I and BrumleyII. If the accountant-defendant wishes to rely upon the provisions of section 30.1 as a defense to liabilityand allege a lack of knowledge of a primary intent on the part of its client to benefit or influence the plaintiff,it can do so by means of an affirmative defense or a motion for involuntary dismissal pursuant to section2-619(a) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 2002)) as was done in BuildersBank v. Barry Finkel and Associates, 339 Ill. App. 3d 1, 790 N.E.2d 30 (2003).

The distinction I have drawn might seem overly technical, but it is extremely important indetermining who has the burden of proving whether the accountant did or did not know whether a primaryintent of its client was for the accountant's professional services to benefit or influence the non-clientplaintiff.

 

JUSTICE KARNEZIS, specially concurring:

The question presented in this case is whether the allegations of malpractice and negligentrepresentation as set forth in Counts Five and Six of plaintiffs' complaint were legally sufficient to state acause of action against defendant, Price Waterhouse Coopers, LLP (PWC).

In dismissing Count Five of plaintiffs' complaint, the trial court held that "as a threshold matter,plaintiffs must allege the existence of a relationship between the parties that gives rise to a duty * * *." Thecourt then went on to state that, in effect, because plaintiffs did not allege that PWC's "primary intent" wasto benefit or influence plaintiffs, they "failed to establish that PWC owed a duty to plaintiffs." Essentially,the court equated "primary intent" with "duty," finding that if plaintiffs failed to sufficiently allege primaryintent, they then failed to establish duty. The trial court then went on to consider Count Six of plaintiffs'complaint, and, based on the above reasoning, concluded that plaintiffs failed to "adequately" allege thatdefendant had a duty to protect the financial interests of plaintiffs.

To determine whether the trial court properly granted PWC's motion to dismiss, we must ultimatelyconsider whether it was necessary for plaintiffs to allege in their complaint that the "primary intent" of theLipper Funds was for PWC's services to "benefit or influence" plaintiffs. I respectfully agree with JusticeHoffman that this question must be answered in the negative. In order to state a common law cause ofaction for malpractice and/or negligent misrepresentation, plaintiffs must allege duty, breach of duty andinjury proximately caused by the breach. Plaintiffs are not required to plead "primary intent." As statedby Justice Hoffman, "primary intent," is properly pled as an affirmative defense provided by Section 30.1of the Illinois Public Accounting Act (225 ILCS 450/30.1 (West 2002)). I concur in the result reachedby Justice South and join in the reasoning characterizing Section 30.1 as an affirmative defense as set outby Justice Hoffman.

1. The Lipper Funds are not parties to this action; the partnership agreement called forarbitration in handling their claims and those claims are held pending the outcome of the arbitration.