Bank of America, N.A. v. Knight
2013 U.S. App. LEXIS 16474
7th Cir.2013Background
- Bank of America loaned Knight entities and lost about $34 million after Knight's bankruptcy; Bank sued Knight’s directors, managers, and accountants alleging looting and accounting failures.
- Accountants Frost, Ruttenberg & Rothblatt and FGMK invoked 225 ILCS 450/30.1(2), which limits accountant liability to clients unless the accountant knew the client’s primary intent was to benefit the plaintiff.
- District court dismissed all claims on the pleadings under Iqbal/Twombly for failure to plead plausible claims and, as to fraud-based theories, for failure to satisfy Rule 9(b).
- Bank argued auditors knew financials would be provided to lenders (including the Bank) and relied on Brumley for lender liability; defendants and court relied on Tricontinental, Kamensky, and Builders Bank construing the “primary intent” requirement narrowly.
- Court noted the trustee in bankruptcy could have pursued these claims (derivative/avoidance/fraudulent conveyance) but did not; Bank declined bankruptcy process and lacked assigned claims for all theories.
- Bank filed three complaints; the district court denied further amendment as futile and dismissed with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether accountants are liable to Bank under 225 ILCS 450/30.1(2) | Accountants knew financials would be given to lenders including Bank, so client’s primary intent was to benefit Bank | §450/30.1(2) requires accountants to know the client’s primary intent was to benefit that particular third party; mere foreseeability of dissemination is insufficient | Affirmed dismissal: foreseeability that statements reach lenders does not satisfy the statute’s “primary intent” requirement; Tricontinental and related Illinois precedent control |
| Whether Bank’s non-accountant claims require fraud pleaded with particularity (Rule 9(b)) | Claims rest on breaches, unjust enrichment and need not all be pleaded as fraud | Complaint lumps defendants together and fails to allege who did what when; many theories depend on fraudulent conduct | Affirmed: complaint fails plausibility standard and, where fraud is alleged or indispensable, fails Rule 9(b) particularity requirements |
| Whether Bank may pursue claims directly instead of through bankruptcy trustee or derivative suit | Bank may sue directly and keep recovery for itself; assignment from trustee covers some claims | Trustee inherits debtor’s claims; creditors normally must use trustee/derivative mechanisms or obtain proper assignment; avoiding bankruptcy process undermines equitable distribution | Affirmed: Bank’s choice to bypass trustee/derivative procedure contributed to dismissal; only assigned claims could be pursued, and many issues could have been handled in bankruptcy |
| Whether dismissal with prejudice was an abuse of discretion after two amendments | Bank should be allowed another chance to amend | Bank had two failed amendments, complaints remained vague and discovery was unnecessary to fix pleading defects | Affirmed: after multiple futile amendments and no showing that discovery would remedy defects, dismissal with prejudice was not an abuse of discretion |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim to survive dismissal)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for complaints)
- Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824 (7th Cir. 2007) (Illinois law: foreseeability of third-party receipt differs from knowledge of client’s primary intent)
- Brumley v. Touche, Ross & Co., 139 Ill.App.3d 831 (1985) (accountant may be liable to lenders who might rely on accountant’s work; decided before §450/30.1)
- Builders Bank v. Barry Finkel & Assocs., 339 Ill.App.3d 1 (2003) (accountant liability to third parties where primary intent of engagement was to benefit lenders)
- Kopka v. Kamensky & Rubenstein, 354 Ill.App.3d 930 (2004) (distinguishes foreseeability from primary intent under Illinois law)
- DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990) (Rule 9(b) requires who, what, when, where, and how for fraud allegations)
- Koch Refining Co. v. Farmers Union Cent. Exch., 831 F.2d 1339 (7th Cir.) (derivative-suit principles and requirement to represent corporate claims appropriately)
- Frank v. Hadesman & Frank, Inc., 83 F.3d 158 (7th Cir.) (Illinois derivative-suit principles)