delivered the judgment of the court, with opinion.
Justices McCullough and Myerscough 1 concurred in the judgment and opinion.
OPINION
In these two consolidated appeals, the plaintiffs are Shahid R. Khan (Khan) and Ann C. Khan along with various business entities that Khan formed for the purpose of creating artificial losses, which he hoped would reduce his taxable income. Khan was not the one who came up with the tax-avoidance schemes. Rather, according to the complaint, he followed the advice of Paul Shanbrom at BDO Seidman, LLP, advice that was reinforced by a variety of co-conspirators, including the defendants in these two appeals.
In one of the appeals, case No. 4—10—0504, the defendants are Deutsche Bank AG (Deutsche Bank); Deutsche Bank Securities, Inc., d/b/a Deutsche Bank Alex. Brown (Brown); and David Parse, an employee of Deutsche Bank (collectively, Deutsche defendants). According to the complaint, Shanbrom and Parse advised Khan to engage in some “investment strategies” in 1999 and 2000 in order to create ordinary losses, and Deutsche Bank and Brown helped implement these strategies.
In the other appeal, case No. 4—10—0583, the defendant is Grant Thornton, LLP, which prepared the 2000 tax returns for one of the plaintiff corporations, Thermosphere EX Partners, LLC, claiming the fake losses. The Khans then used the information from this tax return in their own individual tax returns. The tax returns, however, were incorrect because, as the Internal Revenue Service (IRS) had warned in its publications, such contrived losses lacked economic substance and therefore were not allowable. Consequently, plaintiffs ended up losing a lot of money. Not only were the substantial fees they paid to defendants a total waste, but plaintiffs incurred liability to the IRS for back taxes, interest, and penalties. All this is according to the complaint.
The Deutsche defendants moved to dismiss the complaint pursuant to sections 2—615 and 2—619 of the Code of Civil Procedure (735 ILCS 5/2—615, 2—619 (West 2008)), asserting the legal insufficiency of the complaint and also invoking the statute of limitations in section 13—205 of the Code (735 ILCS 5/13—205 (West 2008)). Grant Thornton likewise moved to dismiss the complaint on the grounds that it was legally insufficient and time-barred. The trial court concluded that the statute of limitations in section 13—205 barred the actions against the Deutsche defendants and that the statute of limitations in section 13—214.2(a) (735 ILCS 5/13—214.2(a) (West 2008)) and the statute of repose in section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)) barred the actions against Grant Thornton. Therefore, the court granted defendants’ motions for dismissal. The court also found, pursuant to Rule 304(a) (Ill. S. Ct. R. 304(a) (eff. Feb. 26, 2010)), that there was no just reason to delay either enforcement or appeal of these rulings.
In our de novo review in these two appeals, taking the well-pleaded facts of the complaint to be true and drawing reasonable inferences in plaintiffs’ favor, we hold that the trial court erred by concluding that the claims against defendants are time-barred. Therefore, we reverse the trial court’s judgments in the two cases, and we remand the cases for further proceedings.
I. BACKGROUND
A. The 1999 Digital Options Strategy
1. Shanbrom and Parse Pitch the Strategy to Khan
Beginning in approximately 1993, BDO performed auditing services for Chromecraft, a company of which Khan was part owner. Michael Collins, a partner at BDO, was in charge of auditing services for Chromecraft, and as of 1999, he had been one of Khan’s trusted accountants and advisors for some six years.
In 1999, Khan requested his own partner at Chromecraft to ask Collins if he knew anyone who could advise him on purchasing foreign currency. Khan needed Japanese yen because he was in negotiations to buy a Canadian company that manufactured plastic automobile bumpers and the Japanese owners of the company wanted to be paid in yen. Because Khan had no experience in foreign-currency trading, he needed guidance.
Collins referred Khan to Paul Shanbrom, who was a member of EDO’s Tax Solutions Group and reputedly an expert in foreign-currency trading, and in September 1999, Khan and one of his estate-planning advisors had a meeting with Collins and Shanbrom. The meeting went beyond the subject of simply purchasing the needed foreign currency. Shanbrom introduced Khan to an “investment strategy” involving the purchase and sale of digital options on foreign currency (the Digital Options Strategy), a strategy which, according to Shanbrom, not only gave Khan a chance to double his money but also allowed him to claim a tax loss if he happened to lose money on his investments in foreign currency. Shanbrom told Khan that BDO had designed the Digital Options Strategy in such a way that it had economic substance for tax purposes. It purportedly had economic substance because Khan had a good chance of making a substantial return. According to the complaint, “Khan did not understand the intricacies of the investments, the tax code or the mechanism that allowed him to receive the tax benefits; however, he trusted EDO’s expertise in this area and their representations.” In other words, Khan had only a vague idea of what the 1999 Digital Options Strategy was all about.
The “investment” part of the strategy involved the buying and selling of options in foreign currency. When someone buys an option, that person buys the right, but not the obligation, to buy or sell a given quantity of assets (in this case, foreign currency) at a fixed price, or “strike price,” within a specified time, regardless of the market price, or “spot price,” of the assets. (A “spot price” is the same thing as a “spot rate.”) An option is “digital,” or “binary,” if the investor stands to win or lose a predetermined amount in full: in other words, the payout will be all of the predetermined amount or nothing (1 or 0, in binary terms). Essentially, a digital option is an all-or-nothing wager that the spot price will be at or above a given price on a certain date. Or it can be an all-or-nothing wager that the spot price will be at or below the given price on that date.
If the investor is betting that the spot price will be at or above the given price on a certain date, the investor has a long option. On the other hand, if the investor is betting that the spot price will be at or below the given price on a certain date, the investor has a short option.
Shanbrom recommended hiring David Parse of Deutsche Bank to assist Khan in acquiring these long and short options. Shanbrom arranged a conference call between himself, Parse, and Khan. In this conference call, Parse told Khan many of the same things that Shanbrom had told him, including that the Digital Options Strategy was a good way to make money and, alternatively, a perfectly legal way to reduce taxable income. It was agreed that Deutsche Bank would handle the “investment” component of this strategy. Paragraph 63 of the complaint recounts the conference call as follows:
“During this conference call, Parse, along with Shanbrom, reiterated the ‘sales pitch’ and reassured Khan that the Digital Options Strategy was completely legal. Parse, along with Shanbrom, further discussed the steps of the Digital Options Strategy and informed Khan that Deutsche Bank would handle all aspects of the investments in foreign currencies. According to Parse, Deutsch [sic] Bank had internal procedures to determine the proper amounts and types of the foreign currency investments that would be appropriate for Khan’s circumstances. Parse told Khan that Parse would make all decisions with respect to the amounts and types of foreign currency investments since he was the expert. Parse again reiterated that Plaintiffs would have a good chance of making a profit on the foreign currency investments. Parse represented to Khan that the foreign currency options that Khan would be executing were actual investments. Shanbrom and Parse never informed Khan that the foreign currency digital options were simply private bets with Deutsche Bank on where the underlying currencies would be on a particular date and time and that Deutsche Bank controlled the outcome.”
According to the complaint, Deutsche Bank controlled the outcome in that, as the “calculation agent,” Deutsche Bank had the contractual right to accept or disregard any spot price. Presumably, Deutsche Bank’s role as calculation agent was stated in the form contracts between Deutsche Bank and Khan (who signed them in his capacity as partner or corporate officer of various plaintiffs). Khan, however, did not understand the import of this designation of Deutsche Bank as calculation agent. He did not understand that Deutsche Bank’s performance under the so-called “contract” amounted to little more than setting the dice on the table with Deutsche Bank’s winning number facing upward. Footnote 12 of the complaint says:
“[T]he FX Contracts [(another name for the digital options contracts)] were not something traded on any recognized exchange but were simply a matter of private contract between the participants. Finally, neither party had any right to take possession of the ‘underlying currency.’ As a result, the FX Contracts amounted, in actuality, to a contractual wager (i.e., a ‘bet’) based on movements in foreign currency prices, without any real possibility of foreign currency ever changing hands between the parties. Of course, the Plaintiffs were unaware of these aspects of the FX Contracts.”
It would seem, then, that these transactions were not “investments” at all but were merely rigged bets. Nevertheless, Parse referred to them as “investments.” The complaint alleges that after the initial conference, Khan “had several additional telephone conversations with Parse in which Parse reiterated his prior statements and further discussed the purported ‘investments.’ ”
2. The Legal Opinion From Jenkens on the 1999 Digital Options Strategy
According to the complaint, the Deutsche defendants were in a conspiracy with BDO to deceive clients such as Khan into paying large fees for the Digital Options Strategy, a strategy that was useless for tax purposes — indeed, worse than useless because the losses it generated were clearly illegitimate and claiming them was likely to result in some expensive liability to the IRS. Part of this conspiracy was to refer clients to an “independent law firm,” Jenkens & Gilchrist, P.C. (Jenkens), to confirm the legality of the 1999 Digital Options Strategy. But Jenkens really was not independent. Paragraph 70 of the complaint alleges as follows:
“As part of their pre-planned conspiracy, the 1999 Strategy Defendants [(defined as BDO and the Deutsche defendants)] advised Plaintiffs that in the unlikely event the Internal Revenue Service (‘the IRS’) audited their tax returns as a result of the 1999 Digital Options Strategy, the Jenkens ‘independent’ opinion letter would confirm the propriety of the 1999 Digital Options Strategy and of claiming the resulting losses on Plaintiffs’ tax returns. The 1999 Strategy Defendants and Jenkens—in furtherance of the conspiracy—further advised Plaintiffs that this ‘independent’ opinion letter would enable the Plaintiffs to satisfy the IRS auditors as to the propriety of the tax returns. Unfortunately and unbeknownst to Plaintiff, Jenkens—with full knowledge of BDO and Deutsche—had already prepared the ‘canned’ and ‘prefabricated’ opinion letter approving the 1999 Digital Options Strategy and needed only to fill in several blanks prior to issuing the opinion letter to Plaintiffs.”
In short, Jenkens was one of the co-conspirators, and its role in the conspiracy was to be the yes-man, issuing reassuring opinion letters that were not the product of an honest and conscientious legal analysis. The legal opinions by Jenkens were not specifically tailored to the client’s particular financial situation “but were merely ‘fill in the blank’ boilerplate opinions provided to Plaintiffs as part of a ‘prewired’ scheme.” Nevertheless, Jenkens collected a substantial fee from clients for these legal opinions. “In addition, Jenkens & BDO were involved in fee ‘kickbacks’ between themselves and with third parties who convinced clients to execute an Investment Strategy with Jenkens, Deutsche Bank, BDO, and others.”
On Shanbrom’s recommendation, Khan went to Jenkens, and on March 20, 2000, Jenkens issued to Khan an opinion letter confirming the legality of the 1999 Digital Options Strategy. Specifically, the letter opined that plaintiffs’ “ ‘basis in their interest in the Partnership after contribution of the Options [would] include the cost of the Long Option contributed, without adjustment for the Short Option.’ ” (The significance of this advice will soon be clear, when we explain how the 1999 Digital Options Strategy worked.) Jenkens further opined that “ ‘[t]he step transaction, sham transaction, and economic substance doctrines [would] not apply to disallow the results of the transactions described herein.’ ” Further, according to Jenkens, IRS Notice 1999-59 (I.R.S. Notice 1999-59, 1999-
3. Wanser’s Affidavit
In support of their combined motion for dismissal, Deutsche Bank and Brown submitted to the trial court an affidavit by one of their attorneys, Michael R. Wanser, and attached to that affidavit, as exhibits A through C, were copies of the form contracts Khan had signed with Deutsche Bank and Brown implementing the digital option trades. Exhibit A of Wanser’s affidavit is a foreign-exchange digital-option transaction confirmation, dated November 29, 1999, between Wilshire Investments, LLC, and Deutsche Bank, signed by representatives of both companies. Paragraph 3 of exhibit A disclaims an agency relationship, a fiduciary relationship, and any reliance by the parties on advice or representations by the other party. The paragraph reads as follows:
“3. Representations
Each party represents to the other party that it is entering into this Transaction as principal (and not as agent or in any other capacity, fiduciary or otherwise) and that
(i) It has sufficient knowledge and experience to be able to evaluate the appropriateness, merits and risks of entering into this Transaction and is acting in reliance upon its own judgment or upon professional advice it has obtained independently of the other party as to the appropriateness, merits and risks of so doing, including where relevant, upon its own judgement [sic] of the correct tax and accounting treatment of such Transaction;
(ii) It is not relying upon the views or advice of the other party (including, without limitation, any marketing materials or model data) with respect to this Transaction; and
(iii) It acknowledges that, with respect to this Transaction, the other party is acting solely in the capacity of an arm’s length contractual counterparty and not in the capacity of financial adviser or fiduciary.”
It would appear that insomuch as Parse, as an agent of Deutsche Bank, advised Khan that he could make a profit on the transaction, Parse gave “advice *** with respect to this Transaction.” It also would appear that insomuch as Parse advised Khan that in the event he lost money on the transaction, he could claim the loss in his tax returns, Parse likewise gave “advice *** with respect to this Transaction.” By signing exhibit A of Wanser’s affidavit, Khan represented to Deutsche Bank that he was not relying on any such advice from Deutsche Bank (or its agent, Parse).
4. Implementation of the 1999 Digital Options Strategy
The 1999 Digital Options Strategy worked as follows. The Khans entered into a private contract with Deutsche Bank whereby the Khans, through SRK Wilshire Investments (Wilshire Investments), bought from Deutsche Bank a long option on foreign currency and sold to Deutsche Bank a short option. Thus, there came into existence an opposing pair of options, one long and the other short. These options were designed to cancel each other out. The strike prices of the two options were only a fraction of a penny apart, and the premium that the Khans paid Deutsche Bank for the long option, though large, was almost entirely offset by the premium Deutsche Bank agreed to pay the Khans for the short option (almost but not quite: the Khans paid a net premium to Deutsche Bank of $350,000, the difference between the $35 million that the Khans paid for the long option and the $34,650,000 that Deutsche Bank agreed to pay them for the short option). Because the strike prices of the opposing options were so close together and because Deutsche Bank, as the calculation agent, had the right to select the applicable spot rate from a range of currency rates, it was a virtual certainty that the transaction would be close to a wash—Deutsche Bank would see to that.
So, pursuant to this scheme that was calculated to be a wash on the investment side (and, as we will explain, a loss on the tax side), the Khans formed the necessary business entities and transferred assets between them, all under the guidance of BDO. On November 17, 1999, the Khans formed Wilshire Investments and SRK Wilshire Partners (Wilshire Partners). On November 24, 1999, through Wilshire Investments, the Khans bought and sold the opposing options, which had expiration dates of December 23, 1999. On November 26, 1999, Wilshire Investments contributed its interest in the as-of-yet unexpired options to Wilshire Partners as a capital contribution. On December 10, 1999, Wilshire Partners purchased a quantity of Canadian dollars as an investment. On December 23, 1999, both the long option and the short option terminated “out of the money”: the options became worthless, based on the spot rate that Deutsche Bank chose. Of course, both the Khans and Deutsche Bank got to keep the premiums they had paid each other, but Deutsche Bank’s premium was $350,000 greater than the premium it had paid to the Khans (or Wilshire Investments). On December 27, 1999, the Khans contributed their interest in Wilshire Partners to Wilshire Investments, causing the dissolution and liquidation of Wilshire Partners. As a distribution in liquidation of Wilshire Partners, all of the investments in foreign currency were distributed to Wilshire Investments.
Consequently, for tax purposes, the Khans’ interest in Wilshire Investments had a basis equal to the amount they had paid to Deutsche Bank for the long option, but that amount supposedly was not offset as a result of the assumption by Wilshire Investments of the Khans’ obligation to Deutsche Bank on the short option, perhaps on the theory that the short option was only a contingent liability (see Stobie Creek Investments, LLC v. United States,
5. The Preparation and Filing of Plaintiffs’ 1999 Income Tax Returns
After the publication of IRS Notice 1999-59 on December 27, 1999, which warned against transactions lacking economic substance and having no apparent purpose other than to generate a fake capital loss, BDO prepared and signed plaintiffs’ 1999 federal and state income-tax returns. Specifically, on April 1, 2000, BDO signed the 1999 federal tax returns for Wilshire Investments and Wilshire Partners, and on April 1, 2000, BDO signed plaintiffs’ 1999 federal individual tax returns. These tax returns contained the losses supposedly generated by the 1999 Digital Options Strategy. Advising plaintiffs that the tax returns were “properly prepared in accordance with professional standards,” BDO recommended that plaintiffs add their signatures to the returns and file them with the IRS. Plaintiffs did so, relying on the representations and assurances that defendants had made to them during the promotion, sale, and implementation of the 1999 Digital Options Strategy and also relying on the opinion letter from Jenkens, which, Shanbrom had assured Khan, would provide “absolute penalty protection.” The filing of these returns was the final step of the 1999 Digital Options Strategy.
6. The Publication of IRS Notice 2000-44
On August 11, 2000, before plaintiffs filed their 1999 individual federal tax returns, the IRS published IRS Notice 2000-44 (I.R.S. Notice 2000-44, 2000-
B. The 2000 COINS Strategy
1. Shanbrom and Parse Pitch the 2000 COINS Strategy
From his conversations with Khan, Shanbrom was aware of Khan’s unhappiness that he had made no money in the foreign-currency market through the 1999 Digital Options Strategy (Khan did not understand that the options had been specifically designed to expire “out of the money”). So, in approximately June 2000, Shanbrom told Khan that BDO had developed another investment strategy, one that offered a better chance of making a profit. He introduced Khan to the 2000 COINS Strategy (it is unclear what “COINS” stands for, if it stands for anything).
As with the 1999 Digital Options Strategy, Shanbrom referred Khan to Deutsche Bank to execute the investment component of the 2000 COINS Strategy, telling him that “Parse and Deutsche Bank were the experts in foreign currency investments and they worked closely with BDO to implement this and other tax-advantaged strategies for BDO clients.” Khan subsequently had several telephone conversations with Parse and Donna Guerin, a partner at Jenkens, and both of them “reiterated Shanbrom’s representation that the foreign currencies digital options were designed in a way to provide Khan with a good chance of making a profit and at the same time legally reducing his taxes.”
In reality, though, the 2000 COINS Strategy was not much different from the 1999 Digital Options Strategy. As the calculating party, Deutsche Bank still got to select the spot rate on expiration of the digital options. “The range of currency rates available to the calculating party [made] the selection of that spot rate subject to the pleasure of the calculating party.” Consequently, it was exclusively the calculating party, Deutsche Bank, who determined whether a digital option paid out. Khan did not understand any of this. Instead, Shanbrom and Parse led him to believe, erroneously, that he could make a profit in the 2000 COINS Strategy. On the advice of Shanbrom and Parse, Khan decided to use this new moneymaking and tax-reducing strategy.
2. Implementation of the 2000 COINS Strategy
The 2000 COINS Strategy was merely a variation on the 1999 Digital Options Strategy. Here is how it worked. On September 29, 2000, using Deutsche Bank as the counterparty, Wilshire Investments bought and sold offsetting pairs of options tied to foreign-currency exchange rates during specified periods in the future, with extremely close strike prices and a spot rate to be chosen by Deutsche Bank in its sole discretion. The cost of the long option, though large, was mostly (but not entirely) offset by the premium Wilshire received on the sale of the short option. On October 18, 2000, pursuant to EDO’s instructions, Wilshire Investments made a capital contribution of these option positions to a partnership formed specifically for purposes of the 2000 COINS Strategy, Thermosphere FX Partners, LLC (Thermosphere). Supposedly, the long option counted toward the basis, without any offset by the short option. On December 6 and 11, 2000, the strike prices on the opposing options were met, with the result that the gain on one option was, roughly speaking, matched by the loss on the other option. The options now were worthless, requiring an adjustment in plaintiffs’ basis in Thermosphere. On December 15, 2000, Thermosphere purchased foreign currency. Plaintiffs requested to be redeemed out of Thermosphere, and on December 18, 2000, plaintiffs’ entire capital balance was redeemed, and a portion of the foreign currency that Thermosphere had purchased was distributed to them. On December 27, 2000, plaintiffs sold the foreign currency and subsequently claimed an ordinary loss.
3. The Legal Opinion From Jenkens on the 2000 COINS Strategy
As with the 1999 Digital Options Strategy, Shanbrom told Khan that it would be necessary to obtain an “independent” legal opinion before actually implementing the 2000 COINS Strategy and using it in plaintiffs’ income tax returns. According to Shanbrom, only two law firms had the necessary expertise and experience with this type of investment strategy, either Sidley Austin LLP or Jenkens, and he advised Khan to select one of those two firms. Khan chose Jenkens because he had a prior relationship with Jenkens in connection with the 1999 Digital Options Strategy.
In January 2001, Shanbrom telephoned Khan and informed him that the legal opinion from Jenkens was ready. Shanbrom told Khan that he himself had reviewed the legal opinion and had made revisions to it (the complaint does not allege that Shanbrom is an attorney) and that with those revisions, the legal opinion was in final form and ready to go but that Khan would have to send Jenkens a check before Jenkens would release a copy of the legal opinion to Khan. Khan sent the check to Jenkens, and on January 12, 2001, Jenkens issued him an opinion letter confirming that the 2000 COINS Strategy was “a legal tax-advantaged investment strategy.”
According to the opinion letter from Jenkens (as revised by Shanbrom), plaintiffs’ basis in their interest in the partnership (Thermosphere), after their contribution of the options, would include the cost of the long option without adjustment for the short option. An adjustment to plaintiffs’ basis would be required as a result of the termination of the options, and their disposition of the foreign currency that they had received in redemption of their partnership interest would result in an ordinary loss. The opinion letter asserted that “ ‘the alleged limitations of [IRS] Notice 2000-44 are more likely than not legally inapplicable to the [2000 Coins Strategy].’ ”
4. The Preparation and Filing of Plaintiffs’ 2000 Income-Tax Returns
Grant Thornton, which allegedly was in the conspiracy with BDO and Deutsche Bank, prepared and signed the 2000 federal and state income tax returns for Thermosphere. These tax returns claimed the artificial losses created by the 2000 COINS Strategy. These losses “flowed through” to the partners, i.e., the Khans. See Adler & Drobny, Ltd. v. United States,
BDO prepared and signed the Khans’ 2000 individual tax returns, both the federal and state returns, as well as the 2000 federal tax return for Wilshire Investments. The Khans’ individual returns contained the losses from the 2000 COINS Strategy.
BDO and Grant Thornton assured Khan that the returns they had prepared were “properly prepared in accordance with professional standards” and that the losses generated by the 2000 COINS Strategy were legitimate and usable. On the basis of those assurances, the opinion letter from Jenkens, and defendants’ advice during the promotion, sale, and implementation of the 2000 COINS Strategy, plaintiffs signed and filed the returns.
5. The Tax Amnesty Program
In late 2001 and early 2002, the IRS offered the “Tax Amnesty Program,” a program in which taxpayers who had participated in illegal tax-avoidance schemes such as the 1999 Digital Options Strategy and 2000 COINS Strategy could voluntarily come forward, disclose their involvement, and thereby avoid any penalties for their underpayment of taxes. BDO advised plaintiffs, however, not to participate in the amnesty program.
According to the complaint, it was for EDO’s own benefit, rather than plaintiffs’ benefit, that BDO steered plaintiffs away from the amnesty program. BDO wanted to avoid attracting any suspicion toward its tax department. If plaintiffs had talked to the IRS, the IRS would have launched an investigation of BDO and would have required BDO to disclose the names of all its clients who had used the Digital Options Strategy or anything similar to it.
6. The IRS Audit
In 2003 and 2004, plaintiffs received notices of audit from the IRS for their 1999-2001 tax returns. In May 2003, they hired counsel to represent them in the audit.
7. The IRS Disallows the Losses Created by the 1999 Digital Options Strategy and the 2000 COINS Strategy
In 2008, the IRS disallowed the losses created by the 1999 Digital Options Strategy and the 2000 COINS Strategy, concluding that the transactions lacked economic substance. As a result, plaintiffs not only lost the benefit of the considerable fees and premiums they had paid to defendants in connection with the 1999 Digital Option Strategy and the 2000 COINS Strategy, but the IRS also determined that plaintiffs owed a large amount of back taxes, interest, and penalties as a consequence of plaintiffs’ claiming the invalid losses.
II. ANALYSIS
A. Case No. 4—10—0504 (the Deutsche Defendants)
1. The Trial Court’s Reason for Dismissing the Complaint
On September 28, 2009, pursuant to sections 2—615 and 2—619 of the Code (735 ILCS 5/2—615, 2—619 (West 2008)), Deutsche Bank and Brown filed a motion to dismiss the complaint. On October 2, 2009, Parse likewise filed a motion to dismiss the complaint pursuant to those two sections.
Section 2—619.1 of the Code (735 ILCS 5/2—619.1 (West 2008)) permits a combined motion for dismissal pursuant to sections 2—615 and 2—619 (735 ILCS 5/2—615, 2—619 (West 2008)), but section 2—619.1 says that “[a] combined motion *** shall be in parts” and that “[e]ach part shall be limited to and shall specify that it is made under one of [s]ections 2—615, 2—619, or 2—1005.” 735 ILCS 5/2—619.1 (West 2008). Defendants’ motions for dismissal are not divided into parts as section 2—619.1 requires. Nevertheless, the memorandum that Deutsche Bank and Brown filed in trial court in support of their motion for dismissal is divided into parts: the first part corresponding to section 2—619 and the second part corresponding to section 2—615. Under the heading of section 2—619, Deutsche Bank and Brown invoke the statute of limitations in section 13—205 (735 ILCS 5/13—205 (West 2008)), and under the heading of section 2—615, they challenge the claims for breach of fiduciary duty (count I), negligence (count II), negligent misrepresentation (count III), disgorgement (count IV), rescission (count V), declaratory judgment (count VI), breach of contract (count VII), fraud (count VIII), consumer fraud (count IX), and civil conspiracy (count XI). We assume that Parse intended his motion for dismissal to follow the same structure.
This structure was, as we have noted, a dual structure — one part corresponding to section 2—615 (735 ILCS 5/2—615 (West 2008)) and the other part corresponding to section 2—619(a)(5) (735 ILCS 5/2—619(a)(5) (West 2008))—and it appears, from the transcript of the hearing of December 3, 2009, that the trial court granted defendants’ motions for dismissal under section 2—619 instead of section 2—615. The court stated: “[U]nder section 2—619(a)9 [sic], the motions to dismiss for statute of limitations should be allowed.” Granting a combined motion for dismissal under section 2—619 rather than section 2—615 is a coherent ruling, considering that a statute of limitations is an affirmative defense (Wise v. Potomac National Bank,
2. The Legal Sufficiency of Count I (Breach of Fiduciary Duty)
a. Our Standard of Review
In their brief, plaintiffs defend the legal sufficiency of count I (breach of fiduciary duty) and count III (negligent misrepresentation). Therefore, we will consider de novo whether plaintiffs pleaded a cause of action for breach of fiduciary duty and negligent misrepresentation. See Ford v. Walker,
Viewing the well-pleaded facts in a light most favorable to the plaintiff, we decide whether the plaintiff has pleaded sufficient facts to constitute a cause of action (Goldman,
b. The Affidavit by Wanser
In the memorandum that Deutsche Bank and Brown submitted to the trial court in support of their combined motion for dismissal, one of the headings was, “Each of Plaintiffs’ Claims Fails as a Matter of Law and Should Be Dismissed Pursuant to 735 Ill. Comp. Stat. 5/2—615.” Under that heading—which challenged the legal sufficiency of plaintiffs’ claims—Deutsche Bank and Brown referred to an affidavit by one of their attorneys, Michael R. Wanser. The affidavit in turn referred to some contractual documents attached to the affidavit as exhibits A through C. This affidavit and its exhibits, however, were not attached to plaintiffs’ complaint. Rather, Deutsche Bank and Brown filed the affidavit, with its attached exhibits, at the same time they filed their motion for dismissal and supporting memorandum. In a footnote of their memorandum, Deutsche Bank and Brown argued: “The Court may consider these documents [(i.e., Wanser’s affidavit and exhibits)] on this motion to dismiss without converting the motion to one for summary judgment because they are explicitly referred to in the Complaint, see e.g., Comp. ¶¶ 82, 248. See Kirchner v. Greene,
It is true that paragraph 82 of the complaint referred to “a set of private contracts with Deutsche Bank involving foreign currency digital options on Japanese Yen” and that paragraph 248 of the complaint referred to “Engagement Agreements.” Nevertheless, the complaint did not quote or so much as mention the particular contractual provisions on which Deutsche Bank and Brown relied in support of their motion to dismiss the complaint for failure to state a cause of action. For that very reason, Kirchner actually afforded no authority for the consideration of Wanser’s affidavit. Cf Kirchner,
Nonetheless, on appeal, plaintiffs do not argue that the trial court’s consideration of Wanser’s affidavit and exhibits was procedurally improper. Instead of challenging the affidavit on procedural grounds, plaintiffs make substantive arguments against it. Therefore, any procedural objection to the affidavit and its exhibits would be forfeited. Ill. S. Ct. R. 341(h)(7) (eff. July 1, 2008) (“Points not argued are waived,” i.e., forfeited.).
That leaves the difficult question of how we should go about performing our analysis under section 2—615 (735 ILCS 5/2—615 (West 2008)). On the authority of Bryson v. News America Publications, Inc.,
Plaintiffs are correct that under section 2—615, Wanser’s affidavit cannot negate the well-pleaded facts of the complaint. Even if the exhibits of Wanser’s affidavit were actually attached to the complaint as exhibits, they would not trump the factual allegations in the complaint, because an exhibit of a complaint trumps the allegations in the complaint only if the exhibit is an instrument upon which the claim is founded. See 735 ILCS 5/2—606 (West 2008). “ ‘When the exhibit is not an instrument upon which the claim or defense is founded but, rather, is merely evidence supporting the pleader’s allegations, the rule that the exhibit controls over conflicting averments in the pleading is inapplicable.’ ” Bajwa v. Metropolitan Life Insurance Co.,
Plaintiffs’ claim for breach of fiduciary duty is not founded on the contractual documents. We know that much from a case that defendants cite in their brief, Armstrong v. Guigler,
c. Choosing Between Illinois Law and New York Law
The parties disagree on which state’s law applies to the determination of whether defendants owed plaintiffs a fiduciary duty: the law of Illinois or the law of New York. The contractual documents attached to Wanser’s affidavit choose New York law. Specifically, paragraph 4 of the confirmation agreement, dated November 29, 1999, between SRK Wilshire Investments, LLC, and Deutsche Bank (exhibit A of Wanser’s affidavit) provides that “the governing law is New York law.” Likewise, the account agreements dated November 18, 1999, between the Wilshire entities and BT Alex. Brown, Inc. (exhibit C of the affidavit), provide: “This Agreement shall be deemed to have been made in the State of New York and shall be construed, and the rights of the parties determined, in accordance with the laws of the State of New York and the United States, as amended, without giving effect to the choice of law or conflict-of-laws provisions thereof.” (We assume that BT Alex. Brown, Inc., is the same corporation as one of the named defendants in this case, Deutsche Bank Securities, Inc., doing business as Deutsche Bank Alex. Brown; none of the parties suggest otherwise.)
We should give effect to a choice-of-law provision in a contract (Hofeld v. Nationwide Life Insurance Co.,
This is not to say that we otherwise will ignore New York law, such as when evaluating the parties’ legal relationship that predated the execution of these contracts. Binding or not, New York case law provides useful guidance on the fiduciary duties of brokers and investment advisors.
d. The Fiduciary Duty of a Broker To Give Competent, Honest Advice Regarding the Purchase or Sale of Securities, Insomuch as the Broker Chooses To Give Such Advice
As plaintiffs argue, if we take the well-pleaded facts of the complaint to be true and draw reasonable inferences from those facts (Bryson,
“Shanbrom set up a conference call between himself, Parse, and Khan to discuss foreign currency trading. During this conference call, Parse, along with Shanbrom, reiterated the ‘sales pitch’ and reassured Khan that the Digital Options Strategy was completely legal. Parse, along with Shanbrom, further discussed the steps of the Digital Options Strategy and informed Khan that Deutsche Bank would handle all aspects of the investments in foreign currencies. According to Parse, Deutsche Bank had internal procedures to determine the proper amounts and types of the foreign currency investments that would be appropriate for Khan’s circumstances. Parse told Khan that Parse would make all decisions with respect to the amounts and types of foreign currency investments since he was the expert. Parse again reiterated that Plaintiffs would have a good chance of making a profit on the foreign currency investments.”
Thus, Shanbrom and Parse, who was an agent of Deutsche Bank, led Khan to believe that his trading in foreign currencies via Deutsche Bank would be an “investment.” An “investment,” of course, is the expenditure of money for the purpose of making a profit. New Oxford American Dictionary 893 (2001). Parse “reiterated that Plaintiffs would have a good chance of making a profit on the foreign currency investments.” Evidently, Deutsche Bank was to serve as Khan’s broker for purposes of trading in foreign currencies. And in the contemplation of the parties, Deutsche Bank’s role would not be the robotic execution of whatever instructions originated with Khan. Far from it, Parse, who was “the expert,” “would make all decisions with respect to the amounts and types of foreign currency investments,” using Deutsche Bank’s “internal procedures” for deciding such matters.
And Deutsche Bank’s advice to Khan went further than the amounts and types of foreign-currency investments. According to the complaint, the “1999 Strategy Defendants”—defined as BDO, Deutsche Bank, Brown, and Parse—also advised Khan on how the contemplated foreign-currency trading could be used to reduce plaintiffs’ federal income taxes through the creation of a large capital loss, should plaintiffs fail to make a profit on the foreign-currency investments. Paragraphs 68 and 69 of the complaint allege as follows:
“68. The 1999 Strategy Defendants advised Plaintiffs that the basis of Plaintiffs’ interest in the partnership [(SRK Wilshire Partners)] would be increased for tax purposes by the purchase cost of the long options, but not decreased by the premium earned by Plaintiffs on the short options. The 1999 Strategy Defendants further advised Plaintiffs that upon the contribution of the partnership interest to the S Corporation [(SRK Wilshire Investors, Inc.)] and the subsequent sale by the S Corporation of its assets, the S Corporation would realize a large capital loss that could be applied to substantially reduce or eliminate the large capital gains realized by Plaintiffs, thus substantially reducing or even eliminating the Plaintiffs’ tax liability.
69. The 1999 Strategy Defendants informed Plaintiffs that depending on the exchange rate between the U.S. dollar and the foreign currencies involved in the digital option transactions, there was a reasonable chance of realizing a pre-tax gain on the FX Contracts. The 1999 Strategy Defendants assured Plaintiffs that in the event Plaintiffs lost money on the FX Contracts, the tax benefits of the 1999 Digital Options Strategy as a whole, resulting from the creation of losses to offset gains and/or income, far outweighed any losses that might be incurred as a result of the FX Contracts.”
According to the complaint, this advice was misleading in two ways. First, the “investment” in foreign currencies was not really an investment at all. Rather, the transaction was designed as a sure-fire way for plaintiffs to lose money to Deutsche Bank. Unbeknownst to Khan, “the foreign currency digital options were simply private bets with Deutsche Bank on where the underlying foreign currencies would be on a particular date and time,” and “Deutsche Bank controlled the outcome” in these bets by choosing the spot rate (we are quoting paragraph 63 of the complaint). According to footnote 12 of the complaint, the “transactions” with Deutsche Bank were “[not] even transactions. *** [T]he FX [(foreign exchange)] Contracts were not something traded on any recognized exchange but were simply a matter of private contract between the participants. Finally, neither party had any rights to take possession of the ‘underlying currency.’ As a result, the FX Contracts amounted, in actuality, to a contractual wager (i.e., a ‘bet’) based on movements in foreign currency prices, without any real possibility of foreign currency ever changing hands between the parties.” In other words, instead of making an “investment,” as Parse and Shanbrom represented he would be doing, Khan would be the predestined loser in a rigged bet. Second, defendants’ advice to Khan was additionally misleading in that the capital loss they promised in the event that plaintiffs lost money in the foreign-currency “investments” would be indefensible under IRS Notice 1999-59.
This negligent or dishonest advice, which Parse allegedly gave Khan at the inception of their relationship, distinguishes the present case from a case on which the Deutsche defendants rely, de Kwiatkowski v. Bear, Stearns & Co.,
In short, although the broker’s provision of advice triggered no ongoing duty to give more advice after the transaction was accomplished (de Kwiatkowski,
Granted, in addition to accusing the Deutsche defendants of giving bad initial advice, plaintiffs accuse them of failing to give further advice. Plaintiffs blame defendants not only for their initial advice to engage in the 1999 Digital Options Strategy and 2000 COINS Strategy but also for their subsequent failure to advise plaintiffs to participate in the amnesty program that the IRS offered in late 2001 and early 2002. But this further advice would have been corrective advice and in that respect would have been significantly different from the ongoing advice that the plaintiff in de Kwiatkowski unreasonably expected from his broker. The plaintiff in de Kwiatkowski contended that after the broker followed his instructions by executing the foreign-currency transactions, his broker had an ongoing duty to keep him apprised of geopolitical developments and other changing circumstances that might cause the value of the dollar to fall, de Kwiatkowski,
e. Confidence Reposed on One Side and Resulting Influence on the Other Side
A confidential or fiduciary relationship exists “where one party reposes special trust and confidence in another who accepts that trust and confidence and thereby gains superiority and influence over the subservient party.” Eldridge v. Eldridge,
When the district court says, however, that no fiduciary relationship can arise between parties to a “business transaction,” the court evidently means, in this context, an “arm’s-length business transaction.” For, actually, it is quite common for a fiduciary relationship to arise in a business transaction—if the transaction creates an agency relationship, for example (see Restatement (Third) of Agency §1.01 (2006)), such as that between an attorney and client (Eldridge,
Looking at the well-pleaded facts of the complaint in a light most favorable to plaintiffs, one could reasonably infer that Khan reposed special trust and confidence in defendants and that they thereby gained superiority and influence over him. After all, Deutsche Bank was a prestigious investment bank, highly sophisticated in its field and capable, by its very name, of inspiring confidence. It is true that Khan was wealthy, apparently, but he was not Deutsche Bank. As Parse told Khan, Deutsche Bank had “internal procedures” for determining the exact amounts and types of foreign currency that would be just right for him. Khan knew little about foreign-currency trading and federal income-taxation, whereas defendants were self-proclaimed experts in those subjects, each of which was a labyrinth in itself. Defendants promised to lead Khan by the hand through these forbidding labyrinths. Using his special expertise and Deutsche Bank’s internal procedures, Parse would decide the types and amounts of foreign currency in which plaintiffs would invest. One might infer, therefore, that the figures in the contracts came from Parse, not from Khan. All in all, one could get the impression that Khan was considerably out of his element and that he more or less was told where to sign. Considering that he thought he was making “investments,” he evidently understood little about the 1999 Digital Options Strategy and the 2000 COINS Strategy. Nevertheless, in blind or uncomprehending faith in the “experts,” he took the plunge more than once. Shanbrom and Parse must have had considerable influence over him, because even though he lost a substantial amount of money in the 1999 Digital Options Strategy, he was fully prepared, on their advice, to risk another drubbing in the 2000 COINS Strategy. But, then, as they assured him, it ultimately did not matter if he lost money in the transactions, because, in the end, he would come out ahead in tax losses.
f. The Contractual Disclaimers, Voidable Without Full Disclosure of All Material Facts
As we have observed, the confirmation agreements between plaintiffs and Deutsche Bank contain a paragraph, entitled “Representations,” in which the parties represent to each other that they are entering into the transactions as principal, not as agent or fiduciary, and that they are not relying on the advice of the other party. Defendants cite cases holding that a contractual disclaimer of representations makes reliance on precontractual representations unreasonable (Danann Realty Corp. v. Harris,
The parties in Danann, for example, had no preexisting fiduciary relationship; they were simply the buyer and seller of a lease. The defendants were the lessees of a building, and pursuant to a written contract, the plaintiff bought the lease from them. Danann,
On the authority of Danann, the Deutsche defendants insist that plaintiffs likewise are bound by the disclaimer in the confirmation agreement with Deutsche Bank. New York case law, however, holds the rationale of Danann to be inapplicable to parties who are in a fiduciary relationship. See Littman v. Magee,
To drive home what we mean, consider this analogy. Assume that someone — let us call him John Doe — confers with an attorney. Doe has never spoken with this attorney before. He just walks into the attorney’s office and tells the attorney his legal problem. The two have a conversation, in which the attorney orally agrees to represent Doe and recommends to him a course of action to address his legal problem. Doe, who possesses no legal expertise, places his trust in this attorney and agrees to the suggested course of action: he accepts the attorney’s advice and consents to what the attorney proposes doing in his behalf. Assume further that the attorney then obtains Doe’s signature on a retainer agreement containing a disclaimer clause. In the disclaimer clause, Doe represents to the attorney (despite the discussion they have just had) that he is not relying on the attorney’s advice regarding this particular legal problem and that he and the attorney are not in an agency relationship or a fiduciary relationship. Few would dispute that the disclaimer clause is itself an abuse of trust, and it is an abuse of trust because it is a sham, it is misleading — and it is misleading in the service of the attorney who supposedly was going to act for Doe’s benefit. The attorney formed a relationship of trust with Doe before presenting him with the conflicting retainer agreement that subverted that relationship of trust.
If a fiduciary relationship already exists, the fiduciary must disclose all material facts before diving through the escape hatch of a contractual disclaimer. Because of such a preexisting fiduciary relationship, the court in Blue Chip Emerald LLC v. Allied Partners Inc.,
Perhaps it was no accident that the written buy-out agreement between the plaintiffs and defendants included a no-representation clause as to the projected proceeds from any future sale of the building. In the buy-out agreement, the plaintiffs acknowledged that, with one exception, the defendants had made no “ ‘representations or warranties’ ” as to “ ‘the actual or projected value of the Property for sale or leasing or to any other matter affecting or related to the Property.’ ” Blue Chip,
The lower court held that these contractual representations and disclaimers defeated the plaintiffs’ complaint, but the Supreme Court of New York, Appellate Division, disagreed. Blue Chip,
“Facts are considered material if they would likely influence the principal’s beliefs regarding the desirability of the transaction.” Letsos v. Century 21-New West Realty,
g. A Pre-Agency Fiduciary Duty
Thus far, we have discussed the possibility that before Khan signed any contract with Deutsche Bank, he and Deutsche Bank established a fiduciary relationship as a matter of fact: a relationship in which Khan reposed special trust in Deutsche Bank and Deutsche Bank accepted that trust, thereby gaining influence over him. See Eldridge,
There is another type of fiduciary relationship besides a fiduciary relationship as a matter of fact, namely, a fiduciary relationship as a matter of law, and such a relationship exists between an agent and a principal. Consequently, one need not prove, factually, that an agent is a fiduciary toward the principal; the agent and principal are in a fiduciary relationship as a matter of law. Carroll v. Caldwell,
A broker is, by definition, an agent: “an agent who negotiates contracts of purchase and sale (as of real estate, commodities, or securities).” Merriam-Webster’s Collegiate Dictionary 145 (10th ed. 2000). See also Owen Wagener & Co. v. U.S. Bank,
Deutsche Bank, Brown, and Parse all admit that a broker-client relationship is what they offered to Khan. In their brief, Deutsche Bank and Brown state that plaintiffs paid them a total of $1,275,000 in 1999 and 2000 for “brokering” the option transactions. Likewise, in his motion for dismissal, Parse argued: “Plaintiffs fail to allege sufficient facts to show that Defendant Parse owed them a fiduciary duty beyond the ordinary broker-client relationship.” Also, in his brief, Parse states: “As a broker and at Plaintiffs’ request, Parse opened non-discretionary brokerage accounts for Plaintiffs at Deutsche Bank and executed trades in these accounts.”
Nonetheless, the argument might be made that even though, by the Deutsche defendants’ own admission, they agreed to be Khan’s broker and, as such, became his agent and his fiduciary as a matter of law, this broker-client relationship (a type of agency) did not come into existence until Khan signed the contracts with Deutsche Bank and Brown. Until then, it might be argued, they were merely in pre-agency negotiations.
The supreme court has held, however, that if “the creation of the agency relationship involve[s] peculiar trust and confidence, with reliance by the principal on the fair dealing by the agent” (emphasis in original) (Martin v. Heinold Commodities, Inc.,
On appeal before the supreme court, the broker in Martin challenged this finding by the trial court, arguing that the plaintiffs had failed to prove, by clear and convincing evidence, that the broker was in a fiduciary relationship with potential customers as a matter of fact before the parties actually entered into a contract. Martin,
Therefore, the nature of the parties’ relationship was not the real question in Martin. Instead, the question was “at what time that relationship attached concerning the agent’s disclosures about his compensation.” Martin,
Likewise, in this case, if we take the well-pleaded facts of the complaint to be true and regard them in a light most favorable to plaintiffs (see Goldman,
3. The Legal Sufficiency of Count III (Negligent Misrepresentation) As the Second Circuit said in de Kwiatkowski,
“One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.” Restatement (Second) of Torts §552(1) (1977).
See also Rozny v. Marnul,
Given the well-pleaded facts of the complaint, which we accept as true and which we construe in a light most favorable to plaintiffs, the Deutsche defendants were acting in the course of their employment when giving Khan advice about the “investments” and tax consequences. They gave Khan this advice for his guidance in his business transactions. The advice, however, was false in that the “investments” were not investments and the tax losses would not be allowable, and defendants were aware, or should have been aware, of the falsity. Plaintiffs suffered resulting pecuniary losses in the form of contractual fees, attorney fees, back taxes, interest, and penalties.
4. Dismissal on the Basis of Statutes of Limitations
a. Our Standard of Review
Thus far in our analysis, we have concluded that counts I and III of the complaint are legally sufficient: plaintiffs have pleaded causes of action against the Deutsche defendants for breach of fiduciary duty and negligent misrepresentation. Now we will consider whether those actions are time-barred.
Pursuant to section 2—619 (735 ILCS 5/2—619 (West 2008)), the trial court granted defendants’ motion to dismiss plaintiffs’ claims on the ground that various statutes of limitations barred the claims. Before beginning our review of that ruling, we will discuss our standard of review. We review de novo a trial court’s ruling on a motion for dismissal pursuant to section 2—619, that is, we give no deference to the trial court. DeLuna v. Burciaga,
We also give the plaintiff the benefit of the doubt if there is a question of fact as to when the plaintiff had the knowledge, or reasonably should have had the knowledge, that causes the statutory period of limitation to start running. See Knox College v. Celotex Corp.,
b. The Trial Court’s Application of the Discovery Rule
A literal interpretation of a statute of limitations could start the clock ticking just as soon as the injured party becomes aware of the injury. Such an interpretation could lead to harsh results because an injured party, even a reasonably attentive injured party, might learn of the injury much sooner than he or she learns it was wrongfully caused. Witherell v. Weimer,
In its remarks from the bench on December 3, 2009, the trial court concluded that plaintiffs sustained their first injury in 1999 or 2000, when they paid the contractual fees to the co-conspirators, and that their cause of action therefore accrued in 1999 or in 2000 at the latest. See Golla v. General Motors Corp.,
Owing to the discovery rule, however, the period of limitation does not necessarily start running on the date that a cause of action accrues. The trial court considered the extent to which the discovery rule postponed the starting of the limitation period (see Knox College,
Beginning in May 2003, when plaintiffs, through their tax attorney, should have discovered the dispositive IRS notices, plaintiffs had five years at the longest to file their lawsuit, so the trial court held. The longest applicable statute of limitations was 5 years (735 ILCS 5/13—205 (West 2008)) rather than 10 years (735 ILCS 5/13—206 (West 2008)) because the court regarded plaintiffs’ contractual claims as disguised tort claims. See Armstrong,
c. Actual Harm, or the Present Existence of Damages
i. Federated and Feddersen
As we have explained, the discovery rule prevents a statutory period of limitation from running until both of the following conditions are fulfilled: (1) the party knows, or reasonably should know, that the party has been injured; and (2) the party knows, or reasonably should know, that the injury was wrongfully caused. Knox College,
Plaintiffs insist that they incurred no damages until 2008, when the IRS disallowed the “losses” generated by the 1999 Digital Options Strategy and the 2000 COINS Strategy. They contend that the trial court erred in its conclusion that they suffered damages as early as 1999 or 2000, when they paid the contractual fees to the co-conspirators. They regard that conclusion as inconsistent with case law, including Federated Industries, Inc. v. Reisin,
In Federated,
In late 2004 and early 2005, the IRS audited Federated, and in September 2005, the IRS issued a notice of proposed adjustment, in which the IRS concluded that Federated had passive investment income in excess of 25% of its gross receipts in the taxable years 2000, 2001, and 2002, and that consequently Federated’s S-corporation status should he terminated. Federated,
In October 2005, Federated, the defendants, and the IRS attended a settlement meeting, at which the IRS presented a proposal for closing the Federated audit and avoiding the involuntary termination of Federated’s S-corporation status. Federated,
In April 2006, the IRS sent Federated an acceptance form for the plaintiffs to sign. This acceptance form specified the amount of additional income tax for 2002 and 2003 that Federated would have to pay to retain its S-corporation status. Federated,
On May 15, 2008, the plaintiffs brought an action against the defendants for accounting malpractice, alleging that the defendants had negligently miscalculated Federated’s passive investment income for the years 2002, 2003, and 2004, causing the plaintiffs to incur liability to the IRS in the total amount of $14 million in additional taxes, interest, and penalties. Federated,
On appeal to the First District, the plaintiffs argued that, contrary to the trial court, the two-year period of limitation had not begun running until May 17, 2006, when plaintiffs signed the formal written acceptance of the IRS’s proposed adjustments. Federated,
The case required the First District to decide “when taxpayers, whose tax returns have been challenged by the IRS, know or have reason to know that they have a cause of action against their accountants.” Federated,
In reaching that conclusion, the First District intended to follow the decision of the Supreme Court of California in International Engine Parts, Inc. v. Feddersen & Co.,
The notice of deficiency informs the taxpayer that the IRS has determined a deficiency in the amount of tax that a taxpayer has paid. 26 U.S.C. §6212(a). (The notice of deficiency is not to be confused with a notice of audit. A notice of deficiency comes after the audit, if the audit reveals that the taxpayer has underpaid.) According to the statute, the notice of deficiency “describe[s] the basis for, and identifies] the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties included in such notice.” 26 U.S.C. §7522(a) (2006). The notice of deficiency also is called a “90-day letter” because the taxpayer has 90 days after receipt of the notice in which to file a petition with the tax court if the taxpayer wishes the tax court to “redetermine” the deficiency. 26 U.S.C. §6213(a) (2006); 35 Am. Jur. 2d Federal Tax Enforcement §175 (2001).
If 90 days elapse without the taxpayer’s filing a petition for redetermination in tax court, the IRS may assess the deficiency. 26 U.S.C. §6202 (2006); 26 C.F.R. §301.6213—1(a) (2009). If, however, the taxpayer files a timely petition for redetermination in tax court, the IRS may assess the deficiency only when the decision of the tax court becomes final and nonappealable (assuming, of course, that the decision is favorable to the IRS). Id.
The IRS makes an assessment by recording the liability of the taxpayer in the office of the Secretary of the Treasury. 26 U.S.C. §6203 (2006); 26 C.F.R. §301.6203—1 (2009). The assessment creates a lien on the taxpayer’s property. 26 U.S.C. §6322 (2006). Thus, “ ‘in the federal scheme[,] assessment involves the taking of an interest in the taxpayer’s property after affording the taxpayer notice of an alleged deficiency and an opportunity to challenge the deficiency.’ ” In re Lewis,
For three reasons, Feddersen deemed the assessment as the commencement of actual injury in cases in which a taxpayer sued an accountant for negligently causing the taxpayer to incur additional liability to the IRS. First, treating the assessment as the beginning of the limitation period would conserve judicial resources. Feddersen,
Second, requiring the taxpayer to sue the accountant while assessment proceedings still are pending would put the taxpayer in the untenable position of making allegations in the negligence action that could be used against the taxpayer in the assessment proceedings or in tax court. Feddersen,
Third, during the audit, the taxpayer might need the accountant’s continuing services. The taxpayer might need the accountant’s help in responding to the audit. Feddersen,
We find these three points in Feddersen to be persuasive. See also CDT, Inc. v. Addison, Roberts & Ludwig, C.P.A., P.C.,
Deutsche Bank and Brown argue, however, that Federated and Feddersen are inapposite because unlike the defendants in those cases, Deutsche Bank and Brown are not accountants. Deutsche Bank and Brown insist that “[t]ax advice, even if given negligently, cannot give rise to a malpractice claim unless given by a professional tax adviser.” (Emphasis in original.) They maintain that “[s]uch representations, however negligent or wrongful, cannot amount to a malpractice claim unless made by a professional in that field.” (Emphasis in original.)
We see no reason to become fixated on the label “malpractice claim.” Regardless of whether one calls it “malpractice” or something else, the Deutsche defendants, like an accountant, gave tax advice to Khan. One does not have to be an accountant to incur liability for giving negligent tax advice. Rather, all section 552(1) of the Restatement (Second) of Torts requires is the following: (1) the Deutsche defendants gave the tax advice in the course of their business or in a transaction in which they had a pecuniary interest, (2) they gave the tax advice for Khan’s guidance in his business transactions, (3) the tax advice was false, (4) the Deutsche defendants failed to exercise reasonable care or competence in obtaining the tax information or in communicating it to Khan, (5) Khan justifiably relied on the tax advice, and (6) he suffered pecuniary loss as a consequence. See Restatement (Second) of Torts §552(1) (1977). If those six conditions were fulfilled, the Deutsche defendants would be liable to Khan for the negligent tax advice regardless of whether they were entitled, by licensing or certification, to claim the title of “professional tax adviser” or “accountant.”
Given that, like an accountant, the Deutsche defendants can incur liability in tort for giving negligent tax advice in the course of their business, we ask the same question that we would ask if the advice had come from an accountant: Have plaintiffs suffered any actual harm (damages) from the advice and if so, when did they suffer the actual harm? Federated and Feddersen speak to that question.
The Deutsche defendants try to consign Federated and Feddersen to irrelevance on the ground that, unlike accountants, the Deutsche defendants are not expected to assist the former client during an IRS audit. It is true that part of the rationale in Federated and Feddersen was that the taxpayer might need the accountant’s continuing services during the audit. Federated,
So, we conclude that the trial court erred in dismissing the actions against the Deutsche defendants as time-barred. Indeed, we hold, as a matter of law, that the actions against those defendants are not time-barred, given the allegations of the complaint. We find no indication in the complaint that more than five years (or even two years) have elapsed since an assessment or a settlement with the IRS. Until an assessment or settlement, there was no actual harm and hence no accrual of a cause of action — even if, by May 2003, it had become abundantly clear to Khan that defendants had given him false advice. Negligence without harm does not make a cause of action.
5. Ripeness
Because we construe the allegations of the complaint in a light most favorable to plaintiffs (see Porter,
“In 2003 and 2004, Plaintiffs received Notices of Audit (Notice of Beginning of Administrative Proceeding and/or notice that their tax return was selected for examination) for the 1999-2001 tax returns. In 2008, Plaintiffs received certain Notice of Adjustment from the IRS indicating that the IRS intended to disallow the Investment Strategies. Also in 2008, Plaintiffs received several Notices of Deficiency with respect to the IRS’s disallowance of the Investment Strategies. The IRS determined in 2008 that Plaintiffs owed substantial back-taxes, penalties and interest as a direct result of the Investment Strategies.”
Because the complaint does not allege that plaintiffs filed a petition for redetermination in the Tax Court within 90 days, we assume the IRS had assessed them for the deficiencies by the time they filed their complaint in July 2009 and that in the final sentence of the foregoing quotation, plaintiffs allege, in so many words, that the IRS assessed them in 2008.
If, however, there has not been an assessment as of yet or if plaintiffs have not settled with the IRS, defendants, on remand, may move for the dismissal of the action, without prejudice, on the ground that the case is not ripe. See 735 ILCS 5/2—619(a)(9) (West 2008); Schulte v. Burch,
B. Case No. 4—10—0583 (Grant Thornton)
1. Apple Valley and Van Dyke
What we have said about actual harm and ripeness applies with equal force to Grant Thornton. In fact, Federated and Feddersen, with their discussion of actual harm, are an even better fit for Grant Thornton because Grant Thornton is an accounting firm.
Grant Thornton, on the other hand, cites and elucidates some cases in which California courts declined to apply Feddersen to an action against an accountant, namely, Apple Valley Unified School District v. Vavrinek, Trine, Day & Co.,
In Apple Valley, for example, the client, a school district, sued an accountant and her employing accounting firm, “claiming defendants’ misrepresentations in an audit report induced the District to provide state funds to a charter school which was not entitled to the funds.” Apple Valley,
The defendants moved to dismiss the lawsuit as time-barred, and the trial court granted their motion. On appeal, the school district argued, on the authority of Feddersen, that it had not suffered actual injury until January 2000, when the comptroller’s audit report concluded that the school district was liable to the state for overpayments to the charter school. Apple Valley,
In the present case, by contrast, plaintiffs expended no fees to investigate their own perceived liability. The school district’s payment of fees to the second accountant and to legal counsel in Apple Valley is not truly comparable to plaintiffs’ payment of fees to their attorney in the IRS audit, because the school district’s investigation is different from an IRS audit. Unlike plaintiffs in this case, the school district did not pay the fees to defend itself against the allegations of wrongdoing leveled against it by a third party (the IRS) — allegations that might or might not lead to liability. Rather, the school district paid the fees in the conduct of its own investigation, an investigation prompted by the school district’s own realization that because of the defendants’ misrepresentations, the school district had disbursed state funds to an unqualified recipient, thereby rendering the school district liable to the state. In that respect, Apple Valley is distinguishable.
Van Dyke likewise is distinguishable because the types of actual harm that the plaintiffs sustained in that case have no counterpart in the present case. On the basis of allegedly negligent advice by the defendant accountant, the plaintiffs in Van Dyke made a charitable contribution of some land. Van Dyke,
So, just because California courts have declined to apply Feddersen to all actions against accountants, it does not logically follow that Feddersen is inapplicable to the present case. We echo the Court of Appeal of California:
“Here, we consider the application of Feddersen to accounting malpractice that is based upon a claim that the client incurred damages as a result of the negligent preparation of tax returns. The fact that Feddersen ‘did not articulate a “rule for all seasons” ’ [citation]—or that it did not even prescribe a rule applicable to all accounting malpractice actions—is not germane. Our application of Feddersen here *** is easily reconcilable with Apple Valley’s refusal to apply Feddersen’s bright-line rule where the accountants’ allegedly deficient performance did not concern tax return preparation.” (Emphasis in original.) Sahadi v. Scheaffer,66 Cal. Rptr. 3d 517 , 540 (Cal. Ct. App. 2007).
2. Contractual Fees as a Contingent Harm Rather Than an Actual Harm
Grant Thornton believes that in the present case, it can identify an actual harm inflicted earlier than an assessment, namely, the fees that Khan paid Grant Thornton to prepare the 2000 tax return for Thermosphere. Grant Thornton points out that unlike the plaintiffs in Federated, plaintiffs in this case seek to recover the fees they have paid to defendants. Grant Thornton argues that Federated is distinguishable because in Federated, the plaintiffs did not seek to recover the fees they had paid to the defendant accountants whereas, in the present case, plaintiffs allege that defendants “defrauded [them] at the outset” and that plaintiffs were damaged at the outset by the fees they paid to the defendants: “the fees paid [are] an element of damage.”
By Grant Thornton’s reasoning, though, Federated would apply only to cases in which the accountant prepared the tax return gratis. In every case in which the client paid the accountant for preparing the tax return, the client would incur actual harm at the outset instead of later, at the assessment. Since accountants generally expect to be paid for their work, Federated effectively would be reduced to nothing. It seems highly improbable, then, that the First District intended the applicability of Federated to turn on whether the accountant charged a fee for his or her services.
Nor can the applicability of Federated turn on whether the plaintiff chooses to claim the fees as an element of damages. Federated presupposes the discovery rule, and the discovery rule is indifferent to whether the plaintiff seeks compensation for the earliest harm. A plaintiff cannot evade the statute of limitations by being selective about the harms the plaintiff alleges in the lawsuit, including the later harms but excluding the earlier ones.
The payment of fees cannot even be characterized as an “earlier harm” until the IRS assesses a deficiency (or the client settles with the IRS). The payment of fees to defendants became actual damages, or will become actual damages, only upon the filing of the assessment in the office of the Secretary of the Treasury. Only then will the fees turn out to be devoid of their intended benefit. In return for the payment of fees to defendants, plaintiffs were to receive either of the following benefits: the making of a profit in the digital option transactions or, alternatively, a capital loss that would reduce their taxable income. Until the IRS disallows the loss and, consequently, assesses the deficiency along with interest and penalties, the fees that plaintiffs paid to defendants are not yet a waste, because plaintiffs have not yet been deprived of the contemplated benefit of their bargain, namely, the alternative benefit of a tax loss.
3. The Attorney Fees the Khans Incurred in the IRS Audit: Merely a Potential Harm Until the Assessment
It might be argued that plaintiffs incurred actual harm in 2003 by having to pay an attorney to represent them in the IRS audit. That argument, however, would go against the grain of case law. By the logic of Lucey,
In Lucey,
Around this time, the plaintiff was thinking about resigning from The Chicago Corporation and starting his own firm. Lucey,
In July 1995, while the Chicago Corporation case was still pending, the plaintiff brought an action against Gertz and Pretzel & Stouffer for legal malpractice. Lucey,
The appellate court agreed that the action should be dismissed— but not because of the statute of limitations. Rather, the appellate court held that the malpractice action was premature prior to the entry of an adverse judgment against the plaintiff in the Chicago Corporation case. Lucey,
“[WJhere an attorney’s neglect is not a direct cause of the legal expenses incurred by the plaintiff (¿.e., the plaintiff prevails when sued or loses for reasons other than incorrect legal advice), the attorney fees incurred are generally not actionable. Since it is also possible the former client will prevail when sued by a third party, damages are entirely speculative until a judgment is entered against the former client or he is forced to settle.” (Emphasis in original.) Lucey,301 Ill. App. 3d at 355 ,703 N.E.2d at 478 .
Thus, if a third party sues the plaintiff, supposedly because the plaintiff followed the defendant’s defective legal advice, the attorney fees that the plaintiff incurs as a result of such suit will not qualify as damages for purposes of an action against the defendant until the third party prevails against the plaintiff. And even then, it must be shown that the cause of the plaintiffs liability to the third party was the plaintiffs following the defendant’s advice.
These principles should hold true even though the purportedly negligent advice came from a non-attorney who is subject to liability under section 552(1) of the Restatement (Second) of Torts. The attorney fees that plaintiffs incurred in the IRS audit are damages only upon the filing of an assessment by the IRS or only when plaintiffs are forced to settle with the IRS, whichever event comes earliest.
4. The Statute of Repose
a. The Lengthening, Rather Than Condensing, Effect of the Qualification in Section 13—214.2(b)
The trial court held that the statute of repose in section 13—214.2(b) of the Code (735 ILCS 5/13—214.2(b) (West 2008)) barred any action by plaintiffs against Grant Thornton for accounting malpractice. (It is unclear how all the business-entity plaintiffs could have a cause of action against Grant Thornton, considering that Grant Thornton only prepared the 2000 tax return for Thermosphere along with the K-l forms that the Khans used in their individual returns. Perhaps, as the litigation progresses, this point will be clarified.) Subsection (b) consists of a deadline followed by a qualification of the deadline:
“In no event shall such action be brought more than 5 years after the date on which occurred the act or omission alleged in such action to have been the cause of the injury to the person bringing such action against a public accountant. Provided, however, that in the event that an income tax assessment is made or criminal prosecution is brought against a person, that person may bring an action against the public accountant who prepared the tax return within two years from the date of the assessment or conclusion of the prosecution.” 735 ILCS 5/13—214.2(b) (West 2008).
“Such action,” in the first sentence of subsection (b), refers to the action described in subsection (a) (735 ILCS 5/13—214.2(a) (West 2008)): an “[a]ction[ ] based upon tort, contract or otherwise against any person, partnership or corporation registered pursuant to the Illinois Public Accounting Act, as amended [(225 ILCS 450/0.01 through 32 (West 2008))], or any of its employees, partners, members, officers or shareholders, for an act or omission in the performance of professional services.” “In no event” may one bring such an action more than five years after the commission of the accounting malpractice.
The adverbial phrase “in no event,” together with the lack of any reference to accrual or knowledge, signals that section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)) is a statute of repose. In a statute of repose, the legislature intends to end the possibility of liability after the passage of a certain period of time, regardless of when—if ever—the cause of action accrued. Goodman v. Harbor Market, Ltd.,
Grant Thornton contends that by operation of the statute of repose in section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)), plaintiffs’ right of action against it terminated in April 2006. Grant Thornton prepared the income tax return for Thermosphere in April 2001. The preparation of the return was the “act or omission alleged in [plaintiffs’] action [against Grant Thornton] to have been the cause of the injury.” 735 ILCS 5/13—214.2(b) (West 2008). Five years after that act or omission, in April 2006, the possibility of liability came to an end, so Grant Thornton argues. Plaintiffs filed their complaint in July 2009.
The termination of Grant Thornton’s liability three years before the filing of the complaint would be quite simple and straightforward but for the qualification, the “provided” sentence, in section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)). Again, that qualification reads as follows: “Provided, however, that in the event that an income tax assessment is made or criminal prosecution is brought against a person, that person may bring an action against the public accountant who prepared the tax return within two years from the date of the assessment or conclusion of the prosecution.” 735 ILCS 5/13—214.2(b) (West 2008). In the trial court’s view, the qualification does not help plaintiffs, because the legislature intended the qualification to “condense” rather than lengthen the five-year period. Grant Thornton endorses the court’s interpretation of the qualification.
The trial court’s interpretation might be more convincing if the statute said that the plaintiff “shall” bring the action against the public accountant within two years after the date of the assessment. Instead, the statute uses the permissive verb “may.” The statute says that the plaintiff “may” bring the action within two years after the assessment — suggesting that notwithstanding the first sentence of section 13—214.2(b), which says that actions against an accountant are barred five years after the harmful act or omission, the plaintiff has permission to bring the action within two years after an assessment. Permission would be necessary, for purposes of the statute of repose, only if the five-year period in the first sentence of section 13—214.2(b) had expired.
Hence, in our de novo reading of section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)) (Abruzzo v. City of Park Ridge,
But what if the IRS does not file an assessment? For example, the IRS might perform an audit and on the basis of the audit, issue the taxpayer a notice of deficiency, and within 90 days after receiving the notice, the taxpayer might pay the full amount of the deficiency specified in the notice. In those circumstances, the IRS surely would not file an assessment. The IRS is prohibited from filing an assessment until the 90-day period has expired (26 U.S.C. §6213(a) (2006)), and if the taxpayer pays the deficiency within those 90 days, there would be no assessment, because there no longer would be any deficiency to assess.
The only difference between the taxpayer who paid the deficiency within the 90-day period, thereby obviating an assessment, and a taxpayer who did not pay during the 90-day period, thereby triggering an assessment, is that the former taxpayer settled with the IRS. It would be unreasonable to suppose that the General Assembly intended to penalize the settling taxpayer by making the qualification in section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)) unavailable to that taxpayer while making the qualification available to the taxpayer who refused to pay the deficiency during the 90-day period, making it necessary for the IRS to file an assessment. In our interpretation of statutes, we should try to avoid ascribing to the legislature an intent to bring about absurd, unjust, or unreasonable outcomes. Roselle Police Pension Board v. Village of Roselle,
Grant Thornton might object that by drawing this implication from section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)), we are disregarding a rule of construction. In its brief, Grant Thornton cites Wheeler v. Wheeler,
Besides, “strict construction” is not synonymous with a cramped or unreasonably narrow construction. It is not the extreme opposite of a “liberal construction.” Franklin County Coal Co. v. Ames,
b. The Negligently Prepared Tax Return Need Not Be the Plaintiffs
Grant Thornton argues that in order for the qualification (the second sentence) in section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)) to be applicable, the accountant had to prepare the plaintiffs return and the IRS had to make an assessment against the plaintiff. Because Grant Thornton prepared Thermosphere’s return instead of the Khans’ return and because the IRS commenced assessment proceedings against the Khans instead of against Thermosphere, Grant Thornton maintains that the qualification in section 13—214.2(b) is inapplicable to the Khans. By preparing the return for Thermosphere, however, Grant Thornton had input into the Khans’ returns, because the losses flowed through the partnership to the partners, the Khans.
Besides, the statute does not say that the return has to be the injured person’s return. The qualification in section 13—214.2(b) merely says: “[I]n the event that an income tax assessment is made *** against a person, that person may bring an action against the public accountant who prepared the tax return within two years from the date of the assessment ***.” 735 ILCS 5/13—214.2(b) (West 2008). The statute says “the tax return,” not “the person’s tax return.” The legislature must have been aware that the negligent preparation of a partnership’s return can cause individual returns to be incorrect and result in assessment proceedings against individuals.
According to the complaint, the IRS initiated assessment proceedings in 2003 by issuing notices of audit to plaintiffs. Construing the complaint in a light most favorable to plaintiffs, we understand plaintiffs as alleging that the assessment proceedings came to an unfavorable conclusion in 2008. (If that is not the case — if assessment proceedings are still pending — Grant Thornton is free, on remand, to move for dismissal of the action without prejudice on the ground of a lack of ripeness.) Pursuant, then, to the qualification in section 13—214.2(b) (735 ILCS 5/13—214.2(b) (West 2008)), plaintiffs had two years after 2008 to bring their action. They filed their complaint in July 2009. Hence, the statute of repose in section 13—214.2(b) does not bar their action.
III. CONCLUSION
For the foregoing reasons, we reverse the trial court’s judgment in the two cases and remand the cases for further proceedings.
Reversed and remanded.
Notes
Justice Myerscough registered her concurrence with this opinion before she resigned from the Appellate Court of Illinois, Fourth District, in order to be sworn in as a judge of the United States District Court, Central District of Illinois.