author: JUSTICE JIGANTI

text:
    J. WILLIAM HOLLAND, Trustee in Bankruptcy for the Estate of American Reserve Corporation, Plaintiff-Appellant, v. ARTHUR ANDERSEN & COMPANY, Defendant-Appellee.
    First District (4th Division)
    No. 83—1975
    Opinion filed September 27, 1984.

      Ross & Hardies, of Chicago (William P. O’Keefe, Jr., William H. Luking, Jeffery M. Cross, and Gregory L. Dose, of counsel, for appellant.
    Charles W. Boand, Robert F. Forrer, and Quinton F. Seamons, all of Wilson & McIlvaine, of Chicago, for appellee.
   JUSTICE JIGANTI

delivered the opinion of the court:

This action was brought by J. William Holland, trustee in bankruptcy for the estate of American Reserve Corporation (ARC) against Arthur Andersen and Company (Andersen), one of ARC’s independent public accountants, to recover damages on six counts of either misrepresentation or breach of contract in regard to auditing services provided by Andersen for ARC. Andersen filed a motion to dismiss all six counts of the complaint pursuant to section 2 — 615 of the Illinois Code of Civil Procedure (Ill. Rev. Stat. 1983, ch. 110, par. 2—615), alleging that the trustee could not bring this action because the trustee can assert only those causes of action held by the debtor, ARC, and that the instant causes of action belonged to ARC’s shareholders and creditors, not ARC. Andersen further argued that even if these causes of action were held by ARC that ARC was bound by the knowledge, acts and omissions of its officers and directors and that such knowledge, acts and omissions precluded recovery by the trustee against Andersen. Andersen also contended that ARC failed to allege sufficient facts to constitute claims for misrepresentation and that the complaint failed to state a cause of action in contract.

After memoranda were submitted and a brief hearing on the motion was heard, the trial court entered an order striking each and every count of ARC’s complaint, denying ARC’s leave to file an amended complaint and dismissing the causes of action against Andersen with prejudice. ARC now appeals.

All facts presented in the following statement of facts were extracted from a detailed complaint and attached exhibits filed by ARC. ARC is an insurance holding company incorporated in Delaware, with its principal place of business in Chicago. Several of its principal, wholly owned subsidiaries were Reserve Insurance Company (Reserve), Market Insurance Company (Market), American Reserve Insurance Company (ARIC), and Guaranty Reinsurance Company (GRC). These subsidiaries primarily engaged in property and casualty insurance involving high-risk coverage. ARC’s financial demise began when court orders were issued in May and July 1979, placing Reserve and ARIC into liquidation and Market into rehabilitation. Subsequently, on April 21, 1980, ARC filed a voluntary bankruptcy petition for reorganization under chapter 11 of the Bankruptcy Code. In November 1981, ARC’s bankruptcy was converted from a chapter 11 reorganization to chapter 7 liquidation proceeding. J. William Holland was appointed by the court as permanent trustee in bankruptcy for ARC on December 31, 1981.

The two relevant factual settings that are the focal points for the instant action involve the reissuance in 1977 of Andersen’s unqualified opinion for ARC’s 1975 consolidated financial statement and a reinsurance treaty entered into in 1974 by Reserve with an alien reinsurance company. ARC and Andersen developed their business relationship as a result of Andersen’s being retained by ARC to audit its consolidated financial statements for the years ending December 31, 1958, through 1975. In each of those years, Andersen issued an unqualified opinion with respect to those consolidated financial statements. However, due to the highly speculative nature of its insurance business, the stated level of ARC’s loss reserves proved to be the most significant and controversial calculation of the consolidated financial statement. Based on the exhibits attached to ARC’s complaint, it appears that historically ARC and Andersen had a difference in philosophy with respect to evaluating the adequacy of loss reserves. ARC displayed a constant optimism in their evaluation by assuming a reversal of unfavorable trends, which resulted in consistently low estimates, while Andersen projected a need for a more conservative approach in order to guarantee a higher and more adequate loss reserve figure.

In late 1975, ARC, in concert with a casualty actuary, determined the level of loss reserves to be carried on the 1975 consolidated financial statement and prepared working papers for Andersen to use during its audit examination. In early 1976, Andersen, after reviewing the determinations made by ARC, questioned various assumptions made by ARC with respect to the level of loss reserves, which were not supported by ARC’s historical experience. Andersen indicated that based, on ARC’s significant reserve deficiencies in the past, several of Andersen’s computations showed ARC insolvent for the year-end 1975. However, after a series of discussions between ARC and Andersen, in which ARC was apparently able to persuade Andersen that ARC’s loss reserves were adequate, Andersen rendered an unqualified audit report on ARC’s 1975 consolidated financial statement on March 29, 1976.

Shortly thereafter, on April 8, 1976, ARC informed Andersen that ARC’s board of directors had determined to change auditors. ARC explained to Andersen that it decided to engage Coopers & Lybrand in order to create greater efficiency, because Coopers already audited two companies acquired by ARC, and that it was easier to consolidate ARC’s and its subsidiaries’ auditing work with a single auditing firm. After some discussion between ARC and Andersen regarding the appropriate explanatory language to use a Form 8 — K, a form required by the SEC when a firm changes auditors, the parties reached a mutual understanding, and the form was submitted containing the agreed-upon language.

In March 1977, Coopers & Lybrand audited ARC’s 1976 consolidated financial statement and thereafter issued an unqualified opinion. Coopers then informed Andersen that Coopers’ audit examination disclosed that during 1976 ARC had reduced its consolidated earnings by charging its income approximately $25 million for claim and claim adjustment expenses in excess of the loss reserves provided as of December 31, 1975, for claims incurred in 1975 and prior years. Coopers treated such charge as resulting from a change in estimate in 1976, but further informed Andersen that it would not state in its comfort letter that the charge was not a prior period adjustment. Coopers indicated that it based its determination that the deficiency represented a change in estimate only on what it saw developed in 1976 and that Andersen, when reissuing its opinion on the 1975 consolidated financial statement, would have to make its decision based on information available to it from the prior years. In April 1977, ARC included its 1975 and 1976 consolidated financial statements for comparative purposes in its annual report to shareholders and its report to the SEC. At that time, Andersen reissued its original unqualified opinion with respect to the 1975 consolidated financial statement.

The second major factual setting regards a reinsurance agreement and is as follows. In 1973 and 1974, ARC and Reserve suffered substantial operating losses with respect to insurance written in previous years involving particularly high-risk and surplus liability lines of coverage. Such operating losses reduced Reserve’s and Market’s statutory surplus, and because of State insurance regulations, Reserve and Market were restricted in the amounts of insurance they could continue to write. This development jeopardized Reserve’s and Market’s ability to preserve their existing market structure.

In response to these adverse financial and business developments, Reserve, Market and GRC, another subsidiary of ARC and previous reinsurer for Reserve and Market, entered into a series of reinsurance agreements or treaties with Societe Commerciale De Reassurance (SCOR), a major European reinsurance company. Under the terms of these agreements, SCOR assumed a large percentage of premiums written by Reserve and Market and then immediately retro-ceded them to GRC. In consideration of these premiums SCOR paid to Reserve and Market a commission, but in return received a slightly higher commission from GRC. However, because the capitalization of GRC was insufficient to cover the potential losses involved in its assumption of the business from SCOR, ARC agreed to guarantee GRC’s obligations to SCOR.

On March 15, 1975, an Andersen auditor submitted a handwritten memorandum that outlined the details of the SCOR treaties and described the apparent effect the treaties had on ARC and its subsidiaries. This memorandum stated that

“Reserve needed surplus relief and Guaranty [GRC] didn’t have enough surplus to provide it. SCOR provided the letter of credit as a financial mechanism and very little else.”

The memorandum further stated:

“In view of the ‘quality’ of the reported surplus, there appears to be a reasonable uncertainty as to the company’s ability *** to remain in business ***.”

Thereafter, Andersen conducted an audit of ARC’S 1974 and 1975 consolidated financial statements and rendered an unqualified opinion with respect to each year.

Because the instant action was decided on a section 2 — 615 motion to dismiss that challenged the legal sufficiency of ARC’s complaint, we find it necessary to state with some particularity the allegations contained in the six count complaint. Counts I and II respectively allege misrepresentation and breach of contract for Andersen’s reissuance in 1977 of their unqualified opinion regarding ARC’s 1975 financial statement. These counts allege that at the time Andersen reissued their opinion they knew that 1976 earnings had been reduced by $25 million so that an additional $25 million increase in 1975 loss reserves could be covered. The counts also allege that Andersen knew that this $25 million increase in loss reserves for 1975 meant that ARC was actually insolvent as of December 31, 1975, and that if adequate loss reserves had been included in the 1975 financial statements then ARC and Andersen would have had to report that insolvency. Counts I and II further allege that the inadequacy of loss reserves resulted not only from ARC’s inadequate loss reserve methodology but also from Andersen’s insufficient verification of that methodology.

Count III alleges misrepresentation for Andersen’s failure to disclose on at least two occasions that the real reason for their discharge as ARC’s independent accountants in 1975 was disagreements with management over the adequacies of loss reserves. Andersen stood by and permitted ARC to issue a misleading proxy statement regarding their discharge and maintained their silence when misleading comments in that regard were made at ARC’s annual meeting.

Counts IV and V respectively allege misrepresentation and breach of contract regarding Andersen’s failure to disclose in its audit that a reinsurance treaty which ARC’s principal operating subsidiary, Reserve, had with an alien reinsurance company had the effect of hiding the shaky financial position and probable insolvency of Reserve, despite Andersen’s admission that they knew these facts.

Count VI alleges that Andersen affirmatively participated in a misrepresentation with Coopers & Lybrand to characterize the $25 million loss reserve deficiency recorded in 1976 as a “change in estimate” rather than a “prior period adjustment.” Count VI further alleges that calling the deficiency a “change in estimate” in light of Andersen’s knowledge that ARC’s loss reserve methodology was inadequate, that Andersen’s test of that methodology was insufficient and that ARC would have been insolvent if reserves had been adequately recorded, resulted in misrepresentation.

Initially, it is necessary that we consider the issue of whether the trustee for the estate of ARC has the requisite standing in order to bring the causes of action asserted. ARC contends that the liquidation trustee represents the estate of the debtor corporation and that he must pursue claims belonging to the estate. (See 4 Collier on Bankruptcy sec. 541.10 (15th ed. 1982).) ARC further contends that a corporation is comprised of a variety of interests including officers, inside directors, outside directors, managers, employees, shareholders and others and that the estate of the debtor corporation is made up of the interests of all the individuals in the corporate family. (See 1 Fletcher, Cyclopedia of the Law of Private Corporations secs. 4, 5 (perm. ed. 1983); 4 Collier on Bankruptcy sec. 541.10 (15th ed. 1982).) In its complaint, ARC specifically alleges that as a result of Andersen’s misrepresentations and breaches of contract, “ARC’s audit committee, investors, creditors and others” relied on said misrepresentations and breaches and thus were precluded from taking any steps towards alleviating the occurred damage or preventing any further damage to ARC. ARC asserts that while the instant causes of action may ultimately benefit ARC’s creditor^, the allegations contained in the complaint represent claims which belonged to ARC and thus are claims which the trustee can bring.

In response, Andersen agrees that the applicable rule of law is that the liquidation trustee can only pursue those claims which belong to the estate of the debtor corporation, ARC. However, Andersen contends that the claims asserted in the instant complaint belong to third parties, such as ARC’s creditors and shareholders, and thus are outside the mandate of the trustee. In support of his position, Andersen cites Caplin v. Marine Midland Grace Trust Co. (1972), 406 U.S. 416, 32 L. Ed. 2d 195, 92 S. Ct. 1678. The supreme court in Caplin specifically held that a trustee in reorganization did not have standing under chapter X of the Bankruptcy Code to assert claims held by a group of debenture holders and that the trustee could only collect and reduce the money of the property of the estates to which he was trustee.

While this court does not dispute the validity of the law as stated in Caplin, we do not believe that it is applicable in the instant action. Caplin involved a reorganization trustee and also was subject to a specific Federal statute, the Trust Indenture Act of 1939, which served to circumscribe the scope of the trustees’ powers. In the case at bar, Holland is a liquidation trustee, which the court in Caplin found to have a contradistinctive purpose from a reorganization trustee. Furthermore, ARC is asserting common law claims of misrepresentation and breach of contract, and thus we do not face limitations such as the ones imposed by the Federal statute in Caplin. Therefore, we do not find Andersen’s citation of Caplin to be controlling in the instant matter.

We do agree that a liquidation trustee may only pursue those claims which belong to the estate of the debtor corporation. (See 4 Collier on Bankruptcy sec. 541.10 (15th ed. 1983).) We further find that ARC’s complaint alleges that various members of the corporation, its “audit committee, investors, creditors and others,” were prevented from taking action on behalf of ARC because of Andersen’s misconduct and that these allegations are sufficient at this stage of the litigation to maintain causes of action belonging to ARC. Therefore, the trustee for the estate of ARC has the capacity to bring the instant complaint.

We will next address the issue of misrepresentation and the question of whether the knowledge, acts and omissions of ARC’s top management should be imputed to ARC and consequently to the trustee and therefore estop the trustee from asserting the instant causes of action. ARC contends that no such imputation can be permitted because the question regarding the knowledge, acts and omissions of ARC’s top management involves questions of fact that cannot be properly decided on a motion to dismiss the complaint, and that, even if such actions of ARC’s management are imputed to ARC, the imputation defense cannot be successful because the purported misconduct was not carried out on behalf of ARC but rather was against it. Andersen’s response is two-fold; first, ARC has waived this argument on appeal by failing to raise it at the trial level, and second, the imputation doctrine can be applied as a matter of law, so that this issue is properly within the purview of the trial court on a motion to dismiss, and that ARC’s top management engaged in misrepresentations on behalf of ARC.

Motions to dismiss under section 2 — 615 attack the legal sufficiency of the complaint, not the factual sufficiency. (Cain v. American National Bank & Trust Co. (1975), 26 Ill. App. 3d 574, 325 N.E.2d 799.) Moreover, a section 2 — 615 motion admits the well-pleaded facts in the complaint and cannot be used to present new matter whether by affidavit or otherwise. Davis v. Weiskopf (1982), 108 Ill. App. 3d 505, 439 N.E.2d 60.

With respect to Andersen’s waiver argument, the record is clear that ARC’s counsel did raise before the lower court the impropriety of Andersen making factual arguments on a motion to dismiss. On two separate occasions counsel for ARC specifically stated, “factual arguments certainly are improper on a motion to dismiss.” We believe that these comments made by ARC sufficiently defeat Andersen’s waiver argument.

In Andersen’s alternative response, irrespective of the procedural limitations imposed by a section 2 — 615 motion to dismiss, Andersen maintains that ARC has sufficiently alleged facts in its complaint and accompanying exhibits that clearly demonstrate that ARC’s top management had knowledge of and had already done in a knowing fashion all that the defendant Andersen is charged with and that such actions by ARC’s top management amounted to fraud on behalf of ARC. Accordingly, Andersen asserts that given this knowledge, ARC, through the application of the imputation doctrine, is precluded as a matter of law from recovering on its complaint.

A leading case applying the imputation doctrine in the area of accountant liability which both parties heavily rely on is Cenco, Inc. v. Seidman & Seidman (7th Cir. 1982), 686 F.2d 449, cert, denied (1982), 459 U.S. 880, 74 L. Ed. 2d 145, 103 S. Ct. 177. Cenco involved an action against Seidman & Seidman, Cenco’s independent auditors, for fraud and breach of contract. During the time Seidman was Cenco’s auditor, a massive inventory fraud involving Cenco’s top management occurred. The evidence during trial revealed that in the early stages of the fraud Seidman had been careless in checking Cenco’s inventory figures and its carelessness had prevented the fraud from being “nipped in the bud.” Furthermore, as the fraud expanded, Seidman’s auditors became suspicious but they concealed their suspicion and kept giving Cenco a clean bill of health. However, other evidence showed that Seidman had diligently attempted to follow up all signs of fraud, but that their attempts had been thwarted by efforts of Cenco’s managers. The main issue in Cenco was whether the jury had been properly instructed that Seidman was entitled to use, through imputation, the wrongdoing of Cenco’s managers as a defense against Cenco’s allegations of breach of contract, negligence and fraud. The Seventh Circuit held that Sidman could use the imputation doctrine to defeat Cenco’s claims. The court further concluded that the acts of Cenco’s managers amounted to acts of fraud on behalf of the corporation as opposed to acts of fraud against the corporation and that policy and reason dictated that Cenco be precluded from recovering on claims of fraud from which it actually benefitted.

ARC argues that Cenco and the instant case are distinguishable in that the rationale for the Seventh Circuit’s application of the imputation doctrine in Cenco cannot be properly used in the instant matter. The court in Cenco imposed the knowledge and acts of its managers on the plaintiff, Cenco, to serve as a defense against their claims against Sidman because the evidence tended to show that the fraudulent acts of Cenco’s managers were perpetrated for the benefit of the corporation. In the case at bar, the only evidence which this court can consider are the well-pleaded facts alleged in ARC’s complaint. ARC argues that those allegations do not indicate that the purported misconduct of ARC’s management was done for the benefit of the corporation. Rather, ARC contends that its complaint does allege that the misrepresentation that was committed was done so against the corporation to its detriment. ARC further argues that if any misconduct was committed by its top management then it is not possible to determine from the complaint, at this stage in the litigation, which personnel participated and to what degree they may have participated.

In further support of its position, ARC cites to Schacht v. Brown (7th Cir. 1983), 711 F.2d 1343, cert, denied (1983), 464 U.S. 1002, 78 L. Ed. 2d 698, 104 S. Ct. 508, a case closely related to the instant matter. In Schacht, the Illinois Director of Insurance, as liquidator of Reserve, ARC’s principal operating subsidiary, brought suit against the officers, directors and independent accountants of ARC and Reserve (Andersen was included as one of the defendants) for fraud in connection with the failure to disclose the effects of a reinsurance agreement that rendered Reserve insolvent. This claim is remarkably similar to counts IV and V in the instant complaint. The defendants moved to dismiss the complaint on the grounds of Cenco, but the Seventh Circuit held Cenco to be inapplicable. The court found that Cenco limited its analysis to cases in which managers were not stealing from the company but stealing for its benefit, and that in Schacht the results of the fraudulent scheme engaged in by the defendants could in no way be described as beneficial to either Reserve or its parent, ARC. It indicated that the impact of the fraud was that Reserve was continued in business past its point of insolvency and concluded that the prolonged artificial insolvency of Reserve benefitted only Reserve’s managers and the other alleged conspirators, not the corporation. Schacht v. Brown (7th Cir. 1983), 711 F.2d 1343, 1348.

In contrast to ARC’s interpretation of Cenco’s application to the instant matter, Andersen maintains that ARC’s top management, just like Cenco’s management, committed fraud on behalf of the corporation and accordingly, such conduct invokes the use of the imputation doctrine as a bar to ARC’s causes of action. Specifically, Andersen contends that ARC’s allegations clearly demonstrate that ARC, through its directors and officers, authored, orchestrated and actually perpetrated the alleged fraud, if any, and that any fraud committed was against outsiders, not against ARC.

Andersen further maintains that the application as a matter of law of the imputation doctrine, the doctrine in the instant case wherein the acts and knowledge of a corporation’s management are attributed to the corporation itself, was reaffirmed in Security America Corp. v. Schacht (N.D. Ill. filed Jan. 31, 1983), No. 82—C—2132. In Security America, the court dismissed fraud allegations by a corporation against its accountants by imputing the acts of the corporation’s management on the corporation. In Security America, the memorandum opinion and order stated:

“[T]he court holds that the particular fact pattern present in this case allows imputation as a matter of law. The directors of Security Casualty incorporated Security America for the purpose of issuing Security America’s stock publicly and purchasing Security Casualty’s stock with the proceeds. Security America’s position in the alleged fraud is clear from the allegations, and it would be pointless for the court to receive evidence of how Stange, Burdett, Lanham, and Frangle acted with respect to Security America.
It is quite clear from the allegations that the alleged fraud-misrepresenting the assets and liabilities of Security Casualty— was a fraud on behalf of Security Casualty, not against it. 686 F.2d at 456. Also inescapable is the conclusion that Security America was not the victim of the fraud; the victims were those who paid money to Security America for its stock.”

Based on Cenco and Security America, Andersen contends that the knowledge and acts of ARC’s top management must be imputed to the trustee as a matter of law.

In order to affirm the trial court’s granting of Andersen’s motion to dismiss with regard to count I, we must determine that ARC’s complaint and exhibits allege sufficient facts to find that the officers and directors of ARC did in a knowing fashion all that Andersen is charged with and that such actions by ARC’s top management amounted to fraud on behalf of ARC.

The record reveals that in 1975 and 1976 ARC did decide on which methodology to use to determine loss reserves and that ARC did charge against its 1976 income $25 million for losses incurred with respect to claims relating to prior years. However, the record further reveals that at the time Andersen reissued its unqualified opinion in 1977 for ARC’s 1975 consolidated financial statement, Andersen was aware that said opinion did not accurately reflect ARC’s financial position. While such misconduct on the part of Andersen may also have been done in a knowing fashion by ARC, there are no allegations in the complaint which establish that the purported misconduct on the part of ARC’s top management was committed on behalf of ARC. The record reflects quite the contrary. ARC’s complaint alleges that the purported misrepresentation served to artificially prolong ARC’s business life past the point of insolvency and that various ARC executive personnel would have taken steps to at least minimize the damage already sustained had they known of the misrepresentations. Thus, the instant case is unlike Cenco and Security America, where the fraud was clearly committed by the companies’ top management and as a result the companies were able to benefit. It does not appear that ARC benefitted from the alleged misconduct, and therefore the imputation doctrine as applied in the above two cases cannot be utilized in the instant matter.

As an additional consideration, ARC directs this court’s attention to Shapiro v. Glekel (S.D.N.Y. 1974), 380 F. Supp. 1053. In Shapiro, a trustee in bankruptcy for a corporation brought an action against the corporation’s accountants for their failure to accurately reflect the corporation’s financial status. The trustee alleged that the accountants’ malfeasance led the corporation to its financial downfall. The accountants moved to dismiss on the grounds that the corporation’s management knew of the inaccuracy of the accountants’ report and that such contributory negligence on the part of the employer would preclude the trustee from recovery.

However, the court found that accountants are commonly employed for the very purpose of detecting defalcations which the employers’ negligence has made possible. Accordingly, the court held that negligence of the employer is a defense only when it contributed to the accountant’s failure to perform his contract and to report the truth.

ARC asserts that the rationale espoused in Shapiro is instructive for a determination of the instant matter. ARC contends that, even if its top management was involved in the alleged misconduct, that Andersen should not be permitted to assert ARC’s participation as a defense so as to absolve Andersen of its own misconduct. ARC argues that Andersen had a contractual obligation as ARC’s independent auditors to protect ARC from implementing inaccurate accounting methods and that even ARC’s knowing selection of such methods did not prevent Andersen from or interfere with Andersen’s attempt to properly discharge its duties.

Andersen contends that Shapiro is inapposite to the instant case and does not serve any instructive purpose, in that Shapiro involves negligence and contributory negligence as opposed to misrepresentation. Andersen further argues that the court in Shapiro merely held that the claimed negligence of management in not knowing the true financial condition of the company did not constitute a defense to the alleged negligence of the accounting firm and that it did not hold that actual knowledge, such as the knowledge held by ARC’s management, would not have been a defense.

While we do not find Shapiro to be controlling in the case at bar, we are interested in the rationale used by Shapiro. It appears to be sound reasoning to hold an accounting firm to its contractual obligations and that absent an intervening circumstance that prevents the firm from properly performing its duties, such as the employer’s own misconduct, the accounting firm must so perform. In the instant case, seeing that the litigation is still at the pleading stages, it does not appear that there are any allegations in ARC’s complaint or in its exhibits that indicate that ARC’s management took any actions that prevented Andersen from properly conducting itself as ARC’s independent auditors. This consideration, in conjunction with the prior analysis of the imputation doctrine, serves to further convince this court that Andersen is not entitled to impute the actions of ARC’s top management on the trustee so as to prevent the continuation of the instant lawsuit. Accordingly, the trial court should not have dismissed count I of ARC’s complaint.

With regard to count IV, ARC contends that this count alleges sufficient facts to indicate that Andersen knew that the surplus generated for Reserve by the SCOR treaty was nothing more than a paper entry to mask that subsidiary’s insolvency, and that despite such knowledge Andersen still rendered an unqualified opinion for the 1975 consolidated financial statement. ARC further contends that as a result of Andersen’s knowing failure to issue an opinion that accurately reflected the true financial condition of ARC and its subsidiary, that certain executive personnel of ARC relied on Andersen’s opinion and consequently failed to take appropriate steps to further prevent ARC’s financial demise. In response, Andersen argues that ARC and its directors and officers possessed all knowledge of the effect the reinsurance agreements with SCOR had on ARC and the adverse financial conditions that led to the SCOR agreements and that therefore ARC was not deceived in any respect.

The case law and discussion regarding the imputation doctrine argued above with respect to count I is equally applicable to count IV. ARC has alleged sufficient facts in order for the court to reasonably infer that Andersen knowingly failed to issue an opinion which accurately reflected the true financial condition of ARC. Moreover, even if it can be determined that ARC’S top management actively participated in this fraudulent scheme, we find that ARC has alleged sufficient facts which indicate that ARC did not benefit from the misconduct. ARC has alleged that it has been damaged by the SCOR agreement by being artificially maintained in business past the point of insolvency. The court in Sehacht found this factual situation to work against the interest of ARC to its detriment and we agree. Accordingly, count IV of the complaint should not have been dismissed.

Counts II and V are both breach of contract claims which respectively involve Andersen’s 1977 reissuance of its unqualified opinion and Reserve’s reinsurance agreement with SCOR. ARC contends that an accountant who contracts to perform auditing services impliedly promises to use the degree of skill, care and competence expected of accountants and that accountants may be sued for breach of contract for failure to perform that promise. Alternatively, ARC contends that its complaint does allege that Andersen contracted for a specific result and that Andersen breached the contract by failing to so perform. In response, Andersen argues that it only contracted to provide services in conformity with generally accepted auditing standards and that any such failure to perform resulted in a malpractice action, not a contract action. It further argues that the damages sought by ARC in counts II and V are tort, not contract, damages and thus reveal the true nature of ARC’S action.

Counts II and V specifically allege that Andersen expressly promised to provide services pursuant to an engagement letter between it and ARC. That letter expressly provided that Andersen would conduct its audit “in accordance with generally accepted auditing standards *** and all irregularities coming to its attention would be reported.” It further alleged that Andersen impliedly agreed to render its services with the requisite skill, care, knowledge and judgment usually possessed by members of the accounting profession. In count II, ARC alleges that Andersen breached the contract by failing to disclose the inaccuracy of ARC’S loss reserve methodology, the insufficiency of Andersen’s tests of that methodology and the impact of the $25 million reserve deficiency. In count V, ARC alleges that Andersen breached the contract by failing to disclose the impact that the SCOR reinsurance treaty had on the financial position of ARC and its subsidiaries.

The record reveals that Andersen expressly promised to disclose all irregularities that came to its attention and that in performing the task of disclosing any irregularities, Andersen impliedly agreed to conduct itself with the degree of skill, care and competence expected of accountants. (See Zostautas v. St. Anthony DePadua Hospital (1961), 23 Ill. 2d 326, 178 N.E.2d 303; Board of Education v. Del Bianco & Associates (1978), 57 Ill. App. 3d 302, 372 N.E.2d 953.) Both counts II and V allege that Andersen became aware of facts that tended to indicate that ARC and its subsidiaries were insolvent. It is further alleged that Andersen rendered an unqualified opinion on ARC’S 1975 consolidated financial statement and then reissued that unqualified opinion in 1977, knowing that those financial statements did not accurately reflect ARC’S true financial condition. Considering that the instant action is only at the pleading stages, it can reasonably be inferred from ARC’S allegations that Andersen became aware of irregularities with respect to both ARC’S loss reserve methodology and Reserve’s reinsurance treaty with SCOR and that Andersen failed to disclose those irregularities both when it issued its unqualified opinion in 1975 and then again when it reissued that opinion in 1977. Accordingly, without the advantage of further inquiry, it appears that ARC has alleged sufficient facts to infer that Andersen contracted with ARC for a specific result, namely, disclosing any known irregularities, and breached that contract when it failed to provide that promised result.

Furthermore, we find that Andersen’s argument with respect to the damages claimed by ARC in the contract counts lacks merit. Andersen argues that ARC has actually claimed tort damages because it claims the same damages as those claimed in the misrepresentation counts. It further argues that if ARC was actually seeking contract damages, then it would have sought the difference between the value of the alleged defective audit and the contract price.

In order to strike an allegation from a complaint, the moving party must state with particularity the alleged defects therein. (Ill. Rev. Stat. 1983, ch. 110, par. 2—615(b).) The arguments offered by Andersen at best raise factual questions as to the nature of the actions asserted, but as we have consistently held in the instant matter, because this case was decided on a section 2 — 615 motion, we will not strike the pleadings when factual matters remain to be resolved. Accordingly, the trial court erred in striking counts II and V of ARC’s complaint.

Count VI alleges that Andersen affirmatively participated in a misrepresentation with Coopers & Lybrand to characterize the $25 million loss reserve deficiency recorded in 1976 as a “change in estimate” rather than a “prior period adjustment.” Andersen responds that count VI is not an action for misrepresentation but rather it alleges liability for a civil conspiracy, a cause of action not available under Illinois law. Thus, it was properly dismissed. Alternatively, Andersen briefly asserts that both count I and count VI allege the same misrepresentation. ARC contends that both Andersen and the trial court inaccurately characterized this count as one sounding in conspiracy. ARC does not assert that there is a separate cause of action in Illinois for conspiracy, but rather asserts that it has added allegations of conspiracy to the allegations of the underlying misrepresentation for the purpose of associating all the co-conspirators with the acts done and declarations made. ARC further contends that the allegations of misrepresentation in count I are separate and distinct from those allegations contained in count VI. In support of this position ARC argues that even if Andersen had reissued in 1977 their 1975 opinion as a qualified opinion and disclosed the facts they failed to disclose, as alleged in count I, the misrepresentation of the $25 million deficiency as a “change in estimate” would still be fraudulent.

The record reveals that ARC has alleged sufficient facts to maintain a count for misrepresentation. However, Andersen has directed its argument to the proposition that count VI is one for conspiracy and thus cannot be permitted to stand. This court does not read count VI as a conspiracy count. There are certain allegations of conspiracy contained within count VI, but the gist of the count is focused on the underlying misrepresentation. Having already determined that ARC has alleged sufficient facts in count VI to maintain a cause of action for misrepresentation, and considering that this action has only progressed to the pleading stages, we conclude that count VI should not have been dismissed but rather should proceed to trial for further inquiry into its merits. Accordingly, the decision to dismiss count VI is also reversed.

Lastly, we must consider count III of ARC’s complaint. Count III alleged misrepresentation for Andersen’s failure to disclose the real reason for Andersen’s dismissal as ARC’s independent accountants. The trial court dismissed count III on grounds that Andersen owed no duty to make any such disclosures and that if there was any misconduct regarding the filing of the SEC form then such actions belong in the Federal court. We agree with the trial court. Regardless of the fact that Andersen may have known that it was being replaced as ARC’s accountant primarily as a result of disputes regarding ARC’s loss reserves, we fail to see where it was incumbent upon Andersen to disclose such information, especially in light of the fact that ARC has failed to argue exactly what duty Andersen was under. Furthermore, as the trial court held, if there are any claims with respect to the SEC form filed, then such actions clearly are to be brought in the Federal courts. Therefore, the dismissal of count III is affirmed.

Based on the foregoing discussion, the dismissal of counts I, II, IV, V, and VI is reversed and the dismissal of count III is affirmed. This action is remanded for a trial on the merits.

Reversed in part, affirmed in part.

JOHNSON and ROMITI, JJ., concur.


source: Caselaw Access Project

license: Public Domain

text:
      In re ESTATE OF MYRTLE B. SODERHOLM (John M. Komala et al., Plaintiffs-Appellants, v. Oscar B. Soderholm et al., Defendants-Appellees).
    First District (4th Division)
    No. 83—1761
    Opinion filed September 27, 1984.

      Richard C. Moenning, of Chicago, for appellants.
    Querrey, Harrow, Gulanick & Kennedy, Ltd., of Chicago (Dennis A. Marks, Victor J. Piekarski, and Michael Resis, of counsel), for appellees.
   JUSTICE JIGANTI

delivered the opinion of the court:

The central issue in this appeal is whether the trial court properly-entered a judgment by default against- the plaintiffs, John and Vera Komala, as a discovery sanction under Illinois Supreme Court Rule 219(c)(v) (87 Ill. 2d R. 219 (c)(v)). In 1981, the plaintiffs filed a declaratory judgment action seeking a judicial determination that Myrtle B. Soderholm, an incompetent, had the requisite mental capacity to create a number of Totten Trust accounts under which the plaintiffs were the beneficiaries. The defendant-appellee herein, La Salle National Bank (the conservator), was named as the successor conservator of Myrtle’s estate soon after the onset of the lawsuit. The conservator filed an answer to the plaintiffs’ complaint, alleging that Myrtle was senile and therefore incapable of creating a valid trust agreement. The conservator further set forth its own prayer for declaratory relief, requesting that the court order the plaintiffs to deliver to the conservator any property in their possession belonging to Myrtle and seeking a declaration that the plaintiffs had no legal or equitable rights in any of Myrtle’s property. The affirmative allegations in support of the conservator’s prayer for declaratory relief stated that the plaintiffs had fraudulently abused a fiduciary relationship they owed to Myrtle.

Both of the plaintiffs were deposed under oath during the course of discovery. As we shall discuss at length later in this opinion, the plaintiffs repeatedly lied during their depositions and admittedly destroyed physical evidence which the trial court had ordered them to produce. It was for these discovery violations that a judgment by default was entered against the plaintiffs. Myrtle died on February 21, 1983, over a year after the suit had been filed by the plaintiffs. On March 3, 1983, the conservator filed its motion seeking sanctions for the plaintiffs’ violations of discovery rules. The plaintiffs responded and further moved for a voluntary dismissal of their complaint, alleging that Myrtle’s death had divested the conservator of authority to request sanctions or pursue the affirmative allegations contained in its answer to the plaintiffs’ complaint.

In its order, the trial court entered judgment by default against the plaintiffs and in favor of the conservator as a discovery sanction. It further granted the conservator’s motions to dismiss the plaintiffs’ complaint with prejudice and to strike the plaintiffs’ answer to the conservator’s affirmative allegations. The plaintiffs’ motion to voluntarily dismiss their own complaint was denied. The plaintiffs now appeal.

The plaintiffs have raised two threshold matters concerning jurisdiction which we must address prior to reaching the merits: whether the trial court improperly refused to voluntarily dismiss the plaintiffs’ complaint upon their own motion and whether the court had jurisdiction to impose sanctions and consider the conservator’s affirmative allegations following the death of Myrtle. If we find that the trial court possessed jurisdiction to enter its order, we must then address the plaintiffs’ argument that the imposition of the sanction of judgment by default was an abusive exercise of the trial court’s discretion. The plaintiffs have also raised a number of peripheral matters which shall be discussed at the conclusion of this opinion.

The plaintiffs first contend that the trial court’s order is “void as a matter of law” because the court “had no jurisdiction to deny” the plaintiffs’ motion to voluntarily dismiss their own complaint. Specifically, the plaintiffs maintain that they possessed an absolute right to voluntarily dismiss their complaint prior to trial. (See Gilbert Hodgman, Inc. v. Chicago Thoroughbred Enterprises, Inc. (1974), 17 Ill. App. 3d 460, 308 N.E.2d 164.) However, section 2—1009 of the Illinois Code of Civil Procedure provides that “*** [a]fter a counterclaim has been pleaded by a defendant no dismissal may be had as to the defendant except by the defendant’s consent.” (Ill. Rev. Stat. 1983, ch. 110, par. 2—1009(a).) While a plaintiff generally may voluntarily dismiss his action before trial, he may dismiss the action only if the defendant consents once a counterclaim has been pleaded. (Myers v. Myers (1977), 51 Ill. App. 3d 830, 366 N.E.2d 114; In re Marriage of Hanlon (1980), 83 Ill. App. 3d 629, 404 N.E.2d 873.) In an action for declaratory judgment, an answer including a prayer for relief may be considered a counterclaim. Country Life Insurance Co. v. Goffinet (1969), 117 Ill. App. 2d 338, 254 N.E.2d 281.

In the instant action, the conservator’s prayer for declaratory relief requested that the court order the plaintiffs to deliver to the conservator any property in their possession belonging to Myrtle and sought a declaration that the plaintiffs had no legal or equitable rights in any of Myrtle’s property. The conservator’s affirmative allegations in support of its prayer for declaratory relief alleged that the plaintiffs had induced Myrtle to create the accounts through fraud and through an abuse of a fiduciary duty they owed to Myrtle. We believe that the conservator’s responsive pleadings constituted a viable counterclaim. Because the conservator did not consent to the plaintiffs’ motion to voluntarily dismiss their complaint, the trial court properly denied the motion to dismiss.

The plaintiffs nonetheless argue that the trial court had no discretion to deny their motion to voluntarily dismiss the complaint because the controversy had become moot. Specifically, the plaintiffs contend that the money in the accounts vested in them as a matter of law when Myrtle died, thus mooting any counterclaim raised by the conservator. As we understand it, the plaintiffs are asking this court to conclude that the money in the accounts became theirs upon Myrtle’s death regardless of whether it was procured by fraud or an abuse of a fiduciary relationship. We find this position untenable. The conservator’s authority to challenge the creation of the trust accounts must necessarily survive Myrtle’s death, and any irregularities in the creation of the trust consequently did not become moot once Myrtle died.

As an alternative argument on this voluntary dismissal issue, the plaintiffs maintain that the conservator had no authority to object to their motion to voluntarily dismiss. Specifically, the plaintiffs contend that the conservator could not challenge the creation of the trusts unless the money in the accounts was needed for Myrtle’s support during her lifetime. The plaintiffs consequently argue that because the money in the accounts was not needed for Myrtle’s support, the conservator could neither challenge the creation of the trusts nor object to the plaintiffs’ motion to dismiss their complaint. We disagree.

The plaintiffs cite a number of cases to the effect that a conservator may not use the funds in an already existing Totten Trust account unless the money is needed for the care and support of the ward. (See, e.g., Rozycke v. Sroka (1972), 3 Ill. App. 3d 741, 279 N.E.2d 155, Schlieper v. Rust (1977), 46 Ill. App. 3d 319, 360 N.E.2d 1192.) In those cases the validity of the creation of the trust accounts was not an issue and the propriety of the conveyances was never questioned. In the instant action, however, the focus of the controversy between the parties centers squarely upon the validity of the creation of the trusts. We therefore do not think that the cases cited by the plaintiffs have any bearing on the case now before this court.

A conservator generally has the duty to appear for and represent his ward in legal proceedings and may commence, prosecute or defend a proceeding on the ward’s behalf. (See Ill. Rev. Stat. 1983, ch. 1101/2, par. 11a—18(c).) The conservator also has the statutory duty to care for and manage the ward’s estate. (Ill. Rev. Stat. 1983, ch. 1101/2, par. 11a—18(a).) In this case, the conservator has alleged in its counterclaim that Myrtle was fraudulently induced to create the accounts and that the plaintiffs abused a fiduciary duty which they owed to Myrtle. We believe that the conservator must necessarily be authorized to pursue these allegations on behalf of its ward in order to protect its ward’s estate and to fulfill its statutory duty to the ward. Accordingly, we believe that the conservator was properly allowed to object to the plaintiffs’ motion to dismiss and to pursue its affirmative allegations in its attempt to set the trusts aside. We consequently find no merit in the plaintiffs’ arguments that the conservator could not object unless the money in the accounts was needed for the care and support of Myrtle.

The next jurisdictional issue raised by the plaintiffs concerns the conservator’s authority to pursue this action after Myrtle’s death. In essence, the plaintiffs maintain that any authority possessed by the conservator to take part in the proceedings terminated upon the death of the ward, Myrtle. The plaintiffs cite no authority in support of their position, and we believe that they are incorrect for two reasons.

First, as the conservator correctly points out, the Probate Act specifically provides that the conservator could maintain this action under the Act with the powers of an administrator to collect. Specifically, section 24 — 19 of the Act provides:

“Without order of appointment and until the issuance of letters testamentary or of administration or until sooner discharged by the court, a representative of the estate of a deceased ward has the powers and duties of an administrator to collect.” (Ill. Rev. Stat. 1981, ch. 1101/2, par. 24—19(a).)

Furthermore, in Hire v. Hrudicka (1942), 379 Ill. 201, 40 N.E.2d 63, the Illinois Supreme Court found that following the death of a ward, the conservator has all of the powers of an administrator unless an administrator has been appointed. In Hire, the conservator sought the recovery of personal assets which had been removed from the deceased ward’s general estate, a factual setting similar to that presented in the case at bar. The court further noted that in such a case, the executor is not a necessary party and that the survival of the cause of action undoubtedly survived the death of the ward. Consequently, the conservator’s authority to pursue this action did not termínate upon Myrtle’s death, because the conservator had the power of an administrator to collect any property removed from the ward’s estate by wrongful means.

Our second reason for finding that the conservator’s authority to take part in the action did not terminate upon Myrtle’s death is that the litigation would have to come to a conclusion before the conserva-' tor could render a proper settlement of the ward’s estate and file a final account. (See Ill. Rev. Stat. 1983, ch. 1101/2, par. 24—11.) In In re Estate of Devereux (1965), 63 Ill. App. 2d 1, 211 N.E.2d 19, the court found that the trial court had not abused its discretion when it allowed a conservator to maintain an appeal following the ward’s death. The proceedings in the trial court in Devereux concerned the conservator’s disputed sale of certain real property. The court found that the validity of the sale had to be determined prior to the time the conservator could file his final settlement and accounting. Similarly, in the case at bar, it was necessary for this litigation to conclude before it could be determined whether the money in the trust accounts belonged to Myrtle’s estate or to the plaintiffs. Therefore, for the two reasons stated above, we do not believe that Myrtle’s death terminated the conservator’s authority to take part in the litigation.

The plaintiffs’ next argument on appeal is that even if the trial court possessed jurisdiction to impose discovery sanctions, it was improper for the court to enter judgment by default against the plaintiffs. The plaintiffs, John and Vera Komala, are married. The record reveals that two sets of “diaries” or “datebooks” were kept by John for the years 1980 and 1981. There were four diaries, two diaries for each of the years in question. One set purportedly contained references to events which took place in the plaintiffs’ lives, including events concerning the plaintiffs’ relationship with Myrtle. The second ■ set of diaries was concerned solely with the plaintiffs’ relationship with Myrtle.

All of these diaries were in existence at the time of Vera’s first deposition. She stated that she had looked at John's “notes” prior to the depositions and that the majority of the notes concerned Myrtle Soderholm. Plaintiffs’ counsel stated that he would obtain the notes and make them available to opposing counsel. At Vera’s second deposition, 18 sheets of notepaper were given by plaintiffs’ counsel to the conservator’s counsel. Vera stated that in addition to those notes, she had also reviewed a diary kept by her husband. The plaintiffs’ attorney stated that he had the diary in his possession and would not produce it that day. Plaintiffs’ counsel also refused to produce the diary when Vera’s deposition continued four days later. The conservator then presented a motion to compel discovery in the trial court, and the court ordered the production of John’s “date book,” which Vera had reviewed prior to her deposition.

At Vera’s next deposition, two date books were produced, one for 1980 and one for 1981. Vera stated that these were books of original entry that they were the only diaries maintained by John during 1980 and 1981, and that they were not altered in any way before being turned over to the plaintiffs’ attorney. On the same date as this deposition the plaintiffs executed an affidavit which stated that they had satisfied the conservator’s request for production pursuant to the order of the trial court.

John’s discovery deposition was subsequently commenced. He stated that the diaries that had been produced were the only diaries he kept and that those diaries were not duplicates made from other diaries. After the deposition, the conservator’s lawyer requested that the diaries be produced again for examination by an expert. Counsel for the plaintiffs refused to produce the documents. The conservator presented a motion in the trial court to compel production of the original diaries. John offered to sign an affidavit to the effect that the diaries produced were the only diaries he possessed. The court ordered the production of the diaries for examination.

Soon after the court’s order, the trial court was informed that the diaries which had been produced were not original diaries and that they were recreated at some time following the court’s first production order. The court was further advised that the original diaries had been burned and totally destroyed by the plaintiffs. In addition, it came to light for the first time at this hearing that John kept two sets of diaries, one a personal diary and one concerning activities with Myrtle Soderholm.

Additional depositions of Vera and John were taken soon thereafter. Vera admitted that the original diaries had been destroyed and that she thought they had been destroyed some time after the court had ordered their production. John admitted that he had intentionally destroyed all four diaries soon after copies of them had been made. The conservator filed its motion seeking sanctions. After extensive hearings, the trial court entered judgment by default against the plaintiffs, granted the conservator’s motion to dismiss the plaintiffs’ complaint with prejudice, and further granted the conservator’s motion to strike the plaintiffs’ answer to the conservator’s affirmative allegations. The plaintiffs now argue that these discovery sanctions were not properly imposed by the trial court.

Supreme Court Rule 219(c) provides that the entry of an order of default is a permissible sanction for a party’s refusal to comply with the rules of discovery or orders compelling discovery. (87 Ill. 2d R. 219(c)(v).) Although courts are reluctant to impose this extreme sanction of judgment by default, such drastic action is authorized where the conduct of the offending party shows a contumacious disregard of the court’s power. (Sanchez v. Phillips (1977), 46 Ill. App. 3d 430, 361 N.E.2d 36; Conover v. Smith (1974), 20 Ill. App. 3d 258, 314 N.E.2d 638.) In determining whether noncompliance with discovery was unreasonable, courts will look to whether the conduct of the offending party is characterized by a deliberate and pronounced disregard for a court order or whether the actions of the party show a deliberate, contumacious or unwarranted disregard of the court’s authority. (Servbest Foods, Inc. v. Emessee Industries, Inc. (1980), 82 Ill. App. 3d 662, 403 N.E.2d 1; George William Hoffman & Co. v. Capital Services Co. (1981), 101 Ill. App. 3d 487, 428 N.E.2d 600.) Sanctions imposed by the trial court rest largely within the court’s broad discretion, and the exercise of such discretion will not be disturbed unless an abuse is apparent. Sanchez v. Phillips (1977), 46 Ill. App. 3d 430, 361 N.E.2d 36; Anderson v. City of Chicago (1975), 29 Ill. App. 3d 971, 331 N.E.2d 243.

Furthermore, the above cited case law must necessarily be read in conjunction with Buehler v. Whalen (1977), 70 Ill. 2d 51, 374 N.E.2d 460, and Williams v. A. E. Staley Manufacturing Co. (1981), 83 Ill. 2d 559, 416 N.E.2d 252, two Illinois Supreme Court decisions which strongly encourage the trial courts to vigorously support the protection of the discovery process by way of the imposition of discovery sanctions. In Buehler, the court stated:

“Our discovery procedures are meaningless unless a violation entails a penalty proportionate to the gravity of the violation. Discovery for all parties will not be effective unless trial courts do not countenance violations, and unhesitatingly impose sanctions proportionate to the circumstances. These are already in Rule 219(c). It provides for varied sanctions, including contempt proceedings. But a contempt procedure is hardly a sanction in reality. The order can, of course, be appealed. The worst penalty is the payment of a nominal fine. Meanwhile, the opposing party may well have been forced to trial without truth, and truth is the heart of all discovery.
Disclosure is the object of all our discovery procedures. It is the opinion of this court that trial courts should make disclosure a reality ***.” (Buehler v. Whalen (1977), 70 Ill. 2d 51, 67, 374 N.E.2d 460, 467.)

In Williams, the court reiterated this admonition to parties who use the discovery process to impede and harass, stating, “Discovery for all parties will not be effective unless trial courts do not countenance violations, and unhesitatingly impose sanctions proportionate to the circumstances.” (Williams v. A. E. Staley Manufacturing Co. (1981), 83 Ill. 2d 559, 566, 416 N.E.2d 252, 256.) It is against this background of Illinois case law that we address the facts presented in the case at bar.

The central issue in this case was whether Myrtle had the mental capacity necessary to create Totten Trust accounts. The diaries destroyed by the plaintiffs were squarely pertinent to this controlling issue because they directly concerned Myrtle’s activities in 1980 and 1981. In fact, one set of diaries contained nothing other than references to Myrtle during those two years. The plaintiffs intentionally and cavalierly destroyed both sets of diaries and deceptively attempted to manipulate the discovery process to serve their own ends. The plaintiffs then compounded their deception by consistently lying under oath about the existence, number and content of the diaries. They further sought to continue this pattern of circumvention by creating bogus and transparently self-serving diaries which they attempted to palm off as the originals. The plaintiffs’ actions lead this court to the inescapable conclusion that the plaintiffs believed that the law is composed of a set of rules that do not apply to them; their intentional disregard for the legal process and their perversion of the truth cannot be condemned too harshly. We believe that where the plaintiffs’ actions show such a deliberate, contumacious and unwarranted disregard of the court’s authority and where the destroyed evidence is directly relevant to the central issue of the case, the trial court was fully justified in entering a judgment by default against the plaintiffs.

We believe anything less than a sanction of judgment by default in this case would condone the plaintiffs’ deceptive attempt to selectively determine what evidence would be presented to the trier of fact. As the supreme court stated in Buehler.

“[A] contempt procedure is hardly a sanction in reality *** [and] *** [t]he worst penalty is payment of a nominal fine.” (Buehler v. Whalen (1977), 70 Ill. 2d 51, 67, 374 N.E.2d 460, 467.)

Each of those sanctions would allow parties such as the plaintiffs in the instant action to coldly consider discovery violations in a cost-effective manner; they could freely destroy evidence harmful to their case and then gladly pay a minor fine to be cataloged as simply another expense of litigation. Such an abuse of the spirit of this State’s discovery rules must not be tolerated at any cost, and we believe that the sanction of judgment by default in this case was fully warranted.

The plaintiffs’ cite Hardware Wholesalers, Inc. v. Clemenic (1984), 124 Ill. App. 3d 304, 464 N.E.2d 700, as additional authority for their position that it was improper for the trial court to enter a default judgment against them. In Clemente, the appellate court found that the trial court had improperly entered a judgment by default against the defendants as a discovery sanction. However, the appellate court stated that there had been no showing at the trial level that the defendants’ conduct was “deliberate and contumacious.” Indeed, the appellate court also stated that if the defendants’ conduct had been “intentional,” the “drastic sanction of default” would have been justified. In the case at bar, the trial court specifically found that the plaintiffs’ conduct in destroying the diaries was “deliberate, wilful and contumacious.” Accordingly, Clemente offers no support for the plaintiffs’ position.

The plaintiffs also argue that nothing of substance was deleted from the original diaries when the counterfeit diaries were created and that the conservator made no showing that any material information was missing. Because no one other than the plaintiffs has seen the original diaries, the plaintiffs ask us to simply take their word that they deleted nothing relevant. We decline to do so. The plaintiffs further contend that they were deprived of the right to a jury trial and to equal protection when the court entered judgment by default against them. However, the plaintiffs did not file a jury demand at the time the action was commenced and therefore waived their opportunity to ever have the matter presented to a jury. (Ill. Rev. Stat. 1983, ch. 110, par. 2—1005(a); see also Greene v. City of Chicago (1978), 73 Ill. 2d 100, 382 N.E.2d 1205.) Because the plaintiffs forfeited their right to a jury trial, they cannot claim on appeal that they were denied equal protection when their claims were not considered by a jury at the trial level.

The plaintiffs next raise a number of arguments concerning a purported affidavit that was filed by the plaintiffs and attached to an affidavit signed by their attorney. The alleged affidavit in question was signed by one Dr. Hemwell and contained certain representations concerning Myrtle’s mental state. The plaintiffs now argue that the writing was not an affidavit, that the trial court improperly considered the writing as evidence to the prejudice of the plaintiffs, and that the trial judge was prejudiced against the plaintiffs because he was somehow induced to rely upon the writing. We believe that these arguments find absolutely no support in the record.

First, the complained-of writing was filed by the plaintiffs themselves. We cannot comprehend how a party can introduce a document into the record and then claim that it prejudiced the trial judge against him. Second, in a bench trial, it will generally be presumed that the trial judge considered only proper evidence and disregarded that which was inadmissible in forming his conclusions. (People v. Harris (1974), 57 Ill. 2d 228, 314 N.E.2d 465; People v. Clarke (1971), 50 Ill. 2d 104, 277 N.E.2d 866.) Furthermore, the plaintiffs’ strident claims of prejudice on the part of the trial judge are not supported by a single shred of evidence in the record. Accordingly, we believe that the plaintiffs’ arguments are misplaced.

The plaintiffs raise two final arguments that we shall consider summarily. First, the plaintiffs maintain that the trial court’s order is not supported by competent evidence that Myrtle lacked the capacity to create the trust accounts. However, the effect of the default judgment entered against the plaintiffs is that all well-pleaded allegations in the conservator’s counterclaim were deemed admitted against the plaintiffs as the parties in default. (See generally Walgreen Co. v. American National Bank & Trust Co. (1972), 4 Ill. App. 3d 549, 281 N.E.2d 462.) Furthermore, the court was not required to hear evidence before entering judgment by default; it is discretionary with the trial court whether to require proof before entry of a default judgment. (See Schwartz v. Moats (1971), 3 Ill. App. 3d 596, 277 N.E.2d 529.) In the case at bar, the conservator affirmatively alleged in its counterclaim that the plaintiffs had induced Myrtle to create the accounts through fraud and through an abuse of a fiduciary duty they owed to Myrtle. These allegations were deemed admitted when a judgment by default was entered against the plaintiffs. The trial court properly exercised its discretion not to hear additional evidence, and we believe that the conservator’s affirmative allegations were sufficient support for the trial court’s order entering judgment in favor of the conservator.

The plaintiffs’ final contention on appeal is that the trial court improperly failed to consider offers of proof made by the plaintiffs. In essence, following the court’s order, the plaintiffs attempted to submit to the court another set of recreated diaries which they contended contained all of the entries found in the destroyed diaries. We do not think that the trial court was under any legal obligation to consider yet another self-serving attempt on behalf of the plaintiffs to creatively provide their own evidence.

For the foregoing reasons, the trial court’s order is affirmed in all respects.

Affirmed.

LINN, P.J., and JOHNSON, J., concur.

       The other defendants named in the declaratory judgment proceeding were the conservator of Myrtle’s estate prior to the time the bank became conservator, the several banks which held the trust accounts, and a prior joint-tenant to one of Myrtle’s accounts. None of these defendants are parties to the instant appeal.


author: JUSTICE GREEN

text:
    HOWARD HUGGINS, Plaintiff-Appellant, v. CENTRAL NATIONAL BANK OF MATTOON, Defendant-Appellee.
    Fourth District
    No. 4—84—0073
    Opinion filed September 14, 1984.

      Raymond Lee, Jr., of Lee & Lee, Ltd., of Tuscola, and William A. Sunderman, of Brainard, Bower & Kramer, of Charleston, for appellant.
    Kenneth L. Bast, of Kidwell, Cummins & Bast, of Mattoon, for appellee.
   JUSTICE GREEN

delivered the opinion of the court:

On April 12, 1979, plaintiff, Howard Huggins, brought suit in the circuit court of Coles County against defendant, Central National Bank of Mattoon, seeking damages arising from the sale by defendant of certain shares of corporate stock pledged by plaintiff to secure his indebtedness to defendant. Eventually an amended three-count complaint was filed. Count I sought an accounting by defendant for the proceeds of the sale of the securities. Counts II and III, respectively, alleged conversions by defendant of (1) the shares originally pledged, and (2) the shares issued as a stock dividend on the original shares. On August 10, 1982, the court granted summary judgment for defendant as to counts II and III. On December 28, 1983, after an evidentiary hearing on count I, the court found that the plaintiff was entitled to $49.14 and entered judgment accordingly. Plaintiff has appealed.

At the time of the ruling on the motion for summary judgment, plaintiff had admitted: (1) on October 18, 1978, he borrowed $56,500 from defendant and executed and delivered to defendant his note in that principal sum due January 16, 1979; (2) to secure the same he pledged 12,298 shares of the capital stock of Standard Metals Corporation; (3) at the time of the execution of the $56,500 note, plaintiff had other outstanding indebtedness to defendant as evidenced by a $27,000 note due on November 30, 1978, a $4,000 note due on October 28, 1978, and a $3,000 note due on December 15, 1978; (4) the terms of the $56,500 note provided that the stock pledged to secure it might be sold not only upon default on that note, but also upon default on the other indebtedness of plaintiff to defendant; and (5) the original shares of Standard Metals Corporation were sold by defendant on December 28, 1978, and all of the shares were sold after the due dates of the various other notes and at a time when plaintiff was not current on those notes.

In opposition to the summary judgment motion, plaintiff stated in an affidavit that (1) he had engaged in various conversations with defendant’s president and discussed the $27,000, $4,000, and $3,000 notes during the month of December 1978 and in prior months, (2) during the course of the conversations, he informed the president that he would “pay all obligations due on or before January 20, 1979,” (3) “accordingly the said notes [above described] were not renewed and no payment was made by him thereon *** it being understood that he would make payment in full as per such agreement,” and (4) the president did not insist upon or demand payment before December 28, 1978. Plaintiff contends that by this affidavit, he set forth matters giving rise to a factual dispute as to whether the president’s promise estopped defendant from selling the pledged shares.

In order for a party to be entitled to a summary judgment, the record presented must show that no factual issue need be proved to entitle that party to a judgment. (Carruthers v. B. C. Christopher & Co. (1974), 57 Ill. 2d 376, 313 N.E.2d 457.) Put another way, the rule is that to be entitled to a summary judgment, the evidence before the court must be such that if it were presented at trial, the party seeking summary judgment would be entitled to judgment as a matter of law. (Fooden v. Board of Governors (1971), 48 Ill. 2d 580, 272 N.E.2d 497.) Plaintiff maintains that a question of fact exists in this case as to whether defendant was estopped from selling plaintiff’s shares based upon his default on the smaller notes when defendant had impliedly promised plaintiff that it would extend the maturity date of such notes. Such a promise for extension would not require consideration to be binding if defendant’s reliance on the promise worked an estoppel. The doctrine involved is one sometimes loosely referred to as promissory estoppel.

Plaintiff relies primarily upon Bank Computer Network Corp. v. Continental Illinois National Bank & Trust Co. (1982), 110 Ill. App. 3d 492, 442 N.E.2d 586. There, a suit was filed claiming that the bank held two of plaintiff’s notes which had been renegotiated and extended previously. The parties were in the midst of negotiations for further extensions when the extended due dates passed. Despite the maturity of the notes, the parties continued to negotiate, and the bank made no demand. On the day before the bank’s final action, it advised the plaintiff of overdrafts in its checking account. Plaintiff represented that payments were in the mail, and the bank officer responded “fine.” On the next day, the bank demanded immediate payment of the obligations and offset plaintiff’s checking account, which had been replenished by the payments which were in the mail on the previous day. A summary judgment for the bank was reversed on appeal.

The basic principle of the doctrine of promissory estoppel is that consideration need not be furnished for a promise to render it enforceable if the promisor should reasonably expect the promise to produce action or forbearance of a substantial character on the part of the promisee, the promise does produce that result, and injustice can be avoided only by enforcement of the promise. (Bank of Marion v. Robert “Chick” Fritz, Inc. (1974), 57 Ill. 2d 120, 311 N.E.2d 138.) In Bank Computer Network Corp., the court stated that although no bank officer was shown to have expressly promised to refrain from offsetting the checking account to apply on the overdue notes, “the promise essential to a claim of promissory estoppel need not be expressed, only unambiguous.” 110 Ill. App. 3d 492, 497, 442 N.E.2d 586, 590-91.

Here, as in Bank Computer, there had been conversations concerning the debt. Here, unlike there, no indication was given that the bank had made any offers. Plaintiff’s affidavit stated he would make all payments by January 20, 1979, and then stated, “it being understood that he [plaintiff] would make payment in full as per such agreement.” The language of the affidavit makes no statement that the bank agreed to anything and is thus ambiguous as to what is meant by “such agreement.” In Bank Computer, a bank officer was stated to have replied affirmatively to the plaintiff’s assurance that funds to restore the plaintiff’s checking account were in the mail. No similar affirmative conduct is attributed to defendant’s president here. The failure to demand immediate payment when plaintiff said he would pay at a later date is not the type of conduct that could reasonably be expected to induce a debtor to rely on his security not being sold.

If defendant’s president told plaintiff that he could have an extension on his loans, plaintiff should have so stated in his affidavit. If defendant’s president did not so state, the circumstances revealed here do not give rise to a factual question as to whether a promissory estoppel existed.

Because plaintiff’s theory of promissory estoppel fails, we need not discuss defendant’s contention that plaintiff would also be prevented from bringing an action for conversion because he was not entitled to the possession of the shares at the time the alleged conversion took place. The trial court properly granted summary judgment on counts II and III.

Plaintiff presents no arguments which indicate that the accounting made pursuant to count I was erroneous. Accordingly, we find no error to have occurred as to that count.

On the first day of trial, plaintiff moved to amend his complaint by reinstating counts II and III. The court properly denied reinstatement. The issues contained in those counts had been decided by the summary judgment previously entered. Before allowing such a motion, the summary judgment would have to have been vacated. No such request was made and, as we have indicated, no error resulted from the entry of the summary judgments.

Accordingly, the judgments of the trial court are affirmed.

Affirmed.

MILLER and WEBBER, JJ., concur.


author: JUSTICE WEBBER

text:
    MID-AMERICA FIRE AND MARINE INSURANCE COMPANY, Plaintiff-Appellee, v. H. FRANK MIDDLETON et al., d/b/a Middleton & Craver, Defendants-Appellants.
    Fourth District
    No. 4—84—0140
    Opinion filed September 5, 1984.

      James L. Ayers and Kenneth E. Baughman, both of Monticello, for appellants.
    Mark T. Petty, of Arcola, for appellee.
   JUSTICE WEBBER

delivered the opinion of the court:

Defendants appeal from a judgment entered by the circuit court of Champaign County in a bench trial in favor of the plaintiff and against the defendants.

The amended complaint upon which the case was tried is a paradigm of the obscurantism which infects present-day pleading, the sum of which ofttimes appears to be: write a letter to the judge and let him divine the theory of the action. With such powers of divination as we still possess, we construe the amended complaint as one grounded in the ancient action of trover and conversion and will deal with it in that context. Even though common law forms of action have long since been abolished in this State, if one seeks relief of the kind formerly encompassed by them, the same substantial averments as existed must be pleaded. Compare Bauscher v. City of Freeport (1968), 103 Ill. App. 2d 372, 243 N.E.2d 650.

The facts, as found in the evidence and the exhibits in the case, may be summarized as follows:

The plaintiff’s insureds, John and Margaret Unwiler, were killed in an automobile accident in 1974. Pursuant to the terms of the respective liability insurance policies, plaintiff paid $6,000 under each policy to the decedents’ daughter as administrator of her parents’ estates. At the time the administrator accepted the $12,000 in insurance proceeds, she signed a release prepared by the plaintiff wherein she agreed to reimburse the plaintiff out of the proceeds of any wrongful death recovery, less the reasonable costs incurred in effecting said recovery.

The administrator later initiated a wrongful death action and retained the defendants to represent her in that matter. Thereafter, the administrator was named a defendant in a related declaratory judgment action. In exchange for the defendants’ agreement to represent her in the declaratory judgment action, the administrator agreed to pay them 50% of any amount recovered in the wrongful death action. The wrongful death action was subsequently settled for a total of $30,000, representing $15,000 for each death. The settlement check was made payable to the administrator and the defendants. The administrator then petitioned the court to settle the cause of action and to make payments to herself, the defendants, and the plaintiff. The attorney’s fees and litigation costs were deducted proportionately from the administrator’s share and the plaintiff’s share of the proceeds. As a result, approximately 50% of the amount owed to the plaintiff pursuant to the release was withheld as attorney’s fees and costs, and it received slightly less than $6,000 as total reimbursement under both policies. The circuit court approved this settlement distribution in an order dated September 20, 1976.

After the proceeds of settlement were distributed, a dispute arose between the plaintiff and the defendants as to the reasonableness of defendants’ fees. This was the origin of the instant litigation.

Plaintiff’s original complaint was dismissed on motion of the defendants and on leave granted an amended complaint was then filed. After alleging the facts of the deaths, its payment of $12,000, its subrogation thereto, and the filing of the wrongful death suits, the plaintiff’s operative allegations were:

“7. That on or about September 20, 1976, the foregoing litigation was settled by said defendants and the sum of $15,000.00 was paid jointly to said defendants and the Estate of John A. Unwiler and the sum of $15,000.00 was paid jointly to said defendants and the Estate of Margaret G. Unwiler.
8. That at the time of the payment referred to hereinabove, the Defendants knew of the interest of the Plaintiff referred to' hereinabove in paragraph 4.
9. That in spite of the knowledge referred to hereinabove, the Defendants withheld from the sum of $12,000 due to the Plaintiff, $6,052.96 and converted the same to their own use.
10. That the withholding referred to hereinabove was without the Plaintiff’s authority, agreement, or consent and was unlawful.
11. That in the alternative, the Defendants are entitled to be compensated only for the fair value of any services that they performed; said services being valued at substantially less than the sum withheld by the Plaintiff, $6,052.96.”

Defendants filed a motion to dismiss the amended complaint and an answer thereto. The gist of the motion was that the amended complaint failed to state a cause of action for conversion. That motion was denied, and the cause proceeded to trial at bench. After hearing evidence and considering exhibits, the trial court entered judgment in favor of the plaintiff and against the defendants in the sum of $6,052.96. The court made no findings in support of its judgment.

The written judgment order was entered October 27, 1983, and on November 28, 1983, defendants filed a post-trial motion pursuant to section 2 — 1203 of the Code of Civil Procedure. (Ill. Rev. Stat. 1983, ch. 110, par. 2—1203.) That motion again attacked the amended complaint as insufficient in law. It was denied.

On December 23, 1983, defendants filed a motion for attorney fees under section 2 — 611 of the Code of Civil Procedure (Ill. Rev. Stat. 1983, ch. 110, par. 2—611), alleging allegations in the complaint were made without reasonable cause and were untrue. That motion was also denied. This appeal then ensued.

Three issues are raised on appeal: (1) the sufficiency of the amended complaint, (2) the manifest weight of the evidence, and (3) the section 2 — 611 fees.

As a preliminary matter, plaintiff claims that defendants have waived the question of the sufficiency of the amended complaint by filing an answer after denial of their motion to dismiss. Defendants indicate that they discern a conflict in our decisions in Warner Agency, Inc. v. Doyle (1984), 121 Ill. App. 3d 219, 459 N.E.2d 633, and People ex rel. Defanis v. Futia (1978), 56 Ill. App. 3d 920, 373 N.E.2d 530.

We do not agree that any such conflict exists. Both decisions reflect different aspects of the general rule stated in Wagner v. Kepler (1951), 411 Ill. 368, 371,104 N.E.2d 231, 233, where it is said:

“While defects in a complaint containing an incomplete or otherwise insufficient statement of a good cause of action may be waived, the question of whether a complaint absolutely fails to state or indicate any ground of liability which the law will recognize can be raised at any time.”

In applying this rule to the instant case, we find that the defendants have waived the question of the sufficiency of the amended complaint and that the trial court did not commit reversible error in denying their motion to dismiss.

A proper complaint for conversion should allege: (1) an unauthorized and wrongful assumption of control, dominion, or ownership by a person over the personalty of another; (2) his right in the property; (3) his right to the immediate possession of the property, absolute and unconditional; and (4) a demand for possession thereof. Farns Associates, Inc. v. Sternback (1979), 77 Ill. App. 3d 249, 252, 395 N.E.2d 1103, 1106.

Even a casual reading of the complaint in this case reveals a woeful lack of these specific allegations. However, when read as a whole, especially paragraph 9 (’’converted the same to their own use”), it would be apparent that an attempt to allege conversion has been made. Therefore, the amended complaint is marginally sufficient. Pleadings are to be liberally construed and, if they fairly apprise the defendant of that with which he is being charged, they will be allowed to stand. (People ex rel. Scott v. College Hills Corp. (1982), 91 Ill. 2d 138, 435 N.E.2d 463.) Tested by this standard, the allegation, “conversion,” while conclusional, told the defendants the nature of the lawsuit, when read with the other allegations. There was no absolute failure under Wagner to state a cause of action.

A party claiming conversion must establish by a preponderance of the evidence the same elements set forth from Farns above. We find that the plaintiff has failed to do so; that the trial court’s judgment was against the manifest weight of the evidence; and that therefore that judgment must be reversed without remand.

Initially, plaintiff did not, and could not, prove that the defendants’ assumption of control over a portion of the wrongful death proceeds was unauthorized. As has been indicated above, that control came about as a result of an order of distribution made by the circuit court of Champaign County. An act which would otherwise constitute a conversion is privileged when done pursuant to a court order. Restatement (Second) of Torts sec. 266 (1965).

More importantly, conversion will lie only for a specific chattel.

“Trover lies for specific chattels wrongfully converted, and not for money had and received for payment of debts. It does not operate on chattels generally, but specifically, such as money in coin or bills, animals, or other property capable of identification as being the actual property or thing wrongfully taken and converted.” Kerwin v. Balhatchett (1909), 147 Ill. App. 561, 565-66.

Under the terms of the release prepared by plaintiff and signed by the administrator of the estates of plaintiff’s insureds, plaintiff had a right to reimbursement from any settlement growing out of the wrongful death actions. However, that reimbursement, according to the release itself, was to be reduced by plaintiff’s “proportionate share of all reasonable costs incurred in effecting said recovery.” Thus plaintiff had no right to a specific fund or specific money in coin or bills. Its right was only to an indeterminate sum.

If plaintiff determined to bring a common law action, the proper one would be assumpsit for money had and received. Compare Janes v. First Federal Savings & Loan Association (1974), 57 Ill. 2d 398, 312 N.E.2d 605.

The same thing is true of the third element of a conversion action, i.e., an absolute and unconditional right to immediate possession. Plaintiff’s right to possession, if any, was conditioned upon the deduction of reasonable costs.

We turn last to the question of the section 2 — 611 fees. That section (Ill. Rev. Stat. 1983, ch. 110, par. 2—611) authorizes the trial court to impose attorney fees upon a party who pleads allegations which are untrue or made "without reasonable cause. A motion must be made within 30 days of judgment or dismissal. In this case the judgment was entered on October 27, 1983, and the motion was not made until December 23, 1983. No mention of any such fees was made in defendants’ post-trial motion filed November 28, 1983. The motion under section 2 — 611 was obviously untimely.

On the merits, apart from the question of timeliness, the motion points out no specifically untrue statements nor statements made without reasonable cause. It made only general allegations about the complaint as a whole. The same is true of defendants’ brief in this court. The trial court heard arguments on the motion and found that no untrue statements were made in plaintiff’s pleadings. There was no abuse of discretion in this finding.

For all the foregoing reasons, the orders of the circuit court of Champaign County denying defendants’ motion to dismiss the amended complaint and denying attorney fees are affirmed; the judgment of the court in favor of the plaintiff and against the defendants is reversed.

Affirmed in part, and reversed without remandment.

MILLS, P.J., and TRAPP, J., concur.