Find Legal Information

Docket No. 97022-Agenda 11-November 2004.
THE COUNTY OF COOK ex rel. ROBERT F. RIFKIN et al.,Appellants, v. BEAR STEARNS & COMPANY, INC., et al., Appellees.

Opinion filed June 3, 2005.

JUSTICE KILBRIDE delivered the opinion of the court:

This case presents questions of whether plaintiffs have standingto assert a cause of action on behalf of Cook County under article XXof the Code of Civil Procedure (735 ILCS 5/20-101 et seq. (West1998)), and whether plaintiffs have standing to assert common lawclaims on behalf of the County. The circuit court of Cook Countydismissed the complaint, finding article XX unconstitutional to theextent it conferred authority on private citizens to file derivativeclaims on behalf of the County. We allowed plaintiffs' direct appealpursuant to Supreme Court Rule 302(a) (134 Ill. 2d R. 302(a)). Wenow affirm and hold: (1) the State's Attorney has the exclusive powerto represent the County in litigation when the County is the real partyin interest; (2) section 20-104(b) of article XX is unconstitutional tothe extent it purports to confer standing on private citizens to suewhen the County is the real party in interest; and (3) plaintiffs'common law claims do not lie when no claim is made that a publicofficial is responsible for the alleged injury, and only the State'sAttorney has the authority to assert those claims.

I. BACKGROUND

In March 2001, plaintiffs, Robert F. Rifkin, Raymond G.Scachitti, and Patrick J. Houlihan, taxpayers and residents of CookCounty, filed a putative class action seeking to recover, on behalf ofthe County, overcharges made by Bear Stearns & Company inconnection with advance refunding bond transactions in 1992. BearStearns was the lead underwriter for the County's issuance of bondsto refinance, at lower interest rates, certain municipal bondspreviously issued by the County. The case was essentially a reassertionof pendent state claims dismissed in an earlier suit filed in the UnitedStates District Court for the Northern District of Illinois. Thatdismissal was affirmed on appeal. See Rifkin v. Bear Stearns & Co.,248 F.3d 628 (7th Cir. 2001).

An advance refunding bond transaction is a financial investmentvehicle allowing the sale of new bonds and the use of the proceeds topurchase securities. These securities are then held in a defeasanceescrow to assure future payment of outstanding bonds that cannotpresently be redeemed because the call provisions are for a futuredate. According to the complaint, federal law restricts the overall yieldlocal governments can earn on securities placed in a defeasanceescrow. By charging more than market value, Bear Stearns reduced,or "burned," the yield on the securities and kept the profit. Thecomplaint alleges the "burn" violates IRS regulations requiringsecurities to be purchased at market value and any profit resultingfrom positive arbitrage be paid to the United States Treasury. If thisis not done, the refunding bonds may lose tax-exempt status. Thecomplaint claims that in the 1992 transaction, Bear Stearnsovercharged the County by approximately $249,000.

The complaint sought relief against Bear Stearns under sections20-102 and 20-103 of article XX (735 ILCS 5/20-102, 20-103(West 1998)). Section 20-102 provides that any person who receivesfraudulently obtained public funds, whether or not that person hascommitted the fraud, must refund the money. 735 ILCS 5/20-102(West 1998). Section 20-103 provides that a person who receivescompensation benefits or remuneration "to which he is not entitled, orin a greater amount than that to which he is entitled" shall be liable torepay those amounts and, in addition, is liable for civil penalties,including treble damages. 735 ILCS 5/20-103 (West 1998). Acommon law claim was also asserted against Bear Stearns forfraudulently representing to the County that it was paying fair marketvalue for the securities and that the escrow accounts would notproduce positive arbitrage. The complaint also sought consequentialdamages against Bear Stearns for breach of its underwriting contract,or for rescission and restitution.

The complaint sought common law relief against the accountingfirm Ernst & Young (Ernst), engaged to verify the accuracy of theescrow account for the County. Plaintiffs allege Ernst breached itscontract by submitting a false or recklessly inaccurate verification andthat it committed accountant malpractice by failing to exercisereasonable care or competence while completing its verification,resulting in a misstatement of the yield on the securities in the escrowfund.

Common law breach of contract claims were also asserted againstPublic Sector Group, Inc. (PSG), and Seaway National Bank ofChicago (Seaway). PSG and Seaway were engaged by the County toprovide financial advisory services in connection with the refundingbonds. The complaint alleged they failed to monitor and verify theaccuracy of the amounts charged to the County for services andsecurities, and failed to disclose to the County that it paid more thanfair market value for securities purchased for the defeasance escrow.

The complaint also asserted a common law breach of fiduciaryduty claim against all defendants, alleging that as investment advisorsto the County, all defendants were, as a matter of law, fiduciaries tothe County. Plaintiffs claim defendants violated their fiduciary dutiesby failing to monitor and inform the County of markups on thesecurities issued in the advanced refunding transaction.

The complaint did not allege that the County or any Countyofficial was in any way complicit in the alleged misrepresentations orfraud. On the contrary, plaintiffs alleged that defendants' fraudulentconcealment of the marked-up price of the securities "was intended to,and did in fact, prevent the County from knowing either that it hadclaims against the Defendants or the true facts underlying thoseclaims."

In their prayer for relief, plaintiffs sought class certification,compensatory and treble damages, rescission of contracts andrestitution, attorney fees and expenses, and equitable relief, includingimposing a constructive trust on or otherwise restricting defendants'assets to ensure plaintiffs an effective remedy.

On March 23, 1999, prior to filing the original suit in federalcourt, plaintiffs' counsel sent by certified mail a letter to the CookCounty State's Attorney, giving notice of his intent to file suit, asrequired by section 20-104(b) of article XX (735 ILCS 5/20-104(b)(West 1998)), for overcharges incurred by Cook County in connectionwith the 1992 bond issue, and demanding that the State's Attorneypursue any and all claims stemming from overcharges in the bondissue transactions. Section 20-104(b) provides:

"Notwithstanding any other provision in this Section, anyprivate citizen residing within the boundaries of thegovernmental unit affected may bring an action to recover thedamages authorized in this Article on behalf of suchgovernmental unit if: (a) the citizen has sent a letter bycertified mail, return receipt requested, to the appropriategovernment official stating his intention to file suit forrecovery under this Article and (b) the appropriategovernment official has not, within 60 days of the date ofdelivery on the citizen's return receipt, either instituted anaction for recovery or sent notice to the citizen by certifiedmail, return receipt requested, that the official has arrangedfor a settlement with the party alleged to have illegallyobtained the compensation or that the official intends tocommence suit within 60 days of the date of the notice. Adenial by the official of the liability of the party alleged liableby the citizen, failure to have actually arranged for asettlement as stated, or failure to commence a suit within thedesignated period after having stated the intention in thenotice to do so shall also permit the citizen to commence theaction.

For purposes of this subsection (b), 'appropriategovernment official' shall mean (1) the Attorney General,where the government unit alleged damaged is the State; (2)the corporation counsel where the government unit allegeddamaged is a municipality with a population of over 500,000;and (3) the chief executive officer of any other localgovernment unit where that unit is alleged damaged.

Any private citizen commencing an action in compliancewith this subsection which is reasonable and commenced ingood faith shall be entitled to recover court costs andlitigation expenses, including reasonable attorney's fees, fromany defendant found liable under this Article." 735 ILCS5/20-104(b) (West 1998).

Article VII, section 4(b), of the Illinois Constitution of 1970designates the president of the Cook County board as the chiefexecutive officer of the County. The notice was not sent, in themanner required by the statute, to John H. Stroger, Jr., who was thenthe president of the Board of Commissioners of Cook County.

The State's Attorney did not respond to the notice, and plaintiffsfiled suit in federal court, asserting a federal claim as well as all thestate claims later presented in the circuit court of Cook County. TheCounty appeared in the lawsuit, but did not originally file any pleadingattacking the complaint. The defendants filed motions to dismiss,asserting, inter alia, the notice was defective because it was notaddressed to the chief executive officer of Cook County as requiredby the statute. When the motion was called for hearing, the State'sAttorney appeared on behalf of the County and sought leave to joinin the request for dismissal. The district court denied the defendants'motion, but did not rule on the County's request. Ultimately, thefederal claims and the pendent state claims were dismissed for failureto allege an injury sufficient to establish standing under article III,section 2, of the United States Constitution. After the dismissal wasaffirmed on appeal (Rifkin, 248 F.3d 628), plaintiffs filed the statecourt lawsuit, but did not give any further notice to the chief executiveofficer of the County.

All defendants and the County, in its capacity as a nominalplaintiff, filed motions to dismiss, raising both the issue of thesufficiency of the presuit notice and the issue of plaintiffs' lack ofstanding. The trial court dismissed the common law claims on June 19,2003, finding that plaintiffs lacked standing to assert common lawcauses of action on behalf of the County. The court also deniedplaintiffs' motion to amend the complaint to assert article XX claimsagainst Ernst, PSG and Seaway, finding those defendants would beprejudiced by the amendment and that no sufficient excuse wasoffered to explain the failure to include article XX claims against thosedefendants in the original complaint. On August 20, 2003, the courtdismissed all remaining counts of the complaint with prejudice, findingsection 20-104(b) of article XX unconstitutional to the extent itauthorized persons other than the State's Attorney to file actions onbehalf of the County in cases when the County is the real party ininterest. The court did not rule directly on the issue of plaintiffs'noncompliance with the statutory presuit-notice requirement. Thisappeal followed.

II. ANALYSIS

Plaintiffs contend the trial court erred in finding section20-104(b) of article XX unconstitutional because article XX allowscitizens to sue on behalf of the County when the County is the realparty in interest. Plaintiffs also assign as error the dismissal of theircommon law claims and the trial court's refusal to allow them to filean amended complaint.

Whether a statute is unconstitutional is a question of lawreviewed de novo. People ex rel. Sherman v. Cryns, 203 Ill. 2d 264,290 (2003). An order dismissing a complaint for lack of standing alsopresents a question of law reviewed de novo. Lyons v. Ryan, 201 Ill.2d 529, 534 (2002). A trial court's denial of a motion for leave toamend a pleading is reviewed under an abuse of discretion standard.Loyola Academy v. S&S Roof Maintenance, Inc., 146 Ill. 2d 263,273-74 (1992).

A. Article XX Claims

In Fuchs v. Bidwill, 65 Ill. 2d 503, 510 (1976), we determinedthat the Attorney General, as the constitutionally designated legalofficer of the state, is the only person authorized to represent the statein matters when the state is the real party in interest. In Lyons, wereaffirmed this holding and held that section 20-104(b) of article XXis unconstitutional to the extent it confers on private citizens standingto commence and prosecute actions on behalf of the state when thestate is the real party in interest, thus improperly usurping theconstitutional powers of the Attorney General. Lyons, 201 Ill. 2d at541. As we said in Lyons, "the 'real party in interest' has an actual andsubstantial interest in the subject matter of the action, as distinguishedfrom one who has only a nominal, formal, or technical interest in, orconnection with, the case." Lyons, 201 Ill. 2d at 534. The plaintiffs inLyons brought their case as a taxpayer derivative action. We held thatbecause only the state would be entitled to the benefits of a successfulaction, the state was the real party in interest. Lyons, 201 Ill. 2d at535. Here, only the County would benefit from a successfulprosecution of the common law and article XX claims. Therefore, theCounty is the only real party in interest.

Like the Attorney General, a State's Attorney is a constitutionalofficer. The 1870 Illinois Constitution provided that there "be electeda state's attorney in and for each county in lieu of the state's attorneysnow provided by law." Ill. Const. 1870, art. VI,