Find Legal Information

Docket Nos. 97023, 97866 cons.-Agendas 12 & 13-November 2004.
RAYMOND G. SCACHITTI et al., Appellants, v. UBS FINANCIALSERVICES et al., Appellees.-THE ILLINOIS HEALTHFACILITIES AUTHORITY ex rel. RAYMOND G. SCACHITTI etal., Appellants, v. MORGAN STANLEY DEAN WITTER & COMPANY et al., Appellees.

Opinion filed June 3, 2005.

JUSTICE KILBRIDE delivered the opinion of the court:

In these related appeals we address: (1) whether taxpayers havestanding to assert common law claims on behalf of the State ofIllinois; (2) whether private citizens have standing to maintain a causeof action on behalf of the state for recovery of fraudulently obtainedpublic funds under section 20-104(b) of article XX of the Code ofCivil Procedure (article XX) (735 ILCS 5/20-104(b) (West 2002));and (3) whether private persons have standing to bring suit on behalfof the state under the qui tam provisions of the Whistleblower Rewardand Protection Act (Act) (740 ILCS 175/1 et seq. (West 2002)). Thecircuit court of Cook County dismissed plaintiffs' complaints, holdingthis court's recent opinion in Lyons v. Ryan, 201 Ill. 2d 529 (2002),foreclosed plaintiffs' claims. The circuit court further held the entireAct unconstitutional based on this court's reasoning in Lyons.

We allowed plaintiffs' direct appeals. See 134 Ill. 2d R. 302(a).We affirm in part and reverse in part, and hold: (1) taxpayers lackstanding to assert common law claims on behalf of the state; (2)private citizens lack standing to maintain a cause of action on behalfof the state for recovery of fraudulently obtained public funds undersection 20-104(b) of article XX (735 ILCS 5/20-104(b) (West2002)); (3) private persons have standing to bring suit on behalf of thestate under the qui tam provisions of the Act (740 ILCS 175/1 et seq.(West 2002)); and (4) the circuit court erred in declaring the Actunconstitutional.

I. BACKGROUND

Plaintiffs' counsel issued 278 requests to various state and localgovernmental units under the Freedom of Information Act (5 ILCS140/1 et seq. (West 2002)), seeking documents relating to nearly 300bond clearance transactions. As a result of information obtained fromthe requests, plaintiffs brought these actions.

These cases essentially repleaded pendent state claims dismissedin earlier suits filed in the United States District Court for theNorthern District of Illinois. The federal cases were dismissed for lackof subject matter jurisdiction.

A. Appeal No. 97023

On November 21, 2002, plaintiffs, Raymond G. Scachitti, PatrickJ. Houlihan, and Robert F. Rifkin, filed a "taxpayer derivative action"on behalf of the State of Illinois against defendants, Payne WebberGroup, Inc., now known as UBS Financial Services (UBS), andDeloitte & Touche, L.L.P. (Deloitte). The lawsuit sought to recover,on behalf of the state, overcharges made by UBS in connection withadvance refunding bond transactions in 1992. UBS served as the leadunderwriter for the state's issuance of new bonds to refinance, atlower rates, certain bonds issued by the state between 1985 and 1992.

Plaintiffs' complaint alleged UBS overcharged the state inconnection with the 1992 advance refunding bond transactions. Anadvance refunding bond transaction is a financial investment vehicleallowing the sale of new bonds and using the proceeds to purchasesecurities. These securities are held in a defeasance escrow to assurethe future payment of outstanding bonds that cannot presently beredeemed because the call provisions are for a future date. Deloittewas the accounting firm engaged by the state to verify the accuracy ofthe escrow account. According to plaintiffs' complaint, federal lawrestricts the overall yield governmental units can earn on securitiesplaced in a defeasance escrow. Charging more than the market valueis referred to as "burning" the yield on the securities. Plaintiffs allege"yield burning" violates IRS regulations requiring securities to bepurchased at market value and any profit resulting from positivearbitrage be paid to the United States Treasury to prevent therefunding bonds from losing tax-exempt status.

Plaintiffs, on behalf of the state, sought recovery of fraudulentlyobtained public funds from UBS under article XX (735 ILCS5/20-101 et seq. (West 2002)). Section 20-102 of article XXprovides that any person who receives fraudulently obtained publicfunds, whether or not that person has committed the fraud, mustrefund the money. 735 ILCS 5/20-102 (West 2002). Section 20-103states that a person who receives compensation, benefits orremuneration "to which he is not entitled, or in a greater amount thanthat to which he is entitled" shall be liable to repay those amounts and,in addition, is liable for civil penalties, including treble damages. 735ILCS 5/20-103 (West 2002).

Plaintiffs also sought recovery, on behalf of the state, offraudulently obtained public funds from defendants under the qui tamprovisions of the Act (740 ILCS 175/1 et seq. (West 2002)).Plaintiffs, as taxpayers, further asserted common law claims on behalfof the state as follows: breach of fiduciary duty against defendants formisrepresenting the fair market value of the treasury securities it soldthe state to be held in the defeasance escrow for the 1992 refundingbonds; fraud and breach of contract against UBS; and breach ofcontract, accountant malpractice, and negligent and fraudulentmisrepresentation against Deloitte.

Plaintiffs sought: (1) compensatory, treble, or other damages andcivil penalties; (2) rescission of contracts "between, or for the benefitof," the state and defendants and an award of restitution damages; (3)attorney fees and expenses; and (4) "extraordinary equitable and/orinjunctive relief, including attaching, impounding, imposing aconstructive trust upon or otherwise restricting defendants' assets."Although plaintiffs' complaint was filed as a putative class action, theprayer for relief did not seek class certification.

Plaintiffs served a copy of the complaint upon the AttorneyGeneral. After reviewing plaintiffs' complaint and submission ofevidence, the Attorney General declined to intervene in the action.Plaintiffs attempted to litigate the case on behalf of the state. Thecircuit court of Cook County granted defendants' motions to dismiss,holding plaintiffs lacked standing to sue on behalf of the state. Thecircuit court also declared the Act unconstitutional in light of Lyons,201 Ill. 2d 529, as a usurpation of the exclusive authority of theAttorney General to sue on behalf of the state.

This court allowed plaintiffs' direct appeal. See 134 Ill. 2d R.302(a). Although the Illinois Attorney General was never involved inthe proceedings below, we granted the Illinois Attorney General leaveto intervene in the appeal (see 735 ILCS 5/2-408 (West 2002)) andto file a brief addressing the constitutionality of the Act. We grantedthe AARP and Taxpayers Against Fraud, and relators David Sipichand George C. Hook, leave to submit amicus curiae briefs in supportof plaintiffs. See 155 Ill. 2d R. 345. Cook County Treasurer MariaPapas was granted leave to file an amicus curiae brief in support ofdefendants. See 155 Ill. 2d R. 345.

B. Appeal No. 97866

On September 13, 2002, Raymond G. Scachitti, Patrick J.Houlihan, and Robert F. Rifkin filed a "taxpayer derivative action" onbehalf of the Illinois Health Facilities Authority (Authority) againstMorgan Stanley Dean Witter & Company (Morgan), and Ernst &Young, L.L.P. (Ernst). The lawsuit sought to recover, on behalf of theAuthority, overcharges made by Morgan in connection with advancerefunding bond transactions in 1993.

Morgan served as the lead underwriter for the Authority'sissuance of new bonds to refinance, at lower rates, certain revenuebonds issued by the Authority in 1989. Ernst was the accounting firmengaged by the Authority to verify the accuracy of the escrowaccount.

Plaintiffs' complaint sought recovery of fraudulently obtainedpublic funds from Morgan under sections 20-102 and 20-103 ofarticle XX (735 ILCS 5/20-102, 20-103 (West 2002)). Plaintiffs'complaint also sought recovery of fraudulently obtained public fundsfrom defendants under the qui tam provisions of the Act (740 ILCS175/1 et seq. (West 2002)). In addition, plaintiffs asserted thefollowing common law claims: breach of fiduciary duty againstdefendants for misrepresenting the fair market value of the treasurysecurities it sold the Authority to be held in the defeasance escrow forthe 1993 refunding bonds; fraud and breach of contract againstMorgan; and breach of contract and accountant malpractice againstErnst.

Plaintiffs' complaint sought: (1) compensatory, treble, or otherdamages and civil penalties; (2) rescission of contracts "between, orfor the benefit of," the Authority and defendants and an award ofrestitution damages; (3) attorney fees and expenses; and (4)"extraordinary equitable and/or injunctive relief, including attaching,impounding, imposing a constructive trust upon or otherwiserestricting defendants' assets."

The circuit court of Cook County dismissed plaintiffs' complaint,holding plaintiffs lacked standing to sue on behalf of the state. Thecircuit court also declared the Act unconstitutional in light of thiscourt's reasoning in Lyons, 201 Ill. 2d 529, as an unconstitutionalusurpation of the exclusive authority of the Attorney General to sueon behalf of the state.

This court allowed plaintiffs' direct appeal. See 134 Ill. 2d R.302(a). We granted the AARP and Taxpayers Against Fraud leave tosubmit an amicus curiae brief in support of plaintiffs. See 155 Ill. 2dR. 345.

II. ANALYSIS

The issues presented in these two appeals involve identicalquestions of law. Accordingly, the Court has, sua sponte, consolidatedthese appeals. See 137 Ill. 2d R. 384(a).

These appeals arise from the dismissal of plaintiffs' complaints forlack of standing. Section 2-619(a)(9) of the Code of Civil Procedure(Code) provides that a complaint may be involuntarily dismissed forlack of standing. 735 ILCS 5/2-619(a)(9) (West 2002). "The standingdoctrine assures that issues are presented to a court only by partieswho have a sufficient stake in the outcome of the controversy."People ex rel. Hartigan v. E&E Hauling, Inc., 153 Ill. 2d 473, 482(1992). A party lacking an interest in the controversy has no standingto sue. Hartigan, 153 Ill. 2d at 482. We review a dismissal orderbased on lack of standing de novo. Glisson v. City of Marion, 188 Ill.2d 211, 220 (1999).

Plaintiffs argue the circuit court erred in dismissing theircomplaints for lack of standing. Plaintiffs also contend the circuitcourt erroneously held the Act (740 ILCS 175/1 et seq. (West 2002))unconstitutional.

Initially, we note plaintiffs claim standing to bring all of theirclaims as taxpayers of the State of Illinois. Plaintiffs use the terms "quitam" and "taxpayer" interchangeably throughout their briefs and referto "common law" qui tam taxpayer suits, as if qui tam actions andtaxpayer actions are synonymous. As we shall explain, they are not.While it is true all of the actions asserted by plaintiffs are purportedlybrought for public benefit, the history and case law regarding thedevelopment of these actions reveal quite different premises for each.

A "taxpayer action" is brought by private persons in theircapacity as taxpayers, "on behalf of themselves and as representativesof a class of taxpayers similarly situated within a taxing district orarea, upon a ground which is common to all members of the class, andfor the purpose of seeking relief from illegal or unauthorized acts ofpublic bodies or public officials, which acts are injurious to theircommon interests as such taxpayers." See 74 Am. Jur. 2d Taxpayers'Actions