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Appellate Court Date: 2017.10.02
14:28:10 -05'00'
Nicholson v. Shapiro & Associates, LLC, 2017 IL App (1st) 162551
Appellate Court JILL NICHOLSON, as Court-Appointed Receiver of Illinois Stock
Caption Transfer Company, d/b/a IST Shareholder Services, Plaintiff-
Appellee, v. SHAPIRO & ASSOCIATES, LLC, an Illinois Limited
Liability Company; and FREIRECH & SHAPIRO, LLC, an Illinois
Limited Liability Partnership, Defendants (Shapiro & Associates,
LLC, Defendant-Appellant).
District & No. First District, Sixth Division
Docket No. 1-16-2551
Filed August 11, 2017
Decision Under Appeal from the Circuit Court of Cook County, No. 15-L-12911; the
Review Hon. Raymond W. Mitchell, Judge, presiding.
Judgment Certified questions answered.
Counsel on Kaplan, Papadakis & Gournis, P.C., of Chicago (Eric D. Kaplan,
Appeal Christopher S. Wunder, and Stacie E. Barhorst, of counsel), for
appellant.
Tressler, LLP, of Chicago (Kenneth M. Sullivan and Michael K.
McDonough, of counsel), for appellee.
Panel JUSTICE CUNNINGHAM delivered the judgment of the court, with
opinion.
Justices Rochford and Delort concurred in the judgment and opinion.
OPINION
¶1 This is an interlocutory appeal pursuant to Illinois Supreme Court Rule 308 (eff. Jan. 1,
2016). We address the following two certified questions for our review: (1) “Under Illinois
law, does the doctrine of in pari delicto bar a court-appointed [Securities and Exchange
Commission (SEC)] receiver from bringing suit on behalf of a company against the company’s
outside auditor for allegedly failing to discover the fraud and/or illegal acts of the company’s
sole owner?” and (2) “Under Illinois law, does the departure of the fraudulent actor prevent the
application of the in pari delicto defense to a court-appointed SEC receiver’s claim against the
company’s outside auditor?” For the reasons that follow, we answer the first certified question
in the negative and the second certified question in the affirmative.
¶2 The certified questions arise out of an action commenced by plaintiff-appellee, Jill
Nicholson, solely in her capacity as court-appointed receiver of Illinois Stock Transfer
Company, against defendant-appellant, Shapiro & Associates (Shapiro).
¶3 Shapiro, an accounting firm, was retained by Illinois Stock Transfer Company (IST), an
Illinois corporation, for the purposes of assisting IST with its tax returns, preparing timely
accountant’s reports, and conducting annual audits of IST as required by regulations
promulgated under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq. (2012)). See
17 C.F.R. § 240.17Ad-13 (2016). IST was a stock transfer agent registered with and governed
by the SEC. After discovering that IST’s president and sole shareholder, Robert Pearson, was
fraudulently converting client funds into payroll for IST, the SEC filed an action against
Pearson and IST in the United States District Court for the Northern District of Illinois. United
States Securities & Exchange Comm’n v. Pearson, No. 14-cv-3785 (N.D. Ill.).1 Pearson was
removed from IST, and the same day, the receiver was appointed by the federal district court
for the estates of both IST and Pearson. The order appointing the receiver authorized her to
bring legal actions in law or equity in any state, federal, or foreign court as necessary or
appropriate.
¶4 The receiver filed a complaint against Shapiro in the circuit court of Cook County alleging
accounting malpractice, breach of contract, and aiding and abetting the fraudulent acts
committed by Pearson.2
¶5 Shapiro filed a combined motion to dismiss pursuant to section 2-619.1 of the Code of
Civil Procedure (735 ILCS 5/2-619.1 (West 2016)), arguing, in part, that the doctrine of
in pari delicto should be imputed to the receiver, barring her from bringing claims against
1
This is a separate action in federal court, and neither IST nor Pearson is a party to this appeal.
2
Freirech & Shapiro, LLC (F&S), a separate limited-liability partnership, was also named as a
defendant in the complaint. IST retained F&S to conduct annual audits prior to retaining Shapiro. F&S
is not a party to this appeal.
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Shapiro for Pearson’s fraudulent acts. 3 The trial court denied Shapiro’s motion, stating,
“Because any award would benefit the defrauded investors and creditors of [IST] rather than
Pearson, the wrongdoer would not personally profit from his wrongdoing. Therefore the
doctrine of in pari delicto does not bar [the receiver’s] claims ***.”
¶6 Shapiro filed a motion for certification pursuant to Rule 308 of the two questions which are
set forth in paragraph 1 above. The trial court granted the motion, and Shapiro filed a timely
application for leave to appeal. We granted the application.
¶7 As this is an appeal pursuant to Rule 308, our review is limited to the certified questions,
which we review de novo as a question of law. Barbara’s Sales, Inc. v. Intel Corp., 227 Ill. 2d
45, 57-58 (2007). We note that some of Shapiro’s arguments relate to the merits of the
receiver’s complaint and are not relevant to the two certified questions before us. Therefore,
we will not address those other issues. See Lewis v. NL Industries, Inc., 2013 IL App (1st)
122080, ¶ 5.
¶8 We begin by reviewing the first certified question: “Under Illinois law, does the doctrine of
in pari delicto bar a court-appointed SEC receiver from bringing suit on behalf of a company
against the company’s outside auditor for allegedly failing to discover the fraud and/or illegal
acts of the company’s sole owner?”
¶9 Shapiro urges us to answer this question in the affirmative. Shapiro argues that if IST had
filed this action against Shapiro, in pari delicto would apply because IST benefited from the
fraudulently obtained funds being diverted to its payroll. Shapiro contends that, because the
receiver filed this action on behalf of IST, in pari delicto should be imputed against her. We
disagree.
¶ 10 The phrase “in pari delicto” means “ ‘[e]qually at fault.’ ” King v. First Capital Financial
Services Corp., 215 Ill. 2d 1, 34 (2005) (quoting Black’s Law Dictionary 806 (8th ed. 2004)).
The doctrine of in pari delicto embodies the principle that “ ‘a plaintiff who has participated in
wrongdoing may not recover damages resulting from the wrongdoing.’ ” Id. (quoting Black’s
Law Dictionary 806 (8th ed. 2004)).
¶ 11 In arguing that the receiver is barred from bringing her claims pursuant to the doctrine of
in pari delicto, Shapiro directs us to many cases from the federal courts and other state courts.
While we may look to other jurisdictions for guidance, we are not bound by their decisions.
People v. Sito, 2013 IL App (1st) 110707, ¶ 21 (citing Independent Trust Corp. v. Kansas
Bankers Surety Co., 2011 IL App (1st) 093294, ¶ 24). There are two Illinois cases informing
our analysis as to the first certified question: Albers v. Continental Illinois Bank & Trust Co.,
296 Ill. App. 592 (1938), and McRaith v. BDO Seidman, LLP, 391 Ill. App. 3d 565 (2009).
¶ 12 In Albers, this court rejected the defendants’ argument that the court-appointed bank
receiver stood in the same shoes as the bank and was, therefore, barred from bringing claims by
reason of being in pari delicto. Albers, 296 Ill. App. at 594. And in McRaith, this court held
that in pari delicto does not apply to a court-appointed liquidator. McRaith, 391 Ill. App. 3d at
595. There, we stated, “the in pari delicto doctrine cannot apply because the Liquidator, by
statutory definition, is not the wrongdoer; rather, he serves to protect the insurance industry
and the public interest by ensuring the victims of the misconduct can recover monies entitled to
them. To equate the Liquidator with [the wrongdoer] under in pari delicto is illogical and
3
Shapiro filed its motion to dismiss jointly with F&S. Again, F&S is not a party to this appeal.
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unavailing.” Id. Thus, in both Albers and McRaith, this court focused on the fact that the
plaintiffs were not the wrongdoers but were instead administrative officers of the state, with
rights, powers, and duties conferred by statute.
¶ 13 Shapiro attempts to distinguish both these cases from the instant matter by claiming that
Albers and McRaith are limited to their particular circumstances. Specifically, Shapiro claims
that these decisions were only relevant to a bank receiver under the Illinois Banking Act or an
insurance liquidator under the Illinois Insurance Code and that the holdings are not relevant to
an SEC receiver.
¶ 14 We reject Shapiro’s attempt to distinguish Albers and McRaith, whose rationale applies
equally here. Those cases held that in pari delicto does not apply when a plaintiff is not the
wrongdoer and has the statutory authority to bring legal action on behalf of creditors and other
victims. Here, the receiver had the power to bring legal action in federal, state, or foreign
courts pursuant to her order of appointment. And the receiver’s authority originates in section
754 of the United States Code (28 U.S.C. § 754 (2012)). Like the plaintiffs in Albers and
McRaith, the receiver is not the wrongdoer but is an administrative officer of the state, with
rights, powers, and duties conferred by statute, who is seeking damages on behalf of IST’s
creditors and defrauded clients. Accordingly, we conclude the doctrine of in pari delicto does
not bar a court-appointed SEC receiver from bringing suit on behalf of a company against the
company’s outside auditor for allegedly failing to discover the fraud and/or illegal acts of the
company’s sole owner. Thus, we answer the first certified question in the negative.
¶ 15 We next review the second certified question: “Under Illinois law, does the departure of the
fraudulent actor prevent the application of the in pari delicto defense to a court-appointed SEC
receiver’s claim against the company’s outside auditor?”
¶ 16 Shapiro urges us to answer this question in the negative, arguing that the departure of the
wrongdoer is of little importance on the claim by the receiver. Shapiro asserts that a plaintiff’s
right to file a claim should not depend on whether the wrongdoer is still with the company.
¶ 17 The in pari delicto defense “ ‘loses its sting’ ” once the person who is in in pari delicto is
removed. McRaith, 391 Ill. App. 3d at 595 (quoting In re Edgewater Medical Center, 332 B.R.
166, 177 (Bankr. N.D. Ill. 2005)). In pari delicto keeps the wrongdoer from profiting from his
wrong, and that reason does not exist once the wrongdoer is gone. Scholes v. Lehmann, 56 F.3d
750, 754 (7th Cir. 1995).
¶ 18 Given our analysis of the first certified question, it necessarily follows that, once the
wrongdoer is removed and replaced by a receiver, in pari delicto does not apply. Applying
in pari delicto after the wrongdoer is gone and can no longer profit from his alleged
misconduct would undermine the equitable defense of in pari delicto. Further, allowing
in pari delicto to be asserted after a receiver is appointed would hinder the receiver’s efforts to
obtain compensation for defrauded victims. Accordingly, the departure of the fraudulent actor
does prevent the application of the in pari delicto defense to a court-appointed SEC receiver’s
claim against the company’s outside auditor. Thus, we answer the second certified question in
the affirmative.
¶ 19 Certified questions answered.
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