Khan v. Deutsche Bank AG

ILLINOIS OFFICIAL REPORTS

Supreme Court

Khan v. Deutsche Bank AG, 2012 IL 112219

Caption in Supreme SHAHID R. KHAN et al., Appellees, v. DEUTSCHE BANK AG et al.,

Court: Appellants.

Docket Nos. 112219, 112221, 112223 cons.

Filed October 18, 2012

Held Where plaintiffs’ 2009 lawsuit complained of 1999 and 2000 investments

(Note: This syllabus which were placed with the defendants in anticipation of tax advantages

constitutes no part of and profits that did not materialize, the complaint was timely under the

the opinion of the court discovery rule when filed within the applicable limitation period after

but has been prepared plaintiffs’ receipt of tax deficiency notices in 2008.

by the Reporter of

Decisions for the

convenience of the

reader.)

Decision Under Appeal from the Appellate Court for the Fourth District; heard in that

Review court on appeal from the Circuit Court of Champaign County, the Hon.

Jeffrey B. Ford, Judge, presiding.

Judgment Appellate court judgment affirmed.

Counsel on Thomas F. Falkenberg and Benjamin M. Whipple, of Williams

Appeal Montgomery & John Ltd., of Chicago, and Kay Nord Hunt, of Lommen,

Abdo, Cole, King & Stageberg, P.A., of Minneapolis, Minnesota, for

appellant Grant Thornton LLP.

Joel D. Bertocchi and Joshua G. Vincent, of Hinshaw & Culbertson,

LLP, of Chicago, and Theresa Trzaskoma and Adam Hollander, of New

York, New York, and Christopher Wimmer, of San Francisco, California,

all of Brune & Richard, LLP, for appellant David Parse.

J. Timothy Eaton and Jonathan B. Amarilio, of Shefsky & Froelich Ltd.,

of Chicago, and Allan N. Taffet, Kirk L. Brett and Keith Blackman, of

Duval & Stachenfeld LLP, of New York, New York, for appellants

Deutsche Bank AG and Deutsche Bank Securities, Inc.

James D. Green, of Thomas, Mamer & Haughey, LLP, of Champaign,

David R. Deary, J. Dylan Snapp and Carol E. Farquhar, of Loewinsohn

Flegle Deary, LLP, of Dallas, Texas, and David C. Frederick, Brendan

J. Crimmins and Emily T.P. Rosen, of Kellogg, Huber, Hansen, Todd,

Evans & Figel, P.L.L.C., of Washington, D.C., for appellees.

Justices JUSTICE GARMAN delivered the judgment of the court, with opinion.

Justices Freeman, Thomas, Karmeier, and Burke concurred in the

judgment and opinion.

Justice Theis concurred in part and dissented in part, with opinion, joined

by Chief Justice Kilbride.

OPINION

¶1 On July 6, 2009, plaintiffs Shahid R. Khan, his wife, Ann C. Khan, and various of their

business entities filed a multicount complaint in the circuit court of Champaign County

against defendants for losses incurred in connection with a series of investment strategies

entered into in 1999 and 2000, a primary purpose of which was to create artificial tax losses

for plaintiffs. Instead, the Internal Revenue Service (IRS) disallowed the resulting tax losses

and determined that plaintiffs owed back taxes, penalties, and interest. Pertinent to this

consolidated appeal, defendants Deutsche Bank AG, Deutsche Bank Securities, Inc., David

Parse, and Grant Thornton filed motions to dismiss pursuant to sections 2-615 and 2-619 of

the Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619 (West 2008)). The section 2-

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619 motions alleged that plaintiffs’ action was time-barred. The trial court granted the

motions and entered an order under Supreme Court Rule 304(a), finding no just reason to

delay enforcement or appeal of its rulings. Ill. S. Ct. R. 304(a) (eff. Feb. 26, 2010). The

appellate court reversed and remanded. 408 Ill. App. 3d 564. This court granted defendants’

petitions for leave to appeal (Ill. S. Ct. R. 315 (eff. Feb. 26, 2010)) and consolidated the

cases for review.

¶2 BACKGROUND

¶3 Plaintiffs’ 11-count complaint sought damages for breach of fiduciary duty,

negligence/professional malpractice, negligent misrepresentation, disgorgement, rescission,

declaratory judgment, breach of the duty of good faith and fair dealing, fraud, violations of

the Illinois Consumer Fraud and Deceptive Business Practices Act, breach of contract, and

civil conspiracy. Plaintiffs alleged that defendants, pursuant to a common scheme, advised

plaintiffs to undertake certain investment strategies, referred to as the 1999 Digital Options

Strategy and the 2000 COINS Strategy. According to plaintiffs, defendants advised them that

the investment strategies could yield a substantial profit and also legally minimize plaintiffs’

federal and state income tax liability. Plaintiffs alleged that defendants knew or should have

known that the investment strategies would not yield such profits or tax benefits because

defendants knew that the IRS was investigating the same or substantially similar transactions

and had concluded that the transactions were illegal tax shelters. Defendants did not inform

plaintiffs of these facts; rather, plaintiffs alleged, defendants’ primary motive in pitching

their scheme was to exact significant fees and commissions from plaintiffs. Plaintiffs further

alleged that they were unknowledgeable and unsophisticated concerning tax laws and tax-

advantaged investment strategies and that they relied on their trusted legal, accounting, and

tax advisors for comprehensive legal, accounting, tax, and investment advice.

¶4 Following is a brief summary of the factual allegations of plaintiffs’ complaint. A fuller

statement of the facts is contained in the appellate court opinion.

¶5 The 1999 Digital Options Strategy

¶6 In 1999, plaintiff Shahid Khan was involved in negotiations to purchase a Canadian

company owned by Japanese investors. The investors requested that Khan pay them the sale

proceeds in Japanese yen. As Khan had no experience with foreign currency, he sought a

referral to any potential advisors with foreign currency trading experience. He was referred

to Paul Shanbrom, a tax partner at BDO Seidman (BDO). At a meeting, Shanbrom suggested

that Khan invest in the 1999 Digital Options Strategy. Shanbrom advised Khan that BDO’s

tax professionals had devised tax-advantaged investment plans that would provide an above-

average rate of return and minimize tax obligations and that the 1999 Digital Options

Strategy was completely legal. Shanbrom recommended defendants David Parse and

Deutsche Bank to execute the options, representing that Parse and Deutsche Bank had

special expertise in foreign currency investments. He also told Khan that he would receive

a legal opinion from an independent law firm that would confirm the propriety of the 1999

Digital Options Strategy, protect Khan in the event of an IRS audit, and prevent the IRS

from assessing plaintiffs with penalties in the unlikely event of an audit. Shanbrom

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recommended the law firm of Jenkens & Gilchrist to provide this opinion. Shanbrom set up

a conference call in which he, Khan, and Parse discussed foreign currency trading. During

the call, Shanbrom and Parse reiterated what Shanbrom had earlier told Khan about the

legality of the 1999 Digital Options Strategy. Neither Shanbrom nor Parse informed Khan

that the foreign currency digital options were simply private bets with Deutsche Bank as to

where the underlying foreign currencies would be on a particular date and time and that

Deutsche Bank controlled the outcome. Plaintiffs alleged that, unbeknownst to them,

Deutsche Bank was able to control the outcome of the options because the contract with

plaintiffs gave Deutsche Bank the power to choose the particular spot rate it wished to use

on the designated date and time. According to plaintiffs, Deutsche Bank designed the options

so that they would expire “out of the money” and be rendered worthless. Thus, plaintiffs lost

the $350,000 premium they paid to Deutsche Bank, which plaintiffs alleged was defendants’

plan all along. Based upon the representations of Shanbrom and Parse, Khan decided to

invest in the 1999 Digital Options Strategy. To that end and in accordance with defendants’

instructions, Khan formed various legal entities to carry out the investment strategy.

¶7 Plaintiffs alleged that defendants made material misrepresentations and omissions on

which plaintiffs relied to their detriment and that defendants intentionally deceived plaintiffs

for the purpose of persuading them to invest in the 1999 Digital Options Strategy.

¶8 We quote below the appellate court’s explanation of how the 1999 Digital Options

Strategy worked:

“The Khans entered into a private contract with Deutsche Bank whereby the Khans,

through SRK Wilshire Investments (Wilshire Investments), bought from Deutsche

Bank a long option on foreign currency and sold to Deutsche Bank a short option.

Thus, there came into existence an opposing pair of options, one long and the other

short. These options were designed to cancel each other out. The strike prices of the

two options were only a fraction of a penny apart, and the premium that the Khans

paid Deutsche Bank for the long option, though large, was almost entirely offset by

the premium Deutsche Bank agreed to pay the Khans for the short option (almost but

not quite: the Khans paid a net premium to Deutsche Bank of $350,000, the

difference between the $35 million that the Khans paid for the long option and the

$34,650,000 that Deutsche Bank agreed to pay them for the short option). Because

the strike prices of the opposing options were so close together and because

Deutsche Bank, as the calculation agent, had the right to select the applicable spot

rate from a range of currency rates, it was a virtual certainty that the transaction

would be close to a wash—Deutsche Bank would see to that.

So, pursuant to this scheme that was calculated to be a wash on the investment

side (and, as we will explain, a loss on the tax side), the Khans formed the necessary

business entities and transferred assets between them, all under the guidance of

BDO. On November 17, 1999, the Khans formed Wilshire Investments and SRK

Wilshire Partners (Wilshire Partners). On November 24, 1999, through Wilshire

Investments, the Khans bought and sold the opposing options, which had expiration

dates of December 23, 1999. On November 26, 1999, Wilshire Investments

contributed its interest in the as-of-yet unexpired options to Wilshire Partners as a

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capital contribution. On December 10, 1999, Wilshire Partners purchased a quantity

of Canadian dollars as an investment. On December 23, 1999, both the long option

and the short option terminated ‘out of the money’: the options became worthless,

based on the spot rate that Deutsche Bank chose. Of course, both the Khans and

Deutsche Bank got to keep the premiums they had paid each other, but Deutsche

Bank’s premium was $350,000 greater than the premium it had paid to the Khans (or

Wilshire Investments). On December 27, 1999, the Khans contributed their interest

in Wilshire Partners to Wilshire Investments, causing the dissolution and liquidation

of Wilshire Partners. As a distribution in liquidation of Wilshire Partners, all of the

investments in foreign currency were distributed to Wilshire Investments.

Consequently, for tax purposes, the Khans’ interest in Wilshire Investments had

a basis equal to the amount they had paid to Deutsche Bank for the long option, but

that amount supposedly was not offset as a result of the assumption by Wilshire

Investments of the Khans’ obligation to Deutsche Bank on the short option, perhaps

on the theory that the short option was only a contingent liability. [Citation.] In other

words, the long option counted for purposes of the basis the Khans had in Wilshire

Investments, but the short option, which greatly reduced the economic significance

of the long option, supposedly did not count. Upon the disposition of the Khans’

partnership interest in Wilshire Investments, the expensive long option had expired

‘out of the money’ and had lost all its value, so the Khans claimed a tax loss equal

to the premium they had paid for the long option, even though (because of the

offsetting short option) they had not really incurred an economic loss in that

amount.” 408 Ill. App. 3d at 571-72.

¶9 The 2000 COINS Strategy

¶ 10 Plaintiffs alleged that in June 2000, aware of Khan’s displeasure at losing money on the

1999 Digital Options Strategy, Shanbrom told Khan of another BDO investment strategy that

Shanbrom claimed had been designed to provide an even better chance at making a profit

than the 1999 Digital Options Strategy and, at the same time, provide clients with the same

positive tax benefits found in the 1999 Digital Options Strategy. The same procedure was

followed for the 2000 COINS Strategy as had been implemented on the 1999 Digital Options

Strategy. Jenkens & Gilchrist would issue an opinion letter confirming the legality of the tax

advantages of the 2000 COINS Strategy. Shanbrom again referred Khan to David Parse and

Deutsche Bank to implement the plan. Khan had telephone conversations with Parse and a

representative of Jenkens, who assured him of the legality of the 2000 COINS Strategy and

that the foreign currency digital options were designed in a way to provide Khan with a good

chance of making a profit while also legally reducing his taxes. Plaintiffs alleged that the

purpose of the promotion by defendants of the 2000 COINS Strategy was to generate large

fees from plaintiffs. Based upon the advice and representations of defendants, Khan decided

to engage in the 2000 COINS Strategy. The 2000 COINS Strategy was a variation on the

1999 Digital Options Strategy. Again, we quote the appellate court’s explanation of how the

2000 COINS Strategy worked:

“On September 29, 2000, using Deutsche Bank as the counterparty, Wilshire

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Investments bought and sold offsetting pairs of options tied to foreign-currency

exchange rates during specified periods in the future, with extremely close strike

prices and a spot rate to be chosen by Deutsche Bank in its sole discretion. The cost

of the long option, though large, was mostly (but not entirely) offset by the premium

Wilshire received on the sale of the short option. On October 18, 2000, pursuant to

BDO’s instructions, Wilshire Investments made a capital contribution of these option

positions to a partnership formed specifically for purposes of the 2000 COINS

Strategy, Thermosphere FX Partners, LLC (Thermosphere). Supposedly, the long

option counted toward the basis, without any offset by the short option. On

December 6 and 11, 2000, the strike prices on the opposing options were met, with

the result that the gain on one option was, roughly speaking, matched by the loss on

the other option. The options now were worthless, requiring an adjustment in

plaintiffs’ basis in Thermosphere. On December 15, 2000, Thermosphere purchased

foreign currency. Plaintiffs requested to be redeemed out of Thermosphere, and on

December 18, 2000, plaintiffs’ entire capital balance was redeemed, and a portion

of the foreign currency that Thermosphere had purchased was distributed to them.

On December 27, 2000, plaintiffs sold the foreign currency and subsequently

claimed an ordinary loss.” 408 Ill. App. 3d at 574.

¶ 11 Plaintiffs alleged in their complaint that defendants failed to disclose to Khan that

Deutsche Bank retained virtually unlimited discretion to determine whether the investments

would pay out and, therefore, could ensure that they would not pay out. Plaintiffs also

alleged that defendants failed to disclose that the investments had no reasonable possibility

of a profit in excess of the substantial fees plaintiffs paid to Deutsche Bank.

¶ 12 In December 1999, the IRS issued Notice 1999-59, entitled “Tax Avoidance Using

Distribution of Encumbered Property.” Plaintiffs alleged that this notice advised taxpayers

that transactions wholly lacking in economic substance for the purpose of generating tax

losses were not allowable for federal income tax purposes. Plaintiffs alleged that based upon

this notice, defendants knew or should have known that the IRS would conclude that the

purported losses from the 1999 Digital Options Strategy and the 2000 COINS Strategy were

improper and not allowable for tax purposes. Nonetheless, defendants intentionally failed

to disclose this information to plaintiffs. In August 2000, the IRS issued Notice 2000-44,

entitled “Tax Avoidance Using Artificially High Basis.” According to plaintiffs, this notice

described transactions similar to the 1999 Digital Options Strategy and the 2000 COINS

Strategy and indicated that any losses from such transactions were not allowable as

deductions for federal income tax purposes. Plaintiffs alleged that despite the clear import

of these IRS notices, defendants failed to advise plaintiffs that the purported losses arising

from the 1999 Digital Options Strategy and the 2000 COINS Strategy were not allowable

for tax purposes and that plaintiffs would be exposed to substantial penalties if they claimed

the losses on their tax returns. Instead, defendants improperly represented to plaintiffs that

they did not have to disclose the 1999 Digital Options Strategy on their 1999 federal tax

returns. In fact, plaintiffs alleged, defendants had failed to register either the 1999 Digital

Options Strategy or the 2000 COINS Strategy as tax shelters with the IRS, despite the fact

that such registration was required. In addition, the opinion letters issued by Jenkens &

Gilchrist verifying the legitimacy of the purported losses generated by the 1999 Digital

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Options Strategy and the 2000 COINS Strategy specifically advised plaintiffs that the

analysis used by the IRS in Notice 1999-59 was inapplicable to plaintiffs. Plaintiffs alleged

that, based on defendants’ advice, they filed their 1999 and 2000 tax returns and included

the purported losses from the investment strategies.

¶ 13 Plaintiffs alleged that in late 2001 and early 2002, the IRS offered the tax amnesty

program, whereby taxpayers who disclosed their involvement in transactions such as the

1999 Digital Options Strategy and the 2000 COINS Strategy could avoid penalties without

conceding liability for back taxes or interest. Defendants advised plaintiffs not to participate

in the amnesty program. Plaintiffs alleged that the failure to advise them to participate in the

program resulted in plaintiffs being assessed substantial penalties and interest that would

have been waived had they participated in the amnesty program.

¶ 14 The trial court granted the section 2-619 motions to dismiss filed by Deutsche Bank,

Parse, and defendant Grant Thornton, an accounting firm that had prepared Thermosphere’s

tax returns. The court found that plaintiffs suffered injury in 1999 through 2001 when they

paid fees to Deutsche Bank and paid for the opinion letters from Jenkens & Gilchrist. The

court noted that plaintiffs had engaged trial counsel in May 2003, who retained an

independent accounting firm to assist with the pending IRS audits. The court found that due

diligence would have discovered the IRS notices referred to above, which would have put

plaintiffs on notice that the tax shelters were illegal. The trial court also granted defendants’

section 2-615 motions to dismiss plaintiffs’ claim for breach of fiduciary duty, finding that

plaintiffs had failed to adequately plead a breach of fiduciary duty and that, in any event,

they had disclaimed the existence of such a duty in the written transaction confirmations

signed after the trades were made. The trial court relied on an affidavit and the transaction

confirmations that were attached to the section 2-615 motions to dismiss. The trial court also

granted the motions as to plaintiffs’ claim for negligent misrepresentation based upon its

finding that plaintiffs had failed to plead the existence of a fiduciary relationship.

¶ 15 The appellate court reversed and remanded. As to the statute of limitations issue, the

court found that the limitations period does not begin to run until the IRS makes a formal

assessment of the taxpayer’s tax liability or the taxpayer agrees with the IRS to pay

additional taxes, penalties, or interest. 408 Ill. App. 3d at 602. On the breach of fiduciary

duty issue, the appellate court acknowledged the affidavit and contractual documents

containing the disclaimers that were attached to the section 2-615 motions to dismiss, but

it found that a preagency fiduciary duty existed as a matter of law between the parties based

upon this court’s decision in Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33 (1994), and

that the contractual disclaimers were voidable due to the Deutsche defendants’ failure to

disclose material facts to Khan concerning the nature of the options transactions and the

nondeductibility of the tax losses. Id. at 593-94. The appellate court also found that plaintiffs

had adequately pleaded a cause of action for negligent misrepresentation. Id. at 595. As to

Grant Thornton, the appellate court concluded that the trial court erred in granting its section

2-619 motion to dismiss. The court found that plaintiffs’ action was timely under the statute

of repose found in the accounting malpractice statute of limitations. Id. at 611.

¶ 16 ANALYSIS

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¶ 17 I. Statute of Limitations—The Deutsche Defendants

¶ 18 A section 2-619 motion to dismiss admits as true all well-pleaded facts in the complaint,

together with all reasonable inferences gleaned from those facts. Wackrow v. Niemi, 231 Ill.

2d 418, 422 (2008). When ruling on a section 2-619 motion to dismiss, a court interprets all

pleadings and supporting documents in the light most favorable to the nonmoving party. Id.

A reviewing court applies de novo review to a trial court’s ruling on the motion. Id.

¶ 19 The parties agree that the five-year statute of limitations contained in section 13-205 of

the Code of Civil Procedure (Code) (735 ILCS 5/13-205 (West 2008)) applies in this case.

That section provides that all civil actions not otherwise provided for “shall be commenced

within 5 years next after the cause of action accrued.” The heart of the parties’ dispute

concerns the date on which the limitations period began to run. Deutsche Bank and David

Parse (hereafter, Deutsche defendants) argue that the statute of limitations in tort actions

begins to run when a plaintiff’s cause of action accrues and that plaintiffs’ cause of action

accrued in 1999 and 2000 when they paid fees to Deutsche Bank for the 1999 Digital

Options Strategy and the 2000 COINS Strategy.

¶ 20 The statute refers to the accrual of the cause of action. A cause of action “accrues” when

facts exist that authorize the bringing of a cause of action. Thus, a tort cause of action

accrues when all its elements are present, i.e., duty, breach, and resulting injury or damage.

Brucker v. Mercola, 227 Ill. 2d 502, 542 (2007). A mechanical application of the statute of

limitations, however, may result in the limitations period expiring before a plaintiff even

knows of his or her cause of action. To ameliorate the potentially harsh results of such an

application, this court has adopted the “discovery rule,” the effect of which is to postpone

the start of the period of limitations until the injured party knows or reasonably should know

of the injury and knows or reasonably should know that the injury was wrongfully caused.

Witherell v. Weimer, 85 Ill. 2d 146, 156 (1981); Nolan v. Johns-Manville Asbestos, 85 Ill.

2d 161, 170-71 (1981). At that point, the burden is on the injured person to inquire further

as to the possible existence of a cause of action. Witherell, 85 Ill. 2d at 156.

¶ 21 This court has noted that the discovery rule formulated by this court:

“is not the same as a rule which states that a cause of action accrues when a person

knows or should know of both the injury and the defendants’ negligent conduct. Not

only is such a standard beyond the comprehension of the ordinary lay person to

recognize, but it assumes a conclusion which must properly await legal

determination. [Citation.] Moreover, if knowledge of negligent conduct were the

standard, a party could wait to bring an action far beyond a reasonable time when

sufficient notice has been received of a possible invasion of one’s legally protected

interests. [Citation.] Also, such a rule would seem contrary to the underlying purpose

of statutes of limitations, which is to ‘require the prosecution of a right of action

within a reasonable time to prevent the loss or impairment of available evidence and

to discourage delay in the bringing of claims.’ [Citations.]

We hold, therefore, that when a party knows or reasonably should know both that

an injury has occurred and that it was wrongfully caused, the statute begins to run

and the party is under an obligation to inquire further to determine whether an

actionable wrong was committed. In that way, an injured person is not held to a

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standard of knowing the inherently unknowable [citation], yet once it reasonably

appears that an injury was wrongfully caused, the party may not slumber on his

rights. The question of when a party knew or reasonably should have known both of

an injury and its wrongful cause is one of fact, unless the facts are undisputed and

only one conclusion may be drawn from them.” Nolan, 85 Ill. 2d at 170-71.

¶ 22 Along these same lines, this court has noted that the term “wrongfully caused” as used

in the discovery rule does not connote knowledge of negligent conduct or knowledge of the

existence of a cause of action. That term must be viewed as a general or generic term and not

as a term of art. Knox College v. Celotex Corp., 88 Ill. 2d 407, 416 (1981). In addition, this

court has “never suggested that plaintiffs must know the full extent of their injuries before

the statute of limitations is triggered. Rather, our cases adhere to the general rule that the

limitations period commences when the plaintiff is injured, rather than when the plaintiff

realizes the consequences of the injury or the full extent of her injuries.” Golla v. General

Motors Corp., 167 Ill. 2d 353, 364 (1995).

¶ 23 The Deutsche defendants argue that plaintiffs’ claim is that they were defrauded into

investing millions of dollars in the investment strategies. To that end, plaintiffs paid

Deutsche Bank over $1 million in fees, which plaintiffs allege was part of the fraud. The

Deutsche defendants argue that the tax-related damages were merely additional

consequences of the alleged wrongdoing and the fact of these later damages does not

postpone the accrual of plaintiffs’ claim. Alternatively, the Deutsche defendants argue that

the limitations period began to run, at the latest, in May 2003, when plaintiffs hired

independent tax counsel, who should have discovered through the exercise of due diligence

the IRS notices advising that artificial losses from tax shelters similar to the ones at issue

here would be disallowed. The appellate court rejected this argument, concluding that until

an assessment or settlement with the IRS, there was no actual harm and hence no accrual of

a cause of action, even if, by May 2003, Khan knew that defendants had given him false

advice.

¶ 24 Plaintiffs disagree that the statute of limitations began to run in 1999 or 2000. They argue

that the Deutsche defendants concealed the fact that plaintiffs would never make a profit on

their investment because they did not inform plaintiffs that Deutsche Bank, as calculation

agent, maintained complete control over the outcome of the transactions. According to

plaintiffs, Deutsche Bank could always pick a spot rate that would ensure that the options

expired “out of the money.” This would enable Deutsche Bank to pocket the spread between

what plaintiffs paid and received from buying and selling the paired options.

¶ 25 Taking as true the well-pleaded facts of plaintiffs’ complaint, they have alleged that the

Deutsche defendants and others entered into a conspiracy to conceal the true nature of the

investment strategies and that they failed to reveal the degree of control Deutsche Bank had

over the outcome of the transactions. A reasonable inference from these allegations is that

plaintiffs did not know and could not reasonably have discovered the wrongful nature of

their injury in 1999 or 2000. The same is true with respect to the purported tax benefits of

the investment strategies. The Deutsche defendants argue that plaintiffs should have been

alerted by IRS notices issued in 1999 and 2000 that any losses generated by the investment

strategies would likely not constitute allowable tax losses. Plaintiffs allege, however, that

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the Deutsche defendants themselves were aware of the IRS notices and, despite knowing that

the alleged tax-reducing investment strategies would likely be disallowed by the IRS,

continued to advise plaintiffs to the contrary. Plaintiffs allege that the Deutsche defendants

used purportedly reputable law firms such as Jenkens & Gilchrist to provide plaintiffs with

purportedly independent legal opinions concerning the tax-related bona fides of the

investment strategies, but that, in fact, the opinions provided to plaintiffs were nothing more

than “fill in the blank” boilerplate opinions and that Jenkens & Gilchrist was a coconspirator

with the Deutsche defendants in the investment schemes. Plaintiffs alleged that the Jenkens

& Gilchrist opinion provided to them for the 1999 Digital Options Strategy affirmatively

stated that the 1999 IRS notice was inapplicable to the transactions at issue. The opinion

provided in connection with the 2000 COINS Strategy stated that the 2000 IRS notice was

“more likely than not legally inapplicable.” Plaintiffs thus alleged that the Deutsche

defendants affirmatively misrepresented both the content and significance of the IRS notices.

¶ 26 Plaintiffs further alleged that in 2001 and 2002, when the IRS announced an amnesty

program for those who had claimed tax losses associated with transactions similar to the

investment strategies, the Deutsche defendants, in furtherance of their conspiracy, advised

plaintiffs not to participate. Plaintiffs alleged the reason for this advice was that one of the

conditions of participation required the taxpayer to disclose to the IRS the identities of the

individuals and entities who were involved in the marketing, sale, or implementation of the

investment strategies, or who received a fee, and that the Deutsche defendants feared

disclosure to the IRS of their involvement in the investment strategies. Taking plaintiffs’

well-pleaded factual allegations as true, together with reasonable inferences therefrom, we

conclude that while a portion of plaintiffs’ injury occurred in 1999 and 2000, they could not

have been expected at that time, given the alleged actions of the Deutsche defendants and

their alleged coconspirators, to discover that their injury was wrongfully caused.

¶ 27 In support of their alternative argument that the statute of limitations began to run, at the

latest, in May 2003, the Deutsche defendants assert that in early 2003, plaintiffs received

notices from the IRS that it would audit their 1999 and 2000 federal income tax returns.

Plaintiffs hired independent tax litigation counsel to represent them in the audit. The

Deutsche defendants argue that plaintiffs’ counsel should have discovered the existence of

the IRS notices concerning the illegal tax shelters in 2003. Plaintiffs respond that because

they alleged that the Deutsche defendants advised them to participate in the investment

strategies and represented that plaintiffs would realize substantial tax benefits, plaintiffs’

claims depend on the ability to establish damages in the form of additional tax liability.

Thus, according to plaintiffs, the earliest that they suffered actual harm was when they

received a notice of deficiency from the IRS in 2008.

¶ 28 The appellate court held that the statute of limitations did not begin to run in this case

until the IRS made a deficiency assessment against plaintiffs or when plaintiffs settled their

tax dispute with the IRS, whichever first occurred. In doing so, the appellate court relied on

Federated Industries, Inc. v. Reisin, 402 Ill. App. 3d 23 (2010). Federated involved a lawsuit

by the plaintiffs against their accountants. The plaintiffs alleged that the defendants provided

negligent accounting services in 2002 and 2003 that required the plaintiffs to pay additional

taxes and penalties. The plaintiffs entered into a settlement with the IRS. They returned their

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formal written acceptance of the IRS’s proposal along with their check for the amount of

taxes in 2006. The plaintiffs filed suit in May 2008. The defendants filed a motion to dismiss

on the ground that the plaintiffs’ action was filed beyond the statute of limitations for

accounting malpractice actions. The trial court dismissed the action and the plaintiffs

appealed. Under the applicable statute of limitations, an action was required to be filed

within two years from the time the plaintiffs knew or should reasonably have known of the

alleged act or omission. The statute further provided that in no event shall an action be

brought more than five years after the date on which the alleged injurious act or omission

occurred. Id. at 25-28.

¶ 29 On appeal, the defendants argued that the statute of limitations should begin to run when

the plaintiffs were aware of some injury and that this event occurred when plaintiffs

consented to the IRS’s proposed tax adjustments in December 2005, more than two years

before they filed their lawsuit. The appellate court reviewed IRS procedures for examining

tax returns and assessing deficiencies. The court noted that the final step in the process is the

assessment of a deficiency, either via the taxpayer’s consent to a deficiency assessment or

the receipt of a final deficiency notice. At that point, the matter is final as to the IRS and

subject to legal appeal in federal tax court. The appellate court noted that courts in some

jurisdictions hold that the statute of limitations begins to run upon an indication from the IRS

of a disagreement with the taxpayer’s return, while other courts have held that the limitations

period does not begin to run until the issuance of the statutory notice of deficiency. Id. at 31-

32. In resolving the statute of limitations question, the appellate court relied on a California

case, International Engine Parts, Inc. v. Feddersen & Co., 888 P.2d 1279 (Cal. 1995).

¶ 30 In Feddersen, the IRS commenced an audit of the plaintiffs’ corporate income tax

returns. Two years into the audit, the plaintiffs were advised that certain adverse tax

consequences would be forthcoming. As a consequence, the plaintiffs withdrew their

settlement offer in unrelated litigation and their bank reduced their line of credit because of

the plaintiffs’ potential additional tax liability. The IRS assessed the tax deficiency and the

plaintiffs filed suit two years later. The trial court dismissed the case on statute of limitations

grounds and the appellate court affirmed. The California Supreme Court reversed, holding

that although the defendants’ alleged negligence may have been discovered during the audit,

the potential liability could not amount to actual harm until the date of the deficiency

assessment or finality of the audit process. While the withdrawal of the settlement offer and

the reduction of the plaintiffs’ line of credit may represent “palpable harm” caused by the

negligence of the defendants, they are based on a tentative assessment of potential tax

liability only. This does not amount to actual harm until the date of the deficiency tax

assessment or finality of the audit process. The Feddersen court noted that its rule

“both conserves judicial resources and avoids forcing the client to sue the allegedly

negligent accountant for malpractice while the audit is pending. It also avoids

requiring the client to allege facts in the negligence action that could be used against

him or her in the audit, without first allowing the accountant to correct the error (or

mitigate the consequences thereof) during the audit process.” Feddersen, 888 P.2d

at 1287.

¶ 31 The appellate court in Federated noted that sound policy reasons supported the

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Feddersen approach, including creating a bright-line rule, judicial economy, and

preservation of the accountant-client relationship. As the appellate court noted here,

however, Federated did not adopt Feddersen’s determination that the trigger for the running

of the statute of limitations is the assessment of a deficiency by the IRS. Rather, Federated

held that the limitations period begins to run when the IRS issues a notice of deficiency or

when the taxpayer agrees with the IRS’s proposed adjustments. Federated, 402 Ill. App. 3d

at 36.

¶ 32 The appellate court in the instant case adopted the Feddersen approach, concluding that

for purposes of an accounting malpractice case involving increased tax liability, the taxpayer

suffers actual harm upon the earliest of two events: (1) the IRS makes a deficiency

assessment or (2) the taxpayer agrees with the IRS to pay additional taxes, penalties, or

interest for which the taxpayer would not have been liable but for the accountant’s

negligence. 408 Ill. App. 3d at 602.

¶ 33 The Deutsche defendants argue that the policy reasons underlying the Federated and

Feddersen decisions are meaningless in the intentional fraud context, noting that

justifications such as preserving the accountant-client relationship and encouraging clients

to seek assistance from their accountants in sorting out their tax difficulties do not apply

where the client has alleged that a party to a transaction committed intentional fraud at the

time of the transaction. In addition, the Deutsche defendants note that plaintiffs did not

contact Deutsche Bank at any point after the 2000 COINS Strategy was completed.

¶ 34 While it may be true that not all of the policy reasons identified by Federated and

Feddersen would apply to this case because the Deutsche defendants were not acting as

accountants, we believe the proper focus should be on the nature of the harm allegedly

caused, not on the status of the parties. Here, although plaintiffs alleged that they suffered

injury by paying fees to Deutsche Bank, they also alleged that the major benefit promised

to them by the Deutsche defendants and their alleged coconspirators in persuading them to

participate in the tax-reducing investment strategies was that they would be able to deduct

losses on their income tax returns regardless of whether they made any profit on the

investment strategy transactions. The factual allegations of the complaint make clear that the

essence of the investment strategies was to provide plaintiffs with a tax benefit, not to make

a profit. In addition, we note that, in its motion to dismiss in the trial court, Deutsche Bank

itself emphasized the fact that plaintiffs “implemented a series of tax shelters (three in as

many years) to avoid tax liabilities in 1999, 2000 and 2001.” Deutsche Bank alleged that

“Shahid Khan made calculated, informed decisions to execute transactions in the hope that

by doing so, he might be able to shelter huge amounts of income.” Thus, Deutsche Bank

recognized that the main purpose of engaging in the investment strategies was to shelter the

Khans’ income from taxation. To this end, the Deutsche defendants arranged for a legal

opinion from Jenkens & Gilchrist purporting to confirm to plaintiffs that the tax-reducing

investment strategies were legitimate and would allow plaintiffs to claim losses on their tax

returns. Plaintiffs alleged that in furtherance of the fraudulent scheme, they were advised not

to participate in the IRS amnesty programs and were assured that the investment strategies

were not the kinds of tax shelters described by the IRS as lacking in economic substance.

Thus, it is clear from the factual allegations of plaintiffs’ complaint that the primary benefit

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plaintiffs sought from the investment strategies was the purported tax benefits. That

defendants were not professional accountants is not determinative of the analysis to be used

here.

¶ 35 Deutsche Bank argues that the Federated decision conflicts with the appellate court’s

decision in SK Partners I, LP v. Metro Consultants, Inc., 408 Ill. App. 3d 127 (2011), an

accounting malpractice case. The plaintiffs there overpaid their taxes due to errors made by

the defendant accountants. The IRS conducted an audit and issued refund checks. Nearly two

years later, the plaintiffs filed their lawsuit alleging negligence in the preparation of their tax

returns by failing to claim a proper depreciation deduction. The trial court granted the

defendants’ motion to dismiss on statute of limitations grounds. The appellate court

affirmed, holding that actual damages occurred at the moment taxes were overpaid and the

plaintiffs were deprived of funds they were rightfully entitled to retain. The limitations

period began to run when their injury was discovered by another accountant. The court

distinguished Federated because there the plaintiffs suffered no damages until the IRS audit

revealed an underpayment of taxes and a deficiency assessment was made. Id. at 131-32.

According to the Deutsche defendants, SK Partners makes clear that tort claims generally

accrue when the defendant’s alleged breach first causes the plaintiff harm and the statutory

limitations period does not toll merely because the IRS is involved. We discern no conflict

between SK Partners and Federated. SK Partners actually used Federated’s analysis in

determining that actual damages accrued when the taxes were overpaid, although it

acknowledged that the rule in Federated did not readily apply to overpayment of taxes. Id.

at 131.

¶ 36 Deutsche Bank argues that the appellate court’s decision runs counter to the majority of

courts that have considered the issue. It cites primarily federal district cases in which the trial

courts there found the limitations period began to run much earlier in similar situations. At

the outset, we note that cases from the federal trial courts lack significant precedential

weight. See Price v. Philip Morris, Inc., 219 Ill. 2d 182, 263 (2005). Nonetheless, Deutsche

Bank cites Hutton v. Deutsche Bank AG, 541 F. Supp. 2d 1166 (D. Kan. 2008), where the

plaintiff brought a class action against investment advisors for allegedly misrepresenting the

nature of investment strategies as legal tax shelters. The defendants filed motions to dismiss

on statute of limitations grounds. The district court granted the motions. It rejected the

plaintiff’s argument that the statute of limitations had not started to run because he was still

litigating his tax-shelter claim in the court of federal claims. The district court noted that

other courts had found allegations similar to the plaintiff’s sufficient to start the running of

the limitations period, such as fees paid to the defendants, losses incurred in the investment

transactions, and expenses paid to accountants and attorneys to assist in the defense of

audits, as well as taxes and penalties paid. The Hutton court found that the plaintiff’s similar

allegations alleged immediate and definite injury sufficient to commence the limitations

period. Id. at 1172-73.

¶ 37 Deutsche Bank also cites Kottler v. Deutsche Bank AG, 607 F. Supp. 2d 447 (S.D.N.Y.

2009), a case concerning allegedly fraudulent investment schemes similar to Hutton and to

the instant case. The trial court in Kottler held that the statute of limitations began to run

when the IRS audited a prior year’s return relative to an investigation of one of the

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investment strategies after the plaintiff was informed by his accountant that the IRS was

investigating that particular strategy and the plaintiff then disclosed his participation in the

investment strategy. The plaintiff received a notice of deficiency detailing the several million

dollars the IRS claimed the plaintiff owed on his 1998 return. The trial court rejected the

plaintiff’s argument that he did not know of the fraud until a Senate subcommittee held

hearings and issued its final report on this and other investment schemes. Id. at 460-61.

¶ 38 In Moorehead v. Deutsche Bank AG, 2011 WL 4496221 (N.D. Ill. 2011), another case

cited by the Deutsche defendants that is similar in many respects to the instant case, the

plaintiffs were offered the opportunity to invest in tax-reducing strategies called OPIS and

BLIPS. The sales pitch made by the defendants to the plaintiffs were similar to the ones

made here. The IRS published a series of public notices stating that losses from the OPIS and

BLIPS strategies were not allowable and that the transactions were fraudulent and illegal.

The IRS also issued formal settlement offers for both the OPIS and BLIPS strategies,

offering to forgo penalties and allow affected taxpayers to recognize some amount of their

capital losses. The IRS audited the plaintiffs’ returns and issued a notice of deficiency.

Nearly two years later, the plaintiffs filed suit. The defendants filed a motion to dismiss on

statute of limitations grounds. The district court applied the law of Texas to the limitations

issue. The court held that under Texas law, the plaintiffs suffered legal injury when the faulty

professional advice was given. However, the discovery rule postponed accrual until the

plaintiff knows or in the exercise of ordinary diligence should know of the wrongful act and

resulting injury. The district court rejected the plaintiffs’ argument that they suffered no

cognizable injury until the IRS assessed back taxes and penalties against them. The court

noted that the plaintiffs alleged in their complaint that the IRS was auditing their tax returns

and that despite this knowledge and the knowledge of the IRS settlement offers on the OPIS

and BLIPS strategies, the defendants failed to advise the plaintiffs to enter into the

settlement offers. The district court regarded these allegations as admissions by the plaintiffs

that the notices of audit they received related specifically to the investment strategies. This

fact, together with the IRS notices and settlement offers was sufficient to put the plaintiffs

on notice of a claim for fraudulent tax advice and the statute of limitations began to run at

that point. Id. at * 6-8.

¶ 39 In Seippel v. Jenkens & Gilchrist, P.C., 341 F. Supp. 2d 363 (S.D.N.Y. 2004), a case

similar to the case at bar, the plaintiffs alleged they were defrauded into investing in illegal

tax shelters. The defendants sought dismissal of the complaint on statute of limitations

grounds. Deutsche Bank, one of the defendants, argued that the plaintiffs’ claims were not

ripe because there had been no final resolution of their dispute with the IRS and state taxing

authorities. The district court rejected that argument, citing losses incurred by the plaintiffs,

including fees paid to the defendants, expenses incurred in defending tax audits, and tax

penalties already assessed and paid. Id. at 371.

¶ 40 We do not find these cases to be persuasive. In Hutton, the taxpayer had already paid

taxes and penalties related to the illegal tax shelter, as well as other expenses to defend

against the audits. In Kottler, the IRS had audited a prior year’s tax return due to an

investigation of one of the investment strategies the taxpayer had entered into and his

accountant had informed him that the IRS was investigating that strategy. The taxpayer then

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elected to disclose his participation to the IRS. In addition, the taxpayer had received a

notice of deficiency related to the illegal tax shelter, yet he did not file his complaint until

much later. In Seippel, tax penalties had already been assessed against the plaintiffs and paid

by them before they filed their complaint. Moorehead is more supportive of the Deutsche

defendants’ position than the other cases they cite. We have held, however, that the

limitations period began to run in this case when plaintiffs received a notice of deficiency.

Thus, we disagree with Moorehead’s analysis.

¶ 41 Defendant David Parse separately argues that fraud is the gravamen of plaintiffs’

complaint based upon representations made to them by Parse and others that the options

transactions were legitimate investments with a real expectation of profit when, in fact, the

opposite was true. He asserts that plaintiffs were on notice of the alleged fraud in 2003 and

that is when the limitations period began to run. However, as plaintiffs argue in their brief,

the discovery rule does not apply before an actionable injury has occurred.

“The discovery rule can delay the commencement of the limitations period where an

injury has already occurred but has not been discovered. [Citation.] However, the

period of limitations does not commence in the first instance until an injury is

incurred. [Citation.] Where no injury has yet occurred, the discovery rule is

irrelevant because there is nothing to discover.” MC Baldwin Financial Co. v.

DiMaggio, Rosario & Veraja, LLC, 364 Ill. App. 3d 6, 22 (2006).

¶ 42 As of May 2003, no injury had occurred. Plaintiffs had filed their tax returns and claimed

tax losses based on the options transactions. At that point, they had received the promised

tax benefits. Further, plaintiffs alleged in their complaint that they had been assured by some

of the alleged coconspirators that the IRS notices did not apply to them. Parse is alleged to

be one of the coconspirators.

¶ 43 Parse further argues that the limitations period begins to run when the plaintiff has a

remedy. He notes that plaintiffs included in their complaint a count seeking rescission and

a count seeking declaratory judgment that the contracts entered into in connection with the

investment transactions are unenforceable due to a lack of consideration. Parse’s view is that

these remedies were available to plaintiffs in May 2003 when, according to Parse, plaintiffs

knew that the IRS had declared similar options transactions a sham. We reject this argument.

The main purpose of entering into the options transactions was to provide plaintiffs with a

tax benefit in the form of a legal tax shelter. While plaintiffs initially received the benefit of

claiming tax losses on their tax returns, the IRS subsequently disallowed the losses and

proposed to assess plaintiffs with back taxes, penalties, and interest. Once the tax returns

were filed and the losses claimed, rescission and a declaratory judgment would not have

provided plaintiffs with any real remedy.

¶ 44 It remains to determine whether the statute of limitations begins to run when the IRS

issues a notice of deficiency or when the IRS makes an assessment. The appellate court here

held that the statute of limitations begins to run at the earlier of (1) an assessment by the IRS

or (2) the taxpayer’s settlement agreement with the IRS. The court found that it was at this

point that the taxpayer suffers actual harm. The appellate court in Federated purported to

follow the Feddersen decision from California; however, Feddersen held that the statute

begins to run when an assessment is made by the IRS, while Federated chose the notice of

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deficiency as the earliest event that would trigger the running of the limitations period.

Federated noted that a majority of jurisdictions in decisions preceding Feddersen had held

that the limitations period commences when there is a formal assessment of a deficiency by

the taxing authority. Federated, 402 Ill. App. 3d at 35.

¶ 45 We conclude that the limitations period begins to run when the IRS issues a notice of

deficiency to the taxpayer. The notice of deficiency “describe[s] the basis for, and

identif[ies] the amounts (if any) of, the tax due, interest, additional amounts, additions to the

tax, and assessable penalties included in such notice.” 26 U.S.C. § 7522(a) (2006). Receipt

of the notice of deficiency puts the taxpayer on notice that he has suffered an injury and that

the injury was wrongfully caused. The notice of deficiency is not a final determination of the

taxpayer’s damages; the formal assessment made by the IRS constitutes the final

determination of the taxpayer’s liability. It is at this latter point that the taxpayer is fully

informed as to the full extent of his injuries. As we have stated, however, the discovery rule

applies in this case. Under that rule, a plaintiff may not sit on his rights, but must investigate

further once alerted to an injury that may have been caused by wrongful conduct. As

previously noted, this court has “never suggested that plaintiffs must know the full extent

of their injuries before the statute of limitations is triggered. Rather, our cases adhere to the

general rule that the limitations period commences when the plaintiff is injured, rather than

when the plaintiff realizes the consequences of the injury or the full extent of her injuries.”

Golla, 167 Ill. 2d at 364. To permit plaintiffs to wait until the full extent of their injuries are

known would read the discovery rule out of this case. Starting the limitations period at the

issuance of the notice of deficiency gives plaintiffs a five-year window within which to file

suit. Thus, even if the IRS has not yet issued a formal deficiency assessment against

plaintiffs in this case, their action is timely.

¶ 46 II. Breach of Fiduciary Duty

¶ 47 The Deutsche defendants filed a section 2-615 motion seeking to dismiss count I of

plaintiffs’ complaint, alleging breach of fiduciary duty. The trial court granted the motion.

A section 2-615 motion to dismiss challenges the legal sufficiency of the complaint based

upon defects apparent on its face. Accordingly, we review de novo the trial court’s order

granting defendants’ motion. Marshall v. Burger King Corp., 222 Ill. 2d 422, 429 (2006).

In reviewing the sufficiency of a complaint, we accept as true all well-pleaded facts in the

complaint and all reasonable inferences that may be drawn therefrom. In addition, we

construe the allegations of the complaint in the light most favorable to the plaintiff. Only

those facts apparent from the face of the pleadings, matters of which the court can take

judicial notice, and judicial admissions in the record may be considered. K. Miller

Construction Co. v. McGinnis, 238 Ill. 2d 284, 291 (2010). A cause of action should not be

dismissed unless it is clearly apparent that no set of facts can be proved that would entitle

a plaintiff to recover. Marshall, 222 Ill. 2d at 429.

¶ 48 In count I of their complaint, plaintiffs alleged that they placed their trust and confidence

in defendants and that defendants had influence and superiority over plaintiffs; thus

defendants owed plaintiffs the duties of honesty, loyalty, and care. In addition, plaintiffs

incorporated their numerous factual allegations into count I. They alleged that defendants

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breached their fiduciary duty to plaintiffs by (1) advising plaintiffs to engage in the

investment strategies; (2) failing to advise plaintiffs that the legal opinions were not

independent and, as a result, could not provide the required legal support or penalty

protection; (3) advising plaintiffs that they could make a profit on the 1999 Digital Options

Strategy contracts and the options; (4) orchestrating the implementation of the investment

strategies; (5) providing the purported required legal opinion letters verifying that the

investment strategies were completely legal; (6) failing to advise plaintiffs that certain

defendants and/or other participants had undisclosed fee-splitting or sharing arrangements;

and (7) advising plaintiffs to sign and file their tax returns in reliance on defendants’ advice,

representations, recommendations, instructions, and opinions, which defendants knew or

should have known the IRS would conclude were improper and illegal, for the purpose of

generating huge fees for defendants.

¶ 49 Initially, we bear in mind that we are not determining whether a fiduciary relationship

actually existed between the Deutsche defendants and plaintiffs. That matter must be left for

further proceedings on remand. We determine only whether the well-pleaded factual

allegations of the complaint adequately alleged that a fiduciary relationship existed and was

breached by the Deutsche defendants. In making this determination, we are limited to the

factual allegations of the complaint and reasonable inferences drawn therefrom. We may not

consider extraneous matters. As this court stated in Illinois Graphics Co. v. Nickum, 159 Ill.

2d 469 (1994):

“A motion to dismiss under section 2-615 attacks only the legal sufficiency of a

complaint. Such a motion does not raise affirmative factual defenses, but alleges only

defects appearing on the face of the complaint. [Citations.] A section 2-615 motion

is required to point out the defects complained of and must specify the relief sought.

[Citation.] The only matters to be considered in ruling on such a motion are the

allegations of the pleadings themselves.” Id. at 484-85.

¶ 50 Here, the Deutsche defendants filed a combined motion to dismiss the fiduciary duty

count of the complaint on the basis of section 2-615 and to dismiss the entire complaint on

statute of limitations grounds pursuant to section 2-619. In the section 2-615 section of the

motion to dismiss, the Deutsche defendants referred to an affidavit of Michael R. Wanser,

one of the attorneys for Deutsche Bank, which verified the accuracy of exhibits attached to

the motion. Those exhibits included confirmations for the 1999 Digital Options Strategy and

the 2000 COINS Strategy transactions and the account agreements entered into by the

parties. The confirmations contained the following language:

“3. Representations

Each party represents to the other party that it is entering into this Transaction

as principal (and not as agent or in any other capacity, fiduciary or otherwise) and

that

(i) It has sufficient knowledge and experience to be able to evaluate the

appropriateness, merits and risks of entering into this Transaction and is acting in

reliance upon its own judgment or upon professional advice it has obtained

independently of the other party as to the appropriateness, merits and risks of so

doing, including where relevant, upon its own judgment of the correct tax and

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accounting treatment of such Transaction;

(ii) It is not relying upon the views or advice of the other party (including,

without limitation, any marketing materials or model data) with respect to this

Transaction; and

(iii) It acknowledges that, with respect to this Transaction, the other party is

acting solely in the capacity of an arm’s length contractual counterpart and not in the

capacity of financial adviser or fiduciary.”

¶ 51 The Deutsche defendants argued in their motion that the allegations of the complaint

were contradicted by the terms of the contractual documents and that plaintiffs had

disclaimed any reliance on advice from the Deutsche defendants, thereby negating the

existence of a fiduciary relationship. The appellate court noted the impropriety of

considering the contractual documents in connection with the section 2-615 motion to

dismiss. Nonetheless, the court found that plaintiffs had forfeited any argument that the trial

court’s consideration of the affidavit and exhibits was improper by making substantive

arguments, rather than by relying on a procedural objection to consideration of the

documents. 408 Ill. App. 3d at 579-80. We disagree with the appellate court’s conclusion.

¶ 52 The appellate court recognized that the affidavit and exhibits attached to the Deutsche

defendants’ motion to dismiss could not negate the well-pleaded facts of the complaint. The

court further noted that the contractual documents were not attached to plaintiffs’ complaint

and that, even if they were, the documents could only trump the allegations in the complaint

if the complaint were founded on the documents. The court observed that plaintiffs’ claim

for breach of fiduciary duty was not founded upon the contractual documents. Id. at 580. In

support, the appellate court cited this court’s decision in Armstrong v. Guigler, 174 Ill. 2d

281 (1996), where the question before the court was whether the 10-year statute of

limitations for actions on a written contract or the five-year statute of limitations for all civil

actions not otherwise provided for applied to a cause of action for breach of an implied

fiduciary duty. The appellate court in that case had held that the implied duty was created

in a written document and, therefore, the 10-year limitations period applied. This court

reversed, holding that the five-year statute applied. Pertinent to the issue in the instant case,

the court noted that a fiduciary duty is not expressed in a written contract, but is implied in

law. Id. at 287. A breach of an implied fiduciary duty is not an action on a contract simply

because the duty arises by legal implication from the parties’ relationship under a written

agreement. A fiduciary duty is founded upon the substantive principles of agency, contract,

and equity. Id. at 293-94.

¶ 53 Based upon this reasoning, the appellate court concluded that since plaintiffs’ action for

breach of fiduciary duty is not founded on the contractual documents, those documents do

not override the factual allegations of the complaint. Accordingly, the appellate court

declared that it would take all of the well-pleaded facts of the complaint as true even if the

disclaimer in the contractual documents appeared to contradict those factual allegations. 408

Ill. App. 3d at 580-81.

¶ 54 We agree with the appellate court that the contractual documents appended as exhibits

to the motion to dismiss are not properly considered under the standard of review for a

section 2-615 motion to dismiss. We disagree, however, with the appellate court’s

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conclusion that plaintiffs forfeited any argument that the documents were improperly

considered by the trial court. The appellate court acknowledged that plaintiffs argued on

appeal that “notwithstanding Wanser’s affidavit, [the court] should ‘accept as true all well-

pleaded facts in the complaint and all reasonable inferences which can be drawn therefrom’

and that [the court] should ‘interpret the allegations of the complaint in the light most

favorable to the plaintiffs.’ ” Id. at 580. This argument urged the appellate court to apply the

accepted standard of review in evaluating the merits of the Deutsche defendants’ section 2-

615 motion to dismiss. Thus, plaintiffs did in fact argue that consideration of the Wanser

affidavit and the contractual documents was improper under the applicable standard of

review. Any substantive arguments plaintiffs made concerning the content and effect of the

contractual documents can properly be seen not as a concession to the applicability of the

documents but as an argument that was necessary due to the trial court’s consideration of the

contractual documents. Thus, contrary to the appellate court, we find that plaintiffs did not

forfeit their argument that the contractual documents should not be considered.

¶ 55 A further reason not to go beyond the face of the complaint here is that plaintiffs point

out what they perceive to be conflicts between the transaction confirmations and the account

agreements regarding the alleged disclaimer of any fiduciary relationship between the parties

with respect to the options transactions. The account agreements were entered into at the

inception of the parties’ relationship and plaintiffs assert that these agreements contain no

disclaimer of a fiduciary relationship. In contrast, the confirmations were signed following

the completion of the options transactions. Plaintiffs assert that these conflicts illustrate the

difficulties inherent in attempting to definitively resolve the existence of a fiduciary

relationship at the pleading stage, especially where the defendant relies on factual material

outside the pleadings to defeat the complaint’s allegations. Plaintiffs argue that the import

and weight, if any, to be given to the contractual documents should be determined only after

discovery and the development of a proper evidentiary record. In addition to this

consideration, we note that plaintiffs have alleged that the Deutsche defendants fraudulently

misrepresented the nature of the tax-reducing investment strategies in an attempt to induce

plaintiffs to enter into the transactions at issue. To the extent that these allegations, if proven,

would have any effect on the nature of the parties’ relationship, it would be premature to

determine the effect of the disclaimers on plaintiffs’ allegations of the existence of a

fiduciary relationship.

¶ 56 The standard of review on a section 2-615 motion to dismiss clearly limits our review

to the face of the complaint. In contrast, on a motion for summary judgment, courts consider

the pleadings, depositions and admissions on file, together with affidavits, if any. Millennium

Park Joint Venture, LLC v. Houlihan, 241 Ill. 2d 281, 308 (2010). Consideration of the

contractual documents attached to the Deutsche defendants’ motion would essentially

convert their section 2-615 motion to dismiss into a motion for summary judgment. We

decline to take this step. In addition, we agree with plaintiffs’ argument that to consider

matters outside the pleadings would inappropriately resolve issues that are best resolved on

remand with the benefit of a full evidentiary record. For all of these reasons, we decline to

address the effect of the alleged disclaimers in the contractual documents at this stage of the

proceedings. Therefore, we will confine our review to the well-pleaded factual allegations

in plaintiffs’ complaint, together with reasonable inferences to be taken therefrom.

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¶ 57 The Deutsche defendants alleged in the appellate court that New York law applied to the

fiduciary duty issue because the contractual documents attached to Wanser’s affidavit

provided that New York law would apply to the construction of the account agreements and

the transaction confirmations. The appellate court determined that it would apply New York

law “insomuch as this case requires us to interpret and apply exhibits A through C [the

contractual documents] of Wanser’s affidavit.” 408 Ill. App. 3d at 581. We need not address

this question. As we have indicated, the contractual documents are not properly part of our

analysis on the section 2-615 issue. Resolution of the effect of the documents on plaintiffs’

claim for breach of fiduciary duty must await further proceedings in the circuit court.

¶ 58 A fiduciary relationship exists where one party reposes trust and confidence in another,

who thereby gains a resulting influence and a superiority over the subservient party. This is

generally accomplished by establishing facts showing an antecedent relationship that gives

rise to trust and confidence reposed in another. Ray v. Winter, 67 Ill. 2d 296, 304 (1977). The

question is whether plaintiffs have sufficiently alleged facts establishing such a relationship.

¶ 59 Deutsche Bank argues that no fiduciary duty existed in this case. It describes Khan as a

sophisticated businessman and characterizes its relationship with him as an isolated and

adversarial financial transaction made at arm’s length based upon a single telephone call

between Khan and Parse prior to either party agreeing to enter into any relationship or

transaction. The complaint, however, alleges that Khan was unknowledgeable and

unsophisticated concerning tax laws and tax-advantaged investment strategies and that he

relied on the Deutsche defendants for comprehensive legal, accounting, tax, and investment

advice. Plaintiffs further alleged that Khan was persuaded to invest in the tax-reducing

investment strategies after a series of telephone conferences with defendant Parse, not just

a single telephone call, as Deutsche Bank claims. According to plaintiffs, Parse, who was

Deutsche Bank’s employee, assured Khan that (1) the options transactions were actual,

legitimate investments; (2) Deutsche Bank would handle all aspects of the transaction, (3)

Parse was the expert and would make all decisions concerning the digital options

transactions, (4) Deutsche Bank had internal procedures that would determine the right types

of investments to make, (5) the tax-reducing investment strategies would produce legal tax

losses for plaintiffs, and (6) plaintiffs would have a good chance of making a profit on the

investments. The complaint alleged that plaintiffs decided to participate in the tax-reducing

investment strategies based upon the Deutsche defendants’ assurances, and that the Deutsche

defendants knew that plaintiffs reposed “tremendous trust and faith” in them as their tax,

financial, and investment advisors with respect to all aspects of the tax-reducing investment

strategies.

¶ 60 We find that these allegations adequately pleaded that the Deutsche defendants had

superior knowledge and influence over Khan and that he relied on them to give him sound

investment and tax advice. It is undisputed that the Deutsche defendants had complete

control over the handling and the outcome of the transactions. In addition, we note that the

Deutsche defendants do not argue that the factual allegations of the complaint are inadequate

to plead the existence of a fiduciary relationship between them and plaintiffs. Instead, they

take issue with the accuracy of the complaint’s factual allegations and focus their argument

on their view that the transactions at issue here were arm’s-length transactions entered into

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by parties who were on equal footing and that, in any event, any fiduciary relationship was

disclaimed by plaintiffs in the contractual documents. Deutsche Bank places great emphasis

on its claim that there was but a single telephone call between Khan and Parse and that this

is insufficient to establish a fiduciary relationship. However, as we have stated, the

complaint alleges a series of telephone conferences among the parties. We note again that

in reviewing an order granting a section 2-615 motion to dismiss, we must take the well-

pleaded factual allegations of the complaint as true. Napleton v. Village of Hinsdale, 229 Ill.

2d 296, 305 (2008).

¶ 61 The appellate court found that the Deutsche defendants had a preagency fiduciary duty

to Khan that predated the existence of the disclaimers in the transaction confirmations,

pursuant to this court’s decision in Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33

(1994). The Deutsche defendants argue that the appellate court misapplied Martin in finding

that a fiduciary duty arose between the parties as a matter of law. The appellate court found

it necessary to address this issue because of the possible effect of the contractual disclaimers.

However, we have concluded that the contractual documents may not be considered on a

section 2-615 motion to dismiss. Therefore, it is unnecessary for us to discuss Martin or the

question of whether a preagency fiduciary duty existed in this case.

¶ 62 Thus, we conclude that the trial court improperly granted the Deutsche defendants’

section 2-615 motion to dismiss plaintiffs’ claim of breach of fiduciary duty.

¶ 63 III. Negligent Misrepresentation

¶ 64 The trial court determined that no fiduciary relationship existed between the parties and

that this conclusion was sufficient to dismiss plaintiffs’ claim for negligent misrepresentation

against the Deutsche defendants. We have determined that plaintiffs adequately pleaded a

cause of action for breach of fiduciary duty based upon the well-pleaded factual allegations

of the complaint and that the contractual documents that were the basis for the trial court’s

dismissal of the fiduciary duty claims were improperly considered by that court. Thus, the

trial court’s order dismissing the count for negligent misrepresentation on this basis was

erroneous. The appellate court concluded that plaintiffs had adequately pleaded a cause of

action for negligent misrepresentation. Plaintiffs alleged that they suffered pecuniary injury

by relying on false information that the Deutsche defendants negligently or fraudulently gave

them in the course of their business. We note that defendants do not argue that the factual

allegations of negligent misrepresentation are insufficient to state a claim. Thus, they have

forfeited any argument to that effect. Ill. S. Ct. R. 341(h)(7) (eff. July 1, 2008) (“Points not

argued are waived and shall not be raised in the reply brief, in oral argument, or on petition

for rehearing.”). In fact, the Deutsche defendants did not raise any issue regarding plaintiffs’

claim for negligent misrepresentation in their petitions for leave to appeal. For this additional

reason, we find that the Deutsche defendants have forfeited any review of the appellate

court’s findings concerning plaintiffs’ claim for negligent misrepresentation. See Buenz v.

Frontline Transportation Co., 227 Ill. 2d 302, 320-21 (2008).

¶ 65 IV. Grant Thornton, LLP

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¶ 66 Plaintiffs allege in their complaint that Grant Thornton participated in the alleged

conspiracy with BDO Seidman and the Deutsche defendants. Grant Thornton, a public

accounting firm, rendered services to Thermosphere FX by preparing its 2000 federal and

state income tax returns. These tax returns claimed the artificial losses created by the 2000

COINS Strategy investment. These losses then flowed through to the Khans as partners.

Thus, the Khans’ individual returns contained the losses from the 2000 COINS Strategy.

¶ 67 The trial court dismissed plaintiffs’ claims against Grant Thornton on statute of

limitations grounds. The court held that the five-year statute of repose applicable to actions

against public accountants barred those claims.

¶ 68 The statute of limitations that applies to plaintiffs’ claims against Grant Thornton is

contained in section 13-214.2 of the Code (735 ILCS 5/13-214.2 (West 2008)). That statute

provides in relevant part as follows:

“(a) Actions based upon tort, contract or otherwise against any person,

partnership or corporation registered pursuant to the Illinois Public Accounting Act,

as amended, or any of its employees, partners, members, officers or shareholders, for

an act or omission in the performance of professional services shall be commenced

within 2 years from the time the person bringing an action knew or should

reasonably have known of such act or omission.

(b) In no event shall such action be brought more than 5 years after the date on

which occurred the act or omission alleged in such action to have been the cause of

the injury to the person bringing such action against a public accountant. Provided,

however, that in the event that an income tax assessment is made or criminal

prosecution is brought against a person, that person may bring an action against the

public accountant who prepared the tax return within two years from the date of the

assessment or conclusion of the prosecution.” 735 ILCS 5/13-214.2 (West 2008).

¶ 69 The interpretation of a statute is a question of law that this court reviews de novo. People

v. Smith, 236 Ill. 2d 162, 167 (2010). The primary goal in construing a statute is to give

effect to the intention of the legislature. The statute’s language must be given its plain and

ordinary meaning. When statutory terms are left undefined, we presume the legislature

intended the terms to have their popularly understood meaning. Id. at 166-67.

¶ 70 Grant Thornton first argues that plaintiffs’ complaint alleges they suffered an injury

when their investments were made and they paid substantial fees to Deutsche Bank. Grant

Thornton also notes that plaintiffs hired tax counsel in 2003 to represent them in litigation

with the IRS and it argues that the statute of limitations began to run at one of these points.

These are the same arguments made by Deutsche Bank and Parse, which we have previously

rejected. We reject Grant Thornton’s arguments for the same reasons.

¶ 71 Grant Thornton attempts to avoid the application of Federated and Feddersen by citing

two cases that refused to apply Feddersen to an action against an accountant, Apple Valley

Unified School District v. Vavrinek, Trine, Day & Co., 120 Cal. Rptr. 2d 629 (Cal. Ct. App.

2002), and Van Dyke v. Dunker & Aced, 53 Cal. Rptr. 2d 862 (Cal. Ct. App. 1996). Neither

of these cases involved preparation of tax returns and subsequent IRS proceedings. In Apple

Valley, the accountants prepared an audit report that induced the plaintiff school district to

provide state funds to a charter school district that was not eligible for the funds. The school

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district learned of the wrongdoing and hired counsel and a different accountant. More than

two years later, the school district filed suit against the defendant accountant during the

pendency of the state comptroller’s audit, which ultimately determined that the charter

school had received several million dollars in funds to which it was not entitled. The school

district argued that the statute of limitations did not begin to run until the comptroller’s final

report determined the amount of the school district’s liability. The California appellate court

disagreed, holding that the school district first sustained an injury when it learned of the

improper conduct and incurred expenses to investigate the extent of the alleged wrongdoing.

The court found that Feddersen did not apply, noting that subsequent decisions had given

the holding of Feddersen a narrow application limited to the context of negligent preparation

of tax returns. Apple Valley, 120 Cal. Rptr. 2d at 636-38.

¶ 72 Similarly, the Van Dyke court found Feddersen inapplicable. The plaintiffs there made

a charitable contribution of land based on their accountant’s advice that they would receive

a tax deduction for the full value. In reality, they were entitled to a partial deduction, which

they then claimed on their tax return. They filed suit against the accountant after the IRS

determined their final tax liability. The Van Dyke court found Feddersen to be limited to the

negligent preparation of tax returns. The court noted that the plaintiffs suffered an actual

injury before the IRS determined their tax liability when they conveyed the land or when

they paid more taxes than they had expected to pay by receiving only a partial deduction.

Van Dyke, 53 Cal. Rptr. 2d at 868-69. Apple Valley and Van Dyke involve factual situations

that are quite different from the one before us. Grant Thornton’s reliance on these two cases

is misplaced.

¶ 73 Grant Thornton argues in the alternative that even if plaintiffs’ action against it is not

barred by the two-year limitations period contained in section 13-214.2, their action is barred

by the five-year repose period contained in the statute. The preparation of the Thermosphere

returns by Grant Thornton took place in 2001. Thus, the period of repose expired in 2006.

Plaintiffs filed suit in 2009, more than five years after the returns were prepared. Plaintiffs

note the exception to the repose period contained in the statute which provides that in the

event an income tax assessment is made or criminal prosecution is brought against a person,

that person may bring an action against the public accountant who prepared the tax return

within two years from the date of the assessment or conclusion of the prosecution. Grant

Thornton argues that, rather than extending the period of repose, the exception contained in

the statute condenses the repose period. This was the construction put on the exception by

the circuit court and rejected by the appellate court. The latter court found it significant that

the exception provides that the plaintiff “may” bring the action, rather than “shall” bring the

action. According to the appellate court, the word “may” indicates that the plaintiff has

permission to bring the action and such permission would be necessary only if the five-year

repose period had expired. Grant Thornton takes issue with this reasoning, arguing that, here,

the term “may” is synonymous with “shall.” It argues that plaintiffs had knowledge of the

relevant facts giving rise to their action at least six years before they filed their lawsuit. Thus,

according to Grant Thornton, this case does not present the circumstance envisioned by the

statute of a taxpayer being blind sided by an assessment. We note that Grant Thornton cites

no authority for its claim that the legislature intended the exception to the repose period to

apply only in those circumstances.

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¶ 74 We reject Grant Thornton’s reading of the exception in the statute. If “may” is construed

to mean “shall,” there would be no need for the proviso in the first instance. An assessment

fixes the taxpayer’s liability and the amount of the assessment becomes a lien on the

taxpayer’s property. 26 U.S.C. § 6321. Certainly, once an assessment is made, the taxpayer

knows full well that he has been injured and that the injury was wrongfully caused and the

limitations period would begin to run at that point in any event. The only reading that gives

the proviso meaning is that it is a true exception to the repose period and that in the

circumstances envisioned by that exception, the taxpayer has an additional two years beyond

the five-year repose period to bring an action against the accountant from the date of the

assessment or the conclusion of the criminal prosecution.

¶ 75 Grant Thornton further argues that the two-year exception does not apply here in any

event because there has been neither an income tax assessment nor a criminal prosecution.

Grant Thornton asserts that the term “income tax assessment” in the statute refers to a formal

assessment made by the IRS and notes that the record does not indicate that a tax assessment

has been made against any plaintiff. Rather, they have received only a notice of deficiency.

Grant Thornton cites no authority in support of its argument that the phrase “income tax

assessment” refers only to a formal IRS assessment of tax. The phrase is not defined in the

statute. Where a term is undefined, we presume that the legislature intended the term to have

its popularly understood meaning. People v. Maggette, 195 Ill. 2d 336, 349 (2001). We note

that Black’s Law Dictionary provides a definition for “deficiency assessment,” defining that

term as “[a]n assessment by the IRS—after administrative review and tax-court

adjudication—of additional tax owed by a taxpayer who underpaid.” Black’s Law Dictionary

133 (9th ed. 2009). This definition would comport with Grant Thornton’s view; however,

the legislature did not use “deficiency assessment” in the statute.

¶ 76 It is appropriate to employ a dictionary to ascertain the meaning of an otherwise

undefined word or phrase. Landis v. Marc Realty, L.L.C., 235 Ill. 2d 1, 8 (2009). The

dictionary definition of “assessment” relevant to this case is “a specific charge or tax

determined upon by assessing : amount assessed.” The word “assess” is defined as “to

determine the rate or amount of (as a tax, charge, or fine).” Webster’s Third New

International Dictionary 131 (2002). Plaintiffs argue that the statutory phrase encompasses

the determination of tax liability made by the IRS here in its notice of deficiency. However,

the notice of deficiency is not a final determination of tax liability. That determination comes

only with the tax assessment made by the IRS. The notice of deficiency is a preliminary

determination by the IRS of tax liability that may change once the assessment proceeding

has run its course. In light of these factors and the dictionary definition of “assessment,” we

agree with Grant Thornton that the two-year extension of the statute of repose contained in

section 13-214.2 begins to run when the IRS makes a final assessment of taxes owed by the

taxpayer. We also agree, however, with the appellate court that in the event an assessment

is not made due to a settlement entered into between the taxpayer and the IRS, the two-year

extension would begin to run from the date of the settlement. It would be incongruous to

allow a taxpayer who received an assessment to take advantage of the two-year extension,

but deny that privilege to a taxpayer who settled with the IRS prior to an assessment.

Interpreting the statute otherwise would lead to an unjust and unreasonable outcome,

something courts should avoid doing whenever possible. See Roselle Police Pension Board

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v. Village of Roselle, 232 Ill. 2d 546, 558-59 (2009).

¶ 77 Grant Thornton asserts that the record does not show that the IRS has yet made an

assessment in plaintiffs’ case. Plaintiffs do not dispute this contention but instead they argue

that to the extent there is a factual issue concerning whether an assessment has been made,

that issue should be considered on remand. We agree with plaintiffs that this is a question

of fact that may not be decided under the current posture of this case. The trial court did not

make that determination because it held that the proviso in the statute did not extend the

period of repose beyond five years. Therefore, on remand, the trial court may determine

whether an assessment has in fact been made. If an assessment has not been made, the trial

court may entertain whatever motions it deems appropriate.

¶ 78 Grant Thornton also argues that the proviso in the statute is inapplicable because Grant

Thornton prepared tax returns for Thermosphere, which did not receive any notice of tax

deficiency from the IRS. Plaintiffs respond, however, that Thermosphere did in fact receive

a formal notice from the IRS of intent to disallow the tax losses claimed on its return. Grant

Thornton also notes that any assessment made by the IRS will be against the Khans on their

tax returns and it argues that it did not prepare the Khans’ returns. Thus, the proviso in the

repose period should not be applied to Grant Thornton’s preparation of the Thermosphere

returns. The appellate court rejected this argument, noting that the legislature must have been

aware that negligent preparation of a partnership tax return can cause the individual partners’

returns to be incorrect and result in assessment proceedings against the partners. The court

concluded that because the statute says “the tax return,” rather than “the person’s tax return,”

it does not matter that the tax return prepared was not that of the Khans. Here, the tax losses

claimed on Thermosphere’s return flowed through to the Khans as partners. To agree with

Grant Thornton’s position would deprive the Khans and others like them of the two-year

extension to the repose period where the accountant who prepared the partnership’s returns

did not also prepare the individual partners’ returns. In construing a statute, we presume that

the legislature did not intend absurd, inconvenient, or unjust results. People ex rel. Sherman

v. Cryns, 203 Ill. 2d 264, 280 (2003). We agree with the appellate court that the legislature

could not have intended a result that would allow an accountant in this situation to escape

liability for the consequences of its negligence because it did not also prepare the partners’

tax returns. We therefore reject this argument.

¶ 79 Accordingly, we conclude that the trial court erred in granting Grant Thornton’s section

2-619 motion to dismiss.

¶ 80 CONCLUSION

¶ 81 For the reasons stated, we affirm the appellate court’s judgment.

¶ 82 Appellate court judgment affirmed.

¶ 83 JUSTICE THEIS, concurring in part and dissenting in part:

¶ 84 The majority holds, in pertinent part, that the five-year limitations period, applicable to

plaintiffs’ various causes of action against the Deutsche defendants (Deutsche Bank AG,

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Deutsche Bank Securities, Inc., and David Parse), did not begin to run until 2008 when

plaintiffs received a deficiency notice from the Internal Revenue Service (IRS), and that

plaintiffs’ complaint, filed in 2009, was therefore timely. Supra ¶¶ 17-45. Because this

holding cannot be reconciled with our discovery rule, I dissent from this portion of the

majority opinion.

¶ 85 The instant litigation arose out of plaintiffs’ participation, beginning in 1999, in a series

of so-called “investment strategies.” Although plaintiffs alleged numerous causes of action,

the gravamen of plaintiffs’ complaint is that defendants defrauded plaintiffs by marketing

and selling investment strategies to them, knowing that, contrary to defendants’

representations, plaintiffs’ investment would yield no profit (because the investment was

rigged) and would not minimize plaintiffs’ tax liability (because defendants knew that the

IRS had found the same or similar investment strategies illegal). The Deutsche defendants’

alleged role in this fraud was confined to the first two investment strategies: the 1999 Digital

Options Strategy and the 2000 COINS Strategy. Plaintiffs alleged that, as a consequence of

defendants’ fraudulent conduct, they suffered the following injuries:

“(1) they paid significant fees to the Defendants and Other Participants, (2) they

unnecessarily purchased the options and digital options and made other investments

to effectuate the Investment Strategies, (3) the IRS has determined that Plaintiffs owe

substantial back-taxes, penalties, and interest, (4) they lost the opportunity to avail

themselves [of] other legitimate tax-savings opportunities, (5) they failed to file

qualified amended returns, (6) they failed to take part in the Amnesty Program, (7)

they failed to take part in the Announcement 2004-46 global settlement initiative,

and (8) they have and will continue to incur substantial additional costs to rectify the

situation.”

¶ 86 The first alleged injury—the payment of significant fees to defendants—figures

prominently in plaintiffs’ complaint. Plaintiffs alleged that defendants “conspired with one

another to design, promote, sell, and implement the Investment Strategies for the purpose

of receiving and splitting substantial fees,” and that “[t]he receipt of those fees was the

primary, if not sole, motive in the development and execution of the Investment Strategies.”

Plaintiffs sought disgorgement of all payments received by defendants from plaintiffs, and

a declaration that defendants have been unjustly enriched and that all fees paid to defendants

should be returned to plaintiffs.

¶ 87 In line with these allegations, the Deutsche defendants contend that plaintiffs were first

injured in 1999 and 2000 when they paid Deutsche Bank over $1 million in fees in

connection with the 1999 Digital Options Strategy and 2000 COINS Strategy. The majority

agrees with the Deutsche defendants that “a portion of plaintiffs’ injury occurred in 1999 and

2000.” Supra ¶ 26. Of course, the five-year limitations period applicable to plaintiffs’ causes

of action did not necessarily commence in 1999. Rather, pursuant to our discovery rule, the

limitations period commenced when plaintiffs knew, or reasonably should have known, that

this injury occurred and that it was wrongfully caused. See Nolan v. Johns-Manville

Asbestos, 85 Ill. 2d 161, 171 (1981). Although plaintiffs alleged that they suffered further

injuries beyond the payment of fees, as the majority opinion recognizes, “ ‘the limitations

period commences when the plaintiff is injured, rather than when the plaintiff realizes the

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consequences of the injury or the full extent of [his] injuries.’ ” Supra ¶ 22 (quoting Golla

v. General Motors Corp., 167 Ill. 2d 353, 364 (1995)).

¶ 88 Echoing the trial court’s ruling, the Deutsche defendants argue that plaintiffs should have

known of their injury, and that it was wrongfully caused, no later than May 2003. At that

point, plaintiffs were aware that their investment in the 1999 Digital Options Strategy and

the 2000 COINS Strategy had yielded no profit; plaintiffs had received audit notices from

the IRS in connection with their 1999, 2000, and 2001 tax returns; and plaintiffs had hired

independent tax counsel in connection with those audits. According to the Deutsche

defendants, plaintiffs’ tax counsel should have discovered, through the exercise of due

diligence, two IRS notices issued in 1999 and 2000 that clearly disallowed sham investment

schemes like the 1999 Digital Options Strategy and the 2000 COINS Strategy.

¶ 89 The import of the two IRS notices is amply set forth in plaintiffs’ complaint. Plaintiffs

alleged that the “clear message” set forth in IRS Notice 1999-59, issued December 27, 1999,

“was that purported losses arising from transactions wholly lacking in ‘economic substance’

(e.g., the 1999 Digital Options Strategy) are not properly allowable for Federal income tax

purposes,” and “[a]s a result of Notice 1999-59, the 1999 Strategy Defendants knew or

certainly should have known that the IRS would conclude that the purported losses arising

from the 1999 Digital Options Strategy were improper and not allowable for tax purposes.”

Plaintiffs also alleged that IRS Notice 2000-44, issued August 11, 2000, “once again clearly

and unequivocally informed accountants, tax attorneys, and financial advisors across the

country—and specifically the 1999 Strategy Defendants *** that it believed the 1999 Digital

Options Strategy was an illegal and abusive tax shelter.” “Most importantly,” according to

plaintiffs, “Notice 2000-44 specified the precise transaction the 1999 Strategy Defendants

marketed and sold to Plaintiffs,” and that the “clear message *** was that the IRS would

conclude that the purported losses arising from the 1999 Digital Options Strategy are not

properly allowable for federal income tax purposes.”

¶ 90 Plaintiffs further alleged that IRS Notice 2000-44 “put the 1999 Strategy Defendants ***

on notice that the IRS would disallow the 1999 Digital Options Strategy as an illegal and

abusive tax shelter and that any taxpayer who filed tax returns using the losses generated

from the 1999 Digital Options Strategy would be exposed to penalties.” Reiterating its

position, plaintiffs alleged that “there is no doubt that the 1999 Strategy Defendants knew

or should have known as a result of IRS Notice 1999-59 and 2000-44 *** that the IRS would

conclude that the purported losses arising from the Plaintiffs’ participation in 1999 Digital

Options Strategy were not properly allowable for federal or state income tax purposes and

that Plaintiffs would be exposed to substantial penalties if they used the losses generated

from the 1999 Digital Options Strategy on their tax returns.” Plaintiffs made comparable

allegations concerning the import of IRS Notices 1999-59 and 2000-44 with respect to the

2000 COINS Strategy.

¶ 91 In light of these allegations, I agree with the trial court that, pursuant to our discovery

rule, the five-year limitations period commenced no later than May 2003. At that point,

plaintiffs knew or should have known that the investment strategies the Deutsche defendants

helped market and sell were not what defendants allegedly represented them to be, namely,

an opportunity to reap “a substantial profit and, at the same time, legally minimize Plaintiffs’

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state and federal tax liability.” Although plaintiffs may not have realized in May 2003 the

full extent of their injuries, they were, at that point, under a burden “to inquire further as to

the possible existence of a cause of action.” Supra ¶ 20 (citing Witherell v. Weimer, 85 Ill.

2d 146, 156 (1981)). Accordingly, plaintiffs’ complaint against the Deutsche defendants,

filed in 2009, was outside the five-year limitations period and was properly dismissed by the

trial court.

¶ 92 The majority faithfully sets forth our discovery rule, but fails to apply it in any

meaningful fashion in this case. Instead, the majority applies a variation of the rule adopted

by the California Supreme Court to determine “when actual injury, caused by an

accountant’s negligent filing of tax returns, occurs,” so as to commence the running of the

statute of limitations period under California’s Code of Civil Procedure. (Emphasis in

original.) International Engine Parts, Inc. v. Feddersen & Co., 888 P.2d 1279, 1280 (Cal.

1995). Under the California rule, “actual injury” (which is a legal term of art under

California law (id. at 1287)), occurs, and the limitations period begins to run, on the date of

the IRS deficiency tax assessment or finality of the IRS audit process, even if the

accountant’s negligence may have been discovered earlier during the audit (id. at 1287,

1288). The California high court observed that the rule “both conserves judicial resources

and avoids forcing the client to sue the allegedly negligent accountant for malpractice while

the audit is pending. It also avoids requiring the client to allege facts in the negligence action

that could be used against him or her in the audit, without first allowing the accountant to

correct the error (or mitigate the consequences thereof) during the audit process.” Id. at

1287.

¶ 93 Based on Feddersen, the majority holds that the limitations period in this case

commenced when the IRS issued a notice of deficiency to plaintiffs in 2008. Supra ¶ 45. The

policy concerns underlying the holding in Feddersen, however, are not implicated in this

case. Simply stated, the Deutsche defendants were not plaintiffs’ accountants, they did not

prepare plaintiffs’ tax returns, and they could not have mitigated the tax consequences of

their earlier alleged fraud. The majority discounts these differences and justifies its holding

by focusing on the “nature of the harm” defendants’ conduct allegedly caused. Supra ¶ 34.

Although acknowledging that plaintiffs’ alleged injuries included the payment of significant

fees to Deutsche Bank in 1999 and 2000 (supra ¶¶ 26, 34), the majority disregards that

injury when considering the “nature of the harm.” Instead, the majority turns to what it

concludes is the “major benefit” plaintiffs sought in their transactions with the Deutsche

defendants: the ability to deduct their losses on their income tax returns. Supra ¶ 34.

Presumably, the alleged inability to enjoy this “major benefit” constitutes the major harm

or the major injury to plaintiffs. The majority thus pegs this case as a tax-liability case,

bringing it a step closer to a Feddersen-type scenario. But the majority’s approach is

contrary to our discovery rule and contrary to plaintiffs’ complaint.

¶ 94 Our discovery rule only delays commencement of the limitations period until the plaintiff

knows, or reasonably should know, of some injury and that it was wrongfully caused. Our

discovery rule does not delay commencement of the limitations period until the plaintiff

knows of some unfulfilled “major benefit” resulting in a major injury. See Golla, 167 Ill. 2d

at 363-64. As set forth above, plaintiffs alleged in their complaint numerous injuries, in

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addition to an increase in their tax liability. Plaintiffs alleged injury in the payment of

significant fees to defendants; the costs associated with implementing the investment

strategies; the lost opportunity to invest in legitimate tax-savings strategies; and the lost

opportunity to mitigate their losses by participating in the IRS amnesty program. This court

should not rewrite plaintiffs’ complaint, and our discovery rule, by tying the limitations

period to the injury it regards as the “major” one.

¶ 95 For these reasons, I dissent from part I of the majority opinion which affirms the

appellate court judgment as to the timeliness of plaintiffs’ complaint against the Deutsche

defendants, and would affirm the trial court’s dismissal of plaintiffs’ claims against these

defendants. Accordingly, I do not join in parts II and III of the majority opinion because

dismissal would moot any other issues as to plaintiffs’ claims for breach of fiduciary duty

(part II) and negligent misrepresentation (part III). In all other respects, I concur in the

majority opinion.

¶ 96 CHIEF JUSTICE KILBRIDE joins in this partial concurrence and partial dissent.

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