Transferee Corporation Is Judgment Debtor’s Alter Ego – Illinois Court (Deep Cut Case)

Dated but relevant for its discussion of some signature commercial litigation issues , Dougherty v. Tsai, 2017 IL App (1st) 161949, addresses, among other things, corporate alter ego liability, fraudulent transfers, and the admissibility of expert witness testimony.

In 2011, the plaintiff lessor obtained a default judgment against a corporate tenant (Tenant) in a 2009 commercial lease dispute case.

Through post-judgment discovery, the landlord learned that the Tenant and its owner (the Owner) secretly transferred money and assets from the Tenant to a related company (Transferee) that had the same employees and general line of business.  The landlord filed a new action in 2013 to hold the Transferee and Owner jointly responsible for the underlying judgment against the Tenant.

After a bench trial, the circuit court found that  the Transferee was the Tenant’s alter ego and entered judgment against the Transferee and Owner.  They appealed.

Defendants argued that the trial judge improperly entered judgment on a nonexistent cause of action – alter ego.  In Illinois, a corporation is a legal entity separate and distinct from its shareholders, directors and officers.  Corporate shareholders, officers and directors are generally not responsible for corporate debts.  But a court will disregard a corporate form and pierce its veil of limited liability where the corporation is merely an alter ego or business conduit of another person or entity.

The alter ego doctrine imputes liability to an individual or entity that uses the corporation as a vehicle to conduct the person’s or entity’s business.  However, neither piercing the corporate veil nor alter ego are separate, “stand-alone” causes of action.  Instead, they are means of imposing liability in an underlying claim.

To pierce the corporate veil, a plaintiff must demonstrate (1) unity of interest and ownership between the corporation and the person to be held liable such that separate personalities of the corporation and parties who compose it no longer exist and (2) circumstances are such that adherence to the fiction of a separate corporate existence would promote injustice or inequitable circumstances.

Here, the Court found that the trial court properly pierced the Tenant’s corporate veil of limited liability.  The similarities between the Tenant and Transferee (same business, ownership and employees, transfer of accounts from one company to the other, etc.) were so glaring that the Transferee was the Tenant’s alter ego.  Since the Tenant and Transferee were essentially one-and-the-same, the Court held that recognizing a separation between them reeked of unfairness to the plaintiff lessor.

The Court also rejected Defendants’ argument that piercing was improper since the underlying case sounded in breach of contract. In a breach of contract case, it’s more difficult to pierce the corporate veil than in tort causes of action.  This is because parties are presumed to enter into contracts voluntarily and assume the risks of the breaching party’s insolvency or protection from liability.

Here, however, the Court noted the 2013 case was not a breach of contract suit; it instead was an attempt to enforce the earlier judgment entered against the tenant.  Because the 2013 case wasn’t viewed as a breach of contract suit, the high hurdle to establish piercing in contract cases didn’t apply. [¶29]

The Court then addressed defendants’ argument that the trial court improperly allowed plaintiffs’ accounting expert to offer undisclosed damages opinions at trial.

The purpose of pretrial discovery in Illinois is to encourage timely disclosure of witnesses and opinions and discourage gamesmanship and surprise testimony.

Rule 213(g) limits expert testimony at trial to matters disclosed in answer to a Rule 213(f) interrogatory or in a discovery deposition.  An expert witness can elaborate on a disclosed opinion so long as the augmented testimony states “logical corollaries” to an opinion instead of new reasons for it.

The Court held that the trial court properly allowed the accountant’s testimony that the Tenant did not receive equivalent value in exchange for nearly $100,000 in rental payments it made to a company controlled by the Owner after the Tenant had supposedly gone out of business and decamped the leased premises.

The Court noted that the accountant had authored a pre-trial report that covered his damage opinions at trial, the report was disclosed to the Defendants and the Defendants deposed the accountant twice before trial. [¶ 43]

Afterwords

The case illustrates how important it is for judgment creditors to be tenacious in their collection efforts.  The Tenant’s Owner operated a complicated web of related business entities and freely transacted business among them.  This made it challenging for the plaintiff to unspool the various layers of corporate liability protection.  However, through its determined efforts and aggressive use of Illinois’ post-judgment enforcement rules, the plaintiff won a substantial money judgment against both individual and corporate defendants.

The case also reaffirms that alter ego and piercing the corporate veil are not  standalone causes of action but are instead a means of attaching liability on an underlying cause of action

Dougherty also makes clear that under Illinois pre-trial discovery rules, an expert witness at trial can amplify previously disclosed opinions as long as the expanded trial testimony has a factual nexus to earlier opinion.

 

 

‘Lack of Money’ Exclusion From Restaurant Lease Force Majeure Clause Not Enough to Get Eatery [Fully] Off the Hook – IL ND

Topical and timely, In re Hitz, 2020 WL 2924523 [Bankr. N.D. Ill. 2020] presents as a useful quarantine-era case that interprets the scope of a force majeure clause in a restaurant lease.

The debtor filed for bankruptcy protection in mid-March 2020 after failing to pay rent for that month.  The creditor moved to modify the automatic stay and sought post-petition rent under 11 U.S.C. 362 and 365, respectively.  In response, the restaurant debtor argued that it was excused from paying post-petition rent based on the lease’s force majeure clause [the “FM Clause”].

The FM Clause excused, the restaurant’s lease performance where its obligations were delayed or hindered by “governmental action or inaction, and “orders of government.”  Notably, the FM Clause specifically carved out an exception for lack of funds.  It stated: [l]ack of money shall not be grounds for Force Majeure.”

The debtor argued that the FM Clause was triggered by Illinois Governor Pritzker’s Executive Order 2020-7 [the “EO”] which banned Illinois restaurants from offering food and drink for on-premises consumption for the two-week period ending March 30, 2020. The EO did, however, encourage restaurants to provide off-premises consumption via delivery and curbside pick-up.

The Court first held that because rent was due March 1, 2020 – fifteen days before the debtor’s petition, the FM Clause did not excuse debtor’s March 2020 rent payment.

To decide whether the FM Clause applied to the following months [e.g. did it excuse rental payments occurring after the March 16, 2020 petition date?], the Court framed the issue as one of basic contract interpretation

In Illinois, a force majeure clause will only excuse contractual performance where the triggering event is the proximate cause of the party’s nonperformance.

The Court found the EO plainly activated the FM Clause.  The EO constituted governmental action and an “order of government” that “hindered” the debtor’s performance of its lease obligations by lopping off its on-premises food and drink revenue.

The Court rejected the creditor’s first argument that the FM Clause didn’t control because the banking and postal systems were still open.  According to the creditor, despite Covid-19, the tenant could have still written rental checks and mailed them to the landlord.  The Court deemed this argument specious; it did not address the debtor’s force majeure argument – that the inability to sell food and drink on-site made it impossible to generate enough revenue to pay rent.

Next, the creditor focused on the lease provision that a “lack of money” didn’t equate to a force majeure event.  The Court nixed this argument, too.  It found that the debtor tenant was not claiming a lack of funds as the proximate cause of its failure to pay rent.  Instead, the EO was: it shut down all Illinois restaurants’ on-premises consumption of food and beverages for a two-week period.

For textual support, the Court applied the contract interpretation maxim that a more specific provision controls over a general one.  While the lease did except a general lack of funds from the FM Clause’s reach, it also counted “governmental action” and “orders of government” as specific force majeure events.  And since the EO plainly qualified as governmental action, the Court held the tenant could properly invoke the FM Clause to reduce its post-petition rent payments.

The creditor’s argument that the tenant could have applied for an SBA loan also fell flat.  The Court noted that nothing in the lease, the FM Clause or any cited legal precedent required a defaulting tenant to try to borrow money to ameliorate any adverse governmental action that hampered a tenant’s ability to pay rent.

The Court didn’t excuse the tenant completely, though. The Court noted the EO expressly urged restaurants to offer food and beverage for off-premises via delivery and curbside pick-up.  Because of this, the Court reduced the tenant’s rental duties in proportion to its diminished ability to generate funds to pay rent.  In its response brief, the debtor estimated the EO rendered 75% of the tenant’s indoor space unusable.  But it also allowed the remaining 25% of the space, including the kitchen, was still working.

Applying this simple math, the Court found the tenant was responsible for 25% of its normal monthly rent payment [including proportionate common area maintenance expenses] for the post-petition months of April – June 2020.

Take-aways:

This case likely augurs [or is at least representative of] a future glut of Covid-19 commercial lease default cases.

Where a general provision conflicts with a more specific one, the latter will control.  Here, while the lease specifically excluded a tenant’s lack of money from the force majeure’s reach, the more specific, “order of government” and “governmental action or inaction” language controlled and served to partially excuse the tenant’s rent liabilities.

The Court’s analysis also tacitly recognized a tenant’s duty to mitigate damages.  Since the tenant acknowledged that it still had a working kitchen and 25% of usable restaurant space, the Court proportionately reduced the tenant’s lease payments instead of completely excusing them.