Archives for April 2014

Shocking! The Company That Owes You $ Dissolved: The Illinois Corporate ‘Survival’ Statute

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The Illinois corporate “survival” statute, 805 ILCS 5/12.80, allows a plaintiff to sue a dissolved corporation for up to five years after the corporation’s existence ends.  So, if a corporation was dissolved on April 29, 2014, a plaintiff who had a claim against the corporation prior to April 29, 2014, has through April 29, 2019 to file suit against that dissolved corporation. 

Any recovery would attach to corporate (as opposed to individual shareholder) assets.  And because the survival act is a legislative creation, its timing requirements are strictly construed and only relaxed in limited circumstances. 

The five-year claims period tries to strike a balance between protecting injured plaintiffs and setting a definite chronological end point for a dissolved corporation’s liability.

Michigan Indiana Condominium Association v. Michigan Place, LLC, 2014 IL App (1st) 123764 presents a recent example of a court’s rigid application of and the harsh results flowing from the five-year corporate survival period in a construction dispute involving various contractors.

In 2011, the plaintiff sued the general contractor for latent defects nine years after construction was complete.  The general contractor in turn filed third-party contribution claims against two masonry subcontractors in 2012.  Both subcontractor defendants were long defunct.  One subcontractor dissolved in 2003; the other, in 2006. 

The subcontractors moved to dismiss the general contractor’s claims under Code Section 2-619, arguing that the claims were time-barred since they were filed (in 2012) after the five-year survival period expired.  The trial court agreed and dismissed the contractor’s third-party claims.

Held: Affirmed.

In upholding the trial court’s dismissal of the general contractor’s third-party complaint, the First District stated the governing corporate law principles: 

– A corporation only exists under the express laws of the State in which it was created; 

– The right to sue a dissolved corporation (and the right of a dissolved corporation to sue) is limited to the time established by the legislature;

 – Corporation dissolution has the same legal effect as the death of a natural person;

 – Corporate survival actions are based on the legislative determination that corporate creditors should be able to sue a dissolved corporation and apply any corporate property to the debt;

 – Once the five-year survival period lapses, the corporation’s “life” also ends and no lawsuit can be filed against the corporation after the survival period expires;

– A dissolved corporation can be served with process through the Illinois Secretary of State (805 ILCS 5/1.01)

(¶¶ 12-13).

In certain situations, courts have relaxed the five-year survival period for public policy reasons.  Key exceptions to the five-year rule concern (1) actions involving minor plaintiffs; and (2) where there is an element of corporate misconduct and resulting unfairness.  (¶¶ 18-21).

  Here, since neither exception applied, the Court held that the survival act’s plain language dictated dismissal of the contractor’s third-party complaint.

 The Court recognized that barring the contractor’s claims was harsh since the contractor’s right to sue expired before it even knew it had claims against the defunct subcontractors. 

Yet because the statutory language was clear, the Court held that it was required to strictly apply the five-year survival rule and time-bar the contractor’s third-party action. (¶¶ 22-23). 

To bolster its decision, the Court noted that in legal and medical malpractice cases, courts strictly apply statutory repose periods (4 years for medical malpractice; 6 years for legal malpractice) that often doom injured plaintiff’s cases.  (¶ 24).  This gave the Court added precedential support for its rejection of the contractor’s third-party claims. 

Take-away: This case presents a good summary of the philosophical underpinnings and statement of the law governing actions by and against dissolved corporations.

Michigan Place also underscores that extending or relaxing a repose or survival period is a legislative (not a judicial) function.

‘Perpetual’ Sales Distribution Contract Is Terminable At Will; It’s Too Indefinite

 

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The First District recently considered whether a contract that could only be ended on both parties’ written consent was too indefinite and “perpetual” to be enforceable.  In Rico Industries v. TLC Group, Inc., 2014 IL App (1st) 131522, the parties entered into a sales contract where plaintiff would sell products to Wal-Mart through defendant – the retailing monolith’s exclusive distributor.  The agreement could only be terminated by the parties’ mutual agreement.  About five years into the contract, the plaintiff decided to sever the relationship and filed a declaratory judgment action seeking a court ruling that the contract was too indefinite to be enforced.  Defendant  countered by filing a motion for judgment on the pleadings that the contract was enforceable and also sought money damages for sales commission it claimed it was owed from the plaintiff.  The trial court agreed with the defendant distributor and entered judgment in its favor.  Plaintiff appealed.

Held: reversed.  Contract that can only be terminated on consent of both parties is too indefinite to be enforced.  The contract is terminable at will.

Q: Why?

A: In Illinois, perpetual contracts violate public policy because they are too indefinite.  A private contract will not be declared void and against public policy unless it clearly violates the constitution, Illinois statutes or caselaw or if the contract is injurious to the public welfare.  Rico, ¶¶ 15-17.  And even though Illinois safeguards freedom of contract, contracts of indefinite duration are terminable at the will of the parties because perpetual contracts are disfavored.  (¶¶ 18-19).

The courts’ stated reason for invalidating perpetual contracts is because “forever is a long time” and that businesses don’t stay viable for very long.  Because of the short shelf-life of many commercial enterprises, never-ending contracts violate Illinois public policy, which prefers contracts with definite start and ending dates.  A contract without a specific end date or terminating event, could conceivably never end.  (¶¶ 27-34).

Take-away: A good result for those that like contractual certainty.  The case’s lesson is that contracts should have a specific start and end date to avoid future disputes of enforceability and definiteness.  Rico also illustrates that contracts with permissive, equivocal termination provisions will likely be deemed perpetual and therefore void on public policy grounds.  Prudent contract drafting dictates that parties should formalize start dates, end dates, as well as termination methods and events.

 

 

 

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LLC Member Not Liable For Fraud Carried Out On Behalf of LLC

The First District expansively construed Section 10-10 of the Illinois LLC statute (805 ILCS 180/10-10) to immunize LLC managers and members from personal liability for misdeeds carried out on the LLC’s behalf.

In Dass v. Yale, 2013 IL App (1st) 122520, the plaintiffs sued an LLC member (along with a general contractor and sales agent) for construction defects in their Chicago condominium.  They alleged the defendant LLC member made multiple misrepresentations in various written sales documents concerning the property’s roof and plumbing condition and past problems with leaking. 

After getting an uncollectable default judgment against the dissolved general contractor, the plaintiffs focused their case on the individual LLC member.  The Court granted the LLC member’s section 2-619 motion and the plaintiffs appealed.

Held: Affirmed.  Section 10-10 of the LLC Act provides that LLC members are not individually liable for actions taken on behalf of the LLC.

Rules/Reasoning:

Section 10-10 of the Illinois LLC Act plainly provides that liabilities of an LLC – arising in contract or tort – belong solely to the LLC and that LLC members or managers aren’t personally liable for LLC liabilities. 

Members of an LLC can only be personally responsible for LLC liabilities where (a) the LLC articles of organization explicitly provide for personal liability; and (b) the member(s) consents in writing to be personally bound by the articles’ section that imposes personal liability on the member(s). 

In addition, an LLC’s failure to follow corporate formalities in its business is not a basis for imposing personal liability on LLC members or managers. ¶37

Here, the plaintiffs’ fraud allegations against the defendant LLC member were premised on conduct he engaged in while carrying out his marketing efforts on behalf of the LLC.  The plaintiffs’ assertion that the defendant misrepresented the property’s condition and its construction materials alleged conduct occurring in the course of the LLC trying to sell the property.

 Since there was no evidence that the LLC’s organizing papers provided for personal liability or that the defendant consented in writing to liability, Section 10-10 of the LLC  Act clearly immunized the defendant from the plaintiffs’ fraud claims.  (¶¶38-39).

Two cases that figure prominently in the Dass analysis are Carrollo v. Irwin, 2011 IL App (1st) 102765 and Puleo v. Topel (368 Ill.App.3d 63) which, respectively, hold that LLC members aren’t individually liable for obligations occurring prior to LLC formation (Carrollo) or after LLC dissolution (Puleo).  

Dass, Carrollo and Puleo form a three-part case continuum on the issue of an LLC member’s liability for actions taken before, during and after an LLC’s formation and dissolution.  The synthesized holding of the three cases underscores that actions of LLC personnel will not give rise to personal liability; even for intentional torts (i.e., fraud). (¶¶ 39-44).  The LLC Act gives members of unformed LLCs more protection than officers of unformed corporations).

Take-away: A harsh result for plaintiffs trying to sue LLC members for acts taken under the auspices of the LLC.  Dass stands for clear proposition that until the legislature amends the LLC Act, LLC members and managers’ acts are protected – as long as they’re taken in connection with the carrying out the LLC’s business.

 Had the plaintiffs claimed that the LLC member committed fraud individually (and unrelated to his LLC duties), the result may have been different.