Five-Year Limitations Period to Sue Dissolved Corporation Applies to Piercing Corporate Veil Suit – IL Court

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Peetom v. Swanson, 334 Ill.App.3d 523 (2nd. Dist. 2002) provides a dated yet instructive recitation of the statute of limitations standards that govern corporate veil piercing actions in Illinois.

The case’s relevant chronology includes: (1) Plaintiff filed a negligence action in 1995 against a corporate defendant for injuries plaintiff suffered in 1993, (2) In May 1997 – the corporate defendant was defaulted; (3) In June 1998, the corporate defendant was involuntarily dissolved by the Illinois Secretary of State for failure to file a report and pay its taxes, (4) In November 1998, a $1M money judgment entered against corporate defendant; and (5) in 2000, plaintiff filed suit against corporate shareholders under a veil piercing theory to enforce the 1998 default judgment.

The trial court dismissed the suit as untimely under the two-year limitations period for personal injury actions and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: The case involves the interplay between three limitations periods in the Code of Civil Procedure.  Section 13-202 sets forth a two-year limitations period for personal injury claims, Section 12.80 of the Business Corporation Act requires a claim against a dissolved corporation (or its shareholders and directors) to be brought within five years after dissolution, and Code Section 12-108 provides for a seven-year period to enforce a judgment.  735 ILCS 5/13-202, 815 ILCS 5/12.80, 735 ILCS 5/12-108.

Since piercing the corporate veil is an equitable remedy and not a cause of action, the limitations period applicable to a piercing claim is governed by the nature of the underlying cause of action.  The question is “which underlying action?”  The 1995 negligence suit or the 2000 action to enforce the money judgment against the corporate shareholders?

The court rejected the shareholder defendants’ argument that the 1995 case was the underlying claim and that the two-year period for personal injury suits applied.  The court found that plaintiff’s 2000 piercing action, which sought to affix liability to the shareholder defendants for the $1M money judgment against the corporation, was the underlying claim for purposes of applying the statute of limitations.  The court found that in the 2000 case, Plaintiff was not alleging negligence against the shareholders but was instead trying to enforce the 1998 judgment assessed against the dissolved corporation.  As a result, Plaintiff would normally have seven years – through November 2005 – to sue on the money judgment.

However, since the corporate defendant was dissolved, the five-year period for suing a dissolved corporation and its shareholders based on pre-dissolution debts applied.  Plaintiff’s piercing suit was still timely though.  The judgment entered in 1998 and plaintiff filed suit in 2000 – well within the five-year period.

The other argument the First District rejected was defendant’s claim that the five-year period to sue a defunct corporation didn’t apply since at the time the corporation was dissolved, the plaintiff’s claim hadn’t yet been reduced to judgment and so plaintiff didn’t have an existing claim prior to the dissolution.

The court disagreed and found that since the corporation had been defaulted in 1997 – prior to the 1998 dissolution – the plaintiff’s claim against the corporation had already been deemed valid even though the plaintiff’s money claim wasn’t mathematically certain until after the company dissolved.  As a consequence, plaintiff had a pre-existing claim against the corporation under the Illinois BCA to trigger application of the five-year limitations period.

Afterwords:

An obvious pro-creditor decision.  The case stands for proposition that in a judgment creditor’s action against corporate shareholders to pierce the corporate veil after an earlier, unsatisfied judgment against a corporation, the seven-year limitations period to enforce a judgment applies.  The only reason the five-year period applied here was because of the specific BCA section (815 ILCS 5/12.80) that speaks to suing dissolved corporations.

Still, the plaintiff’s suit was timely as he filed well before the 2003 deadline.  Had the defendant prevailed, the plaintiff’s claim would have been barred if he didn’t sue in 1995 – two years after plaintiff’s underlying personal injury.

Debtor’s (Non-Spousal) Inherited IRA Not Exempt from Civil Judgment – IL First District Rules

Case: In re Marriage of Xenakis, 2015 IL App (1st) 141297

Fact Snapshot: The judgment debtor successfully moved to discharge citations issued to the custodian of an individual retirement account (IRA) he inherited from his deceased mother.  The judgment creditor appealed, arguing that the IRA wasn’t properly exempt from the judgment’s reach.

Result: The First District agreed with the creditor and reversed the trial court’s discharge of the citations.

Memorable Quote: “We find no indication that the Illinois legislature intended to allow a judgment debtor to exempt assets that could be spent freely and frivolously at the debtor’s whim.  The [post-judgment statute] is aimed at protecting retirement assets as opposed to funds that could, conceivably, be used to supplement the lifestyle of a non-retiree debtor.”

Reasoning:

– The purpose underlying exemptions from judgments is the protection of a debtor’s essential needs.  Setting aside funds for retirement is a court-recognized example of a debtor protecting his essential needs;

– Code Section 12-1006 exempts retirement plan assets from actions to collect a judgment so long as the retirement plan is intended in good faith to qualify as one under the Internal Revenue Code of 1986;

– Code Section 12-1006 is silent on the difference between a traditional IRA and an inherited non-spousal IRA, such as the one involved in this case and is the functional equivalent of Section 522 of the Bankruptcy Code which governs debtor exemptions from the bankruptcy estate;

– The US Supreme Court has held that money in an inherited IRA does not qualify as “retirement funds” under Bankruptcy Code Section 522 1

– Funds in a non-spousal inherited IRA, on their face, are not set aside for purposes of retirement;

– Unlike in a traditional IRA, the beneficiary of an inherited IRA can freely withdraw funds at any time with no tax penalty.  In fact, the owner of an inherited IRA must withdraw its funds – either in total within 5 years of the original owner’s death or via minimum annual withdrawals 2;

– Since inherited retirement funds can be withdrawn and spent by the account holder whenever he wants, these funds don’t serve the purpose of providing a debtor with the “basic necessities of life” and so do not implicate the policies that underlie judgment exemptions;

– An inherited IRA has nothing to do with retirement since the holder can spend it at will.  It is more akin to a discretionary bank account;

(¶¶ 18-26)

After canvassing the Federal bankruptcy Code, the Internal Revenue Code, the Illinois judgment exemption statutes and the foundational rationale for the exemptions, the First District squarely held that non-spousal inherited IRAs can be attached (i.e. are not exempt) by judgment creditors.

Afterwords:

1/ Exemptions serve salutary purpose of protecting debtor from destitution and abject poverty;

2/ Retirement accounts further that prophylactic purpose;

3/ This policy of protecting debtors has limits though.  If “retirement” funds can be withdrawn and spent at will, the funds won’t be treated as retirement funds and will be within a creditor’s reach.

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References:

1  Clark v. Rameker, 134 S.Ct. 2242 (2014); 11 U.S.C. §§ 522(b), (d).

2  26 U.S.C. § 408(d)(3)(C)(ii)(2012)

Time Of Essence Clauses and Installment Payments: How Late Is Too Late?

In Handler v. Johnson, 2015 WL  4506712 (N.D.Ill. 2015), a bankrupt debtor’s adversary moved to reopen a case after the debtor was late on two installment payments under a settlement agreement.

The creditor, a lawyer who previously represented the debtors in unrelated litigation, sued to recover about $21K in attorneys’ fees owed from the prior representation.  The debtors previously agreed to pay the lawyer $7,500 in monthly installments of $100, payable on the 15th of each month.  When the debtors missed the deadline, the attorney creditor moved to reopen the bankruptcy and enter judgment for the full amount of his claim.

The court denied the motion on the basis that the breach was immaterial.  The creditor appealed.

Affirming, the Northern District provides a useful discussion of contractual time is of the essence clauses and the level of breach required to void a settlement agreement calling for payments over time.

Only a material breach will excuse the non-breaching party’s performance under a contract.  A technical or immaterial breach usually doesn’t merit the wholesale undoing of a contract.   If the contract would not have been made absent the disputed provision, then the breach is considered material.  While a party can recover damages in some situations for only a minor breach, he must prove how those damages flowed specifically from the minor breach.

Timely performance of a contract can be considered a material term, especially if the parties say so in the contract.  But even where parties have a time is of the essence provision and a party technically breaches, a court can still inquire into the circumstances underlying the delay in performance to determine whether the delay equals a material breach.  If timely performance is viewed as a material term, a court can still refuse to enforce the contract when to do so would work an unfairness to breaching party or provide a windfall to the non-breaching one.  (*3).

To determine whether a given contract term is material, the court considers several factors including (i) whether the breach defeats the bargained-for objective of the parties, (ii) whether the non-breaching party suffered disproportionate prejudice; (iii) whether economic inefficiency or waste will result by enforcing the subject contract term; and (iv) whether the non-breaching party would receive an inflated, unfair advantage if the court found a material breach.

Here, the equities pointed in the debtors’ favor.  While they did miss the payment deadline by a few days, the breach was tempered by the fact that one of the debtors was hospitalized around the time the payment was due.  Moreover, the lawyer adversary failed to establish any prejudice by having to wait a few days for payment.  Considered in their totality, the circumstances weighed in favor of finding that the tardy payment was not a material breach.  As a result, the District Court affirmed the bankruptcy court’s denial of the plaintiff’s motion to reopen the case.

Afterwords:

(1) Only a material breach will justify abandonment of a contract;

(2) Materiality in the breach context is a fact-specific inquiry that focuses on whether a contract would be made if the breached provision was excised;

(3) A court won’t undo an installment payment contract if payment is made a few days late and no prejudice is shown resulting from the late payment.