Serving The Corporate Defendant – An IL Case Note

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This case piqued my interest since I recently spent an obscene amount of time trying to serve a defendant in a commercial lease dispute.  It wasn’t until after my process server gave sworn testimony for nearly an hour at an evidentiary hearing that the court finally (and mercifully) put the service issue to bed and allowed us to proceed with prosecuting the case.

A few weeks ago (late June 2014), the First District appeals court examined the importance of proper process service in the context of a petition to vacate a default judgment.  The commercial tenant in Essi v. Fiduccia, 2014 IL App (1st) 120203-U, sued her ex-landlord for wrongful eviction.  After serving the summons and complaint on who she thought was the defendant at his insurance agency office, the plaintiff got a default judgment of nearly $300,000 – a sum comprised of lost profits, lost equipment and punitive damages.  About four months later, the defendant filed a petition to vacate the default judgment.  The trial court granted the petition and plaintiff appealed.

Held: Affirmed.  Trial court properly granted defendant’s petition to vacate the default judgment.

Rules/Reasoning:

The defendant’s petition to vacate the default judgment was properly granted because the defendant was never served.  In Illinois a judgment entered without personal jurisdiction over a party is void and can be attacked at any time and the petitioner doesn’t have to show due diligence or a meritorious defense.  735 ILCS 5/2-1401(f), (¶¶ 28-29).

Code Section 2-203 (735 ILCS 5/2-203) governs service of process on individual and corporate defendants in Illinois.  Permissible service methods are (1) personal service – delivering a copy of process to the defendant personally; or (2) substitute or abode service: leaving a copy of process at defendant’s usual place of abode with someone living there over the age of 13, and informing the person of the contents of the summons.  A corporation can be served by leaving the process with its registered agent or any officer or agent of the corporation found anywhere in the state.  (¶45); 735 ILCS 5/2-203.

A sheriff or process server’s return of service that reflects personal service on a defendant is presumptively valid and can only be overturned by clear and convincing evidence.  Uncorroborated, self-serving testimony of a defendant who claims he wasn’t served is usually insufficient to challenge a sheriff’s or process server’s sworn return.  (¶¶ 29, 36-37).  Conversely, where a defendant does submit a properly supported affidavit contesting service, the plaintiff must have the process server testify at an evidentiary hearing concerning the circumstances surrounding the challenged process service.  (¶ 37).

Here, the sheriff deputy’s return stated that process was served on the defendant at his insurance agency’s office.  But this was only a business address.  The defendant didn’t live there.  Defendant supported his petition to vacate with two affidavits: one from him, the other from his brother who is also defendant’s business partner.  Defendant’s brother testified that he was the only one in the insurance officer at the date and time on the sheriff’s return and accepted the papers because he thought they were insurance documents. Defendant, for his part, testified in his affidavit that he was never served at home and that nobody who lived with him was served.  Plaintiff failed to challenge defendants’ affidavits and didn’t call the sheriff deputy to testify in support of his service return (that showed personal service on the defendant).  The Court held that because plaintiff failed to challenge defendants’ affidavits, defendant met the clear and convincing standard for vacating the default judgment.

Afterwords:

This case illustrates that a default judgment entered without proper service can be attacked at any time.  A sheriff’s return of service is prima facie valid but not inviolable.  If a defendant offers sworn testimony contesting service, the plaintiff should call the sheriff deputy or process server to testify at an evidentiary hearing and elicit testimony on the date, time and circumstances surrounding the service on the defendant.  Then, it’s up to the judge to decide based on whose testimony she finds more believable.

 

Shareholder Oppression: A Frustrated Mess?

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Yikes! That was a bad one.  But there’s your James Marshall Hendrix reference for the day.

Shareholder oppression is another easy-to-say, hard-to-apply legal standard that can trigger the break-up of a closely held corporation.  Broadly, it applies where a dominant shareholder squeezes out or excludes a minority shareholder from having a say in the corporation’s business.

Iversen v. C.J.C. Auto Parts and Tires, Inc., 2014 IL App (2d) 130706-U gives some content to shareholder oppression as a remedy for an aggrieved stockholder.

The plaintiff, a 20% shareholder in a Chicago auto parts company, sued the other shareholders and the company after the defendants refused to buy the plaintiff’s shares or accept plaintiff’s offer to sell his shares to an outside buyer.

The plaintiff claimed the defendants ganged up on him to dilute his shares and prevent his retirement. The plaintiff sued the corporation and individual shareholders for oppression under the Illinois corporation statute, and brought civil conspiracy and breach of fiduciary claims.  The trial court dismissed all of the plaintiff’s claims.

Result: Dismissal affirmed.

Reasons:

The plaintiff failed to allege oppressive conduct under the law.  Section 12.56(a)(3) of the Business Corporation Act – 805 ILCS 5/12.56(a)(3) (the “BCA”)- gives a minority shareholder in a close corporation a remedy against directors that act oppressively, illegally or fraudulently with respect to the other shareholders.

 The BCA doesn’t define oppression.  

Courts interpret oppression to mean “arbitrary, overbearing and heavy-handed” conduct.  Examples of shareholder oppression include a corporate officer using a corporation for his own benefit to the exclusion of other stockholders, failing to follow corporate formalities, flouting by-laws freezing out minority stockholders.  (¶¶ 27-30).

The plaintiff here failed to allege defendants’ self-dealing, violation of corporate by-laws, mismanagement or waste of corporate assets. The defendants refusal to accede to plaintiff’s buy-out request didn’t equal  oppression since the shareholder agreement didn’t require a buy-out or the approval of plaintiff’s share sales attempts.  (¶¶ 34, 39).

The plaintiff’s conspiracy claim also failed.  Civil conspiracy requires both (a) an independent tort – underlying wrongful conduct, and (b) an agreement between the defendants to carry out the wrongful conduct.  Without a predicate tort, there can be no conspiracy. 

The plaintiff’s conspiracy claim against the corporate defendant failed because a corporation can only act through its agents.  And by definition, a corporation can’t conspire with itself. (¶¶ 40-41).

Comments:

This case illustrates the importance of choosing the right remedy.  In hindsight, I would have added a specific performance claim to require the defendants to adhere to the agreement’s buyout and share appraisal provisions.

The case’s practice tip value lies in its punctuating how important it is to thoroughly vet a shareholder agreement before investing.  With no specific terms in the shareholder contract obligating defendants to buy back plaintiff’s shares or to not squelch plaintiff’s sale attempts, the plaintiff was basically at the defendants’ mercy.

On the pleading front, it’s clear that a colorable oppression claim under the BCA requires allegations of a corporate officer’s self-dealing, exclusionary conduct, corporate mismanagement or a failure to follow by-laws.  Also, a valid conspiracy claim must be factually detailed to survive summary judgment.

 

Failure to Disclose Claim in Bankruptcy Torpedoes Later Injury Suit

What happens if  (a) you get injured (and you aren’t at fault and have a claim against the person who injured you) after you file for bankruptcy but (b) before you get a discharge and (c) you don’t inform the bankruptcy court of this claim? 

That’s the question examined in Schoup v. Gore, 2014 IL App (4th) 130911 (4th Dist. 2014), a case that will doubtlessly serve as a cautionary tale and make bankruptcy petitioners think twice before not informing the bankruptcy court of a potential civil claim.

In Schoup, the debtor filed bankruptcy in 2010 and obtained a discharge in 2012.  Several months into his bankruptcy, he was injured when he tripped on private property.  This gave the debtor a future premises liability claim against the property owners.  The debtor didn’t tell the bankruptcy court or trustee of the premises suit until after his bankruptcy case was discharged.  

Fresh off his discharge, the debtor filed his premises suit against the property owners.  The owners moved for summary judgment on the basis of judicial estoppel.  They argued that the plaintiff’s failure to disclose the premises suit as an asset in his bankruptcy case barred the premises liability action.  The trial court agreed and entered judgment for the property owners.  Plaintiff appealed.

Ruling: Affirmed.

Q: Why?

A: The judicial estoppel doctrine barred the plaintiff’s premises liability suit.  Judicial estoppel prevents a litigant from taking a position in one case and then, in a later case, taking the opposite position (i.e., you can’t claim that you’re an independent contractor in one case and then in a second case, claim that you’re an employee.)  Judicial estoppel’s purpose is to protect the integrity of the court system and to prevent a party from making a mockery of court proceedings by conveniently taking whatever position happens to serve that party at a given moment.  (¶ 9).  Judicial estoppel applies where a party (1) takes two contrary positions in legal proceedings; (2) successfully maintains that first position and benefits from it.  In the post-bankruptcy setting, a debtor who fails to disclose an inchoate lawsuit can’t later realize a benefit from his concealment. (¶ 14).

The plaintiff here took two positions: he impliedly represented to the bankruptcy court that he had no pending lawsuits and then filed a personal injury suit in state court after discharge.  The two positions were taken in judicial proceedings (Federal bankruptcy court and Illinois state court) and under oath (the plaintiff signed sworn disclosures in the bankruptcy court and filed a sworn complaint in state court).  The plaintiff also obtained a benefit from concealing the premises liability case as he received a discharge without any creditor knowing about the state court claim.  (¶¶ 17-18).

Conclusion: From a defense posture, the case is a great reminder to always check on-line bankruptcy records to see if a plaintiff suing your client has any prior bankruptcies.  More than once I’ve found that a plaintiff recently received a discharge before filing suit and never disclosed the lawsuit as an asset in the bankruptcy case.  In those situations, the plaintiff, not wanting to deal with a judicial estoppel motion (like the one filed by the defendants in this case), is usually motivated to settle for a reduced amount and in one case, even non-suited the case. 

From the lens of a debtor, the lesson is to fully disclose all assets – even lawsuits that haven’t materialized on the bankruptcy filing date.  Otherwise, they run the risk of having a creditor challenge the discharge or even having a future lawsuit dismissed.

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