Sole Shareholder Of Dissolved Corporation Can Sue Under Nine-Year Old Contract – Eludes Five-Year ‘Survival’ Rule

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Haskins, d/b/a Windows Siding Unlimited, Inc. v. Hogan, 2015 IL App (3d) 140609-U – A Synopsis

In 2003, Plaintiff’s former company entered into a written contract with defendant to install windows on defendant’s home. Defendant failed to pay.

The windows company was administratively dissolved in 2005 by the Illinois Secretary of State.  Seven years later, in 2012, Plaintiff – the sole shareholder of the windows company – assigned the company’s claim against the defendant to himself and sued defendant for breach of contract.

The court granted the defendant’s motion for summary judgment and found that the claim was untimely under Illinois’ five-year survival period for a dissolved corporation’s claims.  Plaintiff appealed.

Reversing the trial court, the appeals court first noted that a dissolved corporation’s assets belong to the former shareholders, subject to the rights of creditors.

Section 12.80 of the Business Corporation Act provides that an administrative dissolution of a company does not take away or effect any civil remedy belonging to the corporation, its directors, or shareholders, for any pre-dissolution claim or liability.

The lone limitation on this rule is that suit must be filed on the pre-dissolution claim within five years of the dissolution date. 805 ILCS 5/12.80.

This five-year “survival period” represents the outer limit for lawsuits by or against dissolved corporations.  The purpose of the five-year survival period is to allow the corporation to wrap up its affairs.  The court clarified that the five-year time span applies both to voluntary and involuntary dissolutions.

There are two exceptions to the five-year rule that allow a shareholder to file suit outside the five-year period.  They are: (1) where the shareholder is a direct beneficiary of the contract; and (2) where the shareholder seeks to recover a fixed, easily calculable sum.  (¶ 17).

To meet the first exception, the shareholder must show the parties manifested an intent to confer a benefit on the third party/shareholder. Here, this first exception didn’t apply since there was nothing in the contract suggesting an intent to benefit the plaintiff individually: the windows contract was clearly between a corporate entity (the windows company) and the defendant.

The second exception did apply, however.  The contract was for a fixed sum – $5,070.  As a result, the court found the 10-year limitations period for breach of written contracts applied (instead of the 5-year survival statute) and the plaintiff’s suit was timely (he sued in 2012 for a 2003 breach – within 10 years.) (¶¶ 17-20); 735 ILCS 5/13-206.

Comments: An interesting application of the five-year corporate survival rule to the small claims context.  It appears to be wrongly decided though.  The plaintiff clearly didn’t establish the first exception to the five-year rule: that he was a third-party beneficiary of the 2003 windows contract.  Since he failed to establish both exceptions, the five-year rule should have applied and time-barred the plaintiff’s claim.

Maybe it’s because the plaintiff was the sole shareholder of the defunct corporation that the court collapsed the two exceptions.  Regardless, it remains to be seen whether this decision is corrected or reversed later on.

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.