Gajda v. Steel Solutions Firm, Inc., 2015 IL App (1st) 142219, stands as a recent discussion of the standards governing section 2-619 motions, successor liability and whether piercing the corporate veil is a cause of action or only a remedy for a different underlying legal claim.
The plaintiffs alleged they were misclassified as independent contractors instead of employees under the Illinois Employee Classification Act (820 ILCS 185/60) by their employer and one of its principals. The plaintiffs sued under piercing the corporate veil and successor liability theories. The trial court dismissed all of the plaintiffs’ claims and they appealed.
Reversing the trial court and sustaining the bulk of plaintiffs’ claims, the First District stressed some important recurring procedural and substantive rules in corporate litigation.
Piercing the corporate veil – Standalone cause of action or remedy?
Answer: remedy. In Illinois, piercing the corporate veil is not a cause of action but is instead a “means of imposing liability in an underlying cause of action.” In the usual piercing setting, once a party obtains a judgment against a corporation, the party can then “pierce” the corporate veil of liability protection and hold the dominant shareholder(s) responsible for the corporate obligation. Piercing can also be used to reach the assets of an affiliated or “sister” corporation.
Here, since the plaintiff captioned their first count as one for piercing the corporate veil, the trial court properly dismissed the claim on defendant’s Section 2-615 motion since piercing isn’t a recognized cause of action in Illinois. (¶¶ 19-24). However, the court did find that the plaintiff’s factual allegations that the defunct predecessor and its successor were alter-egos of each other, that they commingled one another’s funds and made improper loans to each other were sufficient to state a claim for piercing the corporation veil as a remedy (not a separate cause of action). (¶ 25).
The court then applied Illinois’ established successor liability rules to both the defunct and current employers. A company that purchases another company’s assets normally isn’t responsible for the purchased company’s debt. Exceptions to this rule against corporate successor non-liability include (1) where there is an express or implied agreement or assumption of liability; (2) where a transaction amounts to a consolidation or merger of the buyer and seller companies; (3) where the buying entity is a “mere continuation” of the selling predecessor entity; and (4) where the transaction is fraudulent in that it is done so that the selling entity can evade liability for its financial obligations. (¶ 26).
Here, the plaintiff’s allegations that showed an overlap in the buying and selling entities’ management and employees as well as the complaint’s assertions that the predecessor and successor companies were commingling funds were sufficient to make out a case of mere continuation successor liability. (¶ 26).
This case cements proposition that piercing isn’t a standalone cause of action – but is instead a remedy where there is an underlying failure to follow corporate formalities. The case is also useful for its providing some clues as to what facts a plaintiff must allege to state a colorable successor liability claim under Illinois law.