Tag: corporate survival

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.

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.