Tag: dissolved corporation

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.

Agent of Disclosed Principal in Contract Litigation (Is It A Corporate Or a Personal Obligation?)

 

imageSometimes it’s difficult to determine who the contracting parties are.  A common example is where the contract text names the parties are two corporations but it’s signed by an individual.  Or, the contract signer clearly notes his corporate affiliation (by stating his job title) next to his signature, but the body of the contract states that the parties are individuals (not corporations) or that the signer is personally guaranteeing the corporate obligations.

Yellow Book Sales and Distribution Co. v. Feldman, 2012 IL App (1st) 120069 illustrates the importance of signature line clarity in contracts in determining the responsible party if a contract is breached.

In Yellow Book, the plaintiff sued an officer of a defunct corporation for breach of  several advertising contracts.  The contract was between two corporations – an advertising firm (plaintiff) and a glass company.  The glass company’s President signed the contracts and wrote “President” or “Pres.” next to his signatures.

The contracts’ signature blocks provided that the signer “personally and individually” assumed full responsibility for the contracts and a contract term on the back page also provided that the signer guaranteed the corporate obligations.

After the corporation dissolved (the corporation was in good standing when the contracts were signed), the plaintiff sued the corporate officer individually for unpaid invoices.  After a bench trial, the trial court found for the plaintiff and the officer appealed.

Result:  Affirmed.

Reasoning:

The contract clearly provided in two different places (signature block and the “Terms and Conditions” section) that the defendant was signing both for the corporation and for himself.

Generally, when a corporate officer signs a contract and indicates his corporate status next to his signature, this insulates the officer from personal liability.  ¶ 38. 

This is a manifestation of the agent of a disclosed principal rule – a corporate officer isn’t personally liable on contracts he signs on behalf of his corporate principal/employer.  (¶¶ 38, 48); See 810 ILCS 5/3-402(a)(b) (where organization name is followed by signature of representative, the signature is deemed made in representative capacity).

The contracts’ text stated that the contracting parties were two corporations and the corporate officer who signed the contracts indicated his corporate affiliation (“Pres.”, “President”) next to his signatures.

Still, this wasn’t enough to defeat the clear contract language in two separate locations that unequivocally stated the defendant was personally guaranteeing the corporation’s contract obligations.

Also critical to the First District’s ruling was the bargaining equality element: the defendant was a lawyer and experienced businessman who testified he clearly understood the difference between personal and corporate liability.

There was also trial testimony that showed defendant was given an opportunity to review the contracts before he signed them and the parties had done business together for over a decade.

Lastly, the Court also noted that defendant made no attempt to either cross out the contracts’ guarantee language or insert language that clarified he was signing only for the corporation and not for himself.  ¶¶ 46-48.

Afterwords:

1/ The contract text and signature line should clearly identify the contracting parties and the signature block should reflect who is signing – an individual, a business entity or both.

2/ If the intent is for the contract to bind a business entity only (not an individual), the contract and signature block should say so and the signer should note his job title or corporate affiliation.

3/ If a contracting party wants the signing corporate officer to be responsible along with the corporation, the signature line should make clear that the person signing is doing so on his own (and not just his company’s) behalf.