Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.

 

 

Veil Piercing Money Judgment Survives Res Judicata Defense – Mich. Court

Piercing the corporate veil, as metaphorical phrase and very real remedy, applies when a shareholder abuses the corporate form to shield himself from liability to corporate creditors. A prototypical piercing scenario is where a sole shareholder so controls his company that it blurs the separation between shareholder and company and is unfair to protect the shareholder from personal liability for company debts.  In such a case, the law views the company and shareholder as inseparable “alter egos” and a court will bypass the liability protection normally afforded a corporate shareholder.

Green v. Ziegelman, 310 Mich.App. 436 (2015) chronicles a piercing defendant’s efforts to avoid personal liability for a breach of contract debt by asserting the res judicata defense. After a 2006 breach of contract money judgment against an architectural firm went unsatisfied, the plaintiff sued the firm’s sole shareholder in 2012 to hold him responsible for the prior judgment.

The defendant – the sole shareholder of an architectural firm – moved for summary judgment that the claim against him was barred by res judicata.  He argued that the plaintiff could have sought to pierce the architecture firm’s corporate veil in the 2006 action but failed to do so.  Now, according to the defendant, it was too late.

The trial court disagreed and denied the shareholder’s summary judgment motion.  After the trial court entered judgment for the plaintiff after trial, the defendant appealed.

Result: Trial court judgment upheld.

Reasons: Michigan law applies a three-part res judicata test: if (1) there is a final judgment on the merits, (2) the second lawsuit’s issue could have been resolved in the first lawsuit, and (3) both actions (the first and second lawsuit) involve the same parties, a second claim will be barred by res judicata.

Res judicata extends not only to claims that were actually litigated but to claims that could have been raised.  The res judicata doctrine is applied to promote fairness; it balances a plaintiff’s right to have his day in court versus a defendant’s competing right to have litigation closure along with the court’s interest in case finality and conserving court resources.

To prevail on a piercing claim in Michigan, a plaintiff doesn’t have to prove a corporate shareholder committed intentional fraud.  It is enough if the shareholder acts “in such a manner as to defraud and wrong the [plaintiff]” or in such circumstances that a court “would aid in the consummation of a wrong” if it validated a company’s separate existence from its shareholder.

To determine whether the plaintiff could have (and should have) sought to pierce the architectural firm’s corporate veil in the 2006 case, the Court noted that under Michigan law, corporate officers are expected to respect a corporation’s separate existence from its individual members.  Because of this, absent evidence that the shareholder defendant abused the corporate form, a piercing claim would not have been well-founded when plaintiff sued in the 2006 case.

The appeals court found that since there was no evidence to signal misuse of the corporate form, there was no reason for the plaintiff to try to pierce the architect company’s corporate veil in the earlier lawsuit.  As a result, the 2012 piercing case did not stem from the same underlying transaction as the 2006 breach of contract case.

Upholding the piercing judgment, the appeals court held that the shareholder completely dominated the architectural firm such that the firm and shareholder were the same person.  Other important factors that led the court to approve the piercing judgment included evidence that the shareholder commingled personal assets with company assets, that the company failed to follow basic corporate formalities, and that 10 days after judgment, the shareholder dissolved the architectural firm and started a new one.

Take-aways:

1/ The res judicata defense won’t bar a piercing the corporate veil claim unless there was clear evidence of fraud or an alter-ego relationship between company and shareholder at the time a prior lawsuit against the corporation was filed;

2/ A plaintiff in a piercing suit under Michigan law isn’t required to show specific fraudulent conduct by the dominant shareholder.  It’s enough that there is an overall “feel” of unfairness based on a multitude of factors including failure to follow formalities, undercapitalization and commingling of personal vs. company assets.

Illinois LLC Manager Liability For LLC Contract Obligations – Some Basics

This unpublished case is dated (2011) but still post-worthy for its discussion of the nature of limited liability company (LLC) contract obligations and when someone is privileged to intentionally tamper with an existing contract.

In 6030 Sheridan Road, LLC v. Wright Management, LLC, 2011 IL App. (1st) 093282-U, the plaintiff real estate developer sued defendants – an LLC property owner and its principal – for tortious interference with business relationship after a planned condominium conversion tanked.

The plaintiff sued when the defendants terminated the condo conversion agreement because of their displeasure with the plaintiff’s handpicked real estate broker and marketing firm.

The plaintiff sued claiming the defendants tortiously interfered with plaintiff’s contracts with the broker and marketing firm and caused the plaintiff to breach those contracts.  The trial court granted summary judgment for the defendants.

Held: Affirmed.

Reasons: the court first held that an individual LLC member could conceivably interfere with a contract entered into by that LLC.  The elemental LLC rules relied on by the court:

An LLC is a separate entity from its principal members and can sue and be sued and make contracts in its own capacity.

An LLC is a hybrid form of doing business that combines the advantages of a corporation’s limitation on personal liability with a partnership’s pass-through tax treatment (i.e., the LLC pays no entity level state or federal income tax.)

– The Limited Liability Company Act (the Act) (805 ILCS 180/1-1 et seq.) requires an LLC to have one or more members and is a separate legal entity from its members.

– An LLC can be member-managed or manager-managed and LLC members owes an LLC’s other members a fiduciary duty of loyalty and care. The same holds true for managers of manager-managed companies.

– The debts of an LLC, whether arising in contract, tort, or otherwise, are solely the debt of the LLC; not its managers or members;

– A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

– An LLC member can only be responsible for LLC debts where: (1) the articles of organization provide for individual liability; and (2) the member has consented in writing.

See 805 ILCS 180/10-10; 180/1-30; 180/15-1, 15-3.

Afterwords:

This case provides detailed discussion of the LLC business entity and the scope of an LLC member’s liability for contract obligations.