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



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.

“But I Did Stay At A Holiday Inn Last Night!”: Unauthorized Practice of Law By Corporate Reps In IL

brady bunchIn Rohr Burg Motors, Inc. v. Kulbarsh, 2014 IL App (1st) 131664, the First District expands on the rule requiring a corporation to be represented by counsel in litigation.

The plaintiff car dealer filed a pro se (i.e. not through an attorney) complaint seeking return of a car the defendant retained after promising to return it to the dealer in exchange for a refund. 

When the dealer’s check bounced, plaintiff kept the car and wouldn’t give it up.  The dealer sued to get the car back.

The check did eventually clear and was cashed by the defendant within a week.  Still, the defendant argued that the dealership committed fraud by submitting a bad check and filed defenses and counterclaims based on the original bounced check.

Representing A Corporation Through a Non-Lawyer – The Rules and Consequences

Upholding summary judgment for the car dealer, the Court first rejected the plaintiff’s argument that the dealer’s complaint was void since a nonattorney filed it. 

The Illinois Attorney Act, 705 ILCS 205/1, plainly provides that “no person shall be permitted to practice as an attorney within this State without having….obtained a license for that purpose….”

Because of this, a corporation’s complaint filed by a non lawyer would normally be void.  This so-called “nullity rule” aims to foster the policy of deterring the unauthorized practice of law. 

The  reason for the rule in the corporate context is that a corporate representative’s interests will often be at odds with the corporate entity’s.  A corporation can, however, defend itself through an officer in a small claims case (a case that seeks damages under $10k). See Supreme Court Rule 282.

The Court here found that sanctions for a corporation’s unauthorized practice of law should be proportionate to the gravity of the violation.  A blanket rule that voids all nonlawyer corporate court filings should be applied only where it furthers the purposes of protecting the public and the integrity of the court system.

The factors a court considers in determining whether to sanction a corporation that acts through a nonattorney include: (1) whether the conduct was done with knowledge that it was improper, (2) whether the corporation acted diligently and promptly in correcting the mistake by obtaining counsel, (3) whether the nonattorney’s participation is minimal or substantial; and (4) whether the participation results in prejudice to the opposing party.  (¶¶ 39-44).

Applying these rules, the Court found that the car dealer’s filing a complaint through its nonlawyer director wasn’t egregious enough to warrant invalidating all of the plaintiff’s filings.  The Court noted there was no evidence the corporate agent intentionally filed suit without an attorney and that within two months of the complaint filing, the plaintiff hired an attorney to represent it in the lawsuit.

Finally, the court found that defendant wasn’t prejudiced by the filing of a complaint by a nonlawyer.  The complaint sufficiently apprised the defendant of the nature of plaintiff’s claims.

Take-aways: Corporate representation by a non-attorney won’t always void the litigation.  The Court will tie any sanction to the seriousness of the unauthorized practice of law violation.  If the mistake is corrected or is only a technical one, it won’t doom the pro se corporation’s filings.