Tag: corporate law

Piercing the Corporate Veil Not a Standalone Cause of Action: It’s A Remedy – IL Court Rules

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).

Successor Liability

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).

Afterwords:

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.

Loss of Earning Capacity and The Self-Employed Plaintiff: What Damages Are Recoverable (IL 4th Dist. Case Note)

The plaintiff in Keiser-Long v. Owens, 2015 IL App (4th) 140612, a self-employed cattle buyer, sued for injuries she suffered in a car accident with the defendant.  The defendant admitted negligence and the parties went to trial on damages.

The defendant successfully moved for a directed verdict on plaintiff’s attempt to recover for lost earning capacity at trial and the Plaintiff appealed.

Reversing, the Fourth District appeals court expanded on the potential damages a personal injury claimant can recover where the plaintiff is self-employed and doesn’t draw a formal salary from the business she operates.

Illinois allows a plaintiff in a negligence suit to recover all damages that naturally flow from the commission of a tort.  Impaired earning capacity is a proper element of damages in a personal injury suit.  However, recovery is limited to loss that is reasonably certain to occur.  Lost earning capacity damages are measured by the difference between (a) the amount a plaintiff was capable of earning before her injury; and (b) the amount she is able to earn post-accident.

Lost earning capacity damages focus on an injured person’s ability to earn money instead of what she actually earned before an injury.  That said, a plaintiff pre- and post-accident earnings are relevant to a plaintiff’s damages computation.  ¶ 37.

Where a plaintiff is self-employed, a court can consider the plaintiff’s company’s diminution of profits as evidence of a plaintiff’s monetary damages where the plaintiff’s services are the dominant factor in producing profits.  By contrast, where a self-employed plaintiff’s involvement is passive and she relies on the work of others to make the company profitable, a profits reduction is not a proper damage element in a personal injury action.

The trial court granted the defendant’s motion for directed verdict since the plaintiff failed to present evidence that she lost income in the form of a salary or bonus from her cattle-buying business.

The appeals court reversed.  It noted that the plaintiff was solely responsible for her company’s profits and was the only one who travelled around the State visiting various cattle auctions and meeting with cattle sellers.  Plaintiff also offered expert testimony that she missed out on the chance to earn some $200,000/year in the years following the accident and that any company profits were labeled “retained earnings” and treated as the plaintiff’s personal retirement plan  ¶¶ 41-43.

The court held that since the plaintiff was the only one whose efforts dictated whether her cattle buying business was profitable or not, her business’s post-accident balance sheet was relevant to her recoverable damages.

The court also rejected the defendant’s argument that since plaintiff’s company was a C corporation (and not an S corp.1), profits and losses did not flow through to the plaintiff, the court should not have considered lost business income as an element of plaintiff’s damages.  The court found that any tax differences between C and S corporations were irrelevant since plaintiff was the cattle company for all intents and purposes.  As a result, any loss suffered by the company was tantamount to monetary loss suffered by the plaintiff.  ¶¶ 45-46.

The court’s final reason for reversing the trial court was a policy one.  Since the plaintiff’s corporation couldn’t sue the defendant, there was no potential for double recovery.  In addition, if the court prevented the plaintiff from recovering just because she didn’t earn a formal salary, this would operate as an unfair windfall for the defendant.  The end result is now the parties must have a retrial on the issue of plaintiff’s lost earning capacity.  ¶¶ 46-47.

Afterwords:

Owens provides a useful synopsis of when impaired earning capacity can be recovered in a personal injury suit.  In the context of a self-employed plaintiff, a plaintiff’s failure to draw a salary per se will not foreclose her from recovering damages; especially where the plaintiff – and not someone working for her – is the one mainly responsible for company profits.  In cases where the plaintiff is self-employed and is singularly responsible for a company’s profits, a loss in business income can be imputed to the defendant and awarded to the business-owner plaintiff.

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1  A C corporation is taxed at both the corporate level and at the shareholder level.  By contrast, an S corporation is not taxed at the corporate level; it’s only taxed at the shareholder individually. (This is colloquially termed “flow-through taxation.”)

Illinois Court Tackles Civil Conspiracy and Consumer Fraud in Interior Design Spat

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Carol Studios, Inc. v. Hong, 2013 IL App 122293-U (1st Dist.2013) provides a good summary of Illinois pleading requirements for consumer fraud, civil conspiracy and unjust enrichment in a construction contract dispute involving commercial property.  

Facts:

Over a span of two years, the owners of a mixed-use property in Skokie, Illinois hired the plaintiff interior design firm along with the defendants architect and general contractor to develop the site.  

At some point the architect and general contractor defendants (the “Defendants”) developed a mutual disdain for the plaintiff and started excluding plaintiff from the development and disparaging the plaintiff’s design services to the owners. 

When the owners fired it, the plaintiff sued.  The trial court dismissed plaintiff’s claims and plaintiff appealed.

Held: Affirmed.

Rules/Reasoning:

To allege civil civil conspiracy in Illinois, the plaintiff must plead: (1) an agreement between two or more persons, (2) to participate in an unlawful act, or a lawful act in an unlawful manner, (3) injury caused by the unlawful overt act performed by one of the parties; and (4) overt act was done in furtherance of a common scheme.

The essence of plaintiff’s conspiracy claim was that the Defendants ganged up on and conspired to block plaintiff from the project by denigrating the plaintiff’s services and telling the owners that Defendants could perform plaintiff’s interior design work better and cheaper. 

The Court found there was nothing inherently unlawful about this: defendants were free to express their work partner preference and to not work with the plaintiff. ¶¶ 23-26.

The Court also rejected plaintiff’s Consumer Fraud Act (the “CFA”) count based on Defendants’ misrepresenting their qualifications to the owners and false statements that they could do plaintiff’s design work for less money. 

In Illinois, a consumer fraud plaintiff must plead: (1) a deceptive act or practice; (2) defendant’s intent to induce plaintiff’s reliance on the deceptive act/practice, (3) occurrence of the deception in trade or commerce, and (4) actual damages to the plaintiff caused by the deception.  ¶¶ 28-29.

The Court narrowly construed the CFA and dismissed plaintiff’s claim.  The Court found that while the CFA can at times apply to business-to-business transactions, a garden-variety breach of contract claim doesn’t equate to consumer fraud.  ¶ 30

 And since the plaintiff’s core claim was that the owners breached the interior design contract, defendants’ freeze-out efforts against plaintiff didn’t have a sufficient connection to consumer protection concerns to bring plaintiff’s claims within the CFA’s coverage.  ¶¶ 27-31

Take-aways:

This case reaffirms that a basic breach of contract claim can’t be transmuted into a statutory consumer fraud claim.  Otherwise, all breach of contract claims would give rise to companion consumer fraud counts. 

Carol Studios also shows how difficult it is to prove civil conspiracy when all that’s really involved is a business dispute among different commercial parties. 

Note: the plaintiff in Carol Studios was permitted to amend its tortious interference with contract claims.