Tag: dissolution

General Contractor Insolvency, Not Owner Recourse, is Key Implied Warranty of Habitability Test – IL First Dist.

In Sienna Court Condominium Association v. Champion Aluminum Corporation, 2017 IL App (1st) 143364, the First District addressed two important issues of common law and statutory corporate law.  It first considered when a property owner could sue the subcontractor of a defunct general contractor where there was no contractual relationship between the owner and subcontractor and then examined when a defunct limited liability company (LLC) could file a lawsuit in the LLC’s name.

The plaintiff condo association sued the developer, general contractor (“GC”) and subcontractors for various building defects.  The subcontractors moved to dismiss the association’s claims on the ground that they couldn’t be liable for breaching the implied warranty of habitability if the plaintiff has possible recourse from the defunct GC’s insurer.

The trial court denied the subcontractors’ motion and they appealed.

Affirming denial of the subcontractors’ motions, the First District considered whether a homeowner’s implied warranty claim could proceed against the subcontractors of an insolvent GC where (1) the plaintiff had a potential source of recovery from the GC’s insurer or (2) the plaintiff had already recovered monies from a warranty fund specifically earmarked for warranty claims.

The court answered “yes” (plaintiff’s suit can go forward against the subs) on both counts. It held that when deciding whether a plaintiff can sue a subcontractor for breach of implied warranty of habitability, the focus is whether or not the GC is insolvent; not whether plaintiff can possibly recover (or even has recovered) from an alternate source (like a dissolved GC’s insurer).

For precedential support, the Court looked to 1324 W. Pratt Condominium Ass’n v. Platt Construction Group,   2013 IL App (1st) 130744 where the First District allowed a property buyer’s warranty claims versus a subcontractor where the general contractor was in good corporate standing and had some assets.  The court held that an innocent purchaser can sue a sub where the builder-seller is insolvent.

In the implied warranty of habitability context, insolvency means a party’s liabilities exceed its assets and the party has stopped paying debts in the ordinary course of its business. (¶¶ 89-90).  And under Pratt’s “emphatic language,” the relevant inquiry is GC’s insolvency, not plaintiff’s “recourse”.¶ 94

Sienna Court noted that assessing the viability of an owner’s implied warranty claim against a subcontractor under the “recourse” standard is difficult since there are conceivably numerous factual settings and arguments that could suggest plaintiff has “recourse.”  The court found the insolvency test more workable and more easily applied then the amorphous recourse standard. (¶ 96).

Next, the Court considered the chronological outer limit for a dissolved LLC to file a civil lawsuit.  The GC dissolved in 2010 and filed counterclaims in 2014.  The trial court ruled that the 2014 counterclaims were too late and time-barred them.

The appeals court affirmed.  It noted that Section 35-1 of the Illinois LLC Act (805 ILCS 180/1-1 et seq.) provides that an LLC which “is dissolved, and, unless continued pursuant to subsection (b) of Section 35-3, its business must be wound up,” upon the occurrence of certain events, including “Administrative dissolution under Section 35-25.” 805 ILCS 180/35-1

While Illinois’ Business Corporation Act of 1993 specifies that a dissolved corporation may pursue civil remedies only up to five years after the date of dissolution (805 ILCS 5/12.80 (West 2014)), the LLC Act is silent on when a dissolved LLC’s right to sue expires.  Section 35-4(c) only says “a person winding up a limited liability company’s business may preserve the company’s business or property as a going concern for a reasonable time”

The Court opted for a cramped reading of Section 35-4’s reasonable time language.  In viewing the LLC Act holistically, the Court found that the legislature contemplated LLC’s having a finite period of time to wind up its affairs including bringing any lawsuits.  Based on its restrictive interpretation of Section 35-4, the Court held the almost four-year gap between the GC’s dissolution (2010) and counterclaim filing (2014) did not constitute a reasonable time.

Afterwords:

Sienna Court emphasizes that a general contractor’s insolvency – not potential recourse – is the dominant inquiry in considering a property owner’s implied warranty of habitability claim against a subcontractor where the general contractor is out of business and there is no privity of contract between the owner and subcontractor.

The case also gives some definition to Section 35-4 of the LLC Act’s “reasonable time” standard for a dissolved LLC to sue on pre-dissolution claims.  In this case, the Court found that waiting four years after dissolution to file counterclaims was too long.

 

 

Five-Year Limitations Period to Sue Dissolved Corporation Applies to Piercing Corporate Veil Suit – IL Court

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Peetom v. Swanson, 334 Ill.App.3d 523 (2nd. Dist. 2002) provides a dated yet instructive recitation of the statute of limitations standards that govern corporate veil piercing actions in Illinois.

The case’s relevant chronology includes: (1) Plaintiff filed a negligence action in 1995 against a corporate defendant for injuries plaintiff suffered in 1993, (2) In May 1997 – the corporate defendant was defaulted; (3) In June 1998, the corporate defendant was involuntarily dissolved by the Illinois Secretary of State for failure to file a report and pay its taxes, (4) In November 1998, a $1M money judgment entered against corporate defendant; and (5) in 2000, plaintiff filed suit against corporate shareholders under a veil piercing theory to enforce the 1998 default judgment.

The trial court dismissed the suit as untimely under the two-year limitations period for personal injury actions and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: The case involves the interplay between three limitations periods in the Code of Civil Procedure.  Section 13-202 sets forth a two-year limitations period for personal injury claims, Section 12.80 of the Business Corporation Act requires a claim against a dissolved corporation (or its shareholders and directors) to be brought within five years after dissolution, and Code Section 12-108 provides for a seven-year period to enforce a judgment.  735 ILCS 5/13-202, 815 ILCS 5/12.80, 735 ILCS 5/12-108.

Since piercing the corporate veil is an equitable remedy and not a cause of action, the limitations period applicable to a piercing claim is governed by the nature of the underlying cause of action.  The question is “which underlying action?”  The 1995 negligence suit or the 2000 action to enforce the money judgment against the corporate shareholders?

The court rejected the shareholder defendants’ argument that the 1995 case was the underlying claim and that the two-year period for personal injury suits applied.  The court found that plaintiff’s 2000 piercing action, which sought to affix liability to the shareholder defendants for the $1M money judgment against the corporation, was the underlying claim for purposes of applying the statute of limitations.  The court found that in the 2000 case, Plaintiff was not alleging negligence against the shareholders but was instead trying to enforce the 1998 judgment assessed against the dissolved corporation.  As a result, Plaintiff would normally have seven years – through November 2005 – to sue on the money judgment.

However, since the corporate defendant was dissolved, the five-year period for suing a dissolved corporation and its shareholders based on pre-dissolution debts applied.  Plaintiff’s piercing suit was still timely though.  The judgment entered in 1998 and plaintiff filed suit in 2000 – well within the five-year period.

The other argument the First District rejected was defendant’s claim that the five-year period to sue a defunct corporation didn’t apply since at the time the corporation was dissolved, the plaintiff’s claim hadn’t yet been reduced to judgment and so plaintiff didn’t have an existing claim prior to the dissolution.

The court disagreed and found that since the corporation had been defaulted in 1997 – prior to the 1998 dissolution – the plaintiff’s claim against the corporation had already been deemed valid even though the plaintiff’s money claim wasn’t mathematically certain until after the company dissolved.  As a consequence, plaintiff had a pre-existing claim against the corporation under the Illinois BCA to trigger application of the five-year limitations period.

Afterwords:

An obvious pro-creditor decision.  The case stands for proposition that in a judgment creditor’s action against corporate shareholders to pierce the corporate veil after an earlier, unsatisfied judgment against a corporation, the seven-year limitations period to enforce a judgment applies.  The only reason the five-year period applied here was because of the specific BCA section (815 ILCS 5/12.80) that speaks to suing dissolved corporations.

Still, the plaintiff’s suit was timely as he filed well before the 2003 deadline.  Had the defendant prevailed, the plaintiff’s claim would have been barred if he didn’t sue in 1995 – two years after plaintiff’s underlying personal injury.

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.