Tag: motion to vacate judgment

Faulty Service on Defunct LLC Spells Trouble for Judgment Creditor – IL 1st Dist.

In a case whose procedural progression spans more than a decade, the First District in John Isfan Construction v. Longwood Towers, LLC, 2016 IL App (1st) 143211 examines the litigation aftershocks flowing from a failure to properly serve a limited liability company (LLC).

The case also illustrates when a money judgment can be vacated under the “substantial justice” standard governing non-final judgments.

The tortured case chronology went like this:

2003 – plaintiff files a mechanics lien suit against LLC for unpaid construction work on an 80-unit condominium development;

2005 – LLC dissolves involuntarily;

2005 – lien suit voluntarily dismissed;

2006 – plaintiff breach of contract action filed against LLC;

2009 – default judgment entered against LLC for about $800K;

2011 – plaintiff issues citations to discover assets to LLC’s former members and files complaint against the members to hold them liable for the 2009 default judgment (on the theory that the LLC made unlawful distributions to the members);

2014 – LLC members move to vacate the 2009 judgment. Motion is denied by the trial court and LLC members appeal.

Holding: The appeals court reversed the trial court and found that the 2009 default judgment was void.

The reason: Plaintiff’s failure to properly serve the defunct LLC under Illinois law. As a result, a hefty money judgment was vacated.

Q:           Why?

A:            A defendant must be served with process for a court to exercise personal jurisdiction over him.  A judgment entered against a party who is not properly served is void.  

Section 50 of the LLC Act (805 ILCS 180/1-50) provides that service of process on an LLC defendant must be made on (a) the LLC’s registered agent or (b) the Secretary of State if the LLC doesn’t appoint a registered agent or where the LLC’s registered agent cannot be found at the LLC’s registered office or principal place of business.

In the context of a dissolved LLC, the LLC Act provides that an LLC continues post-dissolution solely for the purpose of winding up.  This is in contrast to the corporate survival statute that provides that a dissolved (non-LLC) corporation continues for five years after dissolution (This means the defunct corporation can be sued and served for up to five years after dissolution.)  805 ILCS 5/5.05.

Here, the plaintiff sued the LLC’s former registered agent over a year after the LLC dissolved.  This was improper service under the LLC Act.  By failing to serve the Secretary of State in accordance with the LLC Act, the court lacked jurisdiction over the LLC.  (¶¶ 37-40)

The Court also rejected the plaintiff’s argument that the erstwhile LLC members waived their objection to jurisdiction over the LLC by participating in post-judgment proceedings.

Since a party who submits to a court’s jurisdiction does so only prospectively, not retroactively, the party’s appearance doesn’t activate an earlier order entered in the case before the appearance was filed. (¶¶ 40-42)

Another reason the Court voided the default judgment was the “substantial justice” standard which governs whether a court will vacate a judgment under Code Section 2-1301(e). 

The reason Section 2-1301 applied instead of the harsher 2-1401 was because the judgment wasn’t final.  It wasn’t final because at the time the judgment was entered, the plaintiff had a pending claim against another party that wasn’t disposed of.  ((¶¶ 46-47)

Under Illinois law, a default judgment is a drastic remedy and Illinois courts have a long and strong policy of deciding cases on the merits instead of on procedural grounds.  In addition, when seeking to vacate a non-final default order, the movant does not have to show a meritorious defense or diligence in presenting the defense.

Applying these default order guideposts, the Court found that substantial justice considerations dictated that the default judgment be vacated.  Even though the judgment was entered some five years before the motion to vacate was filed, it wasn’t a final order. 

This meant the LLC member movants did not have to show diligence in defending the action or a meritorious defense.  All the members had to demonstrate was that it was fair and just that they have their day in court and that they should be able to defend the plaintiff’s unlawful transfers allegations. (¶¶ 49, 51)

Afterwords: This case provides a useful summary of the key rules that govern how to serve LLC’s and particularly, dissolved LLC’s.  The case’s “cautionary tales” are to (i) serve corporate defendants in accordance with statutory direction; and (ii) always request a finding of finality for default judgments where there are multiple parties or claims involved.

Had the plaintiff received a finding of finality, the LLC members’ motion to vacate would have been untimely under Section 2-1401 – which requires a motion to attack a final judgment to be brought within two years and has a heavier proof burden than a 2-1301 motion.  Still, it wouldn’t have mattered here. The plaintiff’s failure to properly serve the LLC meant the judgment was void and could have been attacked at any time.

 

“I Just Work Here”: Service on Corporate “Employee” Not The Same As Service On Corporate “Agent” – IL Court

Route 31, LLC, v. Collision Centers of America, 2015 IL App (2d) 150344-U examines the law and facts that determine whether service of process on a corporation complies with Illinois law.

The plaintiff served its lawsuit on the defendant’s office manager and eventually won a default judgment.  About nine months later, the corporation moved to quash service and vacate the default judgment on the basis that service was defective.  The trial court denied the motion and the defendant appealed.

The corporate defendant argued that the court had no personal jurisdiction over it since the plaintiff improperly served the lawsuit. A judgment entered without personal jurisdiction can be challenged at any time.

  • Personal jurisdiction may be established either by service of process in accordance with statutory requirements or by a party’s voluntary submission to the court’s jurisdiction.
  • Strict compliance with the statutes governing the service of process is required before a court will acquire personal jurisdiction over the person served.
  • Where service of process is not obtained in accordance with the requirements of the statute authorizing service of process, it is invalid, no personal jurisdiction is acquired, and any default judgment rendered against a defendant is void.
  • Section 2–204 of the Code provides that a private corporation may be served by leaving a copy of the process with its registered agent or any officer or “agent” of the corporation found anywhere in the state or in any other manner permitted by law. 735 ILCS 5/2–204 (West 2012).
  • Substitute service of a corporation may be made by serving the Secretary of State. 805 ILCS 5/5.25(b)
  • A sheriff’s return of service is prima facie evidence of service, which can be set aside only by clear and satisfactory evidence.
  • However, when a corporation is sued, the sheriff’s return as to the fact of agency is not conclusive. Id.

(¶¶ 13-14)

Employee vs. Agent: “What’s the Difference?”

Employee status and agency are often used interchangeably in common parlance but the terms differ in the service of process context.  An employee is not always an “agent.”   Illinois cases have invalidated service of process on corporations where a plaintiff, in different cases, served a cashier and receptionist with process and neither understood what it was.

But at least one court (Megan v. L.B. Foster Co., 1 Ill.App.3d 1036, 1038 (1971), did find that “service upon an intelligent clerk of a company who acts as a receptionist and who understood the purport of the service of summons” was sufficient service on a corporate employee.

In Collision Centers, the plaintiff and defendant submitted warring affidavits.  The plaintiff’s process server testified that the summons recipient held herself out as the “office manager,” and acknowledged that she was authorized to accept service.  The office manager’s affidavit said just the opposite: she claimed to have no corporate responsibilities or authority to receive legal papers for her employer.

The court noted that under the process server’s affidavit, the office manager was akin to an agent – an “intelligent” company representative who appreciates the importance of the served summons.

Yet the defendant’s office manager swore she was only a garden-variety “employee” who lacked any corporate authority to accept service and lacked a basic understanding of the papers’ meaning.  In fact, the office manager stated in the affidavit that she was badgered into accepting the papers by the plaintiff’s process server.

The widely divergent affidavit testimony meant the court could only decide the service issue after an evidentiary hearing with live testimony.  Since plaintiff has the burden of proving proper corporate service and never requested an evidentiary hearing in the trial court, the trial court erred in denying defendant’s petition to quash service without first conducting a hearing.  As a result, the judgment against the corporation was reversed.

Afterwords:

This case highlights the importance of a civil suit plaintiff’s vigilance when serving a corporation.  If service on a registered agent of a corporation (something that is typically public record via a Secretary of State website) isn’t possible, the plaintiff should take pains to serve an officer of the corporation or at least a knowledgeable agent.  Unfortunately, in Illinois at least, this isn’t always possible on the first try since service must usually go through the County Sheriff in the first instance.