Corporate Five-Year Winding Up or “Survival” Period Has Harsh Results for Asbestos Injury Plaintiffs – Illinois Court

An Illinois appeals court recently considered the interplay between the corporate survival statute, 805 ILCS 5/12.80 (the “Survival Act”), which governs lawsuits against dissolved corporations) and when someone can bring a direct action against another person’s liability insurer.

The personal injury plaintiffs in Adams v. Employers Insurance Company of Wasau, 2016 IL App (3d) 150418 sued their former employer’s successor for asbestos-related injuries. Plaintiffs also sued the former company’s liability insurers for a declaratory ruling that their claims were covered by the policies.

The former employer dissolved in 2003 and plaintiffs filed suit in 2011. The plaintiffs alleged the dissolved company’s insurance policies transferred to the shareholders and the corporate successor. The insurers moved to dismiss on the basis that the plaintiff’s suit was untimely under the Survival Act’s five-year winding up (“survival”) period to sue dissolved companies and because Illinois law prohibits direct actions against insurers by non-policy holders.

Affirming dismissal of the suit against the insurers, the court considered the scope of the Survival Act and whether its five-year repose period (the time limit to sue a defunct company) can ever be relaxed.

The Survival Act allows a corporation to sue or be sued up to five years from the date of dissolution. The suit must be based on a pre-dissolution debt and the five-year limit applies equally to individual corporate shareholders.  The statute tries to strike a balance between allowing lawsuits to be brought by or against a dissolved corporation and still setting a definite end date for a corporation’s liability. The five-year time limit for a corporation to sue or be sued represents the legislature’s determination that a corporation’s liability must come to and end at some point.

Exceptions to the Survival Act’s five-year repose period apply where a shareholder is a direct beneficiary of a contract and where the amount claimed is a “fixed, ascertainable sum.”

The Court held that since the plaintiffs didn’t file suit until long after the five-year repose period expired, and no shareholder direct actions were involved, the plaintiffs’ claims against the dissolved company (the plaintiffs’ former employer) were too late.

Illinois law also bans direct actions against insurance companies. The policy reason for this is to prevent a jury in a personal injury suit from learning that a defendant is insured and eliminate a jury’s temptation to award a larger verdict under the “deep pockets” theory (to paraphrase: “since defendant is protected by insurance, we may as well hit him with a hefty verdict.”)

The only time a direct action is allowed is where the question of coverage is entirely separate from the issue of the insured’s liability and damages. Where a plaintiff’s claim combines liability, damages and coverage, the direct action bar applies (the plaintiff cannot sue someone else’s insurer).

Here, the plaintiffs’ coverage claim was intertwined with the former employer’s (the dissolved entity) liability to the plaintiffs.  As a result, the plaintiffs action was an impermissible direct action against the dissolved company’s insurers.

Take-aways:

The Case starkly illustrates how unforgiving a statutory repose period is.  While the plaintiff’s injuries here were substantial, the Court made it clear it had to follow the law and that where the legislature has spoken – as it had by enacting the Survival Act – the Court must defer to it. Otherwise, the court encroaches on the law-making function of the legislature.

Another case lesson is that plaintiffs who have claims against dissolved companies should do all they can to ensure their claims are filed within the five-year post-dissolution period.  Otherwise, they risk having their claims time-barred.

 

Property Is Subject to Turnover Order Where Buyer Is ‘Continuation’ of Twice-Removed Seller – Successor Liability in IL

The Second District appeals court recently affirmed a trial court’s turnover order based on a finding that a property transfer involving three separate parties was in reality, a single “pre-arranged transfer” involving a “straw purchaser.”

I previously profiled Advocate Financial Group, LLC v. 5434 North Winthrop, 2015 IL App (2d) 150144 (see http://paulporvaznik.com/5485/5485) where the court addressed the “mere continuation” and fraud exceptions to the general rule of no successor liability (a successor corporation isn’t responsible for debts of predecessor) in a creditor’s post- judgment action against an entity twice removed from the judgment debtor.

The plaintiff obtained a breach of contract judgment against the developer defendant (Company 1) who transferred the building twice after the judgment date. The second building transfer was to a third-party (Company 3) who ostensibly had no relation to Company 1. The sale from Company 1 went through another entity – Company 2 – that was unrelated to Company 1.

Plaintiff alleged that Company 1 and Company 3 combined to thwart plaintiff’s collection efforts and sought the turnover of the building so plaintiff could sell it and use the proceeds to pay down the judgment. The trial court granted the turnover motion on the basis that Company 3 was the “continuation” of Company 1 in light of the common personnel between the companies.  The appeals court reversed though.  It found that further evidence was needed on the continuation exception but hinted that the fraud exception might apply instead to wipe out the Company 1-to Company 2- to Company 3 property transfer.

On remand, the trial court found that the fraud exception (successor can be liable for predecessor debts where they fraudulently collude to avoid predecessor’s debts) indeed applied and found the transfer of the building to Company 3 was a sham transfer and again ordered Company 3 to turn the building over to the plaintiff. Company 3 appealed.

Held: affirmed

Reasons:

– A corporation that purchases the assets of another corporation is generally not liable for the debts or liabilities of the transferor corporation. The rule’s purpose is to protect good faith purchasers from unassumed liability and seeks to foster the fluidity of corporate assets;

– The “fraudulent purpose” exception to the rule of no successor liability applies where a transaction is consummated for the fraudulent purpose of escaping liability for the seller’s obligations; 

– The mere continuation exception requires a showing that the successor entity “maintains the same or similar management and ownership, but merely wears different clothes.”  The test is not whether the seller’s business operation continues in the purchaser, but whether the seller’s corporate entity continues in the purchaser. 

– The key continuation question is always identity of ownership: does the “before” company and “after” company have the same officers, directors, and stockholders? 

The factual oddity here concerned Company 2 – the intermediary.  It was unclear whether Company 2 abetted Company 1 in its efforts to shake the plaintiff creditor.  The court affirmed the trial court’s factual finding that Company 2 was a straw purchaser from Company 1. The court focused on the abbreviated time span between the two transfers – Company 2 sold to Company 3 within days of buying the building from Company 1 – in finding that Company 2 was a straw purchaser. The court also pointed to evidence at trial that Company 1 was negotiating the ultimate transfer to Company 3 before the sale to Company 2 was even complete.

Taken together, the court agreed with the trial court that the two transfers (Company 1 to Company 2; Company 2 to Company 3) constituted an integrated, “pre-arranged” attempt to wipe out Company 1’s judgment debt to plaintiff.

Afterwords:  This case illustrates that a court will scrutinize property transfers that utilize middle-men that only hold the property for a short period of times (read: for only a few days).

Where successive property transfers occur within a compressed time window and the ultimate corporate buyer has substantial overlap (in terms of management personnel) with the first corporate seller, a court can void the transaction and deem it as part of a fraudulent effort to evade one of the first seller’s creditors.

 

Pleading Fraud ‘On Information And Belief’ Fails Rule 9 Specificity Test

In Deschepper v. Midwest Wine and Spirits,2015 WL 1433230, the Northern District considered the necessary pleading allegations for claims based on the Illinois Wage Payment and Collection Act (“IWPCA”), common law fraud and successor liability in an employment dispute involving former salespersons of a liquor wholesaler.  The employer (and their principals) defendants moved to dismiss under FRCP 12(b)(6).  The court granted in part and denied in part the motion.

The Illinois Wage Payment and Collection Act Claim

Upholding the IWPCA claim, the Court held that to state a claim under the IWPCA, a plaintiff “must plead that wages or final compensation is due to him or her as an employee from an employer under an employment contract or agreement.” 820 ILCS § 115/5.  An employment contract or agreement under the IWPCA doesn’t have to be formal or even written.  Instead, employers and employees can manifest their assent to employment terms by conduct alone.

Here, while there wasn’t a formal written employment contract, the Court still sustained the IWPCA count since the plaintiffs alleged that they had a hybrid salary-plus-commissions arrangement.  This was enough to survive dismissal of the IWPCA claim.

Successor Liability

A plaintiff suing under a Federal statute (like the Fair Labor Standards Act here) can sue on a successor liability theory where (1) the successor had notice of the plaintiff’s claim prior to the acquisition; and (2) there was substantial continuity in the operation of the business before and after the sale/acquisition.

The plaintiffs stated sufficient factual allegations to support a successor liability claim against a corporate entity plaintiff said was formed for the purpose of continuing the employer defendant’s business while avoiding that first employer’s Federal overtime payments to employees obligations.

Fraud

Plaintiffs fraud claims failed because they pled the facts “on information and belief.”  Alleging fraud on information and belief is insufficient to state a fraud claim unless (1) the facts constituting the fraud are not accessible to the plaintiff and (2) the plaintiff provides the grounds for his suspicions.

The court found that the plaintiffs’ shotgun pleading, and generalized assertions of fraud weren’t specific enough to place the court and the defendants on notice of the alleged factual basis for the claimed fraud. As a result, the Complaint didn’t satisfy FRCP 9(b)’s  particularity requirement for alleging fraud.

The fraud claim was also deficient since plaintiffs didn’t allege that the underlying fraud facts weren’t accessible to them and also failed to plead the factual bases for their suspicions that defendants were setting up various business entities to evade paying overtime to the plaintiffs.

Afterwords:

– An actionable IWPCA claim doesn’t require a formal written agreement.  All that’s required is the employer and employee manifest assent to payment terms through their conduct;

– Fraud pleading must rise above notice pleading under FRCP 9(b).  Absent specific factual assertions to support the fraud, the claim will likely be dismissed;

– Successor liability applies where defendant forms an entity that is arguably set up to avoid predecessor corporate obligations.