Dated but relevant for its discussion of some signature commercial litigation issues , Dougherty v. Tsai, 2017 IL App (1st) 161949, addresses, among other things, corporate alter ego liability, fraudulent transfers, and the admissibility of expert witness testimony.
In 2011, the plaintiff lessor obtained a default judgment against a corporate tenant (Tenant) in a 2009 commercial lease dispute case.
Through post-judgment discovery, the landlord learned that the Tenant and its owner (the Owner) secretly transferred money and assets from the Tenant to a related company (Transferee) that had the same employees and general line of business. The landlord filed a new action in 2013 to hold the Transferee and Owner jointly responsible for the underlying judgment against the Tenant.
After a bench trial, the circuit court found that the Transferee was the Tenant’s alter ego and entered judgment against the Transferee and Owner. They appealed.
Defendants argued that the trial judge improperly entered judgment on a nonexistent cause of action – alter ego. In Illinois, a corporation is a legal entity separate and distinct from its shareholders, directors and officers. Corporate shareholders, officers and directors are generally not responsible for corporate debts. But a court will disregard a corporate form and pierce its veil of limited liability where the corporation is merely an alter ego or business conduit of another person or entity.
The alter ego doctrine imputes liability to an individual or entity that uses the corporation as a vehicle to conduct the person’s or entity’s business. However, neither piercing the corporate veil nor alter ego are separate, “stand-alone” causes of action. Instead, they are means of imposing liability in an underlying claim.
To pierce the corporate veil, a plaintiff must demonstrate (1) unity of interest and ownership between the corporation and the person to be held liable such that separate personalities of the corporation and parties who compose it no longer exist and (2) circumstances are such that adherence to the fiction of a separate corporate existence would promote injustice or inequitable circumstances.
Here, the Court found that the trial court properly pierced the Tenant’s corporate veil of limited liability. The similarities between the Tenant and Transferee (same business, ownership and employees, transfer of accounts from one company to the other, etc.) were so glaring that the Transferee was the Tenant’s alter ego. Since the Tenant and Transferee were essentially one-and-the-same, the Court held that recognizing a separation between them reeked of unfairness to the plaintiff lessor.
The Court also rejected Defendants’ argument that piercing was improper since the underlying case sounded in breach of contract. In a breach of contract case, it’s more difficult to pierce the corporate veil than in tort causes of action. This is because parties are presumed to enter into contracts voluntarily and assume the risks of the breaching party’s insolvency or protection from liability.
Here, however, the Court noted the 2013 case was not a breach of contract suit; it instead was an attempt to enforce the earlier judgment entered against the tenant. Because the 2013 case wasn’t viewed as a breach of contract suit, the high hurdle to establish piercing in contract cases didn’t apply. [¶29]
The Court then addressed defendants’ argument that the trial court improperly allowed plaintiffs’ accounting expert to offer undisclosed damages opinions at trial.
The purpose of pretrial discovery in Illinois is to encourage timely disclosure of witnesses and opinions and discourage gamesmanship and surprise testimony.
Rule 213(g) limits expert testimony at trial to matters disclosed in answer to a Rule 213(f) interrogatory or in a discovery deposition. An expert witness can elaborate on a disclosed opinion so long as the augmented testimony states “logical corollaries” to an opinion instead of new reasons for it.
The Court held that the trial court properly allowed the accountant’s testimony that the Tenant did not receive equivalent value in exchange for nearly $100,000 in rental payments it made to a company controlled by the Owner after the Tenant had supposedly gone out of business and decamped the leased premises.
The Court noted that the accountant had authored a pre-trial report that covered his damage opinions at trial, the report was disclosed to the Defendants and the Defendants deposed the accountant twice before trial. [¶ 43]
The case illustrates how important it is for judgment creditors to be tenacious in their collection efforts. The Tenant’s Owner operated a complicated web of related business entities and freely transacted business among them. This made it challenging for the plaintiff to unspool the various layers of corporate liability protection. However, through its determined efforts and aggressive use of Illinois’ post-judgment enforcement rules, the plaintiff won a substantial money judgment against both individual and corporate defendants.
The case also reaffirms that alter ego and piercing the corporate veil are not standalone causes of action but are instead a means of attaching liability on an underlying cause of action
Dougherty also makes clear that under Illinois pre-trial discovery rules, an expert witness at trial can amplify previously disclosed opinions as long as the expanded trial testimony has a factual nexus to earlier opinion.