Chicago Business Litigation Lawyer Blog

Our Chicago, Naperville, Wheaton and Oak Brook business trial lawyers won an important procedural victory in a business dispute involving a closely held business. In short, we were able to convince an Illinois trial court that an attorney's appearance should be stricken after being added to a case, we argued, because it appeared the new attorney could have been added to force the recusal of the judge, the attorney's former law partner.

The underlying case was a high-stakes financial dispute in a closely held business. It had been litigated for six years, but was delayed when the defendants added a new lawyer to their team. This lawyer was the former law partner of the judge assigned to the case, who had already put substantial time and effort into the matter. However, to avoid any appearance of impropriety, the judge immediately recused himself when the new lawyer, the former partner, was added. Our position was that it could appear that this was precisely what the defense had intended. In fact, the new lawyer was added two days after three rulings on motions that the new judge called "hotly contested," including rulings unfavorable to the defense.

Another attorney for the defense was a recognized expert in legal ethics, we argued, so the defense clearly must have known that the judge might recuse himself. Furthermore, the defense admitted that it had discussed the possibility of recusal with the client. And finally, the new lawyer had chosen what we alleged was a non-standard way to notify the court of his addition. Rather than asking for leave of court to move for the addition, which would have allowed the parties to discuss the addition in open court, he simply sent his appearance directly to the judge. The trial court held this was contrary to both the rules of court and the usual practice. All of this showed that it appeared that the attorney might have been added to force a change of judges, we argued. For those reasons, we moved to disqualify the new attorney.

In response to our motion, the Presiding Judge of the Cook County Chancery Division struck the new attorneys appearance in a detailed decision explaining that it was important to protect the Cook County Chancery Court from the stain of even the appearance of improriety. The Judge wrote:

The fact remains that [the new lawyer's] filing of his appearance for the defendants two days after rulings on three hotly contested motions (including significant rulings adverse to defendants), the filing of that appearance without leave of court and without prior notice to the plaintiffs, and the sending of the appearance by messenger directly to [the first judge] when the next court date was scheduled within a few weeks, with the result being the immediate recusal of the judge, just simply looks bad.

You can view the full opinion by clicking here.

As business trial attorneys in Naperville, Oak Brook, Wheaton and throughout the Chicago area, we have found that Illinois judges have a low tolerance for even the appearance of impropriety. If you are part of a business dispute where you feel "pushed around" by the other side's discovery violations or other behavior that appears intended to slow justice, DiTommaso * Lubin can help. Please contact us to learn more about your rights.

To see more about our firm and the cases we have handled click here.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Closely Held Businesses , Shareholder Freeze Out

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A recent case of ours includes a motion to disqualify attorneys for the defense under Rule 3.7 of the Illinois Rules of Professional Conduct. Part (b) of that rule states that a lawyer may not represent a client in a case where he or she may be called as a witness to give testimony prejudicial to the client. We moved for an evidentiary hearing on this subject, because our underlying contentions included the contention that the lawyers for the defense witnessed the intentional torts that underlay the case.

Illinois law takes a motion to disqualify an attorney very seriously. Disqualifying a lawyer is considered drastic under state law, because it touches on basic rights by destroying the client's relationship with the lawyer of his or her choosing. Schwartz v. Cortelloni, 177 Ill.2d 166 (1997). For that reason, an evidentiary hearing to determine what evidence is relevant and admissible is generally either necessary or wise. City of Kalamazoo v. Michigan Disposal Service, 125 FSupp2d 219 (WD Mich 2000). In fact, some appeals courts have found that a lack of an evidentiary hearing is sufficient to allow them to question a trial court's decision.

However, Illinois and federal courts have held that an evidentiary hearing is unnecessary when the facts are not disputed, or when investigation is unlikely to provoke an admission that one side has ulterior motives. Robinson v. Boeing Co., 79 F3d 1053 (11th Cir 1996). The Eleventh Circuit's decision in In Re BellSouth Corp., 334 F3d 941, 962 (11th Cir 2003), supporting Robinson, laid down factors for judges to consider when considering disqualifying an attorney for alleged "judge shopping." These include "the fundamental right to counsel, the court’s docket, the injury to the plaintiff, the delay in reaching decision, the judicial time invested, the expense to the parties objecting and the potential for manipulation or impropriety."

The underlying case is related to a shareholder freeze-out lawsuit, in which we represented a 50% shareholder in a closely held corporation.

Our Chicago, Oak Brook and Naperville commercial trial attorneys, DiTommaso * Lubin, represent clients in greater Chicago and throughout Illinois involved in commercial disputes. In addition to shareholder freeze-out and squeeze-out litigation, we handle a variety of business, commercial and corporate litigation for both large corporations and closely held companies. If you have a similar dispute and you would like to discuss it with us confidentially, please contact us through our Web site or by phone.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Closely Held Businesses , Shareholder Freeze Out

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Our Chicago business litigation firm recently handled a case in which one 50% shareholder allegedly tried to freeze out the other using lawyers hired by the companies owned equally by both. When our clients filed a shareholder freeze-out and breach of fiduciary duty claim and began discovery, the defendants balked, citing the attorney-client privilege to explain why they should not be required to turn over important and incriminating information.

As experienced business litigators know, this is no defense at all. Because our clients were equal shareholders in the business, we argued they were entitled to access to certain attorney communications. Furthermore, there is well-established law showing that the attorney-client privilege cannot be misused to deny discovery when the company or its officer is accused of breaching its fiduciary duty to stockholders. In other words, fiduciary duty trumps the privilege. Caselaw says a corporation may not use the privilege to shield relevant communications from discovery in an action by its own stockholders, unless there is good cause. The multipart test for good cause developed by the courts takes into account the nature of the communication, the seriousness of the allegations and other factors. Garner v. Wolfinbarger, 430 F2d 1093 (5th Cir. 1970).

The attorney-client privilege also cannot be raised when the disputed communications were made after the date the attorney and client began a fraudulent or criminal scheme that was part of the lawsuit. That is, communications about crime, fraud or torts are excepted from the attorney-client privilege. Cleveland Hair Clinic, Inc. v. Puig, 968 FSupp 1227, 1241 (ND Ill 1996). Unfortunately, we believed this to be the situation in our case.

Other exceptions to the privilege include:
• Communications to multiple clients who hired the same attorney, but who later have a legal dispute on the same matter
• Cases of legal malpractice
• Certain cases where a lawyer acts as a witness
• Cases where multiple parties make claims through the same deceased client

Of course, "piercing the veil" of corporate attorney-client privilege is not always easy; those attempting it will likely have to fight for their discovery rights. But in a freeze-out case, in which one shareholder or group of shareholders is unfairly trying to control another, this fight is essential to proving the case. DiTommaso * Lubin handles shareholder freeze-outs and squeeze-out lawsuits for both plaintiffs and defendants in Chicago, Naperville, Wheaton, Oak Brook and throughout Illinois. If you would like to discuss how we can help you, please contact us today.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Closely Held Businesses , Shareholder Freeze Out

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In a business trademark dispute, the Seventh Circuit has ruled that large auto parts retailer AutoZone may proceed with its trademark infringement lawsuit against a two-store automotive services business in Naperville and Wheaton, Illinois, called Oil Zone and Wash Zone. AutoZone, Inc. v. Michael Strick, No. 07-2136 (7th. Cir. Sept. 11, 2008).

AutoZone sells auto parts and products, and has been well-known in the Chicago area since the early 1990s, according to the opinion. In that decade, defendant Michael Strick opened his Oil Zone stores outside Chicago, in Wheaton and Naperville. These stores sold automotive services such as oil changes, not parts or products; the Naperville location also offered car washes under the name "Wash Zone."

AutoZone learned of Strick's businesses in 1998, but did not contact him until sending a letter in February of 2003. It filed a lawsuit against Strick and his businesses near the end of that year, alleging service mark, trademark and trade name infringement and trademark dilution under the federal Lanham Act, federal unfair competition law, the Illinois Trademark Registration and Protection Act and Illinois common law. Both sides sought summary judgment, which was granted to Strick only, on his claim that there was no reasonable likelihood of confusion between his trademark and AutoZone's. Strick's defense of laches -- that AutoZone had waited too long to sue -- was not addressed. AutoZone appealed on the likelihood of confusion issue.

In its analysis, the Seventh Circuit noted that summary judgment in trademark cases is only appropriate when "the evidence is so one-sided that there can be no doubt about how the question should be answered." Packman v. Chicago Tribune Co., 267 F.3d 628, 642 (7th Cir. 2001). That case also laid down a series of seven factors courts must analyze to decide whether to grant summary judgment, which include questions of similarity, geography, consumer confusion and the intent of the parties. The court in this case concluded that six of those factors applied, including the similarity of the marks, the similarity of the products and their geographic proximity.

There was enough likelihood of confusion in this case for the case to survive summary judgment, the court concluded. It also left the issue of latches -- the time between AutoZone noticing Oil Zone and when it filed suit -- up to the district court. Thus, the district court's decision was reversed and remanded to the U.S. District Court for the Northern District of Illinois.

DiTommaso-Lubin's Chicago, Naperville and Oak Brook business litigation attorneys handle trademark disputes, franchise disputes and other Illinois business litigation from their Oak Brook and Chicago law offices. To speak one of our commercial litigation lawyers about representing your business, please contact us through our Web site or via telephone.

To learn more about our firm and the cases we have handled click here.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Closely Held Businesses , Seventh Circuit , U.S. District Courts in Illinois

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As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert's help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago, Oak Brook, Wheaton and Naperville business trial attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we're confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant's job is to examine a person or corporation's accounts "cold," from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company's finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

The goal for both forensic accountants and fraud examiners is to make sure the other side of the case is being completely truthful about its income and accounting practices. As you might imagine, this is a frequent concern in divorces involving a spouse who’s part of a small or closely held business, which may need to be properly valued for the divorce. The company may also need to be investigated when the owning spouse is believed to be hiding assets. However, this concern also comes up in business disputes, such as breach of fiduciary duty lawsuits. When minority shareholders believe the majority is withholding important financial information, using a forensic accountant or fraud examiner may be the most reliable way to discover and prove the truth.

This practice is relatively recent but growing; a simple Web search turns up many accountants and examiners who regularly serve as expert witnesses. Two legal journals serving our Midwestern neighbors, The Wisconsin Law Journal and Michigan Lawyers Weekly, offer online articles on the subject for lawyers who want to learn more.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Billing Fraud , Breach of Contract , Breach of Fiduciary Duty , Certified Fraud Examiner , Closely Held Businesses , Forensic Accountant , Illinois Appellate Courts , Illinois Business Corporation Act , Illinois Limited Liability Company Act , Illinois Supreme Court , Shareholder Disputes , Shareholder Freeze Out , Shareholder Squeeze Out , Stolen Corporate Opportunies

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In a shareholder and breach of fiduciary duty dispute arising from a probate case involving a closely held corporation with two shareholders, the Illinois Third District Court of Appeal has ruled that a shareholder agreement made by a decedent does not allow the remaining shareholder to execute the decedent's will in bad faith. In re Estate of Talty, No. 3–06–0669 (Oct. 29, 2007).

Thomas Talty owned 50% of a closely held corporation (an auto dealership in Morris, Illinois), with his brother William Talty. They each also owned half of the land the dealership was built on, and had an interest in half of an adjoining parcel of land owned by a land trust. Thomas wrote a will in 2000 naming William as executor and naming Thomas's wife, Helen Talty, as sole residual beneficiary of the estate.

The will gave William the right to purchase Thomas's shares of the dealership from his estate, but required that the purchase price be determined by an independent appraiser appointed by the probate court. Similarly, it gave William the right to purchase Thomas's half of the land, but at fair market value set by an independent appraiser approved by the probate court. Separately, in 2001, William and Thomas made a corporate agreement allowing their company to buy the shares of any deceased shareholder. It specified that the fair market value of the shares should be determined by an accountant agreed on by the company and the decedent's representative, or, if they couldn't agree, appointed by the probate court.

After Thomas's death in 2001, William, acting as executor, agreed with the company that Robert Gordon would be the accountant to value the stock. Gordon was already the corporation's accountant, Thomas and Helen Talty's personal accountant, and Thomas and William Talty's cousin. A non-relative recommended by William's lawyer appraised the land. In neither case was Helen or the probate court consulted. Both assessed their respective properties considerably less than what they were later revealed to be worth. The closing date for the sales was set for six days from the day Helen's attorney received a letter notifying him; he filed an emergency motion with the probate court to stop the closing as soon as he read the letter. The probate court denied Helen's motion and proceeded with the sales.

Four months later, Helen filed a petition to set those sales aside and remove William as executor. At that trial, the court found that Thomas had waived William's clear conflict of interests, but William acted in bad faith and abused his discretion. Thus, the trial court removed William as executor, set aside the sales, appointed independent appraisers and awarded Helen attorney fees and other costs. The total of the balance of the sales, rents from the land, and fees and costs due to Helen totaled nearly $2 million.

William appealed on a variety of grounds, but the appellate court affirmed. In its analysis, the court noted that the stock agreement may well have superseded Thomas's will, but it was irrelevant -- William breached his fiduciary duty as executor when he failed to make complete disclosures to Helen. Because William admitted to not disclosing important information and their attorneys had minimal contact, the appeals court declined to overturn the trial court's determination of bad faith.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Closely Held Businesses , Illinois Appellate Courts , Illinois Business Corporation Act , Shareholder Disputes

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A minority shareholder may withdraw his complaint under the Illinois Business Corporation Act of 1983, because the majority shareholder failed to meet requirements of that law, the Illinois Third District Court of Appeal ruled in an Illinois shareholder dispute lawsuit. Lohr v. Havens, 3-06-0930 (Nov. 11, 2007).

Charles Lohr owned a large minority of the stock in Phoenix Paper Products, Inc., a closely held private corporation in Illinois. He and another shareholder, James Durham, became concerned about possible financial mismanagement by the majority shareholder and president, Terry Havens, and their accountant, Samuel Morris. In months of correspondence, they accused Havens and Morris of taking unspecified inappropriate actions without shareholder approval.

This culminated in a 2003 lawsuit by Lohr alleging that Havens and Morris were misusing the company’s resources and acting illegally. Count I of the suit asked the court to either order a buyout of all Lohr’s stock or dissolve the company. Havens filed a timely election to buy Lohr’s shares, but Lohr accused Havens of illegally doing this without shareholder approval. After two years of discovery, Lohr asked to withdraw Count I and its associated demands, but Havens objected. The trial court found that because Havens hadn’t notified shareholders about the election, it was invalid, allowing Lohr to dismiss Count I of his complaint. Havens appealed.

The Illinois Third District Court of Appeal ruled that because Havens did not notify other shareholders of the election, the election was invalid, leaving Lohr free to drop his claim. In its analysis, the court noted that a proper election would stop a shareholder in Lohr’s position from dismissing a petition -- but the plain language and the intent of the law both require notice of an election to shareholders within ten days. For the same reasons, the court also disagreed with Havens’s contention that the trial court was required to hold a hearing to assess equities before allowing Lohr to dismiss his petition.

As Chicago, Oak Brook and Naperville business and shareholder rights litigators with a substantial practice in business and shareholder disputes we’re always pleased to see clarifications of Illinois business law from the courts.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Closely Held Businesses , Illinois Appellate Courts , Illinois Business Corporation Act , Shareholder Disputes

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The doctrine of laches bars a plaintiff from bringing a stolen corporate opportunities lawsuit, the Illinois First District Court of Appeal has ruled. Lozman v. Putnam, No. 1- 06-0861 (February 18, 2008).

Plaintiff Fane Lozman and defendant Gerald Putnam met in 1986 as employees of the same Chicago securities firm. Eight years later, Lozman came up with an idea for a new type of software for traders, and hired another defendant, Townsend Analytics Inc., to program it. To market the software, Lozman and Putnam formed Blue Water Partners, Inc., an Illinois corporation, in 1994. Each was a 50% shareholder and a director. The plan was to barter the software for a share of a brokerage firm’s commissions on trades. Townsend Analytics and its owners, Stuart and Marrgwen Townsend, were offered 15% equity in Blue Water but no director or officer positions.

Later that year, Putnam formed Terra Nova Trading, LLC, with himself as 100% shareholder, to route profits from Blue Water. Another company, Analytic Services, LLC, was formed to sell the software, with Samuel Long as president. In April of 1995, Putnam and Lozman signed an agreement to share commissions generated through or paid by Townsend and its software. For a variety of personal and professional reasons, the relationship between Lozman and Putnam went sour, and they voluntarily dissolved the agreement six months later. A later termination agreement, back-dated to the day of the dissolution, preserved any legal claims. Putnam went on to form three more companies that used the same office and brokerage license as Blue Water, subcontracted with the Townsends and/or competed with Blue Water.

In 1999, Lozman sued for usurpation of corporate opportunity, breach of joint venture, unjust enrichment and fraudulent conveyance of assets. In court, the two men disagreed on the meanings of a variety of their agreements. After a tortuous procedural history including two previous appeals and a dual bench and advisory-only jury trial in the instant action, the court found for the remaining defendants. Among its findings was that the usurpation of corporate opportunities claims by Lozman and Blue Water were barred by laches -- they had waited four years to file their claims. They appealed on that and other grounds, but the appeals court affirmed.

In its opinion, the court noted that plaintiffs claimed Putnam fraudulently breached a fiduciary duty to disclose certain facts, so the running of the laches claim should have started only after Lozman discovered the alleged breach. Prueter v. Bork, 105 Ill. App. 3d 1003, 1007 (1981). However, the court wrote, plaintiffs failed to explain what facts Putnam failed to disclose or when they learned of them, nor did they cite cases that supported their position. Furthermore, the change of circumstances during Illinois’ five-year statute of limitations for a breach of fiduciary duty precluded arguments that laches shouldn’t apply. Thus, the laches finding was upheld, as were the rest of the trial court’s findings.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Closely Held Businesses , Illinois Appellate Courts , Stolen Corporate Opportunies

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A former shareholder, officer and director did not breach his fiduciary duty to a corporation when he started a competing company, and a former employee did not breach his duty of loyalty by joining, the First District Court of Appeal has ruled. Cooper Linse Hallman v. Hallman, No. 1-05-0597 (2006).

Plaintiff Cooper Linse Capital Management, a closely held financial services company, brought on Thomas Hallman in 1994 as a shareholder with 20% of stock shares. The remainder were divided evenly between Lori Cooper and Don Linse. Hallman served as vice president and CFO as well as an employee. Two years later, the company hired James McQuinn as an employee only. Neither man signed a written confidentiality agreement, and both disputed Cooper Linse's contention that they entered into an oral confidentiality agreement. All parties agreed that Linse and Cooper made all of the business decisions.

In 2000, the company that held Cooper Linse's clients' accounts in trust got into financial trouble and had its assets frozen, leaving clients unable to access their accounts and Cooper Linse unable to pay its employees. Linse began negotiations to take over that company's trust business; McQuinn and Hallman quietly began planning to start a business competing with Cooper Linse.

Five months after the assets were frozen, Hallman and McQuinn left for their new firm, taking client lists with them. They had used Cooper Linse computers to plan some aspects of the business, and negotiated to use a soliciting firm that Cooper Linse had previously used. Cooper Linse filed suit against Hallman and McQuinn for seven counts of corporate misconduct, including breach of fiduciary duty against Hallman and breach of duty of loyalty against McQuinn. The trial court found for Hallman and McQuinn on those two counts, and Cooper Linse appealed.

The appeals court affirmed, saying Hallman and McQuinn didn't breach even the strictest duties they had to Cooper Linse. Under Illinois caselaw, the court wrote, former employees like McQuinn may compete with their former employers and even plan their businesses while they're still employed, as long as they don't start competing until they have terminated their employment.

By contrast, the court pointed out that directors and officers like Hallman have a fiduciary duty not to exploit their positions for personal gain, including starting a competing business without telling other officers. But in this case, the justices found no evidence for the breaches alleged by Cooper Linse. One of its allegations was that the two men had asked the soliciting firm for business before leaving Cooper Linse, which indeed could have been a breach. But because Linse himself was involved in some of the meetings and the men testified that they never solicited the business, the trial court found there was no breach and the appeals court agreed. Other arguments fell similarly flat; in particular, the court noted that there was no written confidentiality agreement. Thus, "their conduct did not rise to the level of a breach of their fiduciary duties because they neither exploited their positions for their personal benefit and to the detriment of plaintiff nor impeded plaintiff’s ability to do business.... To hold that Hallman’s and McQuinn’s actions were a breach of their fiduciary duties would be to virtually prevent all officers and directors from seeking new employment prior to resigning from their current positions."

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Closely Held Businesses , Illinois Appellate Courts

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In an issue of first impression in Illinois, the Third District Court of Appeal ruled in a divorce business dispute that retained earnings from a closely held corporation are non-marital property. In re Marriage of Joynt, No. 3-06-0919 (Aug. 16, 2007).

Michael Joynt was president of Mississippi Valley Stihl, Inc. (MVS), a family-owned subchapter S corporation in Illinois, when his former wife, Theresa, filed for divorce. He also owned 33% of the stock; his father and sister were the remaining shareholders. During the divorce trial, both spouses stipulated that Michael's stock was non-marital property. However, the company's accountant testified that MVS had $3.75 million in retained earnings that year, which were set aside for future expenses and not paid as dividends to shareholders. If they had been paid during the trial, Michael would have had an additional $1.25 million in income. The trial court concluded that Michael's interest in the retained earnings were non-marital property. Theresa appealed, contending that the retained earnings were income available to her former husband.

The appeals court affirmed the trial court's decision, noting that the company, not the spouses, paid taxes on retained earnings. Noting that Illinois courts hadn’t addressed the issue before, the judges surveyed decisions from several other states ruling that retained earnings are non-marital property. However, they wrote, that's not always true when the shareholder spouse has full power to decide whether to pay dividends, or substantial influence over that decision. Furthermore, Michael was fairly compensated for his role as president of MVS, and there was no evidence showing that Michael was using MVS to hide marital assets.

Thus, because Michael did not have full control over the decision to distribute dividends, the justices wrote, retained earnings are not a marital asset. Theresa also claimed the trial court made an inequitable distribution of their marital assets; the justices rejected this as well, noting substantial evidence that the trial court had taken Michael's assets into account when making its orders.

If you're facing a similar business division dispute in a divorce, it's essential to get help from an experienced business attorney to protect your hard-earned business and sort out the legally and personally difficult questions you face. Contact the Chicago business litigation firm of DiTommaso-Lubin for assistance in resolving business related issues in a divorce.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Closely Held Businesses , Illinois Appellate Courts

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In an Illinois business contract lawsuit, the Third District Court of Appeal has ruled that a company's president may not hold his financer and business partner liable for the company's debts as an alter ego. Semade v. Estes, 05--CH--31 (June 29, 2007).

Charles Semade and Nicholas Estes formed a private corporation, Heartland Pottery Company, in 1995. Estes provided financing; Semade served as president and CEO. Unfortunately, the company did not succeed. Semade filed a lawsuit against Heartland in 1998 for unpaid salary and expense reimbursements. In that case, he won a judgment of more than $294,000, only to discover that Heartland had no assets.

Semade then filed a complaint against Estes himself, contending that Estes should be liable for the judgment because he was the company's alter ego. Under the law, that means he alleged that Estes and Heartland were the same person for all practical purposes, allowing Semade to "pierce the corporate veil" of limited liability. Semade alleged that Estes controlled all parts of the company and put income and assets in his personal accounts. However, Estes moved for summary judgment, saying Semade lacked standing because he was a director and officer of the company. The trial court agreed, and on appeal, the Third District Court of Appeal agreed.

In its analysis, the court relied on the Illinois Supreme Court ruling in In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d (1994). That case does leave corporate officers liable, the court noted, but only to third parties who were defrauded by an officer conducting his or her personal business through the corporation. The court declined to create a new rule allowing directors to pierce the corporate veil, pointing out that such a rule would allow directors to abuse the doctrine, discarding and taking up the veil as it suits them. Furthermore, the majority argued, directors have broad rights (and a fiduciary duty) to inspect a corporation's books.

Justice Holdridge, dissenting, pointed out that the majority relied on corporate documents to determine Semade's status -- not the de facto arrangement to which both parties testified. For that reason, the justice wrote, the facts were not sufficient to support a dismissal.

As business dispute litigators in Illinois, we believe this issue is one to watch.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Contract , Closely Held Businesses , Illinois Appellate Courts

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