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Company President Has No Standing to Sue Alleged Alter Ego, Appeals Court Rules

 

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.