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Treasurer Cannot Commit Resources of Family Business Without Board Authorization, Court Finds

 

As Illinois closely held business dispute attorneys, we read with interest an appellate decision in a dispute over the extent to which a company officer can act without the board’s approval. In Fritzsche v. LaPlante, No. 2-09-0329 (Ill. 2nd March 2010), the “rogue” officer was M. Christine Rock, the secretary/treasurer for family business Fritzsche Industrial Park, Inc. (FIP), which leases real estate at an industrial park in Lakemoor, Ill. Rock also had power of attorney for her father, Herbert Fritzsche, and those two roles allowed her to lease property to Gregory LaPlante, her longtime live-in boyfriend. Separately, Rock also signed a promissory note to Gerald Shaver as payment for work he had done for FIP. This led to a lawsuit by other family members and corporate members, who alleged that she acted without authorization from the board and that the note and lease were invalid.

FIP was incorporated in 2005, although the family had owned the property for decades before. The other corporate officers were Herbert Fritzsche, president, and Scot Fritzsche, vice president and son of Herbert Fritzsche. Shares of stock were divided among the officers and other sons, daughters and grandchildren, with Herbert Fritzsche getting 68 percent. In July of 2006, Herbert Fritzsche suffered a brain hemorrhage, which affected his health and may have compromised his mental capacity. One result of this was that Rock and LaPlante moved into Herbert Fritzsche’s home after he moved in with another sibling. On the first day of August, Rock signed the lease to LaPlante, which gave him 16 properties at Fritzsche Industrial Park and 10 more owned by Herbert Fritzsche individually. LaPlante was to pay rent in the amount of the property taxes, plus 10 percent of his income, although it was not clear what that income referred to.

A week later, on August 8, Rock signed the promissory note to Shaver in exchange for work done on the property, possibly through his trucking and excavating business. It obligated FIP and Park National Bank, trustee of Herbert Fritzsche’s properties, to pay $450,000 by putting a lien on the properties they owned. Park National Bank did not sign. Three months later, Herbert Fritzsche, FIP, Park National Bank and First Midwest Bank, a trustee for some FIP properties, sued Rock and LaPlante, alleging Rock was not authorized to commit the company’s or her father’s resources. The complaint alleged that Rock was suspected of stealing rents from FIP to pay her personal expenses and refused to provide documentation of rental income, which led to a shareholder decision to remove her as secretary/treasurer in May of that year. After his illness, Herbert also allegedly revoked her power of attorney. Therefore, plaintiffs alleged, Rock had no authority to enter into the lease or the note, and they were invalid. They also claimed the rental agreement was too vague to be enforced.

During the next two years, discovery in the case moved very slowly, possibly because Rock and LaPlante also faced criminal prosecution for theft, conspiracy and financial exploitation of an elderly person. In December of 2008, the plaintiffs moved for summary judgment. They argued that even if Rock was not properly removed as power of attorney and a corporate officer, Illinois law does not allow her to enter into the lease or the note without the board’s approval. They also argued that FIP’s bylaws required approval of the note because it was a form of debt. Defendants responded that the board knew about the lease through e-mails sent among the members, and that no board approval was necessary for the lease and the note because Rock was exercising Herbert’s executive authority through the POA, and because many properties were owned by individual family members rather than the board. After oral arguments, the board granted summary judgment to the plaintiffs, saying Rock did not have the authority to act unilaterally as a matter of law. This appeal followed.

Because it was an appeal of a summary judgment order, the Second noted, it had only to decide whether there were genuine issues of material fact to try. Nonetheless, it found that the defendants failed to meet that standard. Under common law, the court said, the highest officer of a corporation must still get board approval to make contracts, especially ones that are unusual or extraordinary. The lease is such an unusual contract, it wrote, because it involved no trustees for the properties and provided LaPlante with the land for little or nothing. Rock also needed board approval for the lease under the Illinois Business Corporation Act, which requires corporate formalities for transactions involving “substantially all” the corporation’s assets. The lease covered all of the property in the industrial park, the court noted, thus making it impossible for FIP to continue its business.

The court came to similar conclusions about the note. However, in this case, the main support for voiding the note came from FIP’s bylaws. Those bylaws say loans and other forms of indebtedness must be authorized by a board resolution. No such resolution exists, the court said, but the note clearly puts a $450,000 lien on FIP. The appeals court noted that the Business Corporations Act requires board approval for actions outside the ordinary course of business, but believed that the bylaws argument was stronger. Thus, the appeals court upheld the trial court’s grant of summary judgment to the plaintiffs.


At DiTommaso Lubin Austermuehle, we represent all sides in disputes between closely held businesses, including family businesses like this. Our Chicago business attorneys have substantial experience in common-law and statutory claims, as well as court interpretations of corporate bylaws and other founding documents. Disagreements in closely held businesses are often disagreements among relatives or people who have worked closely for years, and they can be full of emotional issues that interfere with the underlying financial and legal issues. Our Naperville business dispute lawyers help both plaintiffs and defendants unpack the most important legal issues and work for an outcome that protects their rights. From offices in downtown Chicago and Oak Brook, we are a Chicago business law firm that represents people throughout Illinois, Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, contact us through our website or call 1-877-990-4990 today.