Breach of Fiduciary Duty

What are the Grounds for Filing a Derivative Lawsuit for an Illinois LLC or Corporation?

May 8, 2024 | Peter S. Lubin and James V. DiTommaso

In Illinois, a derivative lawsuit can be filed by an individual shareholder or a member of a limited liability company (LLC) to enforce a right that belongs to the corporation or the LLC (Silver v. Allard, 16 F.Supp.2d 966 (1998)), (Pistone v. Carl, Not Reported in N.E. Rptr. (2020). The aim of such a lawsuit is to protect the interests of the corporation or the LLC from the misconduct of its directors and managers (Silver v. Allard, 16 F.Supp.2d 966 (1998)).

There are certain prerequisites for filing a derivative lawsuit. Firstly, the shareholder or member must make a demand upon the board of directors to enforce a corporate right (Silver v. Allard, 16 F.Supp.2d 966 (1998)). However, this demand requirement can be excused in certain situations. For instance, if the shareholders can demonstrate that the directors were aware of the misconduct but consciously chose not to act, the demand can be excused. In such cases, the plaintiffs would effectively be arguing the futility of such a demand. It’s important to note, as per Illinois choice of law rules, that the pre-suit demand requirement is governed by the law of Delaware in the case of corporations incorporated there (Wells v. Reed, — N.E.3d —- (2024). Continue reading ›

Why Should you Retain DiTommaso Lubin for Your Breach of Fiduciary Duty Lawsuit?

May 8, 2024 | Peter S. Lubin and James V. DiTommaso

Retaining DiTommaso Lubin for a breach of fiduciary duty lawsuit could be beneficial for several reasons:

Focus on Business Litigation: DiTommaso Lubin has a focus on business litigation, which includes handling cases of breach of fiduciary duty. This specialization means they likely have a deep understanding of the laws and complexities involved in such cases.
Experience: The firm boasts extensive experience in this area of law, which can be crucial for navigating the often complex legal issues that arise in breach of fiduciary duty cases. Experienced lawyers are more likely to understand the nuances of the law and how it applies to specific situations.

Can Taking Excessive Compensation Violate a Managing Member or Majority Shareholder’s Fiduciary Duties?

May 7, 2024 | Peter S. Lubin and James V. DiTommaso

Yes, taking excessive compensation can indeed violate a managing member or majority shareholder’s fiduciary duties. Case law supports this assertion. In Fleming v. Louvers International, Inc., the court found that a majority shareholder violated his fiduciary duties by taking excessive compensation, depriving a minority shareholder of his rightful distributions. This conduct was seen as a breach of both his common-law fiduciary duty and his duty under section 12.56(a)(3) of the Act, and also constituted constructive fraud.

The case of Kovac v. Barron highlighted the defendant shareholder who had the corporations pay him and his wife millions in excessive compensation, which was then concealed by disguising the payments as “contract labor” on the corporations’ tax returns.

Similarly, in Halperin v. Halperin, it was held that the payment of excessive compensation and the concealment of the amount of compensation received by the officers were breaches of fiduciary duty. Concealing compensation amounts from shareholders could still constitute a breach of fiduciary duty, even if the compensation was not found to be excessive. Continue reading ›

Why Contact DiTommaso Lubin for Your Business Dispute in Illinois? Call Us For A Free Consultation.

March 8, 2024 | Peter S. Lubin and James V. DiTommaso

Extensive Experience in Partnership, LLC Member, and Shareholder Disputes

At DiTommaso Lubin, we understand the complexities of business disputes in closely held companies. Whether you are facing a partnership disagreement, LLC member conflict, or shareholder dispute, our experienced attorneys are here to provide you with the guidance and representation you need to protect your interests.

Personalized Attention for Closely Held Companies

Why Choose DiTommaso Lubin for Corporate Oppression Matters

February 28, 2024 | Peter S. Lubin and James V. DiTommaso

When facing corporate oppression, selecting the right legal representation is crucial. DiTommaso Lubin stands out as a firm capable of effectively handling such complex legal matters. Here’s why you should consider them for your corporate oppression case:

1. Concentration in Corporate Law

DiTommaso Lubin possesses a deep understanding of corporate law, including the nuances of corporate oppression. Their experience in dealing with closely-held companies and understanding the dynamics of shareholder relationships positions them well to address the unique challenges of corporate oppression cases.

2. Commitment to Client Success

The firm’s commitment to delivering significant victories for their clients extends to their approach to corporate oppression matters. They focus on achieving outcomes that are not only legally sound but also aligned with the best interests of their clients.

3. Reputation for Integrity and Success

DiTommaso Lubin has established a reputation for honesty and success in the Chicagoland area. This is reflected in the recognition received by its lawyers, including Peter Lubin being named a “Super Lawyer” and Patrick Austermuehle as a “rising star” by prestigious rating services. Their accolades demonstrate their commitment to legal excellence.

4. Personalized Attention to Clients

One of the key strengths of DiTommaso Lubin is the personal attention they provide to each client. This is particularly important in corporate oppression cases, where understanding the specific context and nuances of each situation is crucial for effective representation. Continue reading ›

Navigating Fair Compensation in Closely Held Companies: The Legal Implications of Excessive Salaries

February 25, 2024 | Peter S. Lubin and James V. DiTommaso

In closely held companies, particularly LLCs and corporations with a limited number of shareholders, the issue of compensation for owners and shareholders can be a legal minefield. A significant concern arises when majority owners, often also serving as executives, award themselves excessively high salaries or compensation. This practice, while appearing to be a clever business strategy, can veer into illegality, particularly if it’s done with the intent to minimize or avoid distributions to minority owners.

Understanding the Legal Framework

The legal principles governing such practices are rooted in the fiduciary duties that majority shareholders or LLC owners owe to minority stakeholders. These duties include the duty of loyalty, which mandates that decisions must be made in the best interests of the company and all shareholders, not just a select few.

When majority owners inflate their compensation unjustly, they may be breaching this duty. This is especially true if the inflated salaries negatively impact the company’s profitability or the ability to pay dividends or distributions to other shareholders.

Case Law and Legal Precedents

Various legal precedents highlight this issue. Courts have often scrutinized such practices under the lens of fairness and the fiduciary duties owed. For instance, in cases where the majority shareholders’ salaries are disproportionately high compared to the company’s overall financial health or industry standards, courts have found this to be a breach of fiduciary duty.

In cases such as Fleming v. Louvers International, Inc., courts have found that depriving a minority shareholder of his rightful pro rata distributions through excessive compensation can constitute a breach of fiduciary duty. Another case, Kovac v. Barron, identified a shareholder who committed constructive fraud by causing the corporation to pay him and his wife millions in excessive compensation, which was then concealed as “contract labor” on tax returns.

Certain regulations also provide guidance on this matter. For instance, compensation exceeding the costs that are deductible as compensation under the Internal Revenue Code are deemed unallowable for owners of closely held companies. The Small Business Administration (SBA) views the payment of excessive officers’ salaries as a type of withdrawal from a company, implying that the SBA may see such actions as an attempt to avoid excessive withdrawal limitations. Continue reading ›

Key Points for Defending Officers and Directors of Illinois Corporations or LLCs

December 24, 2023 | Peter S. Lubin and James V. DiTommaso

Recent Illinois law regarding the defense of officers and directors of corporations and LLCs encompasses several key factors:

1. Fiduciary Duties: Officers and directors of corporations and LLCs are fiduciaries, holding duties of good faith, loyalty, and honesty to the corporation. They are not permitted to enhance their personal interests at the expense of the corporation’s interests, and should not be in a position where their own individual interests might interfere with their duties to the corporation.

2. Business Judgment Rule: Under the business judgment rule, a presumption exists that corporate decisions made by an officer or director are made on an informed basis and with an honest belief that the action was in the corporation’s best interests. This presumption can be rebutted by allegations that a director acted fraudulently, illegally, or without sufficient information to make an independent business decision [3].

3. Contractual Obligations: Illinois law provides officers of a corporation with a qualified privilege against liability for tortious interference with a contract with the corporation. To overcome this privilege, the plaintiff must assert and plead that the corporate officers acted with malice and without justification.

4. Piercing the Corporate Veil: Generally, corporate officers and directors are not personally liable for the corporation’s actions, as corporations are considered distinct legal entities separate from their officers, shareholders, and directors. However, under certain circumstances, the corporate veil can be pierced to hold officers and directors personally responsible, such as when there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, or adherence to the fiction of separate corporate existence would sanction fraud or promote injustice.

5. Specifics for LLCs: In the context of LLCs, allegations that officers and directors disguised equity contributions as loans, enabling the company to make interest payments to insiders during a time when the company was either insolvent or undercapitalized, could be sufficient to state a claim for breach of fiduciary duty under Illinois law.

These principles form the foundation of a defense for corporate officers and directors in Illinois. Continue reading ›

Recent Developments in Defending Officers and Directors of Corporations or LLCs in Illinois

December 24, 2023 | Peter S. Lubin and James V. DiTommaso

The legal landscape for Officers and Directors of Illinois corporations and LLCs is constantly evolving. Recent developments in laws, regulations, and court decisions have significant implications for the responsibilities and liabilities of board members. At DiTommaso Lubin, we are committed to staying ahead of these changes to provide our clients with the best possible defense. In this blog post, we’ll explore some of the recent developments in defending Officers and Directors of corporations and LLCs in Illinois.

1. Enhanced Scrutiny of Fiduciary Duties

In recent years, Illinois courts have heightened their scrutiny of the fiduciary duties owed by Officers and Directors of corporations and LLCs. These fiduciary duties include the duty of care and the duty of loyalty. Directors are expected to act in the best interests of the company and its shareholders, and any breaches of these duties can lead to legal action.

2. Clarifications on the Business Judgment Rule

The business judgment rule is a legal principle that provides some protection to Officers and Directors for their decisions made in good faith and in the best interests of the company. Recent developments in Illinois have clarified the application of this rule, emphasizing the importance of proper decision-making processes and documentation.

3. Increased Shareholder Activism

Shareholder activism is on the rise, and Directors and Officers are facing greater scrutiny from shareholders. In response, Illinois law has evolved to address the rights and powers of shareholders, particularly in closely held corporations and LLCs. It’s crucial for Officers and Directors to be aware of these changes and to engage in transparent communication with shareholders.

4. Cybersecurity and Data Privacy Concerns

The digital age has brought new challenges to the forefront, including cybersecurity and data privacy. Directors and Officers are now responsible for overseeing the protection of sensitive information and responding to data breaches appropriately. Failure to do so can result in legal action and regulatory penalties.

5. Environmental and Social Governance (ESG) Issues

ESG issues, such as environmental sustainability and social responsibility, are gaining prominence in the corporate world. Directors and Officers must consider these factors when making decisions, as they can impact the company’s reputation and risk exposure. Staying informed about ESG developments is vital. Continue reading ›

Exploring LLC Derivative Suits in Illinois: Understanding Rights, Procedures, and Legal Recourse

December 18, 2023 | Peter S. Lubin and James V. DiTommaso

Limited Liability Companies (LLCs) are a popular business structure known for providing liability protection to its members. However, conflicts and wrongdoing within an LLC can occur, leading to disputes among members. When an LLC suffers harm due to actions taken by its management or majority members, a derivative suit can be an effective legal recourse for members seeking to address these issues in Illinois.

Understanding LLC Derivative Suits: An LLC derivative suit is a legal action brought by one or more members on behalf of the LLC against a third party, typically the management or majority members, alleging wrongdoing or harm done to the company. In essence, it allows individual members to sue on behalf of the LLC when the company itself fails to take action against internal misconduct.

In Illinois, the procedures and rules governing derivative suits for LLCs are outlined under the Illinois Limited Liability Company Act (805 ILCS 180) and relevant case law.

Requirements for LLC Derivative Suits in Illinois: For a member to file a derivative suit on behalf of an LLC in Illinois, several key requirements must be met:

Ownership Status: The member initiating the derivative suit must be a current member at the time of filing the lawsuit and must have been a member at the time the alleged wrongdoing occurred.
Exhaustion of Remedies: Generally, the member bringing the suit must show that they made a demand on the LLC’s management to take action against the alleged wrongdoing but that the demand was either rejected or ignored, or waiting for a response would be futile.
Injury to the LLC: The alleged misconduct must have caused harm or damage to the LLC, affecting its financial interests or causing other significant negative effects.
Representation of LLC’s Interests: The member bringing the derivative suit must adequately represent the interests of the LLC and not have conflicting interests.

Understanding Fiduciary Duty Law in Illinois: A Comprehensive Guide

December 13, 2023 | Peter S. Lubin and James V. DiTommaso

Fiduciary duty law is a crucial legal concept that governs the relationships between individuals or entities entrusted with responsibilities to act in the best interests of others. In the state of Illinois, as in many other jurisdictions, fiduciary duty law plays a central role in various contexts, including business, finance, estate planning, and more. In this blog post, we will explore the key principles and applications of fiduciary duty law in Illinois.

What Is Fiduciary Duty?

Fiduciary duty is a legal obligation that requires an individual or entity, known as a fiduciary, to act in the best interests of another party, known as the beneficiary or principal. The fiduciary duty imposes a high standard of care, loyalty, and honesty on the fiduciary, ensuring they prioritize the beneficiary’s interests above their own.

Key Principles of Fiduciary Duty Law in Illinois

Duty of Loyalty: Fiduciaries in Illinois are bound by a duty of loyalty, which means they must put the interests of the beneficiary above their own. They should avoid any conflicts of interest and disclose any potential conflicts when they arise.
Duty of Care: Fiduciaries are required to act with the utmost care and diligence in managing the beneficiary’s affairs. This includes making informed decisions, conducting due diligence, and acting prudently.
Duty of Good Faith: Fiduciaries must act in good faith when carrying out their responsibilities. This means they should make decisions honestly and without any ulterior motives.
Duty of Disclosure: Fiduciaries must provide the beneficiary with all relevant information about the management of their affairs. This transparency helps the beneficiary make informed decisions.