As we have written about previously, shareholders in a corporation have two different types of claims they can assert, direct claims and derivative claims. Direct claims are filed by the shareholder for the benefit of the shareholder. Derivative claims are filed by a shareholder but for the benefit of the corporation itself. An Illinois appellate court recently considered the issue of whether a successful shareholder in a derivative action can obtain an award of attorney fees directly from the defendants personally, as opposed to from the common fund created by the judgment.
The parties were investors in a business known as 15th Street Blue Island, LLC (15BI). The plaintiffs made financial contributions totaling approximately $3.7 million to become members of 15BI. The plaintiffs received 47% interest in 15BI as “Class A Members.” An entity owned by defendants Jerry Karlik and Keith Giles, Kargil Blue Island, LLC (KBI), received a 53% interest in the company as a “Class B Member,” and was named as the manager of 15BI.
15BI was formed in 2006 for the purpose of developing condominiums on a vacant parking lot located in Chicago. After the economic crash of the global recession that began shortly thereafter, the original business plan was scrapped for a new one that involved developing rental residences, which was considered a more feasible plan under the economic conditions.
In 2006, another entity jointly owned by Jerry Karlik and Giles, Kargil Development Partners (KDP), entered into a contract to purchase a vacant parking lot (15BI Property) located at 15th Street and Blue Island Avenue in Chicago for $3.72 million. Pursuant to that agreement, KDP deposited an initial earnest money payment of $100,000 from 15BI accounts into an escrow account. In June 2007, Karlik signed a purchase agreement on behalf of 15BI to acquire property known as the Testa Parcel, for $6,250,000. This purchase agreement also required a $100,000 earnest money deposit from 15BI. In an unusual move for a buyer, Karlik later negotiated a $250,000 increase in the purchase price and provided for payment of a commission to yet another company that he and Giles jointly owned. 15BI later abandoned its efforts to buy the Testa Parcel, resulting in 15BI losing 70% of its earnest money deposit.
In 2008, Karlik and Giles sold a portion of KBI, which managed and owned a percentage of 15BI, to new investors, Gangas and Housakos, for approximately $750,000. Karlik testified that the law firm of Branson & Kahn invoiced 15BI and 15BI paid for its work on that sale.
Defendants stipulated that work “should not have been billed through 15B1.” Continue reading ›