Articles Posted in Corporate Law

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Late in 2002, the developer of 1717 S. Prairie Ave. in Chicago, Ill., retained the defendant Hansen & Hempel Co. to complete the masonry work for a 23-story condominium complex. When the building was nearly finished in March 2004, it started to experience water leakage. The condominium association, Board of Directors of the Prairie District Homes Tower Condominium Association, hired an engineering firm to design and implement a repair that was estimated to cost over $6,500,000.

Because of the report on the defects to the building, the association filed a lawsuit wherein the case was tried to a jury on the sole issue of breach of implied warranty of habitability.

The plaintiff board of directors of the condominium association contended that 90% of the through-wall flashing in dams installed by the defendant masonry company were either missing or installed improperly and claimed that because of those material defects it allowed water to penetrate the inner cavity of the building.

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Larry Fabian was hired in 2001 by Cantor Fitzgerald to be a broker at the Chicago Mercantile Exchange. In 2007, he was transferred to BGC, which was a spinoff company of Cantor Fitzgerald.

In 2008, Fabian was named as a partner of “Founding Partner No. 69.” According to Fabian, he earned 100,393 “founding partner units” which could later be converted into common stock of the company.

On March 27, 2009, Fabian quit working for BGC to work for another securities firm. Shortly after leaving BGC, Fabian initiated arbitration before the Chicago Mercantile Exchange where he received $121,758 in commissions that he was owed from Cantor Fitzgerald. This did not include any reimbursement for his “founding partner units.”

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Illinois corporations are governed by the Illinois Corporation Act (805 ILCS 5/1, et seq.) and by the company’s bylaws. In general, the governing principle of the management and control of the corporation is vested in the board of directors, which has a high duty of loyalty to the shareholders of the corporation. The board of directors has a fiduciary duty to uphold the best interests of the corporation and its owners.

It is not uncommon that the boards of directors of corporations become disenchanted with the president or other officers of a corporation. In a common fact setting, a special meeting of the board of directors is called for the sole purpose of removing the president of the corporation, who also serves as treasurer. There’s not much an officer can do to ward off such a move at the board level. The president then files the lawsuit against the board of directors and the corporation claiming that the resolution by the board removing this officer is a waste of corporate assets.

In that case the court would look to construe the corporation’s bylaws and apply the general rules of contracts, while addressing the Illinois Business Corporation Act.

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Dr. Linda Bluestein was a shareholder in Central Wisconsin Anesthesiology S.C. and a member of its board of directors. After losing the vote that terminated her employment contract, Bluestein filed a lawsuit against the corporation for allegedly violating three statutes that protect “employees.” Those statutes were the Americans with Disabilities Act (ADA) and Title VII of the Civil Rights Act of 1964. The presiding federal judge concluded, however, that Bluestein was an employer of the corporation and not an employee. The court granted Central Wisconsin’s motion for summary judgment disposing of her lawsuit.

The 7th U.S. Circuit Court of Appeals in Chicago affirmed the trial judge’s order and applied the “non-exclusive list of six factors” that the U.S. Supreme Court adopted in Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003), as criteria for determining whether a shareholder qualifies as an employee under statutes that don’t provide a “working definition” of the word.

The U.S. Court of Appeals tangled with the question of determining the meaning of the term “employee.” The Supreme Court reasoned that, when the statute (ADA) does not provide a working definition, the courts should turn to the common law test for determining who qualifies as an employee. Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003).

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The Illinois Business Corporation Act, Section 7.75, gives shareholders the right to inspect a company’s records, “but only for a proper purpose.” The Illinois Business Corporation Act was amended in 1984, requiring shareholders to make their demand in writing, “stating with particularity the records sought to be examined and the purpose therefore.” 805 ILCS 5/7.75.

The plaintiffs in this case, Sunlitz Holding Co. (and three of the company’s shareholders) appealed from an order that dismissed its complaint for mandamus against Trading Block Holdings Inc., which claimed that it had satisfied the “proper purpose” and “particularity” requirements.

The lawsuit complaint contained exhibits attaching two letters the plaintiff sent to Trading Block. In an April 1, 2013 letter, plaintiff Sunliz said it wanted to inspect the corporation’s records “to determine the financial condition of the company, the character of the management of the company and whether the company’s financial practices were appropriate.” In another letter dated May 17, 2013, the plaintiff said he was worried that the corporation was being used “as a piggy bank for the insiders and the board of directors.”

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Daniel Nickell filed a lawsuit against the officers and directors of Engineer Support. He claimed it had improperly diverted financial benefits by backdating stock options, which decreased the value of the corporation for its shareholders. Nickell was a shareholder of Engineer Support Systems Inc. (ESSI). ESSI merged with DRS Technologies in January 2006.

In Nickell’s lawsuit, he alleged that the officers and directors made material misrepresentations to induce the merger at a reduced price for the company in exchange for DRS assuming responsibility for the backdating scheme.

The trial judge dismissed Nickell’s lawsuit on the grounds that his claims were pleaded as a shareholder derivative claim and that he did not have standing to sue the ESSI directors and officers for his individual claims. Nickell appealed to the Supreme Court of Missouri, which affirmed the dismissal of his case.

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Fortunee Massuda was an investor in a group of Panda Express restaurants in Chicago. The restaurants were owned by a joint venture, RC Partnership, made up of Panda Express Inc. and Rezko Concessions Inc. Massuda invested $4 million in the joint venture in exchange for an ownership interest of 11% in the joint venture. The joint venture also owned and controlled PE Chicago, a Delaware LLC. By the year 2001, the value of the RC Partnership was estimated to be $56.4 million.

By 2005, Rezko Concessions’ owner, Tony Rezko, was in deep financial and legal trouble. In April 2006, Massuda went to Panda and informed it of her intent to sue Rezko and asked whether Panda would be interested in buying her 11% share. Panda’s general counsel declined the offer and instead told Massuda that her stake was worthless.

In mid-May 2006, Rezko was urgently in need of money. In order to secure funds, Rezko offered to sell PE Chicago’s interest in RC Partnership to Panda. Panda agreed to pay Rezko $3 million, keep the deal between them secret and grant Rezko personally a buy-back option.

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According to the Illinois Appellate Court, a corporate condominium association that was dissolved is in a legal standing the same as that of a dead natural person such as found in the case of Markus v. Chicago Title & Trust, 373 Ill.557 (1940).

Under Illinois §12.80 of the Business Corporation Act of 1983, a five-year window is open for suing a corporation on any claim that existed or liability that was incurred before the dissolution of the company.

In this particular case, the issue was whether (a) two subcontractors who are dissolved and allegedly botched work on a condominium project and (b) the general contractor who wasn’t sued by the condominium association until more than five years after the subcontractors closed shop. Does §12.80 block the general contractor from filing an indemnification, contribution claim against the defunct contractors, or do “equitable considerations” extend the deadline?

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In a case involving a default judgment in the amount of $421,582 against an Illinois corporation, Mama Gramm’s Bakery requested that a Cook County judge pierce the corporate veil of Silver Fox Pastry and put the liability on Haitham Abuzir. Abuzir was never a director, officer, shareholder or employee of the corporation, Silver Fox.

In the attempt to pierce the veil, Mama Gramm’s alleged that Abuzir funded Silver Fox, “made all business decisions” and “exercised ownership control over the corporation to such a degree that separate personalities of the corporation and defendant did not exist.” The trial judge dismissed the complaint for failing to state a cause of action against Abuzir. The Illinois Appellate court reversed that decision and provided an opinion on the issue of “whether the veil may be pierced to reach non-shareholders.”

The underlying case that resulted in a default judgment was a trade secret case. The appellate court discussed the ways to create and organize a sham corporation. “In some instances, the wrongdoer neither holds stock nor serves in an official capacity. Making officer, director or shareholder status a pre-requisite to veil-piercing elevates form over substance and is therefore contrary to veil-piercing’s equitable nature.”

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The Illinois Appellate Court for the First District in Chicago has found that a person can be held liable for a corporation’s debt even if he or she is not an officer or shareholder of the corporation.

In a case that amounts to a decision of wide-ranging implications and one of first impression on Illinois, the appeals court found that a default judgment in the amount of $421,582 against Palos Heights-based Silver Fox Pastries Inc. led to a judgment against an individual corporate “alter ego,” the defendant Haitham Aduzir.

The lawsuit brought against Silver Fox Pastries was for violations of the Illinois Trade Secrets Act.  In that lawsuit, first filed in 2006, the plaintiff John Buckley claimed that Silver Fox was a direct competitor of his business, Momma Gramm’s Bakery Inc. and that it had hired away two of its employees.

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