Westmeyer v. Flynn ( 2008 )

SECOND DIVISION
Date Filed: May 20, 2008
No. 1-07-2946
DORIE WESTMEYER, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. ) No. 04 CH 009299
)
BRIAN FLYNN, PATRICK M. DALEIDEN, )
JOHN L. DEARLOVE, TERRAGLYPH )
INTERACTIVE, L.P., VICTOR CASINI, as )
Trustee of The 62524 Trust, and )
KEITH SKIBICKI, )
) Honorable
Defendants-Appellees ) Bernetta Bush,
) Judge Presiding.
(David Daleiden, )
)
Respondent in Discovery).)
JUSTICE HALL delivered the opinion of the court:
The plaintiff, Dorie Westmeyer, appeals from an order of the
circuit court of Cook County dismissing her complaint seeking to
hold defendants Brian Flynn, Patrick M. Daleiden, John L.
Dearlove, Terraglyph Interactive, L.P. (Terraglyph), Victor
Casini, as trustee of the 62524 Trust, and Keith Skibicki
personally liable for a judgment she received against the
corporate defendants. On appeal, the plaintiff contends that the
circuit court erred in dismissing her complaint on res judicata
grounds. We reverse and remand for further proceeding.
The following facts are taken from the pleadings. The
plaintiff was employed by iMatchNetwork, LLC (iMatchNetwork), a
Delaware limited liability company, as its chief marketing
No. 1-07-2946
officer. In addition to their ownership interests, Messrs.
Flynn, Dearlove and Daleiden comprised the board of directors of
iMatchNetwork. Defendant TerraGlyph also held an ownership
interest in iMatchNetwork.
On April 4, 2003, the plaintiff filed an amended five-count
complaint against TerraGlyph, iMatchNetwork and Messrs. Daleiden
and Dearlove.1 On January 8, 2004, the plaintiff obtained a
default judgment against TerraGlyph and iMatchNetwork. According
to the order, judgment for the plaintiff and against those two
defendants was entered on count I, a claim under the Wage and
Collection Act (the Wage Act) (820 ILCS 115/1 et seq. (West
2002)), of the amended complaint and count II (breach of
contract) and in the amount of $108,064.58.
On June 10, 2004, the plaintiff filed a verified complaint
against the defendants in this case. In count I, the plaintiff
1
The plaintiff's original complaint
was filed on March 13, 2001. The
circuit court granted Mr. Daleiden's
and Mr. Dearlove's motions for summary
judgment.
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No. 1-07-2946
sought to pierce the corporate veil, alleging that iMatchNetwork
was undercapitalized and that the members failed to observe the
formalities of a legitimate company, operated it as the alter ego
of its members and operated it so as to perpetrate a fraud on its
creditors, including the plaintiff. Count II alleged that the
defendants violated the Uniform Fraudulent Transfer Act (740 ILCS
160/1 et seq. (West 2002)) in that they transferred the assets of
iMatchNetwork to themselves, causing iMatchNetwork to become
insolvent and preventing the plaintiff from recovering monies
owed to her. The plaintiff requested that the court void the
sale or transfer of assets in an amount necessary to satisfy the
plaintiff's judgment, injunctive relief against the further
disposition of the assets transferred and the imposition of a
constructive trust upon any of the assets the defendants received
from iMatchNetwork.
The defendants filed separate motions to dismiss pursuant to
section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619
(West 2004)). They argued that the plaintiff's complaint was
barred by res judicata and barred by a prior judgment and that
another action was pending between the parties. See 735 ILCS
5/2-619(a)(3), (a)(4), (a)(9) (West 2004). Except for Mr.
Dearlove's motion, the defendants' motions to dismiss were
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No. 1-07-2946
granted.2
On September 16, 2005, the circuit court denied Mr.
Dearlove's motion to dismiss. On December 14, 2005, the court
granted the plaintiff's oral motion to dismiss voluntarily Mr.
Dearlove. The plaintiff filed her notice of appeal.3
ANALYSIS
The parties address two grounds raised in the circuit court
for the dismissal of the complaint: res judicata and other
affirmative matter, i.e., the inapplicability of the doctrine of
piercing the corporate veil to a limited liability company.
I. Standard of Review
2
No order disposing of count III of the complaint naming
David Daleiden a respondent in discovery could be located.
However, respondents in discovery are not parties to the action
in which they are so named. Shanklin v. Hutzler, 277 Ill. App.
3d 94, 100, 660 N.E.2d 103 (1995).
3
Initially, we dismissed this appeal for lack of
jurisdiction because there was no order dismissing Terraglyph.
Westmeyer v. Flynn, No. 1-06-0082 (2007) (unpublished order under
Supreme Court Rule 23). After the plaintiff remedied the
jurisdictional defect, we granted her motion to consider the case
on the original briefs, record and the oral arguments.
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"Appellate review of a dismissal under section 2-619 is de
novo." Nosbaum v. Martini, 312 Ill. App. 3d 108, 114, 726 N.E.2d
84 (2000). "An appeal from such a dismissal is similar to one
following the grant of summary judgment." Nosbaum, 312 Ill. App.
3d at 114. "'The appellate court must consider whether the
existence of a genuine issue of material fact should have
precluded the dismissal or, absent such an issue of fact, whether
dismissal is proper as a matter of law.'" Nosbaum, 312 Ill. App.
3d at 114, quoting Kedzie & 103rd Currency Exchange, Inc. v.
Hodge, 156 Ill. 2d 112, 116-17, 619 N.E.2d 732 (1993).
"In a section 2-619 motion, all well-pleaded allegations in
support of the claim are taken as true and all reasonable
inferences are drawn in the plaintiff's favor." Nosbaum, 312
Ill. App. 3d at 113. "Under section 2-619 a motion to dismiss
should be granted if, after construing the pleadings and
supporting documents in the light most favorable to the nonmoving
party, the trial court finds that no set of facts can be proved
upon which relief could be granted." Owens v. McDermott, Will &
Emery, 316 Ill. App. 3d 340, 344, 736 N.E.2d 145 (2000).
II. Res Judicata
The plaintiff contends that the circuit court erred when it
dismissed her complaint pursuant to section 2-619(a)(4). That
section provides in pertinent part as follows:
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"(4) That the cause of action if barred by a prior
judgment." 735 ILCS 5/2-619(a)(4) (West 2004).
"Res judicata precludes subsequent litigation between the
same parties on a claim after a court renders final judgment on a
matter." Cload v. West, 328 Ill. App. 3d 946, 949, 767 N.E.2d
486 (2002). "In order to invoke this defense, the following
elements must be shown: (1) that a court of competent
jurisdiction rendered a final judgment on the merits; (2) that
there is an identity of the parties or their privies; and (3)
that there is an identity of cause of action." Cload, 328 Ill.
App. 3d at 949-50. "Res judicata bars not only those issues that
were actually litigated in a prior suit; it bars those that could
have been raised as well." Cload, 328 Ill. App. 3d at 950.
However, "the doctrine of res judicata need not be applied where
fundamental fairness so requires." Weisman v. Schiller, Ducanto
& Fleck, 314 Ill. App. 3d 577, 581, 733 N.E.2d 818 (2000).
In order to determine if the causes of action are the same,
the court applies the transactional test. See River Park, Inc.
v. City of Highland Park, 184 Ill. 2d 290, 313, 703 N.E.2d 883
(1998). "Under this test, claims are part of the same cause of
action if they arise from the same transaction or series of
connected transactions." Cload, 328 Ill. App. 3d at 950.
"Subsequent claims may be barred if they originate from a single
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No. 1-07-2946
group of operative facts." Cload, 328 Ill. App. 3d at 950.
"This proposition applies regardless of whether the claims assert
different theories of relief or are based on evidence that does
not substantially overlap, as long as they arise from the same
transaction. Cload, 328 Ill. App. 3d at 950.
The defendants maintain that the causes of action in the
plaintiff's original complaint and her present complaint are
identical because each complaint sought to hold iMatchNetwork,
via its members, liable for the claims related to the plaintiff's
employment. However, the plaintiff's original complaint alleged
that iMatchNetwork had breached its contract to her and violated
the Wage Act by failing to pay her salary and benefits. The
complaint also alleged that the plaintiff left her previous
employment to take the job with iMatchNetwork based on the
misrepresentations made to her by the individual defendants,
Messrs. Dearlove and Daleiden. In contrast, in the present
complaint, the plaintiff is attempting to collect the judgment
she obtained against iMatchNetwork.
In Miner v. Fashion Enterprises, Inc., 342 Ill. App. 3d 405,
794 N.E.2d 902 (2003), the plaintiff was awarded a default
judgment against Karen Lynn, Ltd. During supplementary
proceedings, the plaintiff discovered the corporation had
insufficient assets. The plaintiff then instituted a suit
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No. 1-07-2946
against defendant Fashion Enterprises, Inc., and individual
defendants alleging that they were liable for the judgment on the
basis that Karen Lynn, Ltd., had been formed to defraud
creditors, had no assets and the corporate formalities were not
observed. The circuit court granted the defendants' motion to
dismiss on res judicata grounds. This court rejected the
argument that the plaintiff was limited to supplementary
proceedings to collect on the judgment. Relying on Peetoom v.
Swanson, 334 Ill. App. 3d 523, 778 N.E.2d 291 (2002), and Pyshos
v. Heart-Land Development Co., 258 Ill. App. 3d 618, 630 N.E.2d
1054 (1994), this court held that "a judgment creditor may choose
to file a new action to pierce the corporate veil of a judgment
debtor in order to hold individual shareholders and directors
liable for a judgment against the corporation." Miner, 342 Ill.
App. 3d at 415.
As in Miner, the plaintiff seeks to pierce the corporate
veil of iMatchNetwork and collect her judgment from the defendant
owners and directors. The defendants make no effort to
distinguish Miner. We agree with the plaintiff that her
complaint to collect the default judgment from the defendants is
not barred by res judicata.
III. Piercing the Corporate Veil
The plaintiff invoked the doctrine of piercing the corporate
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veil in order to hold the defendants liable for the judgment she
received against iMatchNetwork. The defendants maintain that the
doctrine of piercing the corporate veil does not apply to
iMatchNetwork because it is a limited liability company (or LLC).
A. Application of Corporate Veil Piercing to LLCs
iMatchNetwork is a Delaware limited liability company.
"Efforts to pierce the corporate veil are governed by the law of
the state of incorporation." Retzler v. Pratt & Whitney Co., 309
Ill. App. 3d 906, 917, 723 N.E.2d 345 (1999). Therefore,
Delaware law applies to this issue.
Delaware's Limited Liability Company Act provides in
pertinent part as follows:
"(a) Except as otherwise provided by this chapter, the
debts, obligations and liabilities of a limited liability
company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of
the limited liability company, and no member or manager of a
limited liability company shall be obligated personally for
any such debt, obligation or liability of the limited
liability company solely by reason of being a member or
acting as a manager of the limited liability company.
(b) Notwithstanding the provisions of subsection (a)
of this section, under a limited liability company agreement
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No. 1-07-2946
or under another agreement, a member or manager may agree to
be obligated personally for any or all of the debts,
obligations and liabilities of the limited liability
company." Del. Code Ann. tit. 6, §18-303 (2006).
The defendants maintain that, under Delaware law, they
cannot be liable for the judgment against iMatchNetwork based on
their interests in iMatchNetwork and because the plaintiff failed
to allege any facts to establish that they agreed to be obligated
personally for the liabilities of iMatchNetwork.
The defendants point out the cases relied on by the
plaintiff consist of unreported decisions, decisions applying the
law of states other than Delaware and decisions not dealing with
piercing the corporate veil. Nonetheless, there is authority for
the application of the doctrine of piercing the corporate veil to
a Delaware limited liability company.
A limited liability company "is a relatively new entity that
has emerged in recent years as an attractive vehicle to
facilitate business relationships and transactions." Elf Atochem
North America, Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1999).
"The wording and architecture of the [Delaware] Act is somewhat
complicated, but it is designed to achieve what is seemingly a
simple concept - to permit persons or entities ('members') to
join together in an environment of private ordering to form and
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No. 1-07-2946
operate the enterprise under an LLC agreement with tax benefits
akin to a partnership and limited liability akin to the corporate
form." Jaffari, 727 A.2d at 287. Therefore, for liability
purposes, a limited liability company should be subject to the
same treatment as a corporation. See Wellman v. Dow Chemical
Co., No. 05-280-SLR, at 2 (D. Del. March 20, 2007) ("Under
Delaware law, a limited liability company formed under the
Delaware Limited Liability Company Act is treated for liability
purposes like a corporation").
The doctrine of piercing the corporate veil applies to
Delaware corporations. "Delaware law allows a court to pierce
the corporate veil of an entity when there is fraud or when a
subsidiary is the alter ego of its owner." In re Kilroy, 357
B.R. 411, 425 (Bankr. S.D. Texas 2006); see SR International
Business Insurance Co. v. World Trade Center Properties, LLC, 375
F. Supp. 2d 238, 243 (S.D.N.Y. 2005), quoting Geyer v. Ingersoll
Publications Co., 621 A.2d 784, 793 (Del. Ch. 1992); see also
Miller v. Raytheon Aircraft Co., 229 S.W.3d 358 (Tex. App. 2007)
(under Delaware law, members of an LLC are generally not liable
for the obligations of the LLC, absent a showing that the court
should pierce the corporate veil).
The defendants argue that the fact that corporations and
limited liability companies have some similar legal
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No. 1-07-2946
characteristics does not mean that they should be treated the
same for purposes of piercing the corporate veil. They point out
that in Advanced Telephone Systems, Inc. v. Com-Net Professional
Mobile Radio, LLC, 846 A.2d 1264 (Pa. Super 2004), cited by the
plaintiff, the court rejected the application of corporate veil
piercing to a limited liability company. However, the defendants
misread that case. First, although the defendant was a Delaware
limited liability company, the court determined that Pennsylvania
law applied to determine if the plaintiff had the right to have a
jury determine its right to a jury trial on the corporate veil
piercing claim. Having determined that the there was no right to
a jury trial on that issue, the court then applied Pennsylvania
law to uphold the trial court's determination that the plaintiff
was not entitled to pierce the corporate veil. The court noted
that there were no Pennsylvania decisions permitting the piercing
of the corporate veil of a limited liability company. The court
found that cases from other jurisdictions piercing the corporate
veils of limited liability companies were distinguishable on
their facts. Advanced Telephone Systems, Inc., 846 A.2d at 1281.
Advanced Telephone Systems, Inc. does not control the result
in this case because it applied Pennsylvania law. Moreover, as
the court in that case noted, Pennsylvania's Limited Liability
Company Act of 1994 contemplated that, in the appropriate case,
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No. 1-07-2946
the doctrine of piercing the corporate veil would be applied to a
limited liability company. Advanced Telephone Systems, Inc., 846
A.2d at 1281 n.11. In Filo America, Inc. v. Olhoss Trading Co.,
L.L.C., 321 F. Supp. 2d 1266 (M.D. Ala. 2004), the court listed
Advance Telephone Systems Inc. in its collection of cases in
which courts had determined that the corporate veil piercing
doctrine applied to LLCs. See Filo America, Inc., 321 F. Supp.
2d at 1269.
The defendants rely on Puleo v. Topel, 368 Ill. App. 3d 63,
856 N.E.2d 1152 (2006). In that case, this court addressed
whether a member or manager of an LLC may be held personally
liable for obligations incurred by an involuntarily dissolved
LLC. Section 10-10(a) of the Limited Liability Company Act (Act)
provides that a member of an LLC is not personally liable for the
obligations of the LLC unless the LLC agreement specifically
provides for such liability, and the member agrees in writing to
be bound by the provision. 805 ILCS 180/10-10(a) (West 2004).
This court determined that, as the plaintiff failed to establish
the existence of an agreement assented to by the defendant to
assume the LLC's liabilities, the defendant had no personal
liability for the LLC's obligations. Puleo, 368 Ill. App. 3d at
68.
This court further noted that, unlike the Illinois Business
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No. 1-07-2946
Corporation Act (805 ILCS 5/12.30 (West 2004)), the Act did not
contain a provision whereby the unauthorized exercise of
corporate powers rendered the person liable for debts and
liabilities incurred as a result. In addition, while the Act
imposed personal liability on a member for an obligation incurred
beyond the scope of his authority, the liability was owed to the
company, not to third parties. Puleo, 368 Ill. App. 3d at 68;
805 ILCS 180/35-7(b) (West 2004).
Finally, this court observed that, prior to amendment,
section 10-10 had imposed personal liability for the obligations
of an LLC on its members to the extent that a shareholder of an
Illinois corporation was personally liable in analogous
circumstances under Illinois law. Puleo, 368 Ill. App. 3d at 69;
805 ILCS 180/10-10 (West 1996). The court then stated as
follows:
"In 1998, however, the legislature amended section 10-
10 and in doing so removed the above language which
explicitly provided that a member or manager of an LLC could
be held personally liable for his or her own actions or for
the actions of the LLC to the same extent as a shareholder
or director of a corporation could be held personally
liable. As we have not found any legislative commentary
regarding that amendment, we presume that by removing the
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No. 1-07-2946
noted statutory language, the legislature meant to shield a
member or manager of an LLC from personal liability."
Puleo, 368 Ill. App. 3d at 69.
There is no dispute that under both the Delaware Act and the
Act, the members of an LLC have no personal liability absent an
agreement. However, Puleo did not address the doctrine of
piercing the corporate veil. Moreover, while the Act provides
specifically that the failure to observe the corporate
formalities is not a ground for imposing personal liability on
the members of an LLC, it does not bar the other bases for
corporate veil piercing, such as alter ego, fraud or
undercapitalization. See 805 ILCS 180/10-10(d) (West 2004).
We conclude that under Delaware law, the doctrine of
piercing the corporate veil applies to a limited liability
company. Just as with a corporation, the members of an LLC are
not generally liable for the obligations of the LLC. However,
under Delaware law, just as with a corporation, the corporate
veil of an LLC may be pierced, where appropriate. Therefore, the
granting of the defendants' motions to dismiss on the ground that
the doctrine of piercing the corporate veil did not apply to the
defendants' LLC was error.
The circuit court's order dismissing the plaintiff's
complaint is reversed and the cause remanded for further
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No. 1-07-2946
proceedings consistent with the views expressed in this opinion.
Reversed and remanded.
HOFFMAN, P.J., and SOUTH, J., concur.
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