Semande v. Estes ( 2007 )

No. 3--06--0452
_________________________________________________________________
Filed June 29, 2007.
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
A.D., 2007
CHARLES H. SEMANDE, ) Appeal from the Circuit Court
) of the 9th Judicial Circuit
Plaintiff-Appellant, ) McDonough County, Illinois
)
v. ) 05--CH--31
)
NICHOLAS H. ESTES, ) Honorable
) David F. Stoverink
Defendant-Appellee. ) Judge, Presiding.
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PRESIDING JUSTICE LYTTON delivered the Opinion of the court:
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Plaintiff, Charles Semande, obtained a judgment against
Heartland Pottery Company in the amount of $294,340.80. After
discovering that Heartland had no assets, Semande filed a complaint
against defendant, Nicholas Estes, alleging that Estes was the
alter ego of Heartland and, thus, liable for the judgment Semande
obtained against Heartland. Estes filed a motion to dismiss
plaintiff’s complaint, asserting that plaintiff lacked standing to
bring an alter ego action against him. The trial court granted the
motion. We affirm.
In 1995, Semande and Estes entered into several written
agreements for the purpose of forming a corporation, Heartland
Pottery Company. Estes agreed to provide the financing necessary
for Heartland to perform a pottery manufacturing operation, and
Semande agreed to be Heartland’s president and chief executive
officer with full responsibility for all of Heartland’s operations.
The parties agreed that Semande would receive a salary of $110,000
per year, plus bonuses.
According to the agreements between Estes and Semande, Estes
was to be the primary shareholder of Heartland and possess 500
shares of stock in exchange for a payment of $5,000. Semande was
to pay Heartland $50.00 and receive five shares of stock initially.
Semande was also given the option to purchase up to 50% of
Heartland’s shares of stock by a specified date or all of its
shares if he was terminated as president. Semande and Estes agreed
to elect themselves as the only members of Heartland’s board of
directors.
In 1998, Heartland terminated all of its employees, except
plaintiff. Soon thereafter, Semande filed an action against
Heartland for unpaid salary and expense reimbursements owed to him.
In 2001, Heartland was administratively dissolved by the Illinois
Secretary of State for failing to file necessary reports and pay
franchise taxes. Heartland has never been reinstated.
In 2002, Estes provided deposition testimony in connection
with Semande’s case against Heartland. At his deposition, Estes
admitted that no shares of Heartland stock were ever issued to
anyone, including Semande. Estes also admitted that Heartland
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never held a formal annual meeting and executed only one corporate
resolution, which allowed him to open a Heartland bank account.
The trial court entered judgment in favor of Semande and
against Heartland for $294,340.80. Semande then filed a citation
to discover assets against Heartland. Under oath, Estes testified
that Heartland had no assets.
Thereafter, Semande filed a complaint against Estes, alleging
that Estes was the alter ego of Heartland and should be liable for
the $294,340.80 judgment Semande obtained against Heartland. In
his complaint, Semande alleged that although he held the titles of
“director” and “president” of Heartland, Estes controlled all
aspects of the company. According to Semande, “Heartland was a
mere facade for the [d]efendant’s business operations” such that
“adherence to the fiction of a separate corporate existence for
Heartland would sanction a fraud and promote injustice or
inequitable consequences.” Semande alleged that Estes took income
and assets from Heartland and placed them in his personal accounts.
Estes filed a motion to dismiss the complaint, asserting that
Semande, as an officer and director of Heartland, lacked standing
to assert an alter ego action against him. The trial court granted
Estes’ motion to dismiss.
Semande argues that the trial court should not have granted
Estes’ motion to dismiss because Semande was a director and officer
of Heartland in name only and, therefore, had standing to pursue
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his alter ego action.
In Illinois, lack of standing is an affirmative defense.
Greer v. Illinois Housing Development Authority, 122 Ill. 2d 462,
494, 524 N.E.2d 561, 575 (1988). We review a trial court’s
dismissal order based on a lack of standing de novo. Scachitti v.
UBS Financial Services, 215 Ill. 2d 484, 493, 831 N.E.2d 544, 549
(2005).
A corporation is a legal entity separate and distinct from its
shareholders, directors, and officers. In re Rehabilitation of
Centaur Insurance Co., 158 Ill. 2d 166, 172, 632 N.E.2d 1015, 1017
(1994). However, a court may find corporate officers, directors
or shareholders personally liable for corporate obligations through
a remedy known as piercing the corporate veil. People v. V & M
Industries, Inc., 298 Ill. App. 3d 733, 739, 700 N.E.2d 746, 750
(1998). Piercing the corporate veil is an equitable remedy invoked
to assist third parties who have been defrauded. See Crum v. Krol,
99 Ill. App. 3d 651, 661, 425 N.E.2d 1081, 1088 (1981).
A corporate entity will be disregarded, and the corporate veil
pierced, where the corporation is an alter ego or business conduit
of the governing or dominant personality. V & M Industries, 298
Ill. App. 3d at 739, 700 N.E.2d at 751. The alter ego doctrine was
developed for and has historically been used by third persons
injured by their reliance on a distinct corporate entity. Centaur
Insurance Co., 158 Ill. 2d at 173, 632 N.E.2d at 1018; see also
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Sinquefield v. Sears Roebuck and Company, 209 Ill. App. 3d 595,
598, 568 N.E.2d 325, 327 (1991). According to the supreme court:
“The doctrine of alter ego fastens liability on the
individual who uses a corporation merely as an
instrumentality to conduct his or her own personal
business, and such liability arises from fraud or
injustice perpetrated not on the corporation but on third
persons dealing with the corporation. The corporate form
may be disregarded only where equity requires the action
to assist a third party.” Centaur Insurance Co., 158
Ill. 2d at 173, 632 N.E.2d at 1018, quoting 1 W.
Fletcher, Private Corporations §41.10, at 615 (rev. ed.
1990).
Piercing of the corporate veil is limited to protecting those
who have relied on the existence of a distinct corporate entity.
See Centaur Insurance Co., 158 Ill. 2d at 173-74, 632 N.E.2d at
1018. The corporate veil will generally not be pierced for the
benefit of a corporation or its stockholders. See Centaur
Insurance Co., 158 Ill. 2d at 173, 632 N.E.2d at 1018. The
rationale for this prohibition is that “[a] party should not be
allowed to utilize the corporate form on the one hand to protect
himself or herself from liability for a corporation’s debts, and
then on the other hand to nullify the existence of the corporation
to avoid reckoning with the obligations incurred by the corporation
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while it was a viable entity.” 18 C.J.S. Corporations, §20 (2007),
citing In re Lane, 215 B.R. 810, 812 (E. D. Va. 1997). When
shareholders have deliberately adopted the corporate form to obtain
its advantages, they will not be allowed to disregard the
corporation’s existence for their benefit. See Schenley Distillers
Corp. v. United States, 326 U.S. 432, 437, 66 S. Ct. 247, 249, 90
L. Ed. 181 (1946); Board of Transportation v. Martin, 296 N.C. 20,
29, 249 S.E.2d 390, 396 (N.C. Sup. Ct. 1978).
While no Illinois authority has expressly ruled that directors
may not pierce the corporate veil for their benefit, we believe
that the rationale for prohibiting shareholders from piercing the
corporate veil applies equally to directors. Like shareholders,
directors are generally not personally liable for a corporation’s
obligations. See Jacobson v. Buffalo Rock Shooters Supply, Inc.,
278 Ill. App. 3d 1084, 1088, 664 N.E.2d 328, 331 (1996). Giving
directors the ability to pierce the corporate veil would improperly
allow them to hide behind the corporate veil when it benefits them
and then discard it when it is no longer useful. C.f. Schenley
Distillers Corp., 326 U.S. at 437, 66 S. Ct. at 249, 90 L. Ed. 181
(one who has created a corporate arrangement to carry out his
business purposes does not have the choice of disregarding the
corporate entity).
Moreover, directors should be precluded from piercing the
corporate veil because, like shareholders, they are not innocent
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third party creditors. In order to fulfill their fiduciary duties
to the corporation and its shareholders, directors have a right and
responsibility to obtain information about the corporation that
they serve. See Drake v. Newton Amusement Corp., 123 N.J.L. 560,
9 A.2d 636 (N.J. Sup. Ct. 1939); Cohen v. Cocoline Products, Inc.,
309 N.Y. 119, 127 N.E.2d 906 (N.Y. App. Ct. 1955). To that end,
directors may compel inspection of a corporation’s books and
records. See Kunin v. Forman Realty Corp., 21 Ill. App. 2d 221,
157 N.E.2d 785 (1959); Stone v. Kellogg, 62 Ill. App. 444 (1895).
A director is chargeable with knowledge of the facts that corporate
books and records disclose. See F.H. Hill Co. v. Barmore, 220 Ill.
App. 222 (1920).
Furthermore, a director’s right to inspection is even broader
than a shareholder’s. See O’Neal v. Home Town Bank of Villa Rica,
237 Ga. App. 325, 514 S.E.2d 669 (Ga. App. Ct. 1999). Directors
have an “absolute” and “unqualified” right to examine books and
records (18A Am Jur. 2d Corporations § 297, at 170 (2d ed. 2004)),
while shareholders may only examine corporate books for a “proper
purpose” (805 ILCS 5/7.75(c) (West 2006)). Thus, directors have
the ability to determine the financial condition of the corporation
and do not need the equitable protection afforded to third party
creditors who may have been injured.
Here, the trial court found as a matter of law that, as a
director of Heartland, Semande had no standing to pierce
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Heartland’s corporate veil. We agree. As a director, Semande had
an obligation to obtain information about the corporation that he
served. See Drake, 123 N.J.L. 560, 9 A.2d 636; Cohen, 309 N.Y.
119, 127 N.E.2d 906. Thus, he did not stand in the position of an
innocent third party creditor and should not be allowed to employ
the equitable doctrine of piercing the corporate veil. See
Centaur Insurance Co., 158 Ill. 2d at 173, 632 N.E.2d at 1018. The
trial court properly dismissed Semande’s complaint for lack of
standing.
The judgment of the circuit court of McDonough County is
affirmed.
Affirmed.
WRIGHT, J., concurs.
JUSTICE HOLDRIDGE, dissenting:
The only information used by the majority to ascertain
Semande's status comes from agreements drawn up by the parties at
the inception of the corporation. But Semande claims that the
agreed-upon relationship did not exist in practice. There is no
evidence of record rebutting this claim. In fact, Estes gave
deposition testimony indicating that no shares of stock were ever
issued to Semande, and that Semande never participated in corporate
meetings in any capacity because no meetings were ever held.
Considering the nature of Semande's claim, I believe the record
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contains insufficient facts to support dismissal at this stage. I
thus respectfully dissent.
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