Carollo v. Irwin , 2011 IL App (1st) 102765 ( 2011 )

ILLINOIS OFFICIAL REPORTS
Appellate Court
Carollo v. Irwin, 2011 IL App (1st) 102765Appellate Court DONNA CAROLLO, f/k/a Donna Syracusa, Plaintiff-Appellee, v.
Caption LAWRENCE IRWIN, REALTY CONSULTING SERVICES, INC., and
DL REALTY PARTNERSHIP, Defendants-Appellants.
District & No. First District, Fourth Division
Docket No. 1-10-2765
Filed September 22, 2011
Held In an action to enforce an agreement to settle an underlying sexual
(Note: This syllabus harassment complaint and the litigation to dissolve a partnership, the trial
constitutes no part of court properly entered summary judgment awarding plaintiff the
the opinion of the court additional $30,000 due plaintiff if a property owned by the partnership
but has been prepared did not sell, since the articles of agreement for deed for the property
by the Reporter of showing the buyer to be an unformed limited liability company did not
Decisions for the constitute a sale.
convenience of the
reader.)
Decision Under Appeal from the Circuit Court of Cook County, No. 09-M3-0670; the
Review Hon. Sandra Tristano, Judge, presiding.
Judgment Affirmed.
Counsel on Law Office of C. Corey S. Berman, Ltd., of Chicago (C. Corey S.
Appeal Berman, of counsel), for appellants.
ML LeFevour & Associates, of Des Plaines (Mark L. LeFevour, of
counsel), for appellee.
Panel JUSTICE PUCINSKI delivered the judgment of the court, with opinion.
Justices Fitzgerald Smith and Sterba concurred in the judgment and
opinion.
OPINION
¶1 Plaintiff, Donna Carollo, entered into a settlement agreement with her former business
partner, defendant Lawrence Irwin, and the partnership, defendant DL Realty Partnership
(DL Realty), in settlement of claims she asserted against defendants for sexual harassment.
That settlement agreement provided for an additional payment of $30,000 if a certain
property owned by DL Realty did not sell by December 31, 2008. Defendants argue that the
property sold when articles of agreement for deed were executed on December 31, 2008. The
agreement indicated the buyer was an unformed limited liability company (the LLC) and was
signed by an individual on behalf of the unformed LLC. The agreement provided for certain
installment payments and payments of interest, as well as an initial closing, prior to the final
closing and final payment of the balance of the purchase price, when the title to the property
would transfer. It is undisputed that no payments were ever made and no closing occurred.
The circuit court granted summary judgment in favor of plaintiff, finding that no sale
occurred, and awarded her the additional payment under her settlement agreement with
defendants.
¶2 We affirm and hold: (1) there was no sale because (a) the execution of the articles of
agreement did not constitute a sale but merely an executory contract to sell property and did
not transfer legal title and (b) there was no sale after the execution of the articles of
agreement because no payments were ever made and no closing was held, which were
conditions precedent of the transfer of title to the property. We also hold: (2) the contract in
any event was not enforceable because there was no buyer bound by the contract where (a)
the LLC was never subsequently formed and never ratified the contract or authorized Scott
Mason to enter into it, and (b) Scott Mason cannot be individually liable on the contract
because he is statutorily protected under the Limited Liability Company Act (805 ILCS
180/10-10 (West 2006)).
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¶3 BACKGROUND
¶4 The amended complaint alleges that plaintiff, Donna Carollo, formerly known as Donna
Syracusa, worked for defendant Lawrence Irwin and was a partner with Irwin in defendant
DL Realty Partnership. Plaintiff filed complaints of sexual harassment against Irwin with the
Equal Employment Opportunity Commission (EEOC) and the Illinois Department of Human
Rights. Plaintiff also filed a separate lawsuit for dissolution of DL Realty Partnership.
Plaintiff and defendants agreed to settle both the sexual harassment complaint and the
dissolution of partnership litigation, and executed a settlement agreement on October 18,
2007. Pursuant to the terms of the settlement agreement, defendants made certain guaranteed
payments to plaintiff.
¶5 DL Realty owned a property referred to as the River Oaks apartment complex, which it
had been trying to sell for about two years, and for more than eight months before plaintiff
and defendants entered into the settlement agreement. Defendants wished to obtain a selling
price of $4.2 million. Pursuant to paragraph 3 of the settlement agreement, plaintiff was also
entitled to an additional payment of $30,000 if the River Oaks property either did not sell on
or before December 31, 2008, or sold for an amount in excess of $4.2 million. Paragraph 4
of he settlement agreement further provided:
“Any Additional Payment that becomes due to [plaintiff] pursuant to Paragraph 3 of
this Agreement shall be sent to [plaintiff] within seven (7) days following the earlier of:
(i) the closing date of the sale of River Oaks or (ii) December 31, 2008. If River Oaks is
sold on or prior to December 31, 2008, Irwin shall provide [plaintiff] with copies of the
final sales contract and closing statement within seven (7) calendar days after the closing
date.”
¶6 On or about January 6, 2009, defendants sent plaintiff a copy of articles of agreement for
deed dated December 31, 2008, listing the buyer as Cal City Apartments, LLC, “or its
Nominee, Assignee, or Transferee.” The articles were signed by Lawrence Irwin, on behalf
of DL Realty Partnership, and Scott Mason, on behalf of Cal City Apartments, LLC, “an
Illinois Limited Liability Company yet to be formed.” Cal City Apartments, LLC, was not
incorporated at the time of agreement and was not ever subsequently incorporated. Cal City
Apartments, LLC, also never provided for a nominee, assignee, or transferee for its interest
in the articles of agreement for deed.
¶7 The articles provided for an installment payment from the buyer on June 30, 2009,
consisting of the difference between the purchase price and the amount of the principal of
the seller’s mortgage on the property, and 7% accrued interest between December 31, 2008,
and June 30, 2009. The final payment of the purchase price and all accrued interest was due
at the final closing. The “initial closing” was scheduled to occur on December 31, 2008, but
the “final closing” was not scheduled to occur until the date the underlying mortgage was due
to be paid. Title would not transfer until the final closing. The articles provided that if the
buyer does not make the required payments to the seller on June 30, 2009, as required in
paragraph 3(f), the “Agreement shall be terminated and held for naught.” Further, paragraph
17 of the articles provided that at the initial closing the buyer shall execute an assignment of
all the buyer’s right, title and interest to the seller in the event the buyer defaults under the
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terms and conditions of the articles.
¶8 The articles did not provide for a completed sale and transfer of title to the property prior
to December 31, 2008. Rather, the articles provided the following regarding the deed in
paragraph 2:
“(a) If the Buyer shall first make all the payments and perform all the covenants and
agreements in this Articles of Agreement for Deed as required to be made and performed
by said Buyer, at the time and in the manner hereinafter set forth, Seller shall convey or
cause to be conveyed to Buyer or his nominee, by a recordable, stamped general warranty
deed with release of homestead rights, good title to the premises ***. ***
(b) The performance of all the covenants and conditions herein to be performed by
Buyer shall be a condition precedent to Seller’s obligation to deliver the deed aforesaid.”
¶9 The articles further provided that the buyer was entitled to an affidavit of title at any time
upon payment of all amounts due under the articles. A DL Realty’s attorney, Allen Gabe,
who is the attorney who represented DL Realty and drafted the articles of agreement for
deed, held the title to the property in trust until the buyer complied with the terms and
conditions of the articles.
¶ 10 Additionally, the memorandum of articles of agreement for warranty deed stated that “the
terms of said Agreement provide for the future conveyance of said property to the Contract
Purchasers at a date certain, provided the Contract Purchasers shall perform in accordance
with the terms contained in said Agreement.” The record on appeal also includes an affidavit
of Allen Gabe, who averred that “[w]hen seller-financing is involved, Articles of Agreement
for Deed provide a measure of security to the Seller because title to the Property is not
transferred to the Buyer until the Buyer fulfills it payment obligations to the Seller.”
¶ 11 Cal City Apartments, LLC, did not make the payment required on June 30, 2009, nor did
it make any payments, and it did not perform any of the covenants in the articles of
agreement for deed. Scott Mason also did not make any payments and did not perform any
of the covenants in the articles of agreement for deed. On July 15, 2009, Gabe sent a letter
to Cal City Apartments, LLC, c/o Scott Mason, of notice of default. Neither Cal City
Apartments, LLC, nor Scott Mason cured the default.
¶ 12 Defendants refused to pay plaintiff the additional $30,000 under their settlement
agreement. Plaintiff filed the instant cause of action for breach of contract. Count I of her
first amended complaint was based on breach of the settlement agreement. Count II was for
a declaratory judgment that the articles of agreement did not constitute a sale of the property,
and that the invalid execution of the articles by a nonexistent LLC did not affect plaintiff’s
right under the settlement agreement to the additional $30,000 payment. Count III and IV
were alternative breach of contract claim and declaratory judgment claims alleging that if the
court found the articles of agreement to be an effective sale, plaintiff was still entitled to the
additional payment because the property sold for more than $4,350,000.
¶ 13 Plaintiff filed a motion for summary judgment on counts I and II on the basis that there
was no sale of the River Oaks property. The court granted summary judgment on counts I
and II and awarded plaintiff $30,000 and costs. Counts III and IV were voluntarily dismissed.
Defendants appeal the grant of summary judgment and award to plaintiff.
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¶ 14 ANALYSIS
¶ 15 Defendants argue that plaintiff was not entitled to summary judgment because a “sale”
of the River Oaks property occurred when DL Realty entered into the articles of agreement
for deed on December 31, 2008. Summary judgment is appropriate where the pleadings,
depositions, affidavits, and admissions on file, when viewed in the light most favorable to
the nonmoving party, show that no genuine issue of material fact exists and that the moving
party is entitled to a judgment as a matter of law. 735 ILCS 5/2-1005(c) (West 2006). The
purpose of summary judgment is not to try a question of fact, but rather to determine whether
a genuine issue of material fact exists. Robidoux v. Oliphant, 201 Ill. 2d 324, 335 (2002)
(citing Gilbert v. Sycamore Municipal Hospital, 156 Ill. 2d 511, 517 (1993)); Bagent v.
Blessing Care Corp., 224 Ill. 2d 154, 162 (2007) (citing Adams v. Northern Illinois Gas Co.,
211 Ill. 2d 32, 42-43 (2004), and Gilbert, 156 Ill. 2d at 517). “Genuine” is construed to mean
that there is evidence to support the position of the nonmoving party. Ralston v. Casanova,
129 Ill. App. 3d 1050 (1984). “In determining the existence of a genuine issue of material
fact, courts must consider the pleadings, depositions, admissions, exhibits, and affidavits on
file in the case and must construe them strictly against the movant and liberally in favor of
the opponent.” Purtill v. Hess, 111 Ill. 2d 229, 240 (1986) (citing Kolakowski v. Voris, 83
Ill. 2d 388, 398 (1980)). This court reviews a grant of summary judgment de novo. Roth v.
Opiela, 211 Ill. 2d 536, 542 (2004); Outboard Marine Corp. v. Liberty Mutual Insurance
Co., 154 Ill. 2d 90, 102 (1992).
¶ 16 I. There Was No Sale
¶ 17 A. There Was Only an Executory Contract for Sale
¶ 18 Defendants argue that a sale occurred by virtue of the articles of agreement for deed
executed on December 31, 2008, because under articles of agreement for deed, “ ‘equitable
conversion takes place at the instant a valid and enforceable contract is entered into and ***
the buyer at that time acquires an equitable title,’ ” quoting Shay v. Penrose, 25 Ill. 2d 447,
450 (1962). Plaintiff responds with a definition of “sell” from Webster’s New World College
Dictionary and argues there was no sale because there was no exchange or giving up the
property for money or its equivalent.
¶ 19 However, under property law, a contract for the sale of real estate does not constitute a
“sale.” As our supreme court explained in long-standing precedent:
“A difference exists in the established law of property between the legal significance of
a sale of an interest in land and a contract to sell an interest in land. Whereas the sale of
the interest in land results in the actual transfer of the title from the grantor to the grantee,
the contract for sale is only an agreement to be performed in the future and which, if
fulfilled, results in a sale.” 8930 South Harlem, Ltd. v. Moore, 77 Ill. 2d 212, 219 (1979)
(citing In re Estate of Frayser, 401 Ill. 364, 373 (1948)).
See also In re Estate of Martinek, 140 Ill. App. 3d 621, 627 (1986) (citing Moore and holding
that there is a clear legal distinction between a sale of interest in land and a contract to sell
interest in realty; the former results in the actual transfer of title, whereas the latter is merely
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an executory agreement that will result in a sale once performance of the contract is
complete).
¶ 20 Thus, it is clear that an actual transfer of legal title, not equitable title, is required for an
actual sale. Under property law a contract for the sale of real estate does not transfer legal
title and is not equivalent to an actual sale. We hold as a matter of law that the articles of
agreement for deed constituted merely an executory agreement for the sale of the property
and did not constitute an actual sale.
¶ 21 B. The Conditions Precedent of the Articles of
Agreement for Deed Were Not Fulfilled
¶ 22 We further determine that although equitable conversion occurred upon the signing of
the articles of agreement for deed, the conditions precedent to the transfer of legal title were
not fulfilled and, therefore, no sale occurred after the execution of the agreement. When the
seller enters into a valid and enforceable contract for the sale of realty, the seller continues
to hold legal title in trust for the buyer; the buyer becomes equitable owner and holds
purchase money in trust for seller, and this equitable conversion occurs at the time the parties
enter into an installment contract, as was the case here. Martinek, 140 Ill. App. 3d at 628.
¶ 23 However, a sale did not occur after the agreement was executed because the buyer did
not fulfill the conditions precedent of the articles of agreement and there was never a transfer
of title to the River Oaks property. A “condition precedent is one that must be met before a
contract becomes effective or that is to be performed by one party to an existing contract
before the other party is obligated to perform.” Catholic Charities of the Archdiocese of
Chicago v. Thorpe, 318 Ill. App. 3d 304, 307 (2000) (citing McAnelly v. Graves, 126 Ill.
App. 3d 528, 532 (1984)). Conditions precedent in a real estate contract are those that
prevent the vesting of title until the condition is complied with. Koch v. Streuter, 232 Ill. 594,
597 (1908). “ ‘Whether an act is necessary to formation of the contract or to the performance
of an obligation under the contract depends on the facts of the case.’ ” Thorpe, 318 Ill. App.
3d at 307 (quoting McAnelly, 126 Ill. App. 3d at 532). If “ ‘a condition goes solely to the
obligation of the parties to perform, existence of such a condition does not prevent the
formation of a valid contract.’ ” Thorpe, 318 Ill. App. 3d at 307 (quoting McAnelly, 126 Ill.
App. 3d at 532). “The factual analysis hinges on the mutual assent of the parties; if they agree
to formation of a binding contract, agreed-on conditions only affect the duty to perform and
the contract is valid.” Regency Commercial Associates, LLC v. Lopax, Inc., 373 Ill. App. 3d
270, 282 (2007) (citing Thorpe, 318 Ill. App. 3d at 307-08, quoting Edmund J. Flynn Co. v.
Schlosser, 265 A.2d 599, 601 (D.C. 1970)). The intent of the parties to create a condition
precedent to the formation of a contract is a question of law where the language in the
instrument is unambiguous. Thorpe, 318 Ill. App. 3d at 308 (citing IK Corp. v. One
Financial Place Partnership, 200 Ill. App. 3d 802, 810 (1990)).
¶ 24 The articles of agreement for deed had several conditions precedent to the vesting of title.
The articles required an installment payment from the buyer on June 30, 2009, consisting of
the difference between the purchase price and the amount of the principal of the seller’s
mortgage on the property, and 7% accrued interest between December 31, 2008, and June
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30, 2009. The “initial closing” was scheduled to occur on December 31, 2008, but the “final
closing” was not scheduled to occur until the date the underlying mortgage was due to be
paid. The final payment of the purchase price and all accrued interest was due at the final
closing. The articles of agreement specifically provided that title would not transfer until the
final closing. The articles provided that if the Buyer does not make the required payments
to the seller on June 30, 2009, as required in paragraph 3(f), then the “Agreement shall be
terminated and held for naught.” The installment payment and accrued interest due on June
30, 2009, and final payment of the purchase price and all accrued interest due on the final
closing were conditions precedent to the transfer of title to the property. Thus, the conditions
were not conditions precedent to contract formation but, rather, conditions precedent to the
seller’s transfer of title. Prior to the buyer’s default, the contract was in effect. See McAnelly,
126 Ill. App. 3d at 533 (holding a contract contingency of obtaining necessary permits within
24 months which, if not obtained, would make the lease of no effect, was not a condition
precedent to contract formation because neither party had the privilege of revocation prior
to the 24-month period ending and no further expression of assent by the parties was
necessary to proceed with the lease).
¶ 25 However, even if the contract was initially valid, by its terms the contract was not
enforceable if the conditions were not fulfilled. Express conditions precedent in contracts
that affect a party’s performance are subject to rules of strict compliance. Regency
Commercial Associates, LLC, 373 Ill. App. 3d at 282 (citing MXL Industries, Inc. v. Mulder,
252 Ill. App. 3d 18, 26 (1993)). “ ‘[W]here a contract contains a condition precedent, the
contract is neither enforceable nor effective until the condition is performed or the
contingency occurs.’ ” Perry v. Estate of Carpenter, 396 Ill. App. 3d 77, 82 (2009) (quoting
Jones v. Seiwert, 164 Ill. App. 3d 954, 958 (1987), citing Dodson v. Nink, 72 Ill. App. 3d 59,
64 (1979)). If the condition remains unsatisfied, the obligations of the parties are at an end.
McKee v. First National Bank of Brighton, 220 Ill. App. 3d 976, 983 (1991).
¶ 26 Here, even if there was a proper party as the buyer, the conditions precedent were never
fulfilled and the contract was terminated. It is undisputed that both the unformed Cal City
Apartments, LLC, and Scott Mason never paid any amount owed under the contract as a
condition precedent to the transfer of title to the River Oaks property. It is also undisputed
that no initial closing occurred, and no final closing with final payment ever occurred.
Further, DL Realty’s attorney, Allen Gabe, held the title to the property in trust until the
buyer complied with the terms and conditions of the articles, and title to the property was
never released from trust. After nonpayment of the installment amount, Gabe sent a notice
of default to Cal City Apartments, LLC, c/o Scott Mason, and the default was never cured.
Thus, due to the failure to fulfill the conditions precedent, the agreement was terminated and
the contract for deed was not enforceable. See Estate of Barth v. Schlangen, 249 Ill. App. 3d
70, 77 (1993) (holding summary judgment on behalf of a decedent’s estate to quiet title to
property was proper because the buyer admitted that he had made no installment payments
on the contract for the sale of the land). Under the terms of the agreement, the buyer
defaulted and the contract was “held for naught.” We hold that under these facts the contract
was terminated and there clearly was no sale.
¶ 27 According to defendants, however, “[t]his Court and the Illinois Supreme Court have
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made clear that a ‘sale’ occurs at the moment at which the parties enter into their purchase
transaction, even if the buyer ultimately defaults.” Defendants cite to Stephen L. Winternitz,
Inc. v. National Bank of Monmouth, 289 Ill. App. 3d 753 (1997), where the defendant bank
refused to pay the plaintiff its broker’s commission for the sale of equipment when the buyer
failed to pay the purchase price and defaulted on the transaction. The defendant bank
ultimately sold the equipment at a public auction and refused to pay the plaintiff the
commission. The court held that if, on remand, the plaintiff proved that the defendant entered
into a valid, binding contract with the buyer, then a “sale” occurred and the plaintiff was
entitled to its commission. Stephen L. Winternitz, Inc., 289 Ill. App. 3d at 760.
¶ 28 However, Winternitz is easily distinguishable and does not stand for the blanket
proposition urged by defendants. Winternitz dealt with the issue of a broker’s commission
upon the production of a ready, willing and able buyer, whereas here the additional payment
under the settlement agreement was contingent upon an actual sale. Winternitz based its
holding that, for purposes of the brokerage commission contract, a “sale” occurred upon the
holding of Fox v. Ryan, 240 Ill. 391 (1909), also cited by defendants. Fox states the rule that
a broker is entitled to his or her commission if the purchaser presented enters into a valid,
binding and enforceable contract, even though the contract is merely executory, and cannot
be deprived of his or her commission if the sale is not completed. Fox, 240 Ill. at 396.
¶ 29 Here, we are not presented with a contract for a broker’s commission. Plaintiff did not
procure the alleged buyer, and had nothing to do with DL Realty’s further efforts to sell the
River Oaks property after she entered into the settlement agreement with defendants. In fact,
plaintiff would not be entitled to the additional payment if the River Oaks property actually
sold. Thus, any broker commission analysis has no bearing in this context. Here, the
additional payment owed to plaintiff was part of a separate settlement agreement and was
conditioned upon whether an actual sale occurred, not whether a valid contract was executed
with a ready, willing, and able buyer. Because there was no sale, plaintiff was therefore
entitled to the additional payment of $30,000 under the terms of her settlement agreement
with defendants.
¶ 30 II. The Contract Was Not Enforceable Because Neither the Unformed LLC
Nor Scott Mason Could Be Held Liable as a Party to the Contract
¶ 31 Although we have determined that there was no sale, in the interest of clarifying some
confusion as to the liability of LLCs and individual promoters on behalf of LLCs, we further
hold and explain that under the facts of this particular case the contract was not in any event
enforceable. Defendants argue that a party may legally contract with a “to be formed” LLC.
Defendants further maintain that Scott Mason would be deemed the buyer if Cal City
Apartments, LLC, could not be a proper party to the contract. Plaintiff responds that the
unformed LLC did not make any payments or perform any of the covenants in the articles
of agreement for deed and that the unformed LLC did not, and legally could not, comply with
any of the terms and conditions of the articles of agreement. Plaintiff further responds that
Scott Mason would not be liable under the contract because the intent of the parties was that
the LLC was the buyer. We determine that the contract was not enforceable because there
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was no buyer bound by the contract where (a) the LLC was never subsequently formed and
never ratified the contract, and (b) Scott Mason cannot be individually liable on the contract
because he is statutorily protected under the Limited Liability Company Act.
¶ 32 A. The LLC Could Not Be Liable on the Contract Because It
Was Never Subsequently Formed and the Contract Was Never Ratified
¶ 33 We first address plaintiff’s contention that there was no sale because Cal City
Apartments, LLC, was never formed as an Illinois limited liability company and legally could
not comply with the terms and conditions of the articles of agreement. We begin our analysis
with a recognition that an LLC is a corporate form of business in Illinois that has many of
the same statutory powers as a corporation. Under the Business Corporation Act of 1983
(805 ILCS 5/1.01 et seq. (West 2006)), in relevant part, a corporation has the following
powers:
“(d) To purchase, take, receive, lease as lessee, take by gift, legacy, or otherwise
acquire, and to own, hold, use, and otherwise deal in and with any real or personal
property ***.
***
(h) To incur liabilities; to borrow money for its corporate purposes at such rates of
interest as the corporation may determine without regard to the restrictions of any usury
law of this State, to issue its notes, bonds, and other obligations; to secure any of its
obligations by mortgage, pledge, or deed of trust of all or any of its property, franchises,
and income; and to make contracts, including contracts of guaranty and suretyship, but
a corporation may not be organized hereunder for the purpose of insurance.” 805 ILCS
5/3.10(d), (h) (West 2006).
¶ 34 Under the Limited Liability Company Act, LLCs similarly have the power to:
“(3) Purchase, take, receive, lease as lessee, take by gift, legacy, or otherwise acquire,
own, hold, use, and otherwise deal in and with any real or personal property, or any
interest therein, wherever situated.
***
(7) Incur liabilities, borrow money for its proper purposes at any rate of interest the
limited liability company may determine without regard to the restrictions of any usury
law of this State, issue notes, bonds, and other obligations, secure any of its obligations
by mortgage or pledge or deed of trust of all or any part of its property, franchises, and
income, and make contracts, including contracts of guaranty and suretyship.” 805 ILCS
180/1-30 (3), (7) (West 2006).
¶ 35 In Illinois, if an individual enters into a contract on behalf of a corporation before the
corporation is formed, the corporation is not liable unless it is later formed and ratifies the
contract. Under the facts of this case, Scott Mason is in a position similar to that of a
preincorporation promoter who enters into contracts on behalf of a corporate entity not yet
in existence. “A promoter of a corporation is one who actively assists in creating, projecting
and organizing a corporation.” Tin Cup Pass Ltd. Partnership v. Daniels, 195 Ill. App. 3d
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847, 850 (1990). See also Stap v. Chicago Aces Tennis Team, Inc., 63 Ill. App. 3d 23, 26
(1978) (“A promoter is one who alone or with others forms a corporation and procures for
it the rights, instrumentalities and capital to enable it to conduct its business.”). The general
rule is that “[a] contract made with a promoter of a corporation before its organization is not
enforceable against the corporation unless such contract is ratified by the corporation after
its organization.” New Illinois Athletic Club v. Genslinger, 211 Ill. App. 220, 232 (1918).
¶ 36 Defendants cite to H.F. Philipsborn & Co. v. Suson, 59 Ill. 2d 465 (1974), Tin Cup Pass,
195 Ill. App. 3d 847, and In re Estate of Plepel, 115 Ill. App. 3d 803 (1983), and argue that
these cases stand for the proposition that courts will impose liability for corporate debts prior
to corporate formation. However, H.F. Philipsborn and Tin Cup Pass are easily
distinguishable from the facts in this case where the corporations in those cases were
eventually incorporated and ratified the contracts.
¶ 37 In H.F. Philipsborn, the plaintiff prepared an application for a construction and mortgage
loan, which was signed by the defendant as “ ‘North Shore Estates, Inc., by Morris Suson
Pres.’ ” H.F. Philipsborn, 59 Ill. 2d at 467. The application provided that upon acceptance
by plaintiff within 60 days the application would constitute a binding contract to make the
loan and that North Shore Estates would then agree to pay a commission of 2% of the loan.
H.F. Philipsborn, 59 Ill. 2d at 467. The following words were also printed on the loan
application form: “ ‘Title to be in the name of’ ” followed by “ ‘Trust to be formed’ ” and
the words “ ‘or corporation to be formed,’ ” which were added by defendant Suson. H.F.
Philipsborn, 59 Ill. 2d at 467.
¶ 38 The court in H.F. Philipsborn relied on the Supreme Court case of Whitney v. Wyman,
101 U.S. 392, 393 (1879). In that case the defendants sent a letter to the plaintiff stating,
“ ‘Our company being so far organized, by direction of the officers, we now order from
you’ ” certain machinery and was signed “ ‘Charles Wyman, Edward P. Ferry, Carlton L.
Storrs, Prudential Committee Grand Haven Fruit Basket Co.’ ” Whitney, 101 U.S. at 393.
The plaintiff accepted the order for the machinery. Whitney, 101 U.S. at 393. The order was
dated February 1, 1869, and the acceptance was dated February 10, 1869, before the articles
of incorporation were filed with the Secretary of State. Whitney, 101 U.S. at 393. The
machinery was delivered but the plaintiff’s draft on the defendants was protested because it
was addressed to them individually. Whitney, 101 U.S. at 394. The plaintiff filed an action
against the defendants individually to recover the value of the machinery. The Court applied
the rule that whether liability will be imposed upon the promoter depends upon the intent of
the parties (Whitney, 101 U.S. at 395-96) and found from the exchange of letters “that both
parties understood and meant that the contract was to be and, in fact, was with the
corporation, and not with the defendants individually.” Whitney, 101 U.S. at 396. The Court
in Whitney further held that “[t]he corporation subsequently ratified the contract by
recognizing and treating it as valid. This made it in all respects what it would have been if
the requisite corporate power had existed when it was entered into.” Whitney, 101 U.S. at
396-97.
¶ 39 In H.F. Philipsborn , the corporation also was subsequently formed and ratified the
contract. North Shore Estates was organized within 60 days of the execution of the loan
application, and it approved and adopted Suson’s acts and its assumption of liability. H.F.
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Philipsborn, 59 Ill. 2d at 472. Thus, the court held that under these circumstances, the
plaintiff looked only to the corporation for its commission and that there was no basis for the
imposition of personal liability on Suson individually for the payment of the loan
commission merely because the corporation was not yet formed at the time the application
was executed. H.F. Philipsborn, 59 Ill. 2d at 472-73. The court held that, “[o]n this record,”
whether the corporation existed at the time the contract was entered into was “not
controlling,” and held that the corporation, and not the individual, was liable. H.F.
Philipsborn, 59 Ill. 2d at 472-73.
¶ 40 The court in Tin Cup Pass likewise held that the actions of the parties after the lease,
whereby the corporation ratified the contract, “rendered the lease as valid as if the requisite
corporate authority had existed when it was entered into.” Tin Cup Pass, 195 Ill. App. 3d at
851. In Tin Cup Pass, it was undisputed that the plaintiff’s predecessor who signed the lease
knew that a corporation had yet to be formed. Tin Cup Pass, 195 Ill. App. 3d at 850-51. The
lease listed a corporate name as the lessee, and the defendants signed in their capacities as
corporate officers and not as individuals, and there were no individual guarantees. Tin Cup
Pass, 195 Ill. App. 3d at 851. The court held that under these facts, “[i]t was clearly the intent
of the parties to the lease to create a lease with a corporation as the lessee.” Tin Cup Pass,
195 Ill. App. 3d at 851.
¶ 41 Defendants argue that the agreement in this case establishes that Cal City Apartments,
LLC, was the intended entity to be bound by the agreement, and that under Tin Cup Pass and
H.F. Philipsborn the unformed LLC was bound by the contract. However, contrary to
defendants’ contention, the same result in Tin Cup Pass and H.F. Philipsborn does not obtain
here. In both Tin Cup Pass and H.F. Philipsborn, the corporations were later formed and
ratified the contract. The holding of H.F. Philipsborn has been applied only in similar cases
where the intent was to hold the corporation liable on a contract and the corporation was later
incorporated and adopted and ratified the actions of the individual promoter. See, e.g., Tin
Cup Pass, 195 Ill. App. 3d at 851. See Peter J. Hartmann Co. v. Capital Bank & Trust Co.,
296 Ill. App. 3d 593, 607 (1998) (citing H.F. Philipsborn, the court held the corporation
ratified one of the individual counterplaintiffs’ conduct as president and a shareholder of a
corporation who negotiated before its incorporation); Deerpath Investment, Inc. v. Barack,
112 Ill. App. 3d 692, 696 (1983) (citing H.F. Philipsborn and holding that the promoter of
a corporation was not individually liable on a lease entered into on behalf of an as-yet-
unformed corporation where the corporation was later incorporated and ratified and adopted
the subject lease); Stap v. Chicago Aces Tennis Team, Inc., 63 Ill. App. 3d 23, 27 (1978)
(holding that an individual promoter was not liable for a salary contract where the provisions
of the contract established that the plaintiff tennis player entered into the contract with a to-
be-formed corporation, and the evidence showed that the corporation was later incorporated
and an amendment was signed by the parties).
¶ 42 Here, unlike H.F. Philipsborn and Tin Cup Pass, the LLC was never formed, and so it
never adopted and ratified the articles of agreement for deed. The legal existence of an LLC
does not begin until articles of organization have been filed with the Secretary of State. 805
ILCS 180/5-40(a) (West 2006). It is undisputed that articles of organization for Cal City
Apartments, LLC, were never filed and, therefore, Cal City Apartments, LLC, never existed.
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As the LLC never existed, it could not have ratified the actions of Scott Mason.
¶ 43 Also, because Cal City Apartments, LLC, was not yet formed, it could not have been
bound by the agreement because Scott Mason had no authority to bind the LLC. Under the
Limited Liability Company Act:
“Each member is an agent of the limited liability company for the purpose of its business,
and an act of a member, including the signing of an instrument in the company’s name,
for apparently carrying on, in the ordinary course, the company’s business or business of
the kind carried on by the company binds the company, unless the member had no
authority to act for the company in the particular matter and the person with whom the
member was dealing knew or had notice that the member lacked authority.” (Emphasis
added.) 805 ILCS 180/13-5(a)(1) (West 2006).
¶ 44 Further, “[a]n act of a manager which is not apparently for carrying on, in the ordinary
course, the company’s business or business of the kind carried on by the company binds the
company only if the act was authorized under Section 15-1.” 805 ILCS 180/13-5(b)(2) (West
2006). Section 15-1 provides that in a member-managed LLC, except in certain
circumstances not applicable here, any matter relating to the business of the LLC may be
decided by a majority of the members. 805 ILCS 180/15-1(a)(2) (West 2006). In a manager-
managed company, also subject to exceptions which are not applicable here, any matter
relating to the business of the company may be decided by the manager or by a majority of
the managers if there is more than one manager. 805 ILCS 180/15-1(b)(2) (West 2006).
¶ 45 Here, the record is not clear whether the agreement entered into for the purchase of
property would have been for carrying on the regular course of business of Cal City
Apartments, LLC, but under either section 13-5(a)(1) or section 13-5(b)(2) and section 15-1,
it is clear that there was no act by the LLC authorizing Scott Mason because the LLC was not
in existence yet. Thus, the act of Scott Mason in entering the contract to purchase the River
Oaks property was unauthorized.
¶ 46 Also, under the notice provision of section 13-5(a)(1), defendants could not enforce the
agreement against Cal City Apartments, LLC, because the articles of agreement clearly
indicated that Cal City Apartments, LLC, was “an Illinois Limited Liability Company yet to
be formed.” (Emphasis added.) Thus, defendants had notice that Scott Mason could not have
authority from the LLC to bind the LLC because the LLC was not yet in existence. Therefore,
we hold that because the LLC was never formed, the contract was never ratified and Scott
Mason’s execution of the agreement was unauthorized, the LLC could not be liable for the
agreement.
¶ 47 B. Scott Mason Is Not Individually Liable Because the Limited Liability
Company Act Shields Members of LLCs From Personal Liability
¶ 48 Defendants argue that the articles of agreement were valid even if the unformed LLC
could not be held liable because the individual who signed, Scott Mason, would then be
personally liable. However, here there is an important distinction between corporations and
LLCs that neither party recognizes which is dispositive of this issue. We explain that, by
statute, as a matter of law Scott Mason cannot be personally liable.
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¶ 49 Defendants contend that H.F. Philipsborn, Tin Cup Pass, and Estate of Plepel all stand
for the proposition that courts will impose personal liability on individuals who incur
corporate debts prior to corporate formation. However, we note that the result in H.F.
Philipsborn and Tin Cup Pass was the opposite of the result sought here by defendants; the
corporations were held liable, not the individual, because the corporations were ultimately
formed and adopted and ratified the contracts. See H.F. Philipsborn, 59 Ill. 2d at 472; Tin
Cup Pass, 195 Ill. App. 3d at 851. In Estate of Plepel, on the other hand, the decedent’s
estate was liable because there was no evidence that the parties intended to hold the
corporation liable, or that the claimants even knew they were dealing with a corporation.
Estate of Plepel, 115 Ill. App. 3d at 807-08.
¶ 50 In determining whether a corporate officer has contracted in his own behalf, we apply the
general rules of agency. Polivka v. Worth Dairy, Inc., 26 Ill. App. 3d 961, 966 (1974). The
question of whether an agency relationship exists is normally a question of fact; however,
a court may decide the issue as a matter of law if only one conclusion may be drawn from
the undisputed facts. Ioerger v. Halverson Construction Co., 232 Ill. 2d 196, 202 (2008)
(citing Churkey v. Rustia, 329 Ill. App. 3d 239, 243 (2002)). The common law rule is that
where an agent signs a contract in his own name and the contract nowhere mentions the
existence of agency or the identity of the principal, the agent is personally liable and parol
evidence is not admissible to rebut the presumption of the agent’s personal liability. Bank
of Pawnee v. Joslin, 166 Ill. App. 3d 927, 935 (1988). A corporate officer who signs his
name on a contract, without more, is individually liable on the contract. 84 Lumber Co. v.
Denni Construction Co., 212 Ill. App. 3d 441, 443 (1991).
¶ 51 On the other hand, when an agent signs a document and indicates next to his signature
his corporation affiliation, then, absent evidence of contrary intent in the document, the agent
is not personally bound. Central Illinois Public Service Co. v. Molinarolo, 223 Ill. App. 3d
471, 475 (1992) (citing Knightsbridge Realty Partners, Ltd-75 v. Pace, 101 Ill. App. 3d 49,
53 (1981)). Directors or other officers of corporations are not liable for the debts contracted
in the name of, and on behalf of, the corporation and which are binding upon it unless they
are expressly made liable by statute or unless they also contract on their own behalf. Polivka,
26 Ill. App. 3d at 966. “ ‘One of the purposes of a corporate entity is to immunize the
corporate officer from individual liability on contracts entered into in the corporation’s
behalf.’ ” People ex rel. Madigan v. Tang, 346 Ill. App. 3d 277, 284 (2004) (quoting
National Acceptance Co. of America v. Pintura Corp., 94 Ill. App. 3d 703, 706 (1981)).
However, an unauthorized agent purporting to enter into a contract for a principal is
personally liable. Polivka, 26 Ill. App. 3d at 966.
¶ 52 Here, Scott Mason clearly indicated he was signing the articles of agreement on behalf
of Cal City Apartments, LLC, thus seemingly insulating himself from liability. See Baker v.
Daniel S. Berger, Ltd., 323 Ill. App. 3d 956, 969 (2001) (holding that the individual’s
signature on the face of the agreement was clear that he signed the agreement in his
representative capacity on behalf of the corporation and therefore would not be personally
bound). However, the LLC was never formed and so it never adopted and ratified the articles
of agreement for deed. Thus, it would appear that Scott Mason should be liable on the
contract, as he acted without authority of the LLC because the LLC was never formed and
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therefore never ratified his action in entering the articles of agreement.
¶ 53 However, there is an important statutory distinction between LLCs and corporations that
provides members or managers of unformed LLCs with more protection from personal
liability than officers of corporations in this context. Section 3.20 of the Business
Corporation Act of 1983 specifically directs:
“All persons who assume to exercise corporate powers without authority to do so shall
be jointly and severally liable for all debts and liabilities incurred or arising as a result
thereof.” 805 ILCS 5/3.20 (West 2006).
¶ 54 The Limited Liability Company Act had a provision similar to section 3.20 of the
Business Corporation Act. Prior to its amendment, section 10-10 provided:
“(b) A manager of a limited liability company shall be personally liable for any act,
debt, obligation, or liability of the limited liability company or another manager or
member to the extent that a director of an Illinois business corporation is liable in
analogous circumstances under Illinois law.” 805 ILCS 180/10-10(b) (West 1996).
¶ 55 However, when the legislature amended section 10-10 of the Limited Liability Company
Act in 1997, it specifically removed the provision that allowed a member or manager of an
LLC to be held personally liable for the unauthorized exercise of corporate powers in the
same manner as provided in the Business Corporation Act. Puleo v. Topel, 368 Ill. App. 3d
63, 69-70 (2006). See Pub. Act 90-424 (eff. Jan. 1, 1998) (deleting 805 ILCS 180/10-10(b)
(West 1996)).
¶ 56 In addition, the remaining provisions of the Limited Liability Company Act provide that
a member or manager is not liable for acting on behalf of an LLC:
“A member or manager is not personally liable for a debt, obligation, or liability of the
company solely by reason of being or acting as a member or manager.” 805 ILCS 180/10-
10(a) (West 2006).
¶ 57 Section 10-10(a) of the Limited Liability Company Act provides the only means by
which an individual can be liable for contracts entered into on behalf of an LLC:
“(a) Except as otherwise provided in subsection (d) of this Section, the debts,
obligations, and liabilities of a limited liability company, whether arising in contract, tort,
or otherwise, are solely the debts, obligations, and liabilities of the company.” 805 ILCS
180/10-10(a) (West 2006).
¶ 58 Subsection (d) in turn provides that an LLC member can be liable to a third party for
debts or obligations only if: (1) there is a provision to that effect in the LLC’s articles of
organization; and (2) the member has consented in writing to that provision. 805 ILCS
180/10-10(d) (West 2006).
¶ 59 Subsection (c) further provides that “[t]he failure of a limited liability company to
observe the usual company formalities or requirements relating to the exercise of its company
powers or management of its business is not a ground for imposing personal liability on the
members or managers for liabilities of the company.” 805 ILCS 180/10-10(c) (West 2006).
¶ 60 We have recognized the clear legislative intent to shield individuals from personal
liability in transactions on behalf of LLCs, where the LLC did not exist because it was
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dissolved. In Puleo, we held that a managing member was not personally liable for debts that
an LLC incurred after its dissolution because there was no evidence of a provision
establishing the managing member’s personal liability was contained in the LLC’s articles
of organization or that the managing member consented in writing to the adoption of such
a provision, which are the requirements of section 10-10(d) of the Limited Liability
Company Act. Puleo, 368 Ill. App. 3d at 68. We declined to imply into the Limited Liability
Act a provision similar to section 3.20 of the Business Corporation Act that would hold an
individual member liable for obligations incurred when the member was without authority
because the LLC was not in existence. Puleo, 368 Ill. App. 3d at 69. We held that “[a]s we
have not found any legislative commentary regarding that amendment, we presume that by
removing the 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. Thus, other than the very
limited circumstances specified in section 10-10(d), there is no individual liability for
members for any debts and obligations entered into on behalf of an LLC even where, as here,
such acts were unauthorized due to the fact that the LLC had not yet been formed.
¶ 61 Here, there is no evidence that the requirements of section 10-10(d) were met, and thus
there is no basis for holding Scott Mason bound by the contract. While in Puleo the LLC was
dissolved at the time the contract was entered into, whereas here the LLC was never formed
in the first place, the holding of Puleo is equally applicable, as in both instances the LLC was
not in existence at the time of contract. In this case it is undisputed that the LLC was never
formed, and there is no evidence offered by defendants that there were articles of
organization providing for Mason’s liability, nor any writing in which Scott Mason agreed
to be liable. See Puleo, 368 Ill. App. 3d at 68 (independent contractors could not establish
a managing member’s personal liability for debts that the LLC incurred after its dissolution
without showing that a provision establishing the managing member’s personal liability was
contained in the LLC’s articles of organization and that the managing member consented in
writing to the adoption of such a provision). Thus, Scott Mason could not be held
individually liable for the articles of agreement for deed because he is statutorily shielded
from liability. Therefore, neither the unformed LLC nor Scott Mason could be held liable on
the contract and the articles of agreement could not be enforced.
¶ 62 CONCLUSION
¶ 63 We conclude that there was no sale of the River Oaks property and that, therefore,
plaintiff was correctly awarded the additional settlement payment. First, there was no sale
of the River Oaks property by virtue of the articles of agreement for deed because the
agreement constituted merely an executory contract to sell the property and did not transfer
legal title. Also, there was no sale after the execution of the contract because no payments
were ever made and no closing was held, which were conditions precedent of the transfer of
title to the property under the contract. Second, we also hold that there was no sale because
there was no enforceable contract due to the fact that there was no party who could be held
liable as a buyer. The LLC was never formed and thus never ratified the contract on behalf
of the LLC or gave Scott Mason authority to enter into the contract. Also, statutorily as a
matter of law Scott Mason could not be individually liable for signing the contract on behalf
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of the unformed LLC due to insulation from liability under the Limited Liability Company
Act. Thus, there is no genuine issue of material fact that there was no sale of the River Oaks
property. The circuit court correctly granted summary judgment in favor of plaintiff and
awarded plaintiff the additional payment of $30,000 she was due under her settlement
agreement with defendants.
¶ 64 Affirmed.
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