Gillespie Community Unit School District No. 7, Macoupin County, Illinois v. Union Pacific R.R. Co.

Digitally signed by
Reporter of Decisions
Reason: I attest to the
accuracy and integrity
Illinois Official Reports of this document
Date: 2016.01.08
09:13:51 -06'00'
Appellate Court
Gillespie Community Unit School District No. 7, Macoupin County, Illinois v.
Union Pacific R.R. Co., 2015 IL App (4th) 140877Appellate Court GILLESPIE COMMUNITY UNIT SCHOOL DISTRICT NO. 7,
Caption MACOUPIN COUNTY, ILLINOIS; and THE BOARD OF
EDUCATION OF THE GILLESPIE COMMUNITY UNIT SCHOOL
DISTRICT NO. 7, MACOUPIN COUNTY, ILLINOIS, Plaintiffs-
Appellees and Cross-Appellants, v. UNION PACIFIC RAILROAD
COMPANY, Defendant-Appellant and Cross-Appellee (Illinois Mine
Subsidence Insurance Fund, Intervenor-Appellee and Cross-
Appellant).
District & No. Fourth District
Docket No. 4-14-0877
Filed November 6, 2015
Modified upon
denial of rehearing December 30, 2015
Decision Under Appeal from the Circuit Court of Macoupin County, No. 09-L-22; the
Review Hon. Patrick J. Londrigan, Judge, presiding.
Judgment Reversed and remanded.
Counsel on Timothy G. O’Connell, Dan H. Ball, Eric D. Martin, and John Michael
Appeal Clear, all of Bryan Cave LLP, of St. Louis, Missouri, and Barry
Levenstam (argued) and Michael A. Scodro, both of Jenner & Block
LLP, of Chicago, for appellant.
Rick Verticchio and Gina Verticchio, both of Verticchio & Verticchio,
of Gillespie, and Thomas J. Verticchio (argued) and Matthew T.
Kinst, both of Swanson, Martin & Bell, LLP, of Chicago, for appellee
Gillespie Community Unit School District No. 7, Macoupin County,
Illinois.
James E. Betke, of James E. Betke, P.C., of Oak Park, for appellee
Illinois Mine Subsidence Insurance Fund.
Panel JUSTICE APPLETON delivered the judgment of the court, with
opinion.
Presiding Justice Knecht and Justice Steigmann concurred in the
judgment and opinion.
OPINION
¶1 There are three plaintiffs in this case. The first two plaintiffs are Gillespie Community
Unit School District No. 7 and its board of education, and we will refer to those two
plaintiffs, collectively, as “the School District.” The third plaintiff is the Illinois Mine
Subsidence Insurance Fund (Fund). The defendant is Union Pacific Railroad Company
(Union Pacific).
¶2 Plaintiffs brought this action to recover damages from Union Pacific for a coal mine
subsidence, which happened in Benld in March 2009 and which destroyed an elementary
school and damaged a house. The school belonged to the School District. The house
belonged to William and Jennifer Carter. The Carters are not parties to this case, but the Fund
is a reinsurer of their house, and it also is a reinsurer of the school.
¶3 The Fund seeks from Union Pacific the amounts it paid as a reinsurer, and the School
District seeks to be compensated for the destruction of its school and the damage to its land.
¶4 Union Pacific protests, however, that it did not dig the coal mine. Rather, Superior Coal
Company (Superior Coal) did so long ago. Even so, plaintiffs seek to hold Union Pacific
liable on the theory that in 1956 Chicago and North Western Railway Company (Chicago
and North Western) assumed Superior Coal’s liability for subsidences or, alternatively, on
the theory that Superior Coal was, all along, Chicago and North Western’s mere
instrumentality or alter ego. The School District also alleges that Chicago and North Western
directly participated in Superior Coal’s mining activities. It appears to be undisputed that if
any of those theories holds true, the liability ultimately got passed along, by merger, to Union
Pacific.
¶5 In the trial court’s view, the alleged facts failed to support any of those theories, and the
court granted Union Pacific’s motion to dismiss the complaints, with prejudice, for failure to
state a cause of action (735 ILCS 5/2-615 (West 2010)). Plaintiffs appealed. We upheld the
dismissal of some counts and reversed the dismissal of other counts. Gillespie Community
-2-
Unit School District No. 7 v. Union Pacific R.R. Co., 2012 IL App (4th) 110142-U, ¶ 147. We
could not say it was clear, on the face of the complaints, that no set of facts could be proved
that would entitle plaintiffs to recover on the counts alleging assumption of liability, direct
participation, and alter ego. Id. Looking at those counts in the light most favorable to
plaintiffs, we decided to remand the case for further proceedings. Id.¶6 On remand, the parties filed cross-motions for summary judgment. In the hearing on
these motions, the trial court understood our discussion of plaintiffs’ theory of assumption of
liability as leaving the court no choice but to enter a summary judgment in plaintiffs’ favor
on that theory and to award them $9.85 million in damages, although the court made a
summary determination in Union Pacific’s favor on the remaining theories of direct
participation and alter ego (which could not logically coexist with a theory of assumption of
liability).
¶7 Actually, our preceding decision left some room for proof on the question of assumption
of liabilities: we observed that the term “liabilities” in Chicago and North Western’s
resolution of 1956 could mean perfected liabilities, contingent liabilities, or both. Id. ¶ 82. On
remand, Union Pacific presented extrinsic evidence that by assuming Superior Coal’s
“liabilities,” Chicago and North Western intended to assume only perfected liabilities,
liabilities that accrued before Superior Coal’s dissolution–not unaccrued, unknowable,
contingent liabilities, such as liabilities for subsidences occurring after dissolution. Because
the record appears to contain no evidence contradicting Union Pacific’s evidence in that
respect, we conclude, de novo, that Union Pacific eliminated any genuine issue as to the
meaning of “liabilities” in Chicago and North Western’s resolution of 1956, and
consequently we reverse the summary judgment in plaintiffs’ favor. Chicago and North
Western never assumed liability for future subsidences, that is, subsidences occurring after
the dissolution of its subsidiary, Superior Coal.
¶8 That does not mean the case is over. Both plaintiffs and Union Pacific are only partly right in
their cross-motions for summary judgment, and we only partly agree with their cross-appeals.
Plaintiffs are entitled to a summary determination in their favor on Union Pacific’s third,
sixth, and ninth affirmative defenses, as the trial court correctly concluded. Union Pacific is
entitled to a summary determination in its favor on the theory of assumption of liability, and
thus there is no occasion to reform Chicago and North Western’s resolution, as Union Pacific
proposes to do. Union Pacific also is entitled to a summary determination on the theory of
direct participation. But there still is a genuine issue of material fact as to plaintiffs’ alter ego
theory. With that theory still at issue, it would be premature to address the School District’s
remaining contention that it was entitled to prove the cost of grouting (filling the mine rooms
with concrete). See Pielet v. Pielet, 2012 IL 112064, ¶ 57; Business & Professional People for
the Public Interest v. Illinois Commerce Comm’n, 136 Ill. 2d 192, 228 (1989); In re Marriage
of Osborn, 206 Ill. App. 3d 588, 600 (1990).
¶9 Because there still is a genuine issue as to whether Superior Coal was the alter ego or
instrumentality of Chicago and North Western, we reverse the summary judgment in
plaintiffs’ favor, and we remand this case for further proceedings.
¶ 10 We now will explain, in greater detail, how we arrived at this decision, beginning with
the evidence in the summary judgment proceedings.
-3-
¶ 11 I. BACKGROUND
¶ 12 A. The Origin of Superior Coal
¶ 13 From about 1935 to 1947, Superior Coal was in litigation with the Illinois Department of
Finance (Department). The Department claimed that Superior Coal owed a retailers’
occupation tax in the total amount of $97,838 for coal Superior Coal had sold to its parent
corporation, Chicago and North Western, from July 1933 to May 1935. Superior Coal
contested this claim for back taxes because Superior Coal regarded itself as a department of
Chicago and North Western, rather than a bona fide separate corporation, and the purported
sales as intracorporate transfers for cost.
¶ 14 Much of our information about the relationship between those two companies in the early
decades of the 20th century comes from documents filed in that litigation, both in the
Department and in the supreme court. (None of the briefs disputes the admissibility of these
or any other documents produced in discovery. In fact, there was a stipulation to
admissibility.)
¶ 15 The richest source of information about the origin of Superior Coal is a document that
Superior Coal filed with the Department on August 6, 1935: “Summary of History of the
Superior Coal Company and Its Relationship With the Chicago and North Western Railway
Company.” According to this “Summary,” Chicago and North Western came up with a plan,
around 1900, to acquire coal more cheaply–coal that it needed to power its steam
locomotives. Hitherto, when buying coal on the market, Chicago and North Western had to
pay not only the seller’s price, which, of course, was set high enough to fetch the seller a
profit, but also freight charges to transport the coal via foreign rails to Chicago and North
Western’s own lines. This was expensive.
¶ 16 The first step Chicago and North Western took to free itself from its costly dependence
on commercial coal suppliers and other railroads was to buy 25,000 acres of coal lands in
Macoupin County. It then extended its lines to these coal lands.
¶ 17 The next step, in 1903, was to form a subsidiary, Superior Coal, and to convey the coal
lands to it. Initially, Chicago and North Western capitalized Superior Coal in the amount of
$1.5 million. Later, it increased the capitalization to $2 million, represented by 20,000 shares.
Chicago and North Western owned 19,995 of these shares, and the directors of Superior Coal
owned the remaining 5 shares, 1 apiece, as a condition of being qualified to serve as directors
of Superior Coal. (In 1903, Illinois statutory law required that the directors be “bona fide
shareholders in such association.” 1903 Ill. Laws 125.)
¶ 18 All 20,000 of these shares were voting shares. One share equaled one vote. Thus, for
instance, in a special meeting of Superior Coal’s stockholders on July 14, 1947, a total of
20,000 votes were cast on the question of whether Nye F. Morehouse and Arthur R. Seder
should be elected directors of Superior Coal. The decision was unanimous. Chicago and
North Western, by a proxy, Barret Conway, cast 19,995 votes in favor of Morehouse and
Seder, and the 5 directors of Superior Coal cast the remaining 5 favorable votes.
¶ 19 If ever, in the history of Superior Coal, there was a dissenting vote in any meeting of its
shareholders and board of directors, we have not found one in the minutes in the record. It
appears that the five directors of Superior Coal always voted with the majority shareholder,
Chicago and North Western. In fact, Superior Coal publicly stated that its directors held their
shares for the benefit of Chicago and North Western–although, presumably, the purpose of
-4-
requiring directors to be “bona fide shareholders” was to align their interests with the
company they managed and cause them to be independent from outside influences. Id. In an
“Additional Abstract of Record” in Superior Coal Co. v. Department of Finance, 377 Ill. 282(1941) (Superior Coal I), filed in April 1941, Superior Coal’s attorney, Nelson Trottman,
represented to the supreme court: “These five director’s qualifying shares are held for
[Chicago and North Western].”
¶ 20 B. Common Officers and Directors
¶ 21 Superior Coal informed the Department that, since 1903, every director of Superior Coal
had been simultaneously an officer or employee of Chicago and Northwestern. Likewise, the
officers of Superior Coal, with one exception, were simultaneously officers of Chicago and
North Western, usually in a corresponding position. The president of Superior Coal was Fred
S. Pfahler, who also was the coal traffic manager of Chicago and North Western.
¶ 22 C. Selling Coal to the Parent at Cost
¶ 23 According to Pfahler’s testimony in the tax case, the routine was for Chicago and North
Western’s general manager to send a memorandum each week to Superior Coal’s purchasing
agent, designating the amount of coal to be mined and loaded for the next week. At the end
of the month, tonnage statements would be prepared, and using these tonnage statements,
Pfahler would “ ‘figure out what cash’ ” Superior Coal would “ ‘need to meet [its] current
bills,’ ” that is, “ ‘the cost of operating.’ ” Having made his calculations, Pfahler then would
write the purchasing agent, stating that Superior Coal would “ ‘need so much per ton’ ”: a
figure that “ ‘[did] not represent anything beyond cost.’ ” Paying no more than cost, Chicago
and North Western consumed all of Superior Coal’s production (except that Superior Coal
sold trivial amounts of coal to its employees).
¶ 24 It appears that, at least from the early 1930s onward, Superior Coal charged Chicago and
North Western, its sole customer, only the cost of production. We are unclear exactly how far
back in time that cost-only policy went. Even from July 1932 to December 1934, when
Superior Coal was charging Chicago and North Western 20 cents per ton in excess of
Superior Coal’s cost of production, it still was charging, effectively, only the cost of
production, because by prior agreement Superior Coal turned around and paid the excess to
Chicago and North Western’s creditor, the Reconstruction Finance Corporation, as assigned
dividends. In December 1934, Superior Coal resumed charging Superior Coal only the cost
of production.
¶ 25 The contract of December 27, 1934, recited: “[F]or many years [Superior Coal] has,
although constituting a separate corporation, been managed and operated, and its properties
managed and operated, as a branch or department of [Chicago and North Western], and
wholly in its interest ***.”
¶ 26 Superior Coal told the supreme court the same thing in the tax case, Superior Coal I. The
additional abstract of the record in that case states: “At all times since its organization, the
Superior Coal Company has been under the complete domination and control of [Chicago
and North Western] as a mere branch or department of [Chicago and North Western’s]
business.” As summarized in the supreme court’s decision, Superior Coal’s position was as
follows:
-5-
“[Superior Coal] maintains that it is, in fact, but a department or branch of the railway
company [(i.e., Chicago and North Western)]; that it is merely an agent or
instrumentality of the parent corporation; that coal mined by the plaintiff for use in
the railway company’s business is, in reality, mined by the railway company itself,
and that the transactions in question between the plaintiff and its parent are no more
‘sales’ than would be any interdepartmental transfer, or the direct mining by the
railway company of coal for its own use through an agent, under any circumstances to
which the law of agency is applicable.” Id. at 283-84.
¶ 27 D. Pledging Collateral for the Parent’s Loan
¶ 28 In 1934, Chicago and North Western needed to borrow money from banks in New York
City. The banks required collateral, and Chicago and North Western turned to its subsidiary,
Superior Coal.
¶ 29 According to a resolution of Superior Coal’s directors, dated March 16, 1934, Chicago
and North Western had requested Superior Coal to pledge some bonds as collateral. These
were in fact some bonds of Chicago and North Western in which Superior Coal had invested.
By resolution of the directors of Superior Coal, the bonds were turned over to the banks to
secure Chicago and North Western’s loan. The consideration, if any, for Superior Coal is
unclear.
¶ 30 Afterward, the loan was repaid, and the collateral was returned.
¶ 31 E. Dividends
¶ 32 From 1911 to 1952, Superior Coal paid a total of $14.725 million in dividends to Chicago
and North Western. The dividends for the years 1932, 1933, and 1934 ($100,000 and
$400,000 and $300,000, respectively), resulting from temporarily charging Chicago and
North Western 20 cents a ton above the cost of production, were assigned to the
Reconstruction Finance Corporation pursuant to the contract of July 22, 1932, to pay off
Chicago and North Western’s loan.
¶ 33 From 1948 to 1952, Superior Coal’s total net income was $1,245,318, but it declared a
total of $1.850 million in dividends during that period.
¶ 34 F. Depressed Conditions in the Coal Mining Industry
in the Late 1940s and Early 1950s
¶ 35 Throughout Superior Coal’s existence, until about 1947, Chicago and North Western
consumed its entire coal production. Beginning in 1947, Superior Coal began selling a
portion of its production commercially. Because the demand for Illinois coal was declining,
these commercial sales went from a high of 463,000 tons in 1947 to 86,000 tons in 1952.
¶ 36 In the 1950s, when Chicago and North Western was switching to diesel engines, it began
contemplating the dissolution of Superior Coal and the sale of its physical assets for salvage.
¶ 37 On May 24, 1954, in a special meeting, Superior Coal’s stockholders unanimously passed
a resolution, which stated: “[I]t appears from reports presently before the stockholders that
the continuation of coal production by the Superior Coal Company cannot be carried on
profitably for the future and the Chicago and North Western Railway System’s greatly
-6-
reduced requirements for coal may be obtained more reasonably from other sources.”
Therefore, the stockholders “authorized and directed” the board of directors and president of
Superior Coal to “take appropriate action to discontinue active mining operations *** and
carry out a program for the permanent closing and abandonment of mine Nos. 3 and 4, and
the orderly salvaging and disposition of materials and equipment thereof.”
¶ 38 Four days later, the directors of Superior Coal passed a resolution putting Pfahler in
charge of the salvaging operations.
¶ 39 G. Subsidence Claims During the Two Years
Preceding Superior Coal’s Dissolution
¶ 40 On April 4, 1956, in a meeting of Superior Coal’s directors, the topic of subsidence
claims came up. The minutes of the meeting stated as follows:
“Mr. Kiss reported that a new surface subsidence occurred at about 5:30 a.m. on
Sunday, April 1, 1956, in a limited area in the southerly outskirts of Gillespie, in the
area of operations of Mine 3. This subsidence brought probable damage to three
houses, one of which is a farm house, and settling of about six acres of farm land.
General discussion was had with respect to the Company’s current situation in the
matter of subsidence claims and the procedures involved in the processing of such
claims. Mr. Kiss stated that there were 45 claims as a result of the October 1955
subsidence, that 4 of these claims have been paid and 4 more are about ready for
settlement. Based on the Company’s past experience in the settlement of subsidence
claims he estimated the probable cost to the Company to dispose of all presently
known claims and possible claims not yet made for repair of sewers, gas and water
lines at $140,000.
***
In the view of Mr. Kiss’s estimate of $140,000 as to present liability for
subsidence damage and the Company’s past experience, it was agreed that the
Company’s Surface and Subsidence Reserve in the amount of $172,926, as of
December 31, 1955, is apparently adequate and not in need of any adjustment at this
time.”
¶ 41 On August 28, 1956, the topic of subsidences came up again, in a memorandum that
Lowell Hastings, vice president and general counsel of Chicago and North Western, wrote
the chairman of the company, Ben W. Heineman. The purpose of the memorandum was to
“recommend that the Superior Coal Company be dissolved, that its assets be transferred to
the Chicago and North Western Railway Company and that the Railway Company assume
such of its liabilities as cannot be fully liquidated prior to such dissolution.” Lowell did not
believe that subsidence liabilities would be too great compared to Superior Coal’s assets.
¶ 42 The memorandum said: “In this connection we have not overlooked the problems with
respect to subsidence claims. In recent years there have been a number of such claims, all of
which have either been paid or provided for by a reserve which appears to be adequate.
Although the possibility of further subsidences will continue to exist, we have been advised
by Mr. Pfahler, former President of the Coal Company, who, of course, is very familiar with
the properties, that there is no reason to anticipate further difficulty except to a limited extent
-7-
adjacent to the present subsidences.” How “adjacent,” the memorandum did not specify.
¶ 43 H. The Resolution to Dissolve Superior Coal
¶ 44 On September 14, 1956, the board of directors of Chicago and North Western passed a
resolution that Superior Coal be dissolved. The resolution stated as follows:
“WHEREAS, this Company has adopted a policy of reducing the number of its
subsidiary corporations, and in furtherance of that policy it has been determined to be
in the best interest of this Company that the Superior Coal Company (all of whose
outstanding shares are owned by this Company) be dissolved, that its assets be
transferred to this Company, and that this Company assume its liabilities (in the event
that such liabilities cannot be fully liquidated prior to the time a certificate of
dissolution has been issued by the Secretary of State of Illinois);
***
FURTHER RESOLVED, that this Company assume any liabilities of the Superior
Coal Company (subject to applicable Statutes of Limitations) that cannot be fully
liquidated prior to the time a certificate of dissolution has been issued by the
Secretary of State of Illinois.”
¶ 45 Thus, by the terms of the resolution, Chicago and North Western was to acquire all of
Superior Coal’s assets and also was to assume all of Superior Coal’s liabilities that remained
unliquidated at the time of dissolution, provided that judicial enforcement of the liabilities
was not barred by any statute of limitations.
¶ 46 On October 12, 1956, pursuant to section 75 of The Business Corporation Act (Ill. Rev.
Stat. 1955, ch. 32, ¶ 157.75), the shareholders of Superior Coal executed a statement of intent
to dissolve the corporation.
¶ 47 On December 28, 1956, Superior Coal quitclaimed to Chicago and North Western all its
mineral rights in Macoupin County, including the No. 2 mine.
¶ 48 According to a general journal entry of Chicago and North Western for December 1956,
Superior Coal’s subsidence reserve of $124,834.60 likewise was transferred to Chicago and
North Western or to its books.
¶ 49 In February 1957, Superior Coal was dissolved. It was solvent at the time, as far as
Chicago and North Western could tell. Solvency meant that Superior Coal had enough assets
to pay its known liabilities. Trottman had written about six months earlier, in a
memorandum:
“Because of the nature of the liabilities of the Superior Coal Company, it is
impossible to finally liquidate all such liabilities in the immediate future. The
liabilities include pension obligations to pensioned former employees, and subsidence
claims. The pension liabilities have been actuarially computed and the subsidence
claims estimated, and the amounts thereof placed upon the balance sheet. The present
balance sheet shows a solvent condition. Accordingly, if the North Western were to
assume the Superior Coal Company’s liabilities upon receiving its assets in
liquidation, it would appear that such assets would be more than sufficient to take
care of future liabilities. Conceivably, however, there might be potential but unknown
liabilities of the Coal Company (e.g., unknown subsidence claims, or unknown and
-8-
unasserted but potential federal tax deficiencies), which in the aggregate might, when
added to the known liabilities, exceed the assets to be distributed in liquidation.”
The memorandum added, in a footnote: “The balance sheet as of July 31, 1956[,] shows,
under ‘Unadjusted credits,’ a ‘Pension reserve’ in the amount of $425,679, a ‘Personal injury
reserve’ in the amount of $51,435, and a ‘Surface land subsidence reserve’ of $154,874.”
¶ 50 I. The Succession of Ownership
From Chicago and North Western
to Union Pacific
¶ 51 In 1970, Chicago and North Western sold its assets to the newly formed North Western
Employees Transportation Corporation, which agreed to assume “liabilities *** of any kind,
nature and description, whether public or private, whether arising by or as a result of
agreement, action, omission to act, law or violation of law, or otherwise, whether known or
unknown, whether accrued or not accrued for any purpose, and whether or not disclosed by
this Agreement or reflected in any book or record of any [sic] [Chicago and North Western].”
¶ 52 In 1972, North Western Employees Transportation Corporation changed its name to
Chicago and North Western Transportation Company. The company afterward changed its
name to Chicago and North Western Railway Company. (For the sake of simplicity, we will
refer to both North Western Employees Transportation Corporation and Chicago and North
Western Transportation Company as “New Chicago and North Western.”)
¶ 53 In 1995, New Chicago and North Western merged into Union Pacific, and Union Pacific
was the surviving entity.
¶ 54 J. Notice of the Risk of Mine Subsidence
at the Proposed Site of a New Elementary School
and the Expense and Uncertainty of Assessing That Risk
¶ 55 The School District operates schools in two small cities, located three miles apart,
Gillespie and Benld. The elementary school in Benld was a brick building, built in the 1920s.
It was outdated and in need of tuckpointing, and the citizens of Benld wanted to replace it
with a new elementary school. They wanted the new school to be in Benld since both the
middle school and the high school were in Gillespie.
¶ 56 The problem was that Superior Coal had pretty much honeycombed the ground under
Benld (and, for that matter, the ground under Gillespie). Subsidences were occurring right
across the street from the site in Benld where the School District proposed building the new
elementary school. Union Pacific’s own tracks in Sawyerville, less than a mile from Benld,
had sustained damage from a subsidence in 1998, as reported in Gillespie Area News. Indeed,
the whole school district was undermined. In a board of education meeting in December
1998, Jerry Schaefer, a geotechnician, “distributed a map of the school district showing that
virtually all of the available sites [had] been undermined.” (We are quoting from Union
Pacific’s exhibit No. 168: Area Coal Mining Heritage May Hamper Site Selection for New
School, Gillespie Area News, Dec. 10, 1988, at 1.) Timothy McMinn, a principal in the FGM
architectural firm, commented: “One of the problems with building on land prone to
subsidence *** is that the specialized construction needed to establish a solid foundation can
-9-
eat up dollars, reducing the amount of money the district can spend on actual classroom
space.” Id. at 11.
¶ 57 The School District hired an architectural firm, Wight & Company (Wight), which in turn
hired Hanson Engineers (Hanson), to write a foundation engineering report. In 1999, Hanson
wrote its report, which Wight passed on to the School District. The report said, under the
heading “Risk of Coal Mine Subsidence”:
“Due to the many unknown variables involved in predicting both the chance of
subsidence and its possible magnitude, it is nearly impossible to quantify the risk
involved in building on an undermined site. Surface investigations undertaken to
predict the possibility of future subsurface [subsidence] are always very expensive
and are generally inconclusive. The owner should consider the fact that there is no
economically feasible corrective action that can be taken to guarantee against future
subsidence.
The risk of future subsidence must be valued along with the other features of the
site with the knowledge that it will not be possible to completely avoid similar risks
in the area closely surrounding Benld, Illinois.”
¶ 58 In a couple of places in the record, there is mention that exploratory core-drilling to a
depth of 300 feet, where the coal mines were, would have cost $200,000 and would have
yielded no guarantees.
¶ 59 Wight did some relatively shallow drilling to assess the foundational adequacy of the
surface, but this drilling could reveal nothing about the support hundreds of feet down.
¶ 60 K. What the School District Should Have Done,
According to Union Pacific’s Expert
¶ 61 Union Pacific presented an affidavit by David Newman, a mining engineer with expertise
in mine roof stability. He stated that the primary mining method used in the school district
was room-and-pillar mining. The barrier pillars in Superior Coal’s mines were located
approximately 330 yards apart, and in his opinion, the risk of subsidence damage would have
been reduced if, in 2002, the school had been built over or in close proximity to barrier
pillars and if, in addition, the surface had been reinforced with underground grouting.
¶ 62 In his affidavit, Newman did not venture an estimate of how much these measures would
have cost, but he said: “If grouting the mine had been used when building a two-story school
with the same square footage as the 2002 School, and the school had been built in proximity
to the existing barrier pillars, the cost of grouting would have been reduced by more than
50%. The cost of grouting would have been further reduced if [the] column grouting method
were feasible and used at this site instead of saturation grouting.”
¶ 63 In sum, Newman blamed the School District for failing to hire professionals with
sufficient expertise and for failing, with the help of such professionals, to “evaluate the
history of subsidence in the vicinity of the site, the geometry and characteristics of mining
underneath the proposed site, the feasibility of alternative sites, and the cost and feasibility of
grouting or other measures to mitigate the risk, such as moving the location or modifying the
configuration of the building.”
- 10 -
¶ 64 L. The Construction of the Elementary School in Benld
and the Destruction of the School by Mine Subsidence
¶ 65 In 2001, the School District entered into agreements for the construction of the
elementary school in Benld over Superior Coal’s abandoned No. 2 mine. The school was
constructed at a cost of $9 million in public funds, and it opened in August 2002.
¶ 66 In March 2009, 6½ years later, the ground beneath the school subsided, inflicting
structural damage to the school. Within a few weeks, the Illinois State Board of Education
determined that the damage was so severe that the school had to be condemned and
demolished.
¶ 67 II. ANALYSIS
¶ 68 A. Assumption of “Liabilities”
¶ 69 When mining coal in Macoupin County from 1903 to about the mid-1950s, Superior Coal
had an obligation to leave enough subjacent support, i.e., underground pillars, so that the
ground surface, in its natural state, would not subside. See Wilms v. Jess, 94 Ill. 464, 467
(1880); Restatement (Second) of Torts § 820(1), at 78 (1979); 9 Richard R. Powell, Powell
on Real Property § 63.06(1), at 63-28 to 63-29 (Michael Allan Wolf ed., 2000). A cause of
action for breach of that obligation would accrue when the land subsided (Treece v. Southern
Gem Coal Corp., 245 Ill. App. 113, 118 (1923); Restatement (Second) of Torts § 820 cmt. g,
at 80 (1979))–which, of course, could be a long time after the removal of the subjacent
support and a long time after Superior Coal ceased to exist.
¶ 70 In 1957, Superior Coal was dissolved. A few months before its dissolution, Superior Coal
quitclaimed to Chicago and North Western all its mineral rights in Macoupin County.
(Chicago and North Western always had owned all of Superior Coal’s stock except for five
shares, which the directors of Superior Coal owned in order to be qualified to serve as
directors of that company.)
¶ 71 Despite its acquisition of Superior Coal’s assets, Chicago and North Western was not
liable for Superior Coal’s obligations unless Chicago and North Western expressly or
impliedly agreed to assume them (see Alexander v. State Savings Bank & Trust Co., 281 Ill.
App. 88, 96 (1935)) or unless Superior Coal was, all along, Chicago and North Western’s
alter ego, a question we will discuss in a moment. The parties in this appeal do not appear to
dispute that in its resolution of September 14, 1956, Chicago and North Western agreed to
assume “any liabilities” of Superior Coal. Union Pacific disputes, however, that, by this
resolution, Chicago and North Western agreed to assume perpetual liability for any future
subsidences over Superior Coal’s mines. Instead, according to Union Pacific, when the
resolution is reasonably interpreted, Chicago and North Western agreed to assume liability
for subsidences only insomuch as actions for such subsidences were allowable under any
“applicable Statutes of Limitations”: a term Union Pacific regards as including section 94 of
The Business Corporation Act (Ill. Rev. Stat. 1955, ch. 32, ¶ 157.94), otherwise known as the
“corporate survival statute,” a statute that extended the life of a dissolved corporation for two
years to enable it to sue or be sued during that two-year grace period.
¶ 72 Before discussing whether the phrase that Chicago and North Western used in its
resolution, “applicable Statutes of Limitations,” actually applies to the corporate survival
statute, we should do two things. First, we should explain why the parties care whether
- 11 -
Chicago and North Western agreed to assume perpetual liability for future subsidences over
Superior Coal’s mines. Second, we should state the conclusions of fact and law that appear to
be undisputed with respect to plaintiffs’ theory of assumption of liability.
¶ 73 1. Why the Parties Care
¶ 74 Why do the parties care whether, more than half a century ago, a now defunct
corporation, Chicago and North Western, agreed to assume liability for future subsidences
over Superior Coal’s mines? The reason is this. It apparently is undisputed that if indeed
Chicago and North Western agreed to assume Superior Coal’s liability for future
subsidences, that liability gets passed along ultimately to the final successive owner of
Chicago and North Western: Union Pacific.
¶ 75 Again, the succession of ownership from Chicago and North Western to Union Pacific
was as follows. In 1970, Chicago and North Western sold its assets to New Chicago and
North Western, which assumed Chicago and North Western’s “liabilities *** of any kind,
nature and description, whether public or private, whether arising by or as a result of
agreement, action, omission to act, law or violation of law, or otherwise, whether known or
unknown, whether accrued or not accrued for any purpose, and whether or not disclosed by
this Agreement or reflected in any book or record of any [sic] [Chicago and North Western].”
New Chicago and North Western changed its name a couple of times. Then, in 1995, New
Chicago and North Western merged into Union Pacific, and Union Pacific was the surviving
entity.
¶ 76 The parties apparently do not dispute that the language whereby New Chicago and North
Western assumed Chicago and North Western’s liabilities (“liabilities *** of any kind ***
whether known or unknown, whether accrued or unaccrued”) was broad enough to assume
any “unknown” and “unaccrued” liability for future subsidences that Chicago and North
Western had assumed from Superior Coal–if indeed Chicago and North Western had
assumed such liability from Superior Coal, which precisely is the question. After the merger,
the absorbing corporation, Union Pacific, was responsible for any liabilities of the absorbed
corporation, New Chicago and North Western. See Plaza Express Co. v. Middle States Motor
Freight, Inc., 40 Ill. App. 2d 117, 124 (1963).
¶ 77 In short, when New Chicago and North Western merged into Union Pacific, Union
Pacific absorbed the liabilities of New Chicago and North Western. Whether those liabilities
included liability for future subsidences depends on whether, in the first place, Chicago and
North Western agreed to assume that liability from Superior Coal (or whether, alternatively,
Superior Coal was Chicago and North Western’s instrumentality or alter ego under a
veil-piercing theory).
¶ 78 2. Conclusions That Appear to Be Undisputed
¶ 79 a. The Resolution Is an Agreement by Chicago and North Western
to Assume Liabilities of Superior Coal
¶ 80 Again, the law was that if Company A acquired Company B’s assets, Company A was
liable for Company B’s liabilities only if Company A “agree[d,] express[ly] or implied[ly],”
to assume them. (Internal quotation marks omitted.) Alexander, 281 Ill. App. at 96. It
- 12 -
apparently is undisputed that the resolution of September 14, 1956, was an agreement by
Chicago and North Western to assume liabilities of Superior Coal. Id. In its brief, Union
Pacific refers to the resolution as a “contract,” urging us to “read [it] as any other contract.”
¶ 81 b. Among the “Liabilities” That Chicago and North Western Assumed
Was Liability for Predissolution Subsidences
¶ 82 Before the Secretary of State would issue a certificate of dissolution for Superior Coal, he
had to be convinced that “adequate provision” had been made for Superior Coal’s “debts,
liabilities, and obligations.” Ill. Rev. Stat. 1955, ch. 32, ¶ 157.80. Presumably, that is why, in
its resolution of September 14, 1956, Chicago and North Western decided to “assume any
liabilities of the Superior Coal Company” after deciding, earlier in the resolution, to assume
immediate ownership of Superior Coal’s assets. If Chicago and North Western immediately
assumed ownership of the assets out of which Superior Coal’s debts, liabilities, and
obligations would have been satisfied, Chicago and North Western likewise had to assume
those debts, liabilities, and obligations.
¶ 83 Note, however, that to justify the immediate transfer of Superior Coal’s assets to itself,
Chicago and North Western had to assume only those debts, liabilities, and obligations of
Superior Coal that accrued before Superior Coal’s dissolution. The reason was this. The
corporate survival statute (Ill. Rev. Stat. 1955, ch. 32, ¶ 157.94), in derogation of the
common law, extended the life of a dissolved corporation for two years for the limited
purpose of enabling the corporation to sue and be sued, during that period, on claims that
accrued before the dissolution. Under the common law, the right to sue Superior Coal would
have abated the moment Superior Coal was dissolved, but the corporate survival statute (id.)
changed that by putting the dissolved corporation on artificial life support for two years,
enabling it, during that period, to sue and be sued. See Poliquin v. Sapp, 72 Ill. App. 3d 477,
481 (1979); Consolidated Coal Co. of St. Louis v. Flynn Coal Co., 274 Ill. App. 405 (1934).
But the cause of action, either against or in favor of the dissolved corporation, had to accrue
before the dissolution. The corporate survival statute provided:
“The dissolution of a corporation either (1) by the issuance of a certificate of
dissolution by the Secretary of State, or (2) by the decree of a court of equity when
the court has not liquidated the assets and business of the corporation, or (3) by
expiration of its period of duration, shall not take away or impair any remedy
available to or against such corporation, its directors, or shareholders, for any right or
claim existing, or any liability incurred, prior to such dissolution if action or other
proceeding thereon is commenced within two years after the date of such dissolution.
Any such action or proceeding by or against the corporation may be prosecuted or
defended by the corporation in its corporate name.” (Emphasis added.) Ill. Rev. Stat.
1955, ch. 32, ¶ 157.94.
Thus, “any rights, claims, or liabilities preserved by [the corporate survival statute] still [had
to] be raised in a cause of action that actually accrued predissolution.” A Plus Janitorial Co.
v. Group Fox, Inc., 2013 IL App (1st) 120245, ¶ 21.
¶ 84 Again, a cause of action for the removal of naturally necessary subjacent support accrued
not when the support was removed but when the land subsided. Treece, 245 Ill. App. at 118.
Thus, despite the corporate survival statute, it would have been impossible to sue Superior
- 13 -
Coal for a subsidence that happened after dissolution. The common law was to that extent
unmodified. It follows that, to justify the immediate transfer of Superior Coal’s assets to
itself, Chicago and North Western did not have to assume liability for any subsidences that
would happen after dissolution.
¶ 85 It appears to be undisputed that, by its resolution of September 14, 1956, Chicago and
North Western assumed liability for subsidence claims that accrued before the dissolution of
Superior Coal, provided that (1) a complaint was filed within two years after the dissolution
and (2) no statute of limitations barred the claim. Union Pacific admits as much when it
argues in its brief: “The Evidence Shows That the [Chicago and North Western] Resolution
Was Intended To Assume Liabilities Limited to Those Permitted by Section 94.” But Union
Pacific disputes that Chicago and North Western (unnecessarily and irrationally) assumed
liability for future, postdissolution subsidences.
¶ 86 3. The Meaning of “Any Applicable Statutes of Limitations”
¶ 87 In the resolution, Chicago and North Western “assume[d] any liabilities of the Superior
Coal Company (subject to applicable Statutes of Limitations).” (Emphasis added.) On
remand, in the summary judgment proceedings, Union Pacific presented extrinsic evidence
that Chicago and North Western understood the words “applicable Statutes of Limitations” to
include the corporate survival statute, section 94 of The Business Corporation Act (Ill. Rev.
Stat. 1955, ch. 32, ¶ 157.94). Was such extrinsic evidence admissible? When deciding the
meaning of “applicable Statutes of Limitations,” should a court consider evidence outside the
four corners of the resolution?
¶ 88 Union Pacific urges us to interpret the resolution as one would interpret any contract.
There is a well-established rule of contractual interpretation called “the four corners rule.”
According to that rule, “[a]n agreement, when reduced to writing, must be presumed to speak
the intention of the parties who signed it. It speaks for itself, and the intention with which it
was executed must be determined from the language used. It is not to be changed by extrinsic
evidence.” (Internal quotation marks omitted.) Air Safety, Inc. v. Teachers Realty Corp., 185
Ill. 2d 457, 462 (1999). Unless language in a contract is facially ambiguous, the four corners
rule requires us to determine the parties’ intention only from the language of the contract,
without resorting to extrinsic evidence of intention. Id.¶ 89 The supreme court has explained:
“In applying [the four corners] rule, a court initially looks to the language of a
contract alone. See Rakowski v. Lucente, 104 Ill. 2d 317, 323 (1984) (stating that both
the meaning of a written agreement and the intent of the parties is to be gathered from
the face of the document without assistance from extrinsic evidence). If the language
of the contract is facially unambiguous, then the contract is interpreted by the trial
court as a matter of law without the use of parol evidence. [Citation.] If, however, the
trial court finds that the language of the contract is susceptible to more than one
meaning, then an ambiguity is present. [Citation.] Only then may parol evidence be
admitted to aid the trier of fact in resolving the ambiguity. [Citation.]” Id. at 462-63.
¶ 90 The four corners rule, so described, sounds a lot like the parol evidence rule. Justice
Posner points out, however, that although the parol evidence rule “overlaps” the four corners
rule, the two rules are “not identical.” Richard A. Posner, The Law and Economics of
- 14 -
Contract Interpretation, 83 Tex. L. Rev. 1581, 1603 (2005). The four corners rule, he
explains, is more restrictive than the parol evidence rule. While the parol evidence rule
“forbids only the use of evidence of the precontractual negotiations to contradict the written
contract,” the four corners rule “goes further by prohibiting the use of extrinsic evidence to
supplement rather than only to contradict the written contract.” Id.¶ 91 “Extrinsic evidence” is, quite simply, evidence outside the four corners of the contract.
Evidence “regarding the position of the parties, the surrounding circumstances existing at the
time of execution, and the parties’ subsequent conduct” are all examples of extrinsic
evidence. Harris Trust & Savings Bank v. La Salle National Bank, 208 Ill. App. 3d 447, 453
(1990). Such evidence is admissible only if “the language of the contract is facially
unambiguous” (Air Safety, 185 Ill. 2d at 462), that is, only if “the language used is
susceptible to more than one meaning [citation] or is obscure in meaning through
indefiniteness of expression [citation]” (Wald v. Chicago Shippers Ass’n, 175 Ill. App. 3d
607, 617 (1988)).
¶ 92 It is true that in a case Union Pacific cites, Batteast v. Wyeth Laboratories, Inc., 137 Ill.
2d 175, 182-83 (1990), the supreme court considered extrinsic evidence, “the
circumstances,” to determine the meaning the parties intended to give a contractual term,
“release,” without explicitly finding that term to be facially ambiguous. Afterward, however,
in Air Safety, 185 Ill. 2d at 462, the supreme court reaffirmed its commitment to the four
corners rule (which the supreme court never mentioned in Batteast). So, it appears that,
currently the four corners rule is the law in Illinois. In re Marriage of Lyman, 2015 IL App
(1st) 132832, ¶ 71. We are obliged to follow that rule.
¶ 93 The very first thing we must do, according to the four corners rule, is look at the language
of the contract and decide whether it contains, on its face, any ambiguity. Air Safety, 185 Ill.
2d at 462. This is a question of law for the court. Wald, 175 Ill. App. 3d at 617. Looking only
at the resolution and attributing to its words their plain and ordinary meaning (see Founders
Insurance Co. v. Munoz, 237 Ill. 2d 424, 436 (2010); Gallagher v. Lenart, 226 Ill. 2d 208,
233 (2007)), we have to decide whether the term “Statutes of Limitations,” in the
parenthetical phrase “subject to applicable Statutes of Limitations,” is facially ambiguous.
¶ 94 A dictionary is a good place in which to find the plain and ordinary meaning of words.
Valley Forge Insurance Co. v. Swiderski Electronics, Inc., 223 Ill. 2d 352, 366 (2006); West
Bend Mutual Insurance Co. v. DJW-Ridgeway Building Consultants, Inc., 2015 IL App (2d)
140441, ¶ 37. Judging from a dictionary published in 1956, the year Chicago and North
Western passed its resolution, the term “statute of limitations” was neither obscure nor
“susceptible to more than one meaning.” Wald, 175 Ill. App. 3d at 617. A “Statute of
Limitations” is “[a] statute which imposes time limits upon the right of action in certain
cases, as by obliging a creditor to demand payment of a debt within a specified time.” Funk
and Wagnalls New College Standard Dictionary 1142 (1956). This is the only definition the
dictionary gives of “Statute of Limitations.” It is not that there is more than one definition to
choose from. Because the term in the resolution of September 14, 1956, “Statutes of
Limitations” has an unambiguous meaning, extrinsic evidence is inadmissible to prove what
Chicago and North Western meant by that term. See Gallagher, 226 Ill. 2d at 233; Air Safety,
185 Ill. 2d at 462-63.
¶ 95 We realize the parties disagree whether the corporate survival statute (Ill. Rev. Stat. 1955,
ch. 32, ¶ 157.94) is a statute of limitations. Union Pacific insists it is a statute of limitations,
- 15 -
whereas plaintiffs insist it is not. But that really is not a dispute over the meaning of “statute
of limitations,” which is an unambiguous term. Instead, it is a dispute over whether the
corporate survival statute conforms to the meaning of that unambiguous term. It is a dispute
over the application of the resolution rather than its meaning. There is no doubt what “statute
of limitations” means. The question is whether, from an objective point of view, the
corporate survival statute fits the description of a “statute of limitations.”
¶ 96 Objectively, the corporate survival statute, section 94 of The Business Corporation Act
(id.), is not a “statute of limitations” in the plain and ordinary sense of that term, because
instead of “impos[ing] time limits” on a preexisting “right of action” (Funk and Wagnalls
New College Standard Dictionary 1142 (1956)), as a statute of limitations would do, section
94 expands the time within which to sue a corporation, by keeping the corporation alive for
two years after the issuance of a certificate of dissolution. Granted, two years is a finite, or
“limited,” period of time, but if that were enough to make section 94 a statute of limitations,
the only way section 94 could have avoided being a statute of limitations was by extending
the life of a dissolved corporation forever. One cannot plausibly call the corporate survival
statute a “statute of limitations” simply because the statute does not keep the dissolved
corporation alive indefinitely.
¶ 97 Another reason why it would be implausible to call section 94 a “statute of limitations” is
that section 94 surely is subject to actual statutes of limitation, such as the five-year statutory
limitation applicable to actions for property damage (Ill. Rev. Stat. 1955, ch. 83, ¶ 16). See
Michigan Indiana Condominium Ass’n v. Michigan Place, LLC, 2014 IL App (1st) 123764,
¶ 26 (“Compliance with an applicable statute of limitations is merely an additional
requirement that must be met when bringing suit against a dissolved corporation within the
time period contained in [the corporate survival statute].”). Even if a claim accrued before
dissolution and the plaintiff filed suit within two years after dissolution, the five-year statute
of limitations could nevertheless bar the claim. It would be strange if two different
conflicting statutes of limitations applied to the same claim of property damage.
¶ 98 It is true that, in Sarelas v. Fagerburg, 316 Ill. App. 606, 616-17 (1942), the appellate
court referred to the corporate survival statute as a “statute of limitations,” but the issue in
that appeal was not whether the corporate survival statute really was a statute of limitations,
properly speaking. Besides, five years earlier, in the same case, the appellate court said:
“[The corporate survival statute] is not strictly a statute of limitation but is a conditional
limitation upon plaintiff’s right of action.” Sarelas v. McCue & Co., 291 Ill. App. 540, 545
(1937) (citing Dukes v. Harrison & Reidy, 270 Ill. App. 372 (1933)).
¶ 99 In Dukes, a corporation was dissolved by judicial decree on September 17, 1928. Dukes,
270 Ill. App. at 374-75. The corporate survival statute preserved judicial remedies against a
dissolved corporation “ ‘for any liabilities incurred previous to its dissolution,’ ” provided
that “ ‘suit *** [was] brought and service of process had within two years after such
dissolution.’ ” Id. at 375. On January 28, 1930, within the two-year period, the plaintiff sued
the dissolved corporation, but on September 15, 1930, the circuit court dismissed her case for
lack of prosecution. Id. She refiled her complaint on September 14, 1931 (id. at 373), and the
corporation pleaded the expiration of the two-year period in the corporate survival statute (id.
at 375). The plaintiff countered that, under section 26 of the Limitations Act, “ ‘if the time
limited for bringing such action shall have expired during the pendency of such suit,’ ” she
had one year after she was “ ‘nonsuited’ ” to refile her case. Id. at 377. The appellate court
- 16 -
was unconvinced. It held that, in section 26 of the Limitations Act, “ ‘the time limited for
bringing such action’ ” had to be a time specified in a statute of limitations and that the
corporate survival statute was “ ‘not a statute of limitations but [was] a condition of the
liability itself.’ ” Id. at 380-81 (quoting Bishop v. Chicago Rys. Co., 303 Ill. 273, 277 (1922)).
Because the corporate survival statute was not a statute of limitations, section 26 had no
effect on the corporate survival statute. Id. at 381.
¶ 100 The corporate survival statute does something fundamentally different from a statute of
limitations. Whereas a statute of limitations imposes a time limit on a right of action the law
already recognizes, the corporate survival statute creates a new, temporally limited right: the
right to sue a dissolved corporation (see Poliquin, 72 Ill. App. 3d at 481). “[W]here the
statute creates a right that did not exist at common law and restricts the time within which the
right may be availed of, or otherwise imposes conditions, such statute is not a statute of
limitation[,] but the time element is an integral part of the enactment.” Smith v. Toman, 368
Ill. 414, 420 (1938).
¶ 101 So, in 1956, when Chicago and North Western passed its resolution, it was settled law in
Illinois that the corporate survival statute was not a statute of limitations, and hence the
phrase in the resolution “subject to applicable Statutes of Limitations” did not include the
corporate survival statute. See Ambarann Corp. v. Old Ben Coal Corp., 395 Ill. 154, 164
(1946); Wilson v. Wilson, 268 Ill. 270, 273 (1915).
¶ 102 4. “Any Liabilities of the Superior Coal Company”
¶ 103 Chicago and North Western resolved to “assume any liabilities of the Superior Coal
Company.” (Emphasis added.) In our previous decision in this case, we observed that the
word “liabilities” had an established legal meaning. Gillespie Community Unit School District
No. 7, 2012 IL App (4th) 110142-U, ¶ 82. It meant “ ‘a legal obligation or responsibility
enforceable by civil remedy or criminal punishment.’ ” Id. (quoting Loman v. Freeman, 229
Ill. 2d 104, 121 (2008)). We further observed, however, that this obligation or responsibility
could be either perfected or contingent. Id. It could be the obligation to do something “ ‘at
once’ ” or it could be the obligation to do something “ ‘at some future time,’ ” subject to the
occurrence of conditions. Id. (quoting White v. Green, 74 N.W. 928, 929 (Iowa 1898)).
¶ 104 Thus, although “liability” means, in a general sense, an obligation or responsibility
enforceable by law, the question remains as to whether this obligation or responsibility is
perfected or contingent. See Wald, 175 Ill. App. 3d at 617. Extrinsic evidence is admissible
to clear up that ambiguity. See Gallagher, 226 Ill. 2d at 233; Air Safety, 185 Ill. 2d at 462-63.
¶ 105 According to Union Pacific, the extrinsic evidence eliminates any genuine issue as to
whether the word “liabilities” in the resolution of September 14, 1956, meant anything more
than perfected liabilities, e.g., liabilities for subsidences that already had happened, before
the dissolution of Superior Coal. See 735 ILCS 5/2-1005(c) (West 2014) (“The judgment
sought shall be rendered without delay if the pleadings, depositions, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law.”). Union Pacific’s
argument on the extrinsic evidence can be distilled to three points.
¶ 106 First, because section 157.79(b) of The Business Corporation Act (Ill. Rev. Stat. 1955,
ch. 32, ¶ 157.79(b)) required a dissolving corporation to “pay[ ] or adequately provid[e] for
- 17 -
the payment of all its obligations” before “distribut[ing] the remainder of its assets ***
among its shareholders” and because the corporate survival statute (Ill. Rev. Stat. 1955, ch.
32, ¶ 157.94) preserved only rights of action against the dissolved corporation that accrued
before the issuance of the certificate of dissolution, it would have been unnecessary and
irrational for the financially distressed parent corporation, Chicago and North Western, to
assume any liabilities of its subsidiary, Superior Coal, other than those that accrued before
the dissolution of Superior Coal.
¶ 107 Second, out of Superior Coal’s assets, Chicago and North Western received a reserve of
only $172,926 for subsidence claims. According to calculations by Superior Coal’s officers,
this was the approximate amount needed to cover the subsidences that already had happened,
in 1955 and 1956, within a five-block area of Gillespie, insomuch as the claims had not yet
been settled. The companies never set aside a reserve, and never attempted to calculate a
reserve, for subsidences that had not yet happened.
¶ 108 Third, in its financial statements and other public disclosures, Chicago and North
Western never mentioned it had assumed perpetual liability for future subsidences over
Superior Coal’s mines–which surely would have been a material fact for current shareholders
or anyone thinking of investing in Chicago and North Western, considering that, for half a
century, Superior Coal had been mining 29 square miles of land.
¶ 109 “Where extrinsic evidence is introduced to aid in the interpretation of uncertain or
ambiguous contract language, the question of the meaning of the language generally is left to
the jury. If, however, after taking into account the extrinsic evidence, the court determines
that a reasonable person could reach only one conclusion, then the issue should be decided by
the trial court.” Wald, 175 Ill. App. 3d at 619. Given the extrinsic evidence, we are convinced
that a reasonable person could reach only one conclusion: “liabilities” in the resolution of
September 14, 1956, means only positive or perfected liabilities, such as liabilities for
subsidences that happened before the dissolution of Superior Coal, and does not include
contingent liability for subsidences that might happen after the dissolution. See In re
Marriage of Hahn, 324 Ill. App. 3d 44, 47 (2001) (“When a term is susceptible to two
different interpretations, the court must follow the interpretation that establishes a rational
and probable agreement.”).
¶ 110 We find further support for this conclusion in the text of the resolution itself. The
resolution speaks of “liabilities” in the plural. According to dictionaries published in the
1930s, 1940s, and 1950s, the word “liabilities” in the plural, as opposed to “liability” in the
singular, tends to mean existing pecuniary obligations–the opposite of “assets” in a balance
sheet. Webster’s New International Dictionary of the English Language 1242 (1933) (“2. ***
in the pl., one’s pecuniary obligations, or debts, collectively–opposed to assets” (emphasis in
original)); Webster’s New International Dictionary of the English Language 1423 (2d ed.
1934) (same); Walter A. Shumaker & George F. Longsdorf, Cyclopedic Law Dictionary 660
(Frank D. Moore ed., 3d ed. 1940) (“All debts or obligations of a concern. The capital stock,
funded or floating indebtedness, accounts payable, surplus, losses, etc.; are included in this
term in a balance sheet, or statement of the condition of a business concern.”); Funk and
Wagnalls New College Standard Dictionary 687 (1956) (“3. That for which one is liable or
responsible; specifically, in the plural, debts as opposed to assets.” (Emphasis in original.)); 1
Webster’s New Twentieth Century Dictionary of the English Language 1041-42 (2d ed.
1958) (“3. [usually in pl.] a debt; as, accounts payable, surplus, losses, and capital stock are
- 18 -
liabilities of a corporation: opposed to asset” (emphases in original)); see Swiss Colony, Inc.
v. Commissioner, 52 T.C. 25, 31 (1969).
¶ 111 By contrast, “liability” in the singular tends to mean the “state” or “quality” of “being
liable.” Webster’s New International Dictionary of the English Language 1242 (1933) (“1.
State or quality of being liable; as, the liability of an insurer; liability to accidents; liability to
the law.” (Emphases in original.)); Funk and Wagnall’s New College Standard Dictionary
687 (1956) (“1. The state of being liable, or exposed to some accidental or incidental result or
occurrence; as liability to disease. 2. The condition of being responsible for a possible or
actual loss, penalty, evil, expense, or burden; as, liability for damages.” (Emphases in
original.)); 1 Webster’s New Twentieth Century Dictionary of the English Language 1041-42
(2d ed. 1958) (“1. The state of being liable. 2. anything for which a person is liable.”).
¶ 112 When the resolution speaks of “liabilities *** that cannot be fully liquidated prior to the
time a certificate of dissolution has been issued,” the resolution does not mean states or
qualities of being liable. Normally, one does not “liquidate” states or qualities of being liable.
Rather, the resolution means existing pecuniary obligations: Superior Coal had existing
financial obligations, but not all them had been paid or reduced to a specific dollar amount,
i.e., liquidated. Because contingent liability for subsidences that might happen in the future is
not an existing pecuniary obligation, as signified by “liabilities,” we conclude that Union
Pacific was entitled to judgment as a matter of law on plaintiffs’ theory of express
assumption of liability.
¶ 113 In its petition for rehearing, the School District objects that, by that conclusion, we
violate the law of the case by contradicting our previous decision, specifically, paragraph 83,
in which we stated: “When Chicago and North Western assumed all of Superior Coal’s
liabilities, it assumed Superior Coal’s liability to provide subjacent support. That liability
included the contingency that, decades in the future, the land might subside over Superior
Coal’s mines.” (Emphasis added.) Gillespie, 2012 IL App (4th) 110142-U, ¶ 83. When so
stating, however, we were reviewing the dismissal of the plaintiffs’ complaints for failure to
state a cause of action, and we were obliged to interpret the complaints in the light most
favorable to the plaintiffs. See In re Chicago Flood Litigation, 176 Ill. 2d 179, 189 (1997);
Gillespie, 2012 IL App (4th) 110142-U, ¶ 4. Interpreted in the light most favorable to
plaintiffs, the resolution, quoted in their complaints, meant that Chicago and North Western
had assumed not only Superior Coal’s absolute or perfected liabilities but also, in perpetuity,
its contingent liabilities. In the present case, by contrast, we are reviewing the trial court’s
rulings on cross-motions for summary judgment, and our scrutiny no longer is limited to the
complaints (interpreted in the light most favorable to the plaintiffs) but broadens to evidence
outside the complaint. See 735 ILCS 5/2-1115(c) (West 2014).
¶ 114 It is true, as the School District points out, that in our previous decision, we said that
“[t]he word ‘liabilities’ had an established legal meaning,” which was not limited to “a
‘perfected or absolute liability.’ ” Gillespie, 2012 IL App (4th) 110142-U, ¶ 82. But we did
not intend to suggest that in each particular instance in which the word “liabilities” was used,
it invariably meant both absolute and contingent liabilities. As we demonstrated, for
example, by a quotation from a supreme court case, the word “ ‘liability’ ” was “ ‘more
frequently used’ ” in the sense of “ ‘contingency’ ”; “ ‘more frequently’ ” meant usually, but
not always. (Internal quotation marks omitted.) Id. (quoting Evans v. Illinois Surety Co., 298
Ill. 101, 113 (1921)). And we also quoted an Iowa case, stating: “ ‘Liability in a legal sense,
- 19 -
is the state or condition of one who is under obligation to do at once or at some future time
something which may be enforced by action. It may exist without the right of immediate
enforcement.’ ” (Emphases added.) Id. (quoting White, 74 N.W. at 929). So, even though
“liability” had an unambiguous, well-established meaning of “ ‘a legal obligation or
responsibility enforceable by civil remedy,’ ” that obligation or responsibility, as
demonstrated by the quotations, could be absolute, or it could be contingent. Id. (quoting
Loman, 229 Ill. 2d at 121). When, after quoting these cases, we stated that the assumed
liability of Chicago and North Western “included the contingency that, decades in the future,
the land might subside over Superior Coal’s mines” (id. ¶ 83), we merely were interpreting
the complaints in the light most favorable to the plaintiffs, as we said at the outset we would
do (id. ¶ 4). We did not intend to slam the door on any summary judgment contention,
backed up by evidence, the “liabilities” actually meant only absolute liabilities.
¶ 115 B. Direct Participation Liability
¶ 116 The School District argues that because there was evidence that “Chicago and North
Western mandated an overall business strategy of its subsidiary,” Superior Coal, the trial
court erred by making a summary determination against the School District on its theory of
direct participation liability. The School District quotes from Forsythe v. Clark USA, Inc.,
224 Ill. 2d 274, 290 (2007): “[W]e hold that direct participant liability is a valid theory of
recovery under Illinois law. Where there is evidence sufficient to prove that a parent
company mandated an overall business and budgetary strategy and carried that strategy out
by its own specific direction or authorization, surpassing the control exercised as a normal
incident of ownership in disregard for the interests of the subsidiary, that parent company
could face liability.” (Emphasis in original.)
¶ 117 In Forsythe, however, there arguably was a causal nexus between the parentally
mandated budgetary strategy and the injuries of which the plaintiffs complained. When the
evidence was viewed in the light most favorable to the plaintiffs, it was reasonably
foreseeable that the “ ‘survival mode’ ” budgetary cuts the parent corporation required the
subsidiary to make (id. at 305-06) had to come out of “staffing, safety, maintenance, and
training” (id. at 291), which were the only areas that could have been cut (id. at 295), and
because the oil-refining industry “inherently involve[d] a great amount of danger,” it likewise
was reasonably foreseeable that cutbacks in those areas would lead to the injury of
employees (id. at 291). And, in fact, that is what happened: the plaintiffs’ decedents were
burned to death when other, apparently poorly trained, employees of the subsidiary attempted
to replace a valve on a pipe without first making sure the pipe was depressurized. Id. at 278.
Budget cuts led perhaps to less training, which in turn led to death.
¶ 118 In the present case, we do not see the causal connection between any budgetary decision
by Chicago and North Western and the destruction of the school building. The wrongful act
that caused the harm was the removal of naturally necessary subjacent support. The School
District does not explain how the failure to leave enough coal pillars to support the ground
surface had anything to do with Chicago and North Western’s “overall business ***
strategy” for Superior Coal. Id. at 290.
¶ 119 It is true that Chicago and North Western gave Superior Coal a mission: mine coal for
Chicago and North Western’s steam locomotives. In Forsythe, however, the parent was
potentially liable as a direct participant not because the parent had required the subsidiary to
- 20 -
engage in the inherently dangerous oil-refining industry but because the parent had imposed
a budgetary policy on the subsidiary that foreseeably enhanced the dangers of the oil-refining
industry. Merely by requiring Superior Coal to mine coal, Chicago and North Western did
not hinder or discourage Superior Coal from leaving adequate subjacent support, as far as we
can see. Therefore, Union Pacific was entitled to a summary determination in its favor on the
School District’s theory of direct participation liability.
¶ 120 C. Piercing the Corporate Veil
¶ 121 1. Not an Action,
But an Equitable Remedy in an Action
¶ 122 In the event that Chicago and North Western did not expressly assume Superior Coal’s
liability for future subsidences (and we have held that Union Pacific is entitled to a summary
determination that Chicago and North Western did not do so), plaintiffs seek to pierce
Superior Coal’s corporate veil and to impose liability on Chicago and North Western (and,
ultimately, on Union Pacific).
¶ 123 Piercing the veil is not, in itself, an action. Rather, it is an equitable remedy in an action
against an ostensible corporation–for example, a tort action or an action for breach of
contract. Gass v. Anna Hospital Corp., 392 Ill. App. 3d 179, 185 (2009). The veil is the
metaphorical equivalent of the corporate form, and in some circumstances, fairness might
move a court to pierce the veil and to impose liability on the actor behind the veil, often the
dominant shareholder.
¶ 124 The shareholder behind the veil need not be a natural person. It can be a parent
corporation using a subsidiary as its instrumentality. “Generally, before the separate
corporate identity of one corporation will be disregarded and treated as the alter ego of
another, it must be shown that it is so controlled and its affairs so conducted that it is a mere
instrumentality of another, and it must further appear that observance of the fiction of
separate existence would, under the circumstances, sanction a fraud or promote injustice.”
(Emphasis added.) Main Bank of Chicago v. Baker, 86 Ill. 2d 188, 205 (1981).
¶ 125 2. The Difference Between Normal Participation as a Majority Shareholder
and Using the Subsidiary as an Instrumentality
¶ 126 Chicago and North Western owned all of Superior Coal’s stock except for five shares
(which the directors of Superior Coal owned in order to be qualified to serve as directors).
Also, the two corporations had common directors and officers. It is relevant to an
instrumentality analysis that Chicago and North Western owned almost all of Superior Coal’s
stock and that the two corporations had common directors and officers (see Hystro Products,
Inc. v. MNP Corp., 18 F.3d 1384, 1389 (7th Cir. 1994)), but those facts are insufficient, by
themselves, to make Superior Coal a mere instrumentality of Chicago and North Western
(Superior Coal I, 377 Ill. at 289).
¶ 127 The very definition of a “parent corporation” is “[a] corporation that has a controlling
interest in another corporation (called a subsidiary corporation), [usually] through ownership
of more than one-half the voting stock.” (Emphasis in original.) Black’s Law Dictionary 344
(7th ed. 1999). Obviously, Superior Coal could not be regarded as the instrumentality of
- 21 -
Chicago and North Western merely because Chicago and North Western owned almost all of
Superior Coal’s stock. If, simply by owning a majority of the voting stock in a corporation,
the stockholder reduced the corporation to an instrumentality, every subsidiary would be an
instrumentality, lacking a genuine existence as a corporation in its own right. See Logal v.
Inland Steel Industries, Inc., 209 Ill. App. 3d 304, 310 (1991) (“To hold otherwise would
render virtually every subsidiary the alter ego of its parent.”); Eric J. Gouvin, Resolving the
Subsidiary Director’s Dilemma, 47 Hastings L.J. 287, 287-88 (1996) (“Holding companies
dominate our economy. In 1995, the ten largest companies on the Fortune 500 owned an
average of 62 subsidiaries each. Many subsidiary corporations, though owned entirely by
another corporation, are themselves gigantic corporate enterprises. For example, Philip
Morris, the tenth largest U.S. corporation, owns such major businesses as the Miller Brewing
Company, Kraft Foods, and the Philip Morris tobacco manufacturing operating unit.”).
¶ 128 “[B]y definition, a parent corporation is a corporation that has working control of the
subsidiary corporation through stock ownership.” Fontana v. TLD Builders, Inc., 362 Ill.
App. 3d 491, 503 (2005). The parent exercises this control by voting its shares. As the
majority shareholder, the parent effectively gets to decide who serves on the subsidiary’s
board of directors, because the parent will cast the most votes, corresponding to the number
of shares it owns. No doubt the parent will choose directors sympathetic to its vision, and if
they become unsympathetic, the parent will replace them. See Patrick L. Sealey, An
Alternative Approach to Diversity Jurisdiction for Corporations: Parent-Subsidiary
Corporations, 20 J. Corp. L. 497, 510 (1995) (“Even if a subsidiary has its own management
team, it would be naive to expect the enterprise owners to remain silent if they disagree with
the subsidiary’s policies; if heads roll, there is no doubt whose heads they will be.” (Internal
quotation marks omitted.)).
¶ 129 When a parent exercises the power it has over a subsidiary by virtue of owning the
majority of the voting shares, how do we know when the parent is just exercising “working
control” over the subsidiary (Fontana, 362 Ill. App. 3d at 503), as it is only to be expected a
parent will do, and how do we know when the parent is doing something more than that:
using the subsidiary as its mere instrumentality (Gass, 392 Ill. App. 3d at 185). See Stephen
B. Presser, The Bogalusa Explosion, “Single Business Enterprise,” “Alter Ego,” and Other
Errors: Academics, Economics, Democracy, and Shareholder Limited Liability: Back
Towards a Unitary “Abuse” Theory of Piercing the Corporate Veil, 100 Nw. U. L. Rev. 405,
415 (2006) (“Since shareholders or parents always will have the potential to control, or will
be controlling their corporations, to apply *** [a] control test is to evaporate the protections
of limited liability.”).
¶ 130 The answer must lie in the different connotations of the terms “working control” and
“mere instrumentality.” “Instrumentality” means something more than “control.” All
corporations that are instrumentalities are under working control, but not all corporations
under working control are instrumentalities. The proposition that a parent “controls” a
subsidiary says nothing about the ends to which the parent exercises that control. By contrast,
the proposition that a subsidiary is the “mere instrumentality” of the parent conveys not only
the idea of control but control in the parent’s interest as opposed to the subsidiary’s interest.
There is a difference between controlling a subsidiary in the subsidiary’s interest and
controlling it in the parent’s interest. An “instrumentality” is “[a] means or agency through
which a function of another entity is accomplished, such as a branch of a governing body.”
- 22 -
Black’s Law Dictionary 802 (7th ed. 1999). When a subsidiary is the “mere instrumentality”
of its parent, the subsidiary’s apparent mission is to accomplish the functions of its parent,
such that the subsidiary’s separate corporate form is superfluous and the subsidiary might as
well be a branch or department of the parent.
¶ 131 The question might be asked, though: Why would anyone buy a majority stake in a
company merely to have an opportunity for self-denial? “In the shareholders’ minds, the
function of the corporation is to serve and benefit its owners. Thus, they will cause it to act
accordingly. It certainly seems nonsensical to suggest that shareholders should occasionally
cause their corporations to act contrary to their interests so that the company will not be seen
as their ‘instrumentality.’ ” Kent Bickham Payne, Piercing the Corporate Veil in Louisiana
Absent Fraud or Deceit, 48 La. L. Rev. 1229, 1238 (1988). In other words, shares are private
property. Cannot shareholders vote them however they desire? Is it not only to be expected
that the parent, like any other majority shareholder, will act in its own best interest, even if
that means acting against the best interest of the subsidiary?
¶ 132 Actually, if the subsidiary has minority shareholders, the parent has to think of them, too.
The supreme court has held: “An action by a parent corporation injurious to its subsidiary is
actionable as a breach of fiduciary duty.” In re Rehabilitation of Centaur Insurance Co., 158
Ill. 2d 166, 174 (1994). “[A] parent corporation generally owes a fiduciary duty to its
majority-controlled subsidiary or to the minority shareholders of its subsidiary.” 12B William
Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5811.40, at 159
(2000). In its dealings with the subsidiary, the parent must be fair and must refrain from
oppressing the minority. Harry G. Henn & John R. Alexander, Laws of Corporations and
Other Business Enterprises § 240, at 654 (1983). See also 18 C.J.S. Corporations § 398, at
688 (2007) (“A parent corporation owes a fiduciary duty to its subsidiary when there are
parent-subsidiary dealings, and transactions between a parent corporation and its subsidiary
are subject to scrutiny for fraud, unfair dealing, or other inequitable conduct.”); 18A Am. Jur.
2d Corporations § 674, at 503 (2004) (“In exercising its control and dominion over a
subsidiary, the parent corporation is a fiduciary, invoking the requirement of fairness in its
dealings with such subsidiary.”); cf. United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 691
(5th Cir. 1985) (“Where the subsidiary is wholly-owned by the parent and has the same
directors and officers, operating the subsidiary independently of the parent company not only
has little practical meaning, it would also constitute a breach both of the subsidiary’s duty to
further the interests of its owner, and of the directors’ and officers’ duty towards the parent
company.”).
¶ 133 It appears that Superior Coal had minority shareholders, namely, its directors–a tiny
minority, but a minority, nevertheless. Therefore, when making decisions for Superior Coal,
each of the directors on Superior Coal’s board owed a fiduciary duty not only to Chicago and
North Western as the majority shareholder but also to the other directors as minority
shareholders. Instead of “favor[ing] one intracorporate group to the detriment of another,” the
directors of Superior Coal “owe[d] fiduciary duties to the corporation to exercise unbiased
judgment in the best interests of the corporation as a whole.” Henn, supra, § 240, at 652.
Therefore, it was not only to be expected that Superior Coal, having minority shareholders,
would be the mere instrumentality of Chicago and North Western, the majority shareholder.
(The instrumentality doctrine might be problematic in the case of a wholly owned subsidiary,
considering that, in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771
- 23 -
(1984), the Supreme Court said: “A parent and its wholly owned subsidiary have a complete
unity of interest. *** [T]heir general corporate actions are guided or determined not by two
separate corporate consciousnesses, but one. They are not unlike a multiple team of horses
drawing a vehicle under the control of a single driver.” Cf. Gajda v. Steel Solutions Firm, Inc.,
2015 IL App (1st) 142219, ¶ 23 (“Courts are reluctant to pierce the corporate veil and will
only do so when (1) there is such a unity of interest and ownership that the separate
personalities of the corporations no longer exist and (2) circumstances exist so that adherence
to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or
promote inequitable circumstances.” (Internal quotation marks omitted.)). Perhaps, in the
case of a wholly owned subsidiary, the test is reduced to (2).)
¶ 134 Generally, when a subsidiary operates as the mere instrumentality of its parent, the two
corporations have common directors and officers (Fontana, 362 Ill. App. 3d at 502), and
when ostensibly acting as directors and officers of the subsidiary, these persons really have
on their hats as directors and officers of the parent (see Gass, 392 Ill. App. 3d at 185). The
people of the state, through their democratically elected representatives, have chosen to
bestow corporate personhood on certain conditions, including the condition that the directors
of the corporation serve the corporation (see 1903 Ill. Laws 125). When, in reality, the
directors’ allegiance and loyalty are to the majority shareholder instead of to the corporation,
the democratic will is subverted in a duplicitous way. The Supreme Court has said:
“[D]irectors and officers holding positions with a parent and its subsidiary can and do
‘change hats’ to represent the two corporations separately, despite their common ownership.
[Citations.] *** [C]ourts generally presume that the directors are wearing their ‘subsidiary
hats’ and not their ‘parent hats’ when acting for the subsidiary ***.” (Internal quotation
marks omitted.) United States v. Bestfoods, 524 U.S. 51, 69-70 (1998). In a footnote, the
Supreme Court added: “Here, it is prudent to say only that the presumption that an act is
taken on behalf of the corporation for whom the officer claims to act is strongest when the
act is perfectly consistent with the norms of corporate behavior, but wanes as the distance
from those accepted norms approaches the point of action by a dual officer plainly contrary
to the interests of the subsidiary yet nonetheless advantageous to the parent.” Id. at 70 n.13.
See also Forsythe, 224 Ill. 2d at 292-93 (quoting those passages from Bestfoods, 524 U.S. at
69, 70 n.13).
¶ 135 Thus, it is not “consistent with norms of corporate behavior” for dual directors and
officers, when they are acting purportedly on behalf of the subsidiary, to take actions “plainly
contrary to the interests of the subsidiary [and] yet nonetheless advantageous to the parent.”
(Internal quotation marks omitted.) Id. at 293. (Again, the rule might be otherwise in the case
of a wholly owned subsidiary.) When that happens, the subsidiary has been reduced to a
mere instrumentality of the parent. While transacting the subsidiary’s business, the dual
directors and officers really are taking their orders from on high, or their loyalties are pointed
in that direction, and they act in the parent’s interest. See Baker v. Raymond International,
Inc., 656 F.2d 173, 180 (5th Cir. 1981) (“[w]hether the directors and officers of [the
subsidiary] act independently in the interest of that company, or whether they take their
orders from the [parent] and act in the [parent’s] interest”); Eric J. Gouvin, Resolving the
Subsidiary Director’s Dilemma, 47 Hastings L.J. 287, 300 (1996) (“For most board
decisions, therefore, the default rule appears to be that the directors owe their duties to the
corporation as an entity. Although assessing the corporation’s interests necessarily requires
- 24 -
evaluation of shareholder interests, directors ordinarily do not owe their primary duty to the
shareholders.”); Brian Winrow, Director Liability: A Cliché in North Dakota, 84 N.D. L. Rev.
1109, 1134 (2008) (“Directors help establish the independence between the corporation and
the shareholder.”). The cases speak of a “unity of interest”: not just a unity of ownership but
a “unity of interest.” South Side Bank v. T.S.B. Corp., 94 Ill. App. 3d 1006, 1009 (1981). It is
as if the subsidiary has no interest of its own but exists primarily to serve the interests of the
parent, so that, substantially, there is no difference between the subsidiary and a department
of the parent. Formalistically, there might be a difference–the corporate rituals might be
scrupulously observed–but substantially, in the underlying decisions ornamented by these
corporate rituals, the subsidiary primarily serves the parent.
¶ 136 3. Factors, Many of Which Are More Relevant to the Question of
Corporate Neglect Than to the Question of Instrumentality
¶ 137 Union Pacific says that “[t]o establish the first element of a veil-piercing claim”–namely,
that the subsidiary is the mere instrumentality of the parent–“certain factors are critical,” and
Union Pacific lists 10 factors:
“(1) inadequate capitalization[,] (2) failure to issue stock[,] (3) failure to observe
corporate formalities[,] (4) nonpayment of dividends[,] (5) insolvency of the debtor
corporation[,] (6) non-functioning of officers or directors[,] (7) absence of corporate
records[,] (9) diversion of assets from the corporation by or to a shareholder[,] and
(10) the failure to maintain an arm’s-length relationship among related entities.”
Actually, none of the cases that Union Pacific cites–Main Bank; Cosgrove Distributors, Inc.
v. Haff, 343 Ill. App. 3d 426 (2003); and Logal v. Inland Steel Industries, Inc., 209 Ill. App.
3d 304 (1991)–says that all the factors are “critical.” Indeed, when the question is whether a
subsidiary is the mere instrumentality of the parent, few of the factors even make sense.
¶ 138 a. Inadequate Capitalization
¶ 139 Union Pacific points out that, 112 years ago, in 1903, Chicago and North Western made a
capital investment of $1.5 million in Superior Coal. See David Millon, Piercing the
Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, 56 Emory L.J.
1305, 1337 (2007) (“When courts speak of undercapitalization, typically the reference is to
the amount of capital contributed to the venture when it is launched.”). It is unclear what this
capital investment has to do with the question of whether Chicago and North Western used
Superior Coal as its mere instrumentality during the succeeding half century.
¶ 140 Inadequate capitalization would be relevant if Superior Coal still existed and plaintiffs
sued it only to learn that it lacked any assets to collect from. “The consideration of whether a
corporation is adequately capitalized is based on the policy that shareholders should in good
faith put at the risk of the business unencumbered capital reasonably adequate for the
corporation’s prospective liabilities. [Citation.] It is inequitable to allow shareholders to set
up a flimsy organization just to escape personal liability.” Fontana, 362 Ill. App. 3d at 504.
Plaintiffs are not claiming, however, that Chicago and North Western set up Superior Coal as
a flimsy, undercapitalized organization so that when an injured party sued Superior Coal in
lieu of Chicago and North Western, Superior Coal would be judgment-proof. Instead,
plaintiffs are claiming that Chicago and North Western set up Superior Coal as a plausible
- 25 -
organization, with the trappings, bureaucracy, and assets of a real corporation, only to use
Superior Coal as its mere instrumentality.
¶ 141 Undercapitalized, Superior Coal would not have been of much use as an instrumentality.
To be the coal-mining tool of Chicago and North Western, Superior Coal had to have
employees, equipment, and mineral rights–all of which required a capital investment.
¶ 142 b. Failure to Issue Stock
¶ 143 The appellate court has said that when deciding whether a subsidiary is the mere
instrumentality of its parent, a court should consider, among other factors, the “failure to
issue stock,” apparently meaning that if the subsidiary had issued stock, that fact would go
against an instrumentality theory. (Internal quotation marks omitted.) Gass, 392 Ill. App. 3d
at 186.
¶ 144 This is another factor that makes absolutely no sense in an instrumentality case. “Stock
control *** [is] generally [a] prerequisite” to an instrumentality theory. (Emphasis added.)
Hystro, 18 F.3d at 1389. By the power that majority stock ownership confers, the parent
makes the subsidiary its instrumentality. Obviously, the parent would not be able to do
that–and would not even be a parent–unless the subsidiary had issued stock.
¶ 145 c. Failure to Observe Corporate Formalities
¶ 146 A court might pierce the corporate veil because of a “failure to observe corporate
formalities.” Gallagher v. Reconco Builders, Inc., 91 Ill. App. 3d 999, 1005 (1980). Often,
the reason given for this factor is as follows: “[O]ne may view incorporation as a privilege
conferred by the State, rather than as an ordinary incident of doing business. Since the State,
by statute, authorizes the creation of a corporation and, pursuant to the same statute, sets
forth certain rules for its operation, observance of such rules is a condition precedent to the
benefit of limited liability.” 7 Charles W. Murdock, Illinois Practice § 8:17 (2d ed. 2015).
¶ 147 Observance of the corporate formalities, however, is only one condition precedent to
limited liability. In the case of a subsidiary with minority shareholders, another condition
precedent is having officers and directors who use these corporate formalities to conduct the
subsidiary’s business rather than the parent’s business. Fontana, 362 Ill. App. 3d at 500.
“[W]here corporate formalities are substantially observed and the parent does not dominate
the subsidiary, a parent and subsidiary are two separate entities[,] and the acts of one cannot
be attributed to the other.” (Emphasis added.) Central States, Southeast & Southwest Areas
Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 944 (7th Cir. 2000).
¶ 148 d. Nonpayment of Dividends
¶ 149 Another factor that routinely shows up in the list is the nonpayment of dividends, the
implication apparently being that if the subsidiary has paid dividends, it is less likely to be a
mere instrumentality of the parent. Gass, 392 Ill. App. 3d at 186.
¶ 150 Actually, dividends are a two-edged sword. On the one hand, the argument could be
made that if the subsidiary acquired the means to pay dividends, the parent must have
allowed the subsidiary to act in its own self-interest and to make a profit. On the other hand,
when the subsidiary consistently pays hefty dividends to the parent, those amounts enrich the
- 26 -
parent instead of getting plowed back into the subsidiary. The parent, as the majority
shareholder, would not necessarily be averse to getting paid dividends by its instrumentality.
¶ 151 e. Insolvency of the Debtor Corporation
¶ 152 That the subsidiary is insolvent can be a sign that the subsidiary is a mere instrumentality
of the parent if the parent’s policy is to exploit the subsidiary into oblivion. See Henderson v.
Rounds & Porter Lumber Co., 99 F. Supp. 376, 384 (W.D. Ark. 1951). Not every parent,
however, would want to do that to its instrumentality. If the subsidiary is on the road to
bankruptcy, it will not be a serviceable instrument for long. To be a useful and durable
instrument, the subsidiary must be solvent.
¶ 153 If Superior Coal had gone down, it is questionable how much longer Chicago and North
Western would have lasted, because it would have had to buy coal at commercial rates and
pay to have it shipped. Evidently, Chicago and North Western could not even afford to pay
Superior Coal the cost of production. See Superior Coal I, 377 Ill. at 286 (“[Chicago and
North Western] has long been in bankruptcy ***.”). To continue supplying coal to Chicago
and North Western without profit, Superior Coal had to receive enough funding to survive.
¶ 154 f. Nonfunctioning of the Other Officers or Directors
¶ 155 The next factor is the “nonfunctioning of the other officers or directors.” (Emphasis
added.) “Other than whom?” the reader might wonder–until the reader realizes that this factor
and, indeed, all the other factors in the list come ultimately from cases in which a corporation
allegedly was the alter ego of an individual, a natural person. Cosgrove, 343 Ill. App. 3d at
429; Fiumetto v. Garrett Enterprises, Inc., 321 Ill. App. 3d 946, 958-59 (2001); Ted Harrison
Oil Co. v. Dokka, 247 Ill. App. 3d 791, 795 (1993); Gallagher, 91 Ill. App. 3d at 1005.
¶ 156 For instance, John Doe buys some online incorporation software, types in his name as
president and director and types in the names of his Uncle Henry and Aunt Sally as other
directors. Later, when Acme Corporation is sued, no board meetings have ever taken place,
and the “other officers or directors,” Uncle Henry and Aunt Sally, have never participated in
the management of the corporation and, for that matter, are unsure what a director even does.
It is as if Acme Corporation had no formal existence beyond the certificate of incorporation.
¶ 157 By contrast, in a case in which a subsidiary serves as the instrumentality of a
sophisticated parent, one would expect that, typically, the subsidiary will have a formal
existence, maybe even an elaborate formal existence. “Since the parent/subsidiary situation is
generally found in the context of larger corporations with more sophisticated counsel, there
generally is not a problem with the corporate rituals.” 7 Charles W. Murdock, Illinois
Practice § 8:19 (2d ed. 2015). After all, there has to be something that functions as an
instrumentality of the parent. A mere piece of paper, a certificate of incorporation, would not
be much of an instrumentality. There has to be a corporate apparatus, something for the
parent to dominate. Formally, all the parts of a subsidiary corporation are there, just as the
Manchurian Candidate has all his body parts. But the will has been taken over. The directors
of the subsidiary “function,” in a manner of speaking. They attend board meetings and vote
on corporate matters, but when doing so, they usually are working for the parent, at least
when it comes to significant matters.
- 27 -
¶ 158 g. Absence of Corporate Records
¶ 159 Like the nonfunctioning of officers and directors, the absence of corporate records is
“more probative of corporate neglect than intentional misuse of the entity.” Jeffrey K.
Vandervoot, Piercing the Veil of Limited Liability Companies: The Need for a Better
Standard, 3 DePaul Bus. & Com. L.J. 51, 98 (2004). The gist of an instrumentality theory is
not so much neglect of the corporate form as misuse of the corporate form by turning the
subsidiary into the self-sacrificing lackey of the parent. Minutes, contracts, and other
documents are generated by a corporate apparatus devoted almost exclusively to the parent’s
interest. In fact, generating corporate records is part of the instrumental function.
¶ 160 For example, a proposed contract is duly approved in the minutes of Superior Coal’s
board meeting, and the contract is duly signed by the respective officers of their companies,
but the contract agrees to sell coal to Chicago and North Western at merely the cost of
mining the coal–as if the transaction were nothing but the funding of a department, not a
negotiation between two separate corporations, each of which is intent on maximizing its
own profit.
¶ 161 h. Diversion of Assets
¶ 162 A “diversion of assets from the corporation by or to a shareholder” (Cosgrove, 343 Ill.
App. 3d at 429) is an “unauthorized use” of corporate assets (Black’s Law Dictionary 491
(7th ed. 1999) (definition of “diversion”)). Again, this factor seems more relevant to the case
of the unsophisticated individual shareholder who is neglectful of the corporate formalities.
¶ 163 For example, in Miles v. CEC Homes, Inc., 753 P.2d 1021, 1022 (Wyo. 1988) (cited in
In re Estate of Wallen, 262 Ill. App. 3d 61, 69 (1994)), Maurice Miles owned a corporation,
Meadowbrook Development, Inc. (Meadowbrook), which was in the business of building
houses. The trial court pierced the corporate veil and held Miles liable for Meadowbrook’s
debt. Miles, 753 P.2d at 1022-23.
¶ 164 One of the reasons why the Supreme Court of Wyoming upheld that decision was “the
diversion of assets from [the] corporation by or to [the] stockholder ***, to the detriment of
creditors.” (Internal quotation marks omitted.) Id. at 1024. Meadowbrook had built storage
units and a retail office building for Miles personally, all “without profit.” Id. Meadowbrook
also had built a garage on Miles’s property, and there was no record that Miles ever paid
Meadowbrook for the labor, materials, and other expenses. Id. Miles even gave away a
corporate dump truck in exchange for snow plowing services at his personal residence. Id.
¶ 165 Typically, in an instrumentality case, one would not expect a large parent corporation to
resort to such crude, undocumented “diversions” of the subsidiary’s assets. That would be
unnecessary. That would be highly irregular. Instead, the subsidiary, as the parent’s
instrumentality, would pass resolutions to put up collateral for the parent’s loans or to sell its
merchandise to the parent at cost or to pay dividends to the parent that exceed the
subsidiary’s net income. Instruments would be drafted accordingly. Memoranda would be
signed. All the i’s would be dotted, and all the t’s would be crossed. The exploitation of the
subsidiary would be duly and meticulously self-authorized.
¶ 166 i. Failure to Maintain an Arm’s-Length Relationship
- 28 -
¶ 167 The final factor in the list is the “failure to maintain [an] arm’s-length relationship[ ]
among related entities.” Cosgrove, 343 Ill. App. 3d at 429. This factor is a little hard to
understand in the case of a parent and a subsidiary because “arm’s length” means “[o]f or
relating to dealings between two parties who are not related or not on close terms and who
are presumed to have roughly equal bargaining power.” Black’s Law Dictionary 103 (7th ed.
1999). A parent and its subsidiary are related corporations, and it would be naive to suppose
they have roughly equal bargaining power. The parent may replace the directors and even
dissolve the subsidiary.
¶ 168 A more apt question is the one posed by a factor that Union Pacific has omitted from the
list: “whether the corporation [was] a mere facade for the operation of the dominant
shareholder[ ].” Cosgrove, 343 Ill. App. 3d at 429.
¶ 169 Superior Coal was a coal-mining company, and from 1903 to 1947, in an age of
steam-powered locomotives and coal-heated homes, Chicago and North Western was its only
customer. Superior Coal “[sold] the entire output of its mines, except inconsequential sales to
its own employees for their person use, to the parent corporation.” Superior Coal I, 377 Ill. at
283. Except for some “limited amounts” Superior Coal received from royalties, rents, and
investments, Chicago and North Western was its only source of income. Id. at 285. See
Steven v. Roscoe Turner Aeronautical Corp., 324 F.2d 157, 161 (7th Cir. 1963) (One of the
factors suggestive of instrumentality is that “[t]he subsidiary has substantially no business
except with the parent corporation.” (Internal quotation marks omitted.)).
¶ 170 It appears that, from the early 1930s onward, Superior Coal charged Chicago and North
Western, its sole customer, only the cost of production. That effectively was true even from
July 1932 to December 1934, when Superior Coal was charging Chicago and North Western
20 cents per ton in excess of Superior Coal’s cost of production, because by prior agreement
Superior Coal turned around and paid that excess to Chicago and North Western’s creditor,
the Reconstruction Finance Corporation. In December 1934, Superior Coal resumed charging
Chicago and North Western only the cost of production.
¶ 171 The contract of December 27, 1934, recited: “[F]or many years said Coal Company has,
although constituting a separate corporation, been managed and operated, and its properties
managed and operated, as a branch or department of said Railway Company, and wholly in
its interest ***.” See id. (“In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the parent
corporation ***.” (Internal quotation marks omitted.)). Superior Coal told the supreme court
the same thing in Superior Coal I, 377 Ill. at 283-84.
¶ 172 Union Pacific dismisses these representations as rhetorical and conclusory. That Superior
Coal was an instrumentality of Chicago and North Western is indeed a conclusion of fact, but
it is unclear why Superior Coal and Chicago and North Western would feel the need to wax
rhetorical in a private contract between themselves. If A says of B, “He is nothing but a
yes-man for C,” the statement could be shrugged off as rhetorical and conclusory unless A
offered evidence to back it up. If B, however, solemnly says of himself, “I’m nothing but a
yes-man for C,” and if C solemnly agrees, the statement is not so easily dismissed, because,
arguably, no one knows better than B and C themselves whether B is a yes-man for C. See
Steven, 324 F.2d at 161 (“In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the parent corporation
***.” (Internal quotation marks omitted.)).
- 29 -
¶ 173 But the evidence does not point all one way. Some things could be said against the
instrumentality theory. In the tax case, Superior Coal had an incentive to exaggerate its
servility, to get out of paying the retailers’ occupation tax. Apparently, Superior Coal
exercised some freedom to make decisions in its own interest. Throughout its existence,
Superior Coal paid dividends, which, arguably, suggests enough autonomy to make a profit.
It leased out properties to third parties. When investing in Chicago and North Western, the
board of Superior Coal instructed its agents to buy securities and bonds at the “best prices
obtainable.” From 1947 onward, Superior Coal sold coal to other customers, and Chicago
and North Western no longer consumed 100% of its production. Superior Coal found salvage
buyers for its physical assets. It is not for us, but it is for the trial court, to determine the
weight to give these competing items of evidence. See Destiny Health, Inc. v. Connecticut
General Life Insurance Co., 2015 IL App (1st) 142530, ¶ 22. Therefore, we reverse the
summary determination in favor of Union Pacific on the instrumentality issue, and we
remand this case for an evidentiary hearing on that issue.
¶ 174 Until the trial court, sitting in equity, resolves the factual question of whether Superior
Coal was indeed a mere instrumentality of Chicago and North Western, the legal question of
whether justice requires a piercing of the corporate veil is premature.
¶ 175 4. Superior Coal I
¶ 176 Union Pacific argues that even though, in Superior Coal I, Superior Coal insisted to the
supreme court that it was merely a “department,” “branch,” “agent,” or “instrumentality” of
Chicago and North Western (Superior Coal I, 377 Ill. at 283-84), the supreme court was
unconvinced and said: “[T]he separate corporate existence of the two companies has been
established and long preserved in the present case, and each corporation has obviously
secured substantial economic benefits from its separate existence.” Id. at 291.
¶ 177 Read in isolation, that sentence does indeed appear to suggest that Superior Coal was a
bona fide corporation, separate and distinct from its parent, Chicago and North Western. In
context, though, “the separate corporate existence of the two companies,” “established and
long preserved” (id.), meant only the “utiliz[ation of] separate corporate forms for nearly
forty years,” including “the legal habiliments” (that is, the clothing) “incident to a sale in the
transactions involved in this litigation” (emphases added) (id. at 295). For purposes of the
retailers’ occupation tax, nothing else mattered but these corporate forms and the legal
habiliments of sales. The supreme court was indifferent to the question of what will was
animating Superior Coal’s corporate form. Superior Coal could candidly admit that, in
reality, it was merely an “agent or instrumentality” of its parent, Chicago and North Western
(id. at 283-84), but all the supreme court cared about was whether Chicago and North
Western and Superior Coal had been going through the motions of being separate
corporations, including the execution of what purported to be contracts for the sale of coal.
After “observ[ing] the formalities incident to separate corporate existence and receiv[ing]
substantial economic benefits therefrom” (emphasis added) (id. at 290), the purported
corporation, Superior Coal, could not pierce its corporate veil for its own benefit, “for the
purpose of avoiding the burdens likewise incident to the maintenance of separate corporate
identities” (id.)–even if the “corporate entity” was indeed a “fiction,” as the supreme court
seemed to grant in its statement of the issue (id. at 289).
- 30 -
¶ 178 The contracts for the sale of coal at no more than production cost might well have been,
in reality, “interdepartmental transfer[s],” as Superior Coal claimed (id. at 283-84), but the
“legal habiliments” of sales between two “corporate forms” were enough to trigger liability
for the retailers’ occupation tax (id. at 295). If the contracts were fake, Superior Coal had
faked its way into taxation. That was what the supreme court was getting at, as it later made
clear in Superior Coal Co. v. Department of Revenue, 4 Ill. 2d 459, 463 (1954) (Superior Coal
II): “We *** held [in Superior Coal I] that the facts and circumstances did not warrant the
disregarding of the fiction of the corporate entity.” (Emphasis added.) So, granting that
Superior Coal’s separate corporate existence was a “fiction” as Superior Coal claimed, the
fiction nevertheless would be observed because, under the circumstances, justice did not
demand its nonobservance.
¶ 179 Recall that just because a subsidiary is the mere instrumentality of the parent and, as
such, a “fictional” corporation, that is not enough to warrant piercing the corporate veil.
Dregne v. Five Cent Cab Co., 381 Ill. 594, 603 (1943). There is an additional requirement:
piercing the corporate veil must be necessary to thwart injustice or bad faith. Id. at 604. In
Superior Coal I, piercing the corporate veil would have enabled bad faith rather than
thwarted it.
¶ 180 D. Affirmative Defenses
¶ 181 1. Affirmative Defense No. 3:
the School Building as the Proximate Cause of the Subsidence
¶ 182 Union Pacific argues the trial court erred by making a summary determination in
plaintiffs’ favor on Union Pacific’s amended third affirmative defense. That affirmative
defense was as follows: “[T]he alleged mine subsidence would not have occurred but for the
placement of the school on the site, [which] *** thereby became the immediate and/or sole
proximate cause of such occurrence ***.”
¶ 183 Union Pacific thereby pleaded a defense the supreme court recognized in Wilms. The
supreme court held: “The act of removing all support from the superincumbent soil is, prima
facie, the cause of its subsequently subsiding, but if the subsiding is, in fact, caused by the
weight of buildings erected subsequent to the execution of the lease of the mine [by the
previous owner of the land], this is in the nature of contributive negligence, and may be
proved in defence.” Wilms, 94 Ill. at 469. In other words, “this obligation to protect the
superincumbent soil only extends to the soil in its natural state, and *** no obligation rests
on the owner of the subjacent strata to support additional buildings, in the absence of express
stipulation to that effect.” Id. at 468. The mine operator must leave “naturally necessary
subjacent support.” (Emphasis added.) Restatement (Second) of Torts § 820(1), at 78 (1979).
¶ 184 As Powell explains, the weight of the building generally is trivial compared to the weight
of the superincumbent soil, and proving that the building caused the subsidence could be like
proving the addition of a straw caused the camel to collapse:
“Strict liability extends only to that support required by the land itself, and does
not include additional support needed because of artificial structures. However, this
distinction has little real significance in the law of subjacent support because the
weight of artificial additions is generally slight compared with the weight of the fallen
- 31 -
supported land. Thus, some courts have held that if one withdraws subjacent support
for the land of another, and subsidence would have occurred even in the absence of
any artificial additions to the land, then the actor is strictly liable for harm to both the
land and the structures. Moreover, the party removing subjacent support has the
burden of proving that the subsidence would not have occurred but for the additional
structures.” 9 Richard R. Powell, Powell on Real Property § 63.06(1), at 63-28 to
63-29 (Michael Allan Wolf ed., 2000).
¶ 185 Union Pacific’s own expert, Newman, testified that the 2009 “subsidence would have
occurred irrespective of what was on the surface” of the School District’s property. Robert D.
Gibson, supervisor of the emergency section of the Illinois Department of Natural Resources
Office of Mines and Minerals Abandoned Mined Lands Division, agreed that the weight of
the building had nothing to do with the subsidence. The weight of the building, he testified,
was “insignificant” compared to the weight of “all the rock and soils and stuff” above the
mine, and the land would have subsided with nothing on the surface. It appears that no expert
contradicted Newman and Gibson in that respect. Therefore, we find no genuine issue of fact
as to Union Pacific’s amended third affirmative defense, which alleged that the “mine
subsidence would not have occurred but for the placement of the school on the site,” and the
trial court was correct to make a summary determination in plaintiffs’ favor on that
affirmative defense.
¶ 186 2. Affirmative Defense Nos. 6 and 9:
Comparative Fault and Assumption of Risk
¶ 187 In its sixth affirmative defense, Union Pacific alleged as follows:
“(a) The School District knew or should have known of the risk of mine
subsidence, but it and/or its agents failed to take proper care in the design,
construction, maintenance, or use of the school.
(b) The School District knowingly and voluntarily assumed the risk of mine
subsidence.
(c) The School District knew of the risk of mine subsidence, but it and/or its
agents failed to take proper care in selecting a site for the school.
(d) The School District knew of the risk of mine subsidence and impermissibly
counted on using the owner of the mineral rights as an insurer of last resort should
subsidence occur, but did not give notice to the owner of the mineral rights as to the
plans for new construction or consult as to possible methods to abate the risk of future
subsidence.
If judgment is rendered in the School District’s favor, such judgment must be reduced
in amount or barred under the Illinois doctrine of comparative fault.” (Emphasis
added.)
¶ 188 In its ninth affirmative defense, Union Pacific alleged as follows:
“(a) The School District knew of the risk of mine subsidence but it knowingly and
voluntarily built on the site anyway.
(b) The School District knew of the risk of mine subsidence, built on the site
anyway, and it and/or its agents declined to take necessary precautions in the design,
- 32 -
construction, maintenance, or use of the school to reduce or eliminate the risk of
subsidence.
If judgment is rendered in Plaintiff’s favor, such judgment must be reduced in amount
or barred under the Illinois doctrine of assumption of risk.” (Emphasis added.)
¶ 189 Union Pacific makes essentially two arguments in support of its sixth and ninth
affirmative defenses. First, Union Pacific points out that in Wilms, 94 Ill. at 469, the supreme
court recognized “contributive negligence” as a defense in an action for mine subsidence.
Second, Union Pacific reasons that because comparative fault is a defense to strict product
liability (see Coney v. J.L.G. Industries, Inc., 97 Ill. 2d 104, 119 (1983)), it likewise should be
a defense to strict liability for mine subsidences.
¶ 190 The School District responds that in Wilms, 94 Ill. at 469, the supreme court stated that
the causation of the subsidence by the weight of the buildings was “in the nature of
contributive negligence,” which was not the same as saying it was contributive negligence.
(Emphasis added.) As for Union Pacific’s other argument–that cases recognize comparative
fault as a defense to strict products liability–the School District draws a distinction between
“strict liability” and “absolute liability,” arguing that the operator of a mine is absolutely
liable for mine subsidences, not strictly liable. “This right of support is absolute and without
condition ***.” (Emphasis added.) Lloyd v. Catlin Coal Co., 210 Ill. 460, 468 (1904). A “coal
company’s liability depends not on fault but arises from its absolute duty to provide the
surface with support.” (Emphasis added.) Tankersley v. Peabody Coal Co., 31 Ill. 2d 496, 502
(1964). Cases after Lloyd and Tankersley have drawn a distinction between “strict liability”
and “absolute liability.” Korando v. Uniroyal Goodrich Tire Co., 159 Ill. 2d 335, 343 (1994)
(“Strict products liability is not a doctrine of absolute liability; the manufacturer of a product
is not an absolute insurer.”); Prince v. Galis Manufacturing Co., 58 Ill. App. 3d 1056, 1060
(1978).
¶ 191 We will address those arguments and counterarguments in turn.
¶ 192 a. “Contributive Negligence”
¶ 193 The supreme court said in Wilms, 94 Ill. at 469: “The act of removing all support from
the superincumbent soil is, prima facie, the cause of its subsequently subsiding, but if the
subsiding is, in fact, caused by the weight of buildings erected subsequent to the execution of
the lease of the mine, this is in the nature of contributive negligence, and may be proved in
defence.” (Emphasis added.) Contributive negligence (or contributory negligence) barred
recovery in a tort case. Willard v. Swansen, 126 Ill. 381, 384-85 (1888).
¶ 194 For two reasons, the supreme court could not have meant in Wilms that “contributive
negligence,” strictly speaking, was a defense in an action for mine subsidence. Wilms, 94 Ill.
at 469. First, even if a predecessor already had erected a building when the plaintiff acquired
the land, the plaintiff, though himself innocent of any negligence, still would have been
barred from recovery if it was the weight of the building that caused the land to subside.
Second, under the doctrine of contributive negligence, the plaintiff had the burden of proving
his or her own lack of contributive negligence (Broadbent v. Chicago & Grand Trunk Ry. Co.,
64 Ill. App. 231, 233 (1896)), whereas, according to Wilms, 94 Ill. at 469, the mine operator
had the burden of proving that the weight of the building had caused the subsidence.
- 33 -
¶ 195 A building cannot be contributorily negligent, and that probably is why the supreme court
used the phrase “in the nature of contributive negligence.” Wilms, 94 Ill. at 469. It is one
thing to say that something is contributive negligence, and it is another thing to say that
something is “in the nature of” contributive negligence. The phrase “in the nature of” means
“similar in type to or having the characteristics of.” The New Oxford American Dictionary
1140 (2001). In Wilms, 94 Ill. at 469, the supreme court did not mean that the causal weight
of the buildings was contributive negligence. Instead, the supreme court meant it was similar
to contributive negligence in that, if the weight of the building caused the land to subside,
recovery was barred. The weight of the building was relevant only to proximate cause, not
contributory negligence, properly speaking.
¶ 196 In any event, in Alvis v. Ribar, 85 Ill. 2d 1, 27-28 (1981), the supreme court abolished the
doctrine of contributory negligence and replaced it with the doctrine of pure comparative
negligence, which reduced the plaintiff’s recovery by whatever percentage the plaintiff was
negligent. If, for example, a trier of fact found that both the plaintiff and the defendant had
negligently caused the harm and that the plaintiff was 90% negligent compared to the
defendant’s 10% negligence, the plaintiff would recover only 10% of the damages the
plaintiff had incurred. Id. at 25-26.
¶ 197 Later, in 1986, the legislature passed section 2-1116 of the Code of Civil Procedure (Ill.
Rev. Stat. 1987, ch. 110, ¶ 2-1116), which established a rule of modified comparative fault.
Under that rule, the plaintiff would be barred from any recovery if the plaintiff’s fault was
more than 50% of the cause of the injury, whereas if the plaintiff’s fault was 50% or less, the
plaintiff’s recovery would merely be reduced by that percentage. Section 2-1116 provided as
follows:
“In all actions on account of bodily injury or death or physical damage to property,
based on negligence, or product liability based on strict tort liability, the plaintiff shall
be barred from recovering damages if the trier of fact finds that the contributory fault
on the part of the plaintiff is more than 50% of the proximate cause of the injury or
damage for which recovery is sought. The plaintiff shall not be barred from
recovering damages if the trier of fact finds that the contributory fault on the part of
the plaintiff is not more than 50% of the proximate cause of the injury or damage for
which recovery is sought, but any damages allowed shall be diminished in the
proportion to the amount of fault attributable to the plaintiff.” Id.(Public Act 89-7 (Pub. Act 89-7, § 15 (eff. Mar. 9, 1995)) rewrote section 2-1116. In Best v.
Taylor Machine Works, 179 Ill. 2d 367 (1997), however, the supreme court held Public Act
89-7 to be unconstitutional in its entirety, with the result that the 1986 version of section
2-1116 returned to force.)
¶ 198 b. “Absolute Liability” and “Strict Liability”
¶ 199 The School District draws a distinction between “absolute liability” and “strict liability.”
“Absolute liability” can mean different things, depending on the context in which the term is
used. Sometimes it means a perfected liability as opposed to a contingent liability. Howard v.
Swift, 356 Ill. 80, 85 (1934); Scholbe v. Schuchardt, 292 Ill. 529, 534 (1920). Sometimes it
means liability even in the absence of negligence on the defendant’s part (Whitney & Starrett
Co. v. O’Rourke, 172 Ill. 177, 184-85 (1898); Ciuferi v. Bullock Mining Co., 332 Ill. App. 1,
11 (1947)): a synonym for “strict liability.” Black’s Law Dictionary 925 (7th ed. 1999). In
- 34 -
products liability cases, “absolute liability” can mean, pejoratively, an extreme, unreasonable
liability to which a manufacturer is not subject, namely, being “an absolute insurer of [the]
product as to all injuries resulting from contact with or use of the product” (Prince, 58 Ill.
App. 3d at 1060), regardless of whether “the injury or damage resulted from a condition of
the product manufactured by the defendant, *** the condition was an unreasonably
dangerous one, and *** the condition existed at the time the product left the manufacturer’s
control” (Korando, 159 Ill. 2d at 343).
¶ 200 When imposing an “absolute” duty on a mining operator to provide naturally necessary
subjacent support, Tankersley and Lloyd did not intend to make the mining operator an
unconditional insurer against subsidences, regardless of what had caused the subsidences. By
making the mine operator an insurer, Tankersley and Lloyd would have abandoned the rule in
Wilms, a case which Tankersley and Lloyd cited with apparent approval. Tankersley, 31 Ill.
2d at 502; Lloyd, 210 Ill. at 468. Rather, when speaking of the “absolute” duty to support the
surface estate, Tankersley and Lloyd meant that the mine operator was strictly liable for
subsidences resulting from the mine operator’s removal of naturally necessary subjacent
support (Tankersley, 31 Ill. 2d at 502; Lloyd, 210 Ill. at 468), that is, the mine operator was
liable regardless of “the degree of care that may [have been] used by [it] in the prosecution of
its work” (id.). See Black’s Law Dictionary 926 (7th ed. 1999) (defining “strict liability” as
“[l]iability that does not depend on actual negligence or intent to harm, but that is based on
the breach of an absolute duty to make something safe”); Restatement (Second) of Torts
§ 820 cmt. b, at 78 (1979).
¶ 201 c. The Incompatibility of Comparative Fault With Subsidence Law
¶ 202 Section 2-1116 recognizes comparative fault as a defense to only one kind of strict
liability, “product liability based on strict tort liability,” and to only one kind of property
damage, “physical damage to property, based on negligence.” (Emphases added.) Ill. Rev.
Stat. 1987, ch. 110, ¶ 2-1116. The present case meets neither description.
¶ 203 Not only would a comparison of fault in the present case be unauthorized by section
2-1116, but it would be inconsistent with an essential principle of mine subsidence law. Fault
in a subsidence case is either/or. The harm is the subsidence, and the subsidence is either the
mine operator’s fault or not the mine operator’s fault. The options are digital, one or zero.
Either the mine operator left enough subjacent support to hold up the land in its natural state,
in which case the mine operator is blameless, or else the mine operator failed to do so, in
which case the mine operator is entirely to blame.
¶ 204 Union Pacific is attempting to shift some of the blame onto the School District by arguing
that because subsidence was occurring right across the street, a reasonable person would have
perceived a high risk that the same lack of naturally necessary subjacent support existed on
the School District’s side of the street. To be comparatively negligent, though, the School
District would have had to do something that contributed to “the proximate cause of the
injury or damage for which recovery is sought.” Id. The injury or damage is the subsidence.
By building the school, the School District did not cause the subsidence. By filling the mine
rooms with grout, the School District might have prevented the subsidence, but by omitting
the grout, the School District did not cause the subsidence.
¶ 205 Granted, the damages would have been smaller (they would have been only to the land) if
the School District had built elsewhere, but the duty to mitigate damages arises only after the
- 35 -
injury has occurred, not before. Malanowski v. Jabamoni, 332 Ill. App. 3d 8, 15 (2002);
Tsoukas v. Lapid, 315 Ill. App. 3d 372, 377 (2000); Brady v. McNamara, 311 Ill. App. 3d
542, 547 (1999); Grothen v. Marshall Field & Co., 253 Ill. App. 3d 122, 128 (1993); TRW
Title Insurance Co. v. Security Union Title Insurance Co., 887 F. Supp. 1029, 1030 (N.D. Ill.
1995).
¶ 206 We can understand the argument that one should not knowingly and perversely pile up
damages. But the School District did not know that Superior Coal had failed to leave
naturally necessary subjacent support beneath the particular site of construction. According
to the law of strict products liability, to which Union Pacific draws an analogy, a plaintiff
injured by a defective product did not assume the risk of the injury unless, at the time, the
plaintiff actually was aware of the dangerous defect in the product. Calderon v. Echo, Inc.,
244 Ill. App. 3d 1085, 1091 (1993) (“[F]or assumption of risk to preclude recovery, plaintiff
must be aware of the defect in the product ***.” (Emphases added.)); King v. American Food
Equipment Co., 160 Ill. App. 3d 898, 908 (1987) (“[A] plaintiff assumes the risk of a
defective product only if he is actually aware of the defective nature of the product ***.”).
¶ 207 The School District “had the right to assume that the coal would be mined and removed
in a lawful manner and that sufficient coal or supports would be left to support the surface.”
Morris v. Saline County Coal Co., 211 Ill. App. 178, 184 (1918). It strikes us as implausible
that by breaching its duty toward some landowners in a city, a coal mining company could
effectively deprive all the other landowners in the city of the right to make that assumption,
with the consequence that, thereafter, all these other landowners would have to “earn” the
right to build on their own land by first performing an expensive subterranean investigation
and, if necessary, grouting. Otherwise, if a subsidence occurred, they supposedly would be at
“fault” for purposes of section 2-1116 (Ill. Rev. Stat. 1987, ch. 110, ¶ 2-1116). Such a rule
effectively would shift to the owners of the surface estate the mine operator’s duty to
substitute artificial supports for the naturally necessary supports the mine operator has
removed. See Seitz v. Coal Valley Mining Co., 149 Ill. App. 85, 89-90 (1909). It seems
implausible that the law would do that. Therefore, we affirm the summary determination in
plaintiffs’ favor on the sixth and ninth affirmative defenses.
¶ 208 III. CONCLUSION
¶ 209 For the foregoing reasons, we reverse the summary judgment in plaintiffs’ favor, and we
remand this case for further proceedings.
¶ 210 Reversed and remanded.
- 36 -