Elleby v. Forest Alarm Service, Inc.

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Appellate Court Date: 2021.03.25
12:29:00 -05'00'
Elleby v. Forest Alarm Service, Inc., 2020 IL App (1st) 191597Appellate Court RUTH ELLEBY, Plaintiff-Appellant, v. FOREST ALARM
Caption SERVICE, INC., LINDA LICHTENAUER, MARK COYLE, and
RON LYNGEN, Defendants-Appellees.
District & No. First District, Fifth Division
No. 1-19-1597
Filed March 6, 2020
Decision Under Appeal from the Circuit Court of Cook County, No. 18-CH-12724; the
Review Hon. Neil H. Cohen, Judge, presiding.
Judgment Affirmed.
Counsel on James L. Wideikis, Shawn M. Staples, and Jonathan L. Loew, of Much
Appeal Shelist P.C., of Chicago, for appellant.
David J. Stein and Jiwon J. Yhee, of Masuda, Funal, Eifert & Mitchell,
Ltd., of Chicago, for appellee Forest Alarm Service, Inc.
Paul F. Markoff and Karl G. Leinberger, of Markoff Leinberger LLC,
of Chicago, for other appellees.
Panel PRESIDING JUSTICE HOFFMAN delivered the judgment of the
court, with opinion.
Justices Rochford and Delort concurred in the judgment and opinion.
OPINION
¶1 The plaintiff, Ruth Elleby, appeals from orders of the circuit court of Cook County that
(1) dismissed her claims against defendants Linda Lichtenauer, Mark Coyle, and Ron Lyngen
(collectively, the individual defendants) and (2) entered judgment on the pleadings in favor of
defendant Forest Alarm Service, Inc. (FASI). For the reasons that follow, we affirm.
¶2 The following facts relevant to the disposition of this appeal were adduced from the
pleadings and exhibits of record.
¶3 FASI is an Illinois corporation that provides security alarm sales, service, installation, and
monitoring. According to the plaintiff, FASI is a “family-owned, closely held corporation.”
The individual defendants, along with the plaintiff, are shareholders of FASI. Lichtenauer and
the plaintiff each own 33.5% of the shares, and Lyngen and Coyle each own 16.5% of the
shares. Coyle, in addition to being a shareholder of FASI, is also the president and secretary of
FASI.
¶4 In 2017, the plaintiff considered selling her shares of FASI. On August 16, 2017, the
plaintiff’s attorney sent Coyle a letter, indicating that the plaintiff had decided to “exercis[e]
her rights under the Illinois Business Corporation Act *** to have the Corporation and/or its
shareholders purchase her shares.” The letter stated that the plaintiff was willing to sell her
shares at a price based on a 2013 valuation of FASI.
¶5 On October 19, 2017, an attorney representing the individual defendants responded,
disputing that the “Illinois Business Corporation Act” provided the plaintiff with a right to
force them to purchase her shares. The letter stated that, nonetheless, the individual defendants
were willing to purchase the plaintiff’s shares for a $178,177 or, alternatively, sell their shares
to her using the 2013 valuation.
¶6 On November 14, 2017, the plaintiff’s attorney sent an e-mail to the individual defendants’
attorney, requesting that certain FASI records “be produced within 14 days” so the plaintiff
could adequately respond to their offer. The requested records included, inter alia, client lists,
profit and loss statements, balance sheets, and “any and all personal Credit Card Statements,
belonging to [the individual defendants] that have been used to pay FASI invoices.”
¶7 On January 15, 2018, the plaintiff’s attorney sent a letter to the attorney representing the
individual defendants, noting that the plaintiff had not received a response to her demand for
records. The letter also alleged that the plaintiff’s “access to the on-line company financial and
banking records” had been blocked and that the plaintiff “discovered several unauthorized and
wasted expenditures made by the Company to Macy’s Department Store.” The letter further
alleged that the plaintiff discovered “several questionable alarm part expenditures,
unauthorized bonus payments, unexplained credit card purchases and sales of company
vehicles,” and that “FASI client contracts are inexplicably being transferred or terminated.”
The letter concluded by stating that the plaintiff was willing to sell her shares for the price of
$450,000.00 and gave the individual defendants 14 days to respond.
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¶8 Subsequently, the plaintiff hired a new attorney who, on August 17, 2018, sent a letter to
the individual defendants’ attorney, demanding again “the production of FASI’s books and
records pursuant to 805 ILCS 5/7.75.” The letter stated that the records were being requested
by the plaintiff’s “forensic accountant and business valuator” and threatened to “utilize the
legal system” if the records were not produced. Attached to the letter was a three-page list of
the records that the plaintiff demanded be produced. The letter also asked the individual
defendants’ attorney to clarify whether he represented FASI or the individual defendants.
¶9 On August 25, 2018, the individual defendants’ attorney responded and confirmed that, as
he stated in his initial communication, he represented only the individual defendants, not FASI.
Regarding the plaintiff’s threat to “utilize the legal system” if the records were not produced,
the individual defendants’ attorney noted that the plaintiff had not yet directed any of her
demands for records to FASI. He also opined that her document demand was “well beyond
anything authorized by 805 ILCS 5/7.75.” He reiterated though that, because he represented
the individual defendants and not FASI, the plaintiff’s demand for FASI records was “not [his]
issue.” The letter also stated that the individual defendants were willing to “discuss a resolution
based on a real and current valuation” of FASI.
¶ 10 On August 28, 2018, the plaintiff’s attorney sent a letter to Coyle, in his capacity as both
“President and Registered Agent” of FASI, and demanded “the production of FASI’s books
and records pursuant to 805 ILCS 5/7.75.” The letter included the three-page attachment listing
the records the plaintiff wished produced. The letter demanded that FASI produce the records
“no later than October 1, 2018.”
¶ 11 On October 1, 2018, Frank Cesario, FASI’s certified public accountant (CPA), sent an e-
mail to the plaintiff, Coyle, and Lichtenauer. Attached to the e-mail was a document that
Cesario called the “financial statement for [FASI] through August 31, 2018.” The attachment
included a balance sheet and a profit and loss statement.
¶ 12 On October 3, 2018, Cesario sent another e-mail to the plaintiff and the individual
defendants. This e-mail included additional financial documents, including a profit and loss
statement that compared the months of January through August for both 2017 and 2018 and
general journal transactions dated August 31, 2018.
¶ 13 On October 10, 2018, Coyle sent an e-mail to the plaintiff, Lyngen, and Lichtenauer,
attaching the FASI “financial reports” for 2017. The following reports were included: general
and administrative expenses, costs of goods sold, statement of income and retained earnings,
and a balance sheet.
¶ 14 On October 11, 2018, the plaintiff filed a two-count complaint against the individual
defendants and FASI. 1 Count I alleged that FASI and the individual defendants violated
section 7.75 of the Business Corporation Act of 1983 (Act) (805 ILCS 5/7.75(d) (West 2018))
by refusing her “numerous requests” for FASI’s books and records. Pursuant to section 7.75(d)
of the Act (id.), the plaintiff also sought to hold the individual defendants liable for 10% of the
value of her stock in FASI, damages, and attorney fees for refusing her request to examine the
records. In support of her claim, the plaintiff attached copies of the e-mails and letters detailed
above. Count II alleged that the individual defendants breached the fiduciary duties they owed
to FASI and to her. Specifically, the plaintiff alleged that the individual defendants breached
1
The original complaint also included Christina Pavia as a defendant, but she was not named as a
defendant in the amended complaint.
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their fiduciary duty by failing to produce the financial records and books she requested,
engaging in corporate waste and self-dealing, and by freezing the plaintiff out of the
management and control of FASI.
¶ 15 On October 26, 2018, the individual defendants filed a motion to dismiss the plaintiff’s
complaint pursuant to section 2-615 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615
(West 2018)). The individual defendants raised the following arguments: (1) count I was not
ripe because section 7.75(b) of the Act (805 ILCS 5/7.75(b) (West 2018)) provides her with
the right to “examine, in person or by agent, at any reasonable time” FASI’s books and records
and she has alleged only that she demanded the “production” of such records, (2) the plaintiff’s
complaint failed to allege that she brought her claim derivatively on behalf of FASI, (3) the
plaintiff failed to allege facts establishing a fiduciary duty because FASI is not a closely held
corporation nor is it governed by a shareholder agreement, (4) the plaintiff’s complaint failed
to plead facts that established conduct that amounted to a breach of fiduciary duty, and (5) the
plaintiff failed to allege damages.
¶ 16 On November 11, 2019, FASI filed a motion to dismiss the plaintiff’s only claim against
it, count I, pursuant to section 2-615 of the Code. FASI’s motion adopted and incorporated the
individual defendants’ argument from their motion to dismiss regarding count I.
¶ 17 On January 29, 2019, the circuit court entered an order giving the plaintiff 14 days to amend
her complaint.
¶ 18 On February 15, 2019, the plaintiff filed an amended complaint, seeking relief both
individually and derivatively on behalf of FASI. Count I still alleged that the individual
defendants and FASI violated section 7.75(d) of the Act (id. § 7.75(d)) by refusing her
“numerous requests” for FASI’s books and records, attaching copies of the e-mails and letters
detailed above. The plaintiff amended count II to reflect that she brought the claim derivatively
on FASI’s behalf. The plaintiff also alleged that “[d]emand on the Board of Directors of [FASI]
to bring this suit against the individual defendants herein would be a futile and useless act, in
that defendants committed the wrongs complained of herein, have profited from the wrongs,
and defendants would not bring suit against themselves.” In count II, she alleged that the
individual defendants breached their fiduciary duties. Specifically, she alleged that the
individual defendants breached their fiduciary duties in the following ways: (1) “freezing” her
out of FASI by “blocking [her] access to [FASI’s] on-line financial and banking records,”
denying her “the ability to participate in the operation and management of” FASI, and denying
her access to FASI’s books and records; (2) “unauthorized and wasted expenditures made by
[FASI] to Macy’s Department Store;” (3) “several questionable alarm part expenditures;”
(4) “unauthorized bonus payments;” (5) “unexplained credit card purchases and sales of
[FASI] vehicles;” (6) terminating or transferring client contracts; and (7) “preparing balance
sheet entries that evidence potentially improper distributions or inadequate bookkeeping.” In
support of her claims, the plaintiff attached a copy of an unsigned shareholder agreement that
included in the margins handwritten addendums and Microsoft Word comments. According to
the plaintiff, the shareholders “did not formally execute or sign [FASI’s] Shareholder
Agreement” but “everyone operated under the document as if it were fully executed.” In
support of her claim that there were unauthorized expenditures at Macy’s Department Store,
the plaintiff attached bank records that she claimed were from FASI’s checking account with
entries that state “Auto Pymt Macys” and “CITIAUTFDR.”
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¶ 19 On April 1, 2019, the individual defendants again filed a motion to dismiss pursuant to
section 2-615 of the Code. Regarding count I, they once more argued that the plaintiff alleged
only that she demanded the “production” of books and records from FASI, not that she ever
demanded to “examine” FASI’s books and records. As such, the individual defendants argued
that the plaintiff failed to allege they ever refused a request to examine FASI’s books and
records. Regarding count II, the individual defendants argue that the plaintiff failed to allege
that she made a demand on FASI’s board of directors to bring suit or why demand was excused,
the existence of a fiduciary duty, or sufficient facts to show that the alleged conduct amounted
to a breach of fiduciary duties.
¶ 20 On June 13, 2019, the circuit court granted the individual defendants’ motion to dismiss as
to both counts of the plaintiff’s amended complaint. As to count I, the circuit court held that
the plaintiff “had no right to the production of the records she sought, merely the right to
examine them,” and the plaintiff did not allege that she ever made a request to examine the
records in person that was denied. The court also held that the plaintiff did not allege any facts
showing the Lichtenauer or Lyngen had any control over FASI’s records or that they refused
any request for access to the records on behalf of FASI. As to count II, the circuit court first
noted that, because the plaintiff was raising a derivative claim, she was required to allege
particularized facts showing that she made a demand on the corporation to bring suit and was
refused or that she should be excused from making such a demand. The court held that the
plaintiff’s conclusory statement that “demand would be futile” was insufficient. Moreover, the
court held that, although the plaintiff sufficiently alleged that the individual defendants owed
FASI and each other a fiduciary duty, the plaintiff failed to allege sufficient facts “from which
it can be concluded that any of the conduct at issue constitutes a breach of fiduciary duty.”
Specifically, the court held the following: the individual defendants did not breach their
fiduciary duties by failing to produce books and records because the plaintiff did not make a
proper request for such records; the individual defendants did not deny the plaintiff the ability
to participate in the management of FASI because minority shareholders are not entitled to so
participate absent a shareholder agreement and the shareholder agreement the plaintiff attached
to her amended complaint was unexecuted; and the plaintiff’s allegations regarding the
“unauthorized” expenditures and terminated contracts were not sufficient to allege a breach of
a fiduciary duty.
¶ 21 On July 17, 2019, FASI filed a motion for judgment on the pleadings, arguing that the
plaintiff’s allegation against it in count I is identical to the allegation the circuit court dismissed
against the individual defendants in its June 13, 2019, order. FASI incorporated the June 13,
2019, order into its motion for judgment on the pleadings, arguing that the court’s reasoning
in that order applied equally to it.
¶ 22 Only July 18, 2019, the circuit court granted FASI’s motion for judgment on the pleadings.
The circuit court provided the plaintiff with an opportunity to once again amend her complaint,
which she refused. At the plaintiff’s request, the circuit court entered an order dismissing her
claims against FASI and the individual defendants “with prejudice.” This appeal followed.
¶ 23 On appeal, the plaintiff argues that the circuit court erred by dismissing her two claims
against the individual defendants and granting judgment on the pleadings in favor of FASI on
count I. We first address the circuit court’s decision to dismiss count I as to the individual
defendants and enter judgment on the pleadings on count I in favor of FASI.
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¶ 24 A motion to dismiss a complaint under section 2-615 of the Code (735 ILCS 5/2-615 (West
2018)) attacks the legal sufficiency of a complaint based upon defects apparent on the face of
the complaint. Bogenberger v. Pi Kappa Alpha Corp., 2018 IL 120951, ¶ 23. The critical
inquiry is whether the allegations of the complaint, when construed in a light most favorable
to the plaintiff, are sufficient to state a cause of action upon which relief may be granted. Id.In making this determination, all well-pleaded facts in the complaint must be taken as true. Id.Our supreme court has emphasized that Illinois is a fact-pleading jurisdiction that requires the
plaintiff to allege sufficient facts “to bring a claim within a legally recognized cause of action.”
Marshall v. Burger King Corp., 222 Ill. 2d 422, 429-30 (2006). A cause of action will not be
dismissed on the pleadings unless it clearly appears that no set of facts can be proved which
will entitle the plaintiff to recover. Beahringer v. Page, 204 Ill. 2d 363, 369 (2003). Our review
is de novo. Bogenberger, 2018 IL 120951, ¶ 23.
¶ 25 Section 2-615(e) of the Code provides that “[a]ny party may seasonably move for judgment
on the pleadings.” 735 ILCS 5/2-615(e) (West 2018). In general, a pleading motion claims
that, even if all of the facts alleged by the opponent were true, movant is entitled to judgment.
Christensen v. Wick Building Systems, Inc., 64 Ill. App. 3d 908, 912 (1978). A motion for
judgment on the pleadings requires the circuit court to examine the pleadings to determine
whether an issue of fact exists, or conversely, whether the controversy can be resolved as a
matter of law. Crestview Builders, Inc. v. Noggle Family Ltd. Partnership, 352 Ill. App. 3d
1182, 1184-85 (2004). We review de novo a decision to grant a motion on the pleadings. See
Egan v. Steel, 137 Ill. App. 3d 539, 543 (1985).
¶ 26 The plaintiff argues that her amended complaint properly alleged a claim that the
defendants violated her rights under section 7.75 of the Act (805 ILCS 5/7.75 (West 2018)),
which states as follows:
“(b) Any person who is a shareholder of record shall have the right to examine, in
person or by agent, at any reasonable time or times, the corporation’s books and records
of account, minutes, voting trust agreements filed with the corporation and record of
shareholders, and to make extracts therefrom, but only for a proper purpose. In order
to exercise this right, a shareholder must make written demand upon the corporation,
stating with particularity the records sought to be examined and the purpose therefor.
(c) If the corporation refuses examination, the shareholder may file suit in the
circuit court *** to compel by mandamus or otherwise such examination as may be
proper. If a shareholder seeks to examine books or records of account the burden of
proof is upon the shareholder to establish a proper purpose. If the purpose is to examine
minutes or the record of shareholders or a voting trust agreement, the burden of proof
is upon the corporation to establish that the shareholder does not have a proper purpose.
(d) Any officer, or agent, or a corporation which shall refuse to allow any
shareholder or his or her agent so to examine and make extracts from its books and
records of accounts, minutes and records of shareholders, for any proper purpose, shall
be liable to such shareholder, in a penalty of up to ten per cent [sic] of the value of the
shares owned by such shareholder, in addition to any other damages or remedy afforded
him or her by law. It shall be a defense to any action for penalties under this Section
that the person suing therefor has within two years sold or offered for sale any list of
shareholders of such corporation or any other corporation or has aided or abetted any
person in procuring any list of shareholders for any such purpose, or has improperly
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used any information secured through any prior examination of the books and records
of account, or minutes, or records of shareholders of such corporation or any other
corporation.
(e) Upon the written request of any shareholder of a corporation, the corporation
shall mail to such shareholder within 14 days after receipt of such request a balance
sheet as of the close of its latest fiscal year and a profit and loss statement for such
fiscal year; provided that if such request is received by the corporation before such
financial statements are available, the corporation shall mail such financial statements
within 14 days after they become available, but in any event within 120 days after the
close of its latest fiscal year.” Id. § 7.75(b)-(e).
¶ 27 Thus, in order to state a claim, the plaintiff was required to allege that she (1) was a
shareholder of FASI, (2) who made a written demand upon FASI, (3) stating with particularity
the records she wished to examine, and (4) the purpose therefor.
¶ 28 The plaintiff contends that she made numerous demands for the books and records of FASI,
provided a detailed list of the records requested, stated that the records were for the purposes
of evaluating the price of her shares, and was refused the records.
¶ 29 The defendants respond that the plaintiff failed to allege she made a “written demand upon
[FASI]” to “examine” its books and records at a reasonable time that was subsequently denied.
They raise three primary arguments. First, they contend that the plaintiff failed to allege that
she made a request to “examine” FASI’s books and records. Rather, they contend the exhibits
demonstrate only that she made a demand for the records to be “produced,” which is not her
statutory right under section 7.75(b) of the Act. Second, they argue that the vast majority of
the plaintiff’s demands were not made to FASI, as is required by statute, but to the individual
defendants’ lawyer. Third, the defendants contend that, even if the plaintiff did make a
statutorily compliant request, she was never denied the right to examine the records. We
ultimately agree with the defendants.
¶ 30 We begin by addressing the defendants’ argument that the plaintiff failed to state a claim
because she demanded production of the records, not to examine them. The plain language of
section 7.75(b) of the Act provides shareholders with the right to “examine, in person or by
agent,” a corporation’s books and records. Id. § 7.75(b). The defendants are correct that, in
each of the letters attached to the plaintiff’s complaint, she only ever demands that FASI’s
records and books be “produced.” However, we do not believe that section 7.75(b) requires
shareholders to say the magic word “examine” in order to be entitled to a corporation’s books
and record. Moreover, in order for a shareholder to examine a corporation’s books and records,
they must first be produced in some fashion. For instance, in Hagen v. Distributed Solutions,
Inc., 328 Ill. App. 3d 132, 139, 146 (2002), this court found that a shareholder’s written request
that “ ‘documents be provided’ ” to him pursuant to section 7.75 of the Act so that he may
examine them was sufficient under the Act. Likewise, the plaintiff’s demand that specific
books and records be “produced” is sufficient given the detailed nature of the request.
¶ 31 Nonetheless, even assuming that the plaintiff’s request for production of records is
compliant with section 7.75(b) of the Act, that section also states that, in order to exercise the
right to examine a corporation’s books and records, “a shareholder must make written demand
upon the corporation.” 805 ILCS 5/7.75(b) (West 2018). Here, although the plaintiff made
several written demands for books and records that she maintains were ignored, most of those
letters were sent to the individual defendants’ attorney, not to FASI. It was not until August
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28, 2018, that the plaintiff made a demand of FASI via a letter to Coyle, in his capacity as
FASI’s president and registered agent. Therefore, the plaintiff made, at most, “one written
demand upon the corporation” for the books and records she is entitled to pursuant to section
7.75(b) of the Act.
¶ 32 That said, the plaintiff was also required to allege that her request was refused, and she has
not done so here. As the plaintiff’s complaint acknowledges, on October 1, 2018, FASI’s CPA
sent her, Coyle, and Lichtenauer a copy of FASI’s balance sheet as of August 31, 2018, and a
profit and loss statement from January through August 2018. On October 3, 2018, FASI’s CPA
sent another e-mail with additional financial documents attached. On October 10, 2018, Coyle
sent an e-mail to the plaintiff with still more financial information attached. The plaintiff filed
the complaint giving rise to this appeal on the next day. Put simply, the plaintiff has not alleged
that FASI, nor any agent or officer of FASI, refused her request for an examination of corporate
books and records. Rather, the facts alleged show that the plaintiff’s sole request for FASI’s
books and records directed to FASI was answered on the day she set as a deadline (October 1,
2018) and more documents were produced in the subsequent week. Evidently unhappy with
the content of the production, she filed this lawsuit. Even taking the facts in the light most
favorable to the plaintiff, we cannot conclude that she alleged sufficient facts to state claim for
a violation of section 7.75(b) of the Act.
¶ 33 In so holding, we acknowledge that in Hagen this court found that a shareholder was
entitled to judgment even though he did not allege that the corporation explicitly refused his
request. However, we find Hagen distinguishable on the grounds that here, unlike in Hagen,
the plaintiff did not make multiple requests for records that were ignored for six months before
she filed suit. Instead, as previously mentioned, the plaintiff made a sole request for books and
records directed to FASI, and FASI produced some records on the deadline given. The plaintiff,
unhappy with the production, filed this suit. We conclude that, based on these facts, the plaintiff
has failed to allege that FASI, or any agent of officer thereof, refused her request to examine
FASI’s books and records.
¶ 34 To be clear, the plaintiff is entitled, as a shareholder, to examine the records she has
requested of FASI pursuant to section 7.75(b) of the Act. See id. However, the Act requires
that, in order for the circuit court to issue a writ of mandamus or award damages, she must first
allege that she was refused access. See id. § 7.75(c), (d). She has not done so here. Accordingly,
the circuit court did not err by dismissing count I as to the individual defendants or granting
judgment on the pleadings in favor of FASI.
¶ 35 The plaintiff next argues that the circuit court erred by granting the individual defendants’
motion to dismiss count II: a derivative claim brought on behalf of FASI that alleged the
individual defendants breached their fiduciary duties. Once again, our review of a circuit
court’s decision to grant a motion to dismiss pursuant to section 2-615 of the Code is de novo.
Bogenberger, 2018 IL 120951, ¶ 23.
¶ 36 A shareholder derivative suit permits an individual shareholder to bring suit “ ‘to enforce
a corporate cause of action against officers, directors, and third parties.’ ” (Emphasis in
original.) Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 95 (1991) (quoting Ross v.
Bernhard, 396 U.S. 531, 534 (1970)). It was intended as a vehicle to allow shareholders to
protect a corporation’s interests from “ ‘faithless directors and managers.’ ” Id. (quoting Cohen
v. Beneficial Industrial Loan Corp., 337 U.S. 541, 548 (1949)). However, to preserve the
balance of control, the shareholder must first demonstrate as a precondition to bringing suit
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that she made a demand on the corporation to pursue the action and that the demand had been
refused or that the demand was “ ‘excused by extraordinary conditions.’ ” Id. at 96 (quoting
Ross, 396 U.S. at 534). “The demand requirement is not merely a matter of procedure.” In re
Huron Consulting Group, Inc., 2012 IL App (1st) 103519, ¶ 17.
¶ 37 The plaintiff argues that the circuit court erred by first finding that she failed to allege
sufficient facts to show that demand on FASI to bring the suit was excused by extraordinary
conditions. According to the plaintiff, she properly alleged that demand on the FASI board of
directors to bring suit would be a futile and useless act because the individual defendants would
not bring suit against themselves. The individual defendants respond that the plaintiff failed to
allege who FASI’s board of directors were and, therefore, failed to allege why demand would
be useless.
¶ 38 In the plaintiff’s amended complaint, she stated that “[d]emand on the Board of Directors
of [FASI] to bring this suit against the individual defendants herein would be a futile and
useless act, in that defendants committed the wrongs complained of herein, have profited from
the wrongs, and defendants would not bring suit against themselves.” We first note that the
individual defendants are correct in that the plaintiff never alleged who was on FASI’s board
of directors and why they would not bring suit against the individual defendants. Instead, the
plaintiff seems to be arguing that, because the individual defendants hold a majority of the
shares in FASI and are the defendants in this suit, it naturally follows that they would not have
allowed FASI to bring this suit and, as such, a demand would have been futile.
¶ 39 The plaintiff is correct that “[d]emand is excused where the majority of the directors are
themselves involved in the matters complained of, so that it is evident that the demand would
be unavailing.” (Internal quotation marks omitted.) Valiquet v. First Federal Savings & Loan
Ass’n of Chicago, 87 Ill. App. 3d 195, 200 (1979). However, the plaintiff is still required to
“plead facts, not conclusions.” Id. Additionally, “courts assess futility ex ante rather than
ex post.” Kamen v. Kemper Financial Services, Inc., 939 F.2d 458, 462 (7th Cir. 1991).
¶ 40 Here, the plaintiff did not allege who sat on FASI’s board of directors. The plaintiff’s
complaint alleged only that Coyle is President and Secretary of FASI, as well as a shareholder,
and that Lyngen and Lichtenauer are also shareholders. There is no allegation that Lyngen or
Lichtenauer are involved in the operation of FASI in any way. The plaintiff appears to be
conflating the board of the directors and the shareholders, and while it is possible that the
individual defendants also sit on the board of directors and, therefore, would be resistant to
bringing suit against themselves, the plaintiff has not specifically alleged that is the case here.
We reiterate that “[t]he demand requirement is not merely a matter of procedure.” In re Huron
Consulting Group, Inc., 2012 IL App (1st) 103519, ¶ 17. The plaintiff was required to plead
facts, not conclusions, which she has failed to do. We, therefore, conclude that the plaintiff has
failed to allege with particularity facts showing that the demand requirement was excused.
¶ 41 That said, even if we were to find that the plaintiff sufficiently alleged that demand would
have been futile, we still conclude that she failed to state a claim that the individual defendants
breached their fiduciary duty.
¶ 42 To state a claim for breach of fiduciary duty, the plaintiff must allege the following: “(1)
that a fiduciary duty exists; (2) that the fiduciary duty was breached; and (3) that such breach
proximately caused the injury of which the party complains.” Lawlor v. North American Corp.
of Illinois, 2012 IL 112530, ¶ 69.
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¶ 43 Here, the plaintiff argues that FASI is a closely held corporation and, as a result, the
individual defendants owed fiduciary duties to FASI. Additionally, she argues that Coyle, as
an officer of FASI, owed FASI a fiduciary duty of loyalty. We agree with the plaintiff that
Coyle, as president and secretary of FASI, owed a duty of loyalty to FASI. See Cooper Linse
Hallman Capital Management, Inc. v. Hallman, 368 Ill. App. 3d 353, 357 (2006) (explaining
that a corporate officer owes a duty of loyalty to their corporate employer). However, it is less
clear that FASI is a closely held corporation. If, in fact, FASI is not a closely held corporation,
then the plaintiff has not alleged that Lichtenauer and Lyngen, as minority shareholders, owed
FASI a fiduciary duty. See Dowell v. Bitner, 273 Ill. App. 3d 681, 690 (1995) (“[I]n general, a
mere owner of stock does not owe a fiduciary duty to the corporation.”).
¶ 44 To begin, the plaintiff does not allege that FASI has elected to be a closely held corporation
under section 2A.05 of the Act (805 ILCS 5/2A.05 et seq. (West 2018)). Rather, she argues
that FASI is a closely held corporation under common law because its stock is not sold openly
on the market. In Hagshenas v. Gaylord, 199 Ill. App. 3d 60, 69 (1990), the Second District
applied common-law principles applicable to closely held corporations despite the fact that the
company at issue was not subject to a previous version of the Act. The Hagshenas court relied
on the definition of a close corporation as “ ‘one in which the stock is held in a few hands, or
in a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling,’ ”
and also the fact that the shareholders elected themselves directors and officers and participated
in the day-to-day operations. Id. (quoting Galler v. Galler, 32 Ill. 2d 16, 27 (1964)); see also
Illinois Rockford Corp. v. Kulp, 41 Ill. 2d 215 (1968). Here, the plaintiff alleged that FASI’s
shares were in the hands of only four individuals and the “stock is not bought and sold on the
open market.” However, only one of the four shareholders, Coyle, is alleged to be involved
with the day-to-day operations of FASI. Therefore, it is far from certain whether FASI is a
closely held corporation, in which case Lynden and Lichtenauer would not owe FASI a
fiduciary duty.
¶ 45 Regardless, even assuming, arguendo, that the individual defendants owed FASI a
fiduciary duty, the plaintiff was also required to allege that the individual defendants breached
those fiduciary duties. She failed to do so here. The plaintiff’s amended complaint alleged that
the individual defendants breached their fiduciary duties in the following ways: (1) “freezing
out” the plaintiff by denying her “the ability to participate in the operation and management
of” FASI, denying her access to FASI’s books and records, and “blocking [the plaintiff’s]
access to [FASI’s] on-line financial and banking records”; (2) “unauthorized and wasted
expenditures made by [FASI] to Macy’s Department Store”; (3) “several questionable alarm
part expenditures”; (4) “unauthorized bonus payments”; (5) “unexplained credit card
purchases and sales of [FASI] vehicles”; (6) terminating or transferring client contracts; and
(7) “preparing balance sheet entries that evidence potentially improper distributions or
inadequate bookkeeping.” We take each in turn.
¶ 46 One of the plaintiff’s primary allegations is that the individual defendants were “freezing”
her out of FASI by denying her the ability to participate in the operation and management of
FASI, blocking her access to FASI’s on-line financial and banking records, and denying her
access to FASI’s books and records. We have already addressed the plaintiff’s claims regarding
the books and records above, and we conclude once again that, because the plaintiff failed to
allege that the individual defendants ever denied her access to such records, she cannot state a
claim that they breached their fiduciary duties. Turning to the plaintiff’s other contentions, we
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note that the plaintiff is a minority shareholder and, therefore, is not entitled to control the
operations of FASI absent a shareholder agreement. See Gidwitz v. Lanzit Corrugated Box Co.,
20 Ill. 2d 208, 215 (1960). Recognizing this fact, the plaintiff attached a copy of an unsigned
shareholder agreement to her amended complaint that she contends provided her with the right
to participate in the management of FASI and forms the basis of her claim that the individual
defendants breached their fiduciary duties by “freezing” her out. The individual defendants
respond that no such agreement existed and note that the attached shareholder agreement is
unsigned and has handwritten notations and Microsoft Word comments in the margins. We
agree with the individual defendants.
¶ 47 The Act requires that a shareholder agreement be “in writing.” 805 ILCS 5/7.71(a) (West
2018). As the shareholder agreement attached here is unsigned, features handwritten notations,
and Microsoft Word comments, it does not satisfy the Act’s requirement that an agreement
between parties be “in writing.” Thus, the plaintiff’s sole right as a shareholder is “to
participate, according to the amount of [her] stock, in selection of the management of the
corporation.” Gidwitz, 20 Ill. 2d at 215. The plaintiff has failed to allege specific facts showing
that the individual defendants prevented her from participating, consistent with the amount of
shares she owns, in selecting the management of FASI. Illinois is a fact-pleading jurisdiction,
which requires the plaintiff to allege sufficient facts “to bring a claim within a legally
recognized cause of action.” See Marshall, 222 Ill. 2d at 429-30 (citing cases). The plaintiff
has failed to do so here and, therefore, the circuit court did not err in concluding that she failed
to state a claim for breach of fiduciary duty based on these allegations.
¶ 48 The plaintiff next alleged a breach of fiduciary duty based on “unauthorized and wasted
expenditures made by [FASI] to Macy’s Department Store.” In support of this claim, the
plaintiff attached bank records that she attests are for FASI’s checking account with entries
that state “Auto Pymt Macys” and “CITIAUTFDR.” As the individual defendants point out,
nothing about the bank statement indicate that they reflect purchases at Macy’s Department
Store. According to the individual defendants, the payments went to “Citi, the issuer of the
credit card that can be used anywhere, including for business expenses.” Regardless of whether
that is accurate, the fact remains that the plaintiff has failed to allege specific, supporting facts
upon which to base an accusation that the expenditures were “unauthorized and wasted.” There
is no allegation that what was purchased did not have a legitimate business purpose. In fact,
there is no allegation as to what was purchased. The plaintiff’s sole basis for alleging these
purchases were “unauthorized or wasted” is her apparent belief about the store where the
purchase occurred. Once more, we conclude that the circuit court did not err in dismissing this
claim. See id.¶ 49 The plaintiff’s next allegation is that she discovered “several questionable alarm part
expenditures.” However, the plaintiff failed to allege any details regarding the expenditures,
such as who made the expenditures, what the expenditures were, when the expenditures were
made, what she found “questionable” about the expenditures, and how did the expenditure
amount to a breach of fiduciary duty. Put simply, this is not fact-pleading, and the circuit court
did not err in dismissing this allegation.
¶ 50 We find that several of the plaintiff’s remaining allegations suffer from the same flaw: no
specific factual support. Specifically, the plaintiff’s allegations regarding “unauthorized bonus
payments,” “unexplained credit card purchases and sales of [FASI] vehicles,” and terminating
or transferring “client contracts” all fail to allege specific facts to support a claim that this
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conduct amounted to a breach of fiduciary duty. In other words, there is simply no facts alleged
to determine who engaged in the conduct, what the conduct actually consisted of, and why it
was a breach of a fiduciary duty. As such, the circuit court did not err in dismissing this
allegation for failing to state a claim against the individual defendants.
¶ 51 Lastly, the plaintiff alleged a breach of fiduciary duty based on “preparing balance sheet
entries that evidence potentially improper distributions or inadequate bookkeeping.” Put
simply, the plaintiff cannot state a claim for breach of fiduciary duty by alleging “potentially
improper” conduct. This pure speculation falls far short of Illinois’s fact-pleading standard.
See id.¶ 52 In sum, we conclude that the circuit court did not err when it granted the individual
defendants’ motion to dismiss count II of the plaintiff’s amended complaint. The plaintiff
failed to allege that the she was excused from making a precondition demand on FASI, and
she failed to allege sufficient facts to state a claim against the individual defendants for
breaching their fiduciary duties.
¶ 53 For these reasons, we affirm the judgment of the circuit court.
¶ 54 Affirmed.
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