Opinion ID: 2047375
Heading Depth: 1
Heading Rank: 2

Heading: Corporation's Alter Ego Action

Text: We now must answer the question of whether, in Illinois, a corporation may bring an alter ego action against its parent shareholder, piercing its own corporate veil in the process. If a corporation is so allowed, then the alter ego claim is property of the company and the Director as rehabilitator may assert the action against Borg-Warner. If not, then the Director may not bring the alter ego claim. We conclude that a corporation may not assert an alter ego action against its own shareholders. A corporation is a legal entity separate and distinct from its shareholders, directors, and officers. ( Main Bank v. Baker (1981), 86 Ill.2d 188, 204, 56 Ill.Dec. 14, 427 N.E.2d 94.) The same applies even where one corporation wholly owns another and the two have mutual dealings. ( Dregne v. Five Cent Cab Co. (1943), 381 Ill. 594, 603, 46 N.E.2d 386.) However, this separate and distinct legal entity will be disregarded, and the corporate veil pierced, where a subsidiary is so organized and controlled, and its affairs so conducted by a parent, that observance of the fiction of separate identities would sanction a fraud or promote injustice under the circumstances. Main Bank, 86 Ill.2d at 205, 56 Ill.Dec. 14, 427 N.E.2d 94. The Director argues that no Illinois decision prohibits a corporation from asserting an alter ego action against its own shareholders, but that a recent appellate decision determined that a corporation could bring such an action. ( Aspling v. Ferrall (1992), 232 Ill.App.3d 758, 174 Ill.Dec. 9, 597 N.E.2d 1221.) The Director further argues that several Federal and State decisions have reached the same conclusion. See Koch Refining, 831 F.2d 1339; St. Paul Fire & Marine Insurance Co. v. Pepsico, Inc. (2d Cir. 1989), 884 F.2d 688; In re S.I. Acquisition, Inc. (5th Cir.1987), 817 F.2d 1142; Corcoran v. Frank B. Hall & Co. (1989), 149 A.D.2d 165, 545 N.Y.S.2d 278. The alter ego doctrine was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. As one authority has noted: The doctrine of alter ego fastens liability on the individual who uses a corporation merely as an instrumentality to conduct his or her own personal business, and such liability arises from fraud or injustice perpetrated not on the corporation but on third persons dealing with the corporation. The corporate form may be disregarded only where equity requires the action to assist a third party. (Emphasis added.) 1 W. Fletcher, Private Corporations § 41.10, at 615 (rev. ed. 1990). Generally, the corporate veil is never pierced for the benefit of the corporation or its stockholders   . (18 Am.Jur.2d Corporations § 45, at 846 (1985).) And, as another source, in noting that reverse piercing (where the parent company asserts that the subsidiary is not really a separate entity) is not favored, states: [T]he rules relating to piercing of the corporate veil are designed to protect those relying on the existence of a distinct corporate entity   . 18 C.J.S. Corporations § 12, at 282 (1990). We agree with these statements of law and do not expand the doctrines of alter ego and piercing the corporate veil to include a subsidiary's bringing an action against its parent corporation. As one court has noted: [T]he general law mandates that the piercing of a corporate veil must never be made for the benefit of the corporation or its shareholders. It is troublesome, in this court's view, to allow a corporation, through its trustee, to pierce its own veil since it would have the effect of denying the corporation of its own corporate existence. ( In re Dakota Drilling, Inc. (D.N.D.1991), 135 B.R. 878, 884.) Moreover, we note that the Director, as rehabilitator, is not powerless to assert claims against Borg-Warner. An action by a parent corporation injurious to its subsidiary is actionable as a breach of fiduciary duty. The Director, as rehabilitator, may assert an action for breach of fiduciary duty against Borg-Warner on Centaur's behalf. We further note that creditors are generally not capable of asserting such actions, as they are not owed a duty by a subsidiary's parent corporation. See Macaluso v. Jenkins (1981), 95 Ill.App.3d 461, 469, 50 Ill.Dec. 934, 420 N.E.2d 251 (officers of corporation owe no fiduciary duty to creditors). Next, we find the Director's reliance on Aspling to be misplaced. Aspling held that a creditor of a bankrupt corporation could not assert an alter ego action against the corporation's sole shareholder because the bankruptcy trustee had already brought and settled a similar claim against the shareholder. Moreover, the creditor had received a settlement from the bankruptcy estate. While the Aspling decision did note Koch Refining's finding that a corporation in Illinois could assert an alter ego claim against its parent corporation, it did not discuss whether this was the law in Illinois. Instead, Aspling relied on the general finding in Koch Refining that the bankruptcy trustee has the exclusive right to bring an alter ego action against corporate shareholders and fiduciaries. ( Aspling, 232 Ill.App.3d at 763, 174 Ill.Dec. 9, 597 N.E.2d 1221.) Koch Refining gave three reasons for this general finding, only one of which involved an interpretation of Illinois alter ego law. Thus, we do not find that Aspling determined whether in Illinois a corporation has standing to assert an alter ego action against its own shareholders. The Director also urges this court to accept the reasoning of Koch Refining in finding that a bankruptcy trustee could assert an alter ego action against the bankrupt corporation's shareholders. Of the court's three reasons for this finding, the Director argues two are applicable here: (1) under Illinois law, a corporation may bring an alter ego action against its parent corporation, and thus the action is property of the bankruptcy estate which the trustee can pursue; and (2) a bankruptcy trustee has the right to bring general creditor claims on behalf of the creditors. The Koch Refining court reached its first conclusion by finding: (1) in Illinois piercing of the corporate veil is allowed to reach an equitable result; and (2) no Illinois decision has limited the standing of any party to bring such a suit. While the Director urges this court to adopt this reasoning, we decline and note one commentator's characterization of the Koch Refining opinion as very hazy    [involving] a reading of state law [which] fairly tortures the traditional notion that alter ego actions are for the benefit of creditors only and do not belong to the corporation. Epling, Trustee's Standing to Sue in Alter Ego or Other Damage Remedy Actions, 6 Bankr.Dev.J. 191, 196. The Koch Refining court's second reason for allowing the trustee to bring an alter ego claim on behalf of the creditors is that the bankruptcy trustee has creditor status    to bring suits for the benefit of the estate and ultimately of the creditors under section 544 of the Bankruptcy Code (11 U.S.C. § 544 (1988)). ( Koch Refining, 831 F.2d at 1348.) This creditor status, the court found, applies to general creditor claims rather than personal claims of the creditors. A general claim, according to the court, is a claim common to all the creditors which could be asserted by any one of them, while a personal claim is one which is had only by specific creditors. ( Koch Refining, 831 F.2d at 1349.) The Koch Refining court found the alter ego claim there to be a general claim and thus properly brought by the trustee pursuant to his creditor status. However, in Illinois, as just noted, the Code and Illinois law do not provide the Director with creditor status to assert creditors' claims, whether they be personal or general. The Director also argues that the decision we adopt today conflicts with the Federal district court's finding that the Director as rehabilitator was the proper party to assert the alter ego claim against Borg-Warner. However, the district court's finding relied on Koch Refining's interpretation of Illinois alter ego law, which we have just concluded is not the law in Illinois. The Director next notes that other Federal courts have found that subsidiaries may assert alter ego claims against their corporate parents and pierce their own corporate veils in a bankruptcy context. ( St. Paul Fire & Marine Insurance, 884 F.2d 688; In re S.I. Acquisition, 817 F.2d 1142.) While this is true, other Federal cases have concluded otherwise. (See In re Ozark Restaurant Equipment Co. (8th Cir.1987), 816 F.2d 1222 (noting that Arkansas follows the general rule that the corporate veil is not to be pierced for the benefit of the corporation or shareholders); In re Dakota Drilling, 135 B.R. 878.) Moreover, as Epling notes in his article, those Federal courts which have formulated an emerging doctrine whereby the alter ego cause of action is determined to be property of the corporation [have done so] through a labored and dubious reading of state law. Epling, 6 Bankr.Dev.J. at 201. See also Boyce, Koch Refining and In re Ozark: The Chapter 7 Trustee's Standing to Assert An Alter Ego Cause of Action, 64 Am.Bankr.L.J. 315, 327 (noting that bankruptcy courts should not grant standing [to trustees to assert alter ego claims] by abrogating state [alter ego] law based on federal policy and equitable considerations). Next, the Director notes a New York appellate decision which construed New York's insurance insolvency law, which contains language similar to Illinois' code. The New York insurance statute provided that the liquidator was vested `by operation of law with the title to all property, contracts and rights of action of such insurer as of the date of the entry of the order so directing ... to liquidate.' (Emphasis in original.) ( Corcoran, 149 A.D.2d at 167, 545 N.Y.S.2d at 280, quoting N.Y. Insurance Law § 7405(b) (McKinney 1985).) The New York court found that the Superintendent of Insurance, as liquidator, could bring an alter ego action against the insolvent corporation's parent and sole shareholder. The Corcoran court based its decision on the following: (1) in New York, the Superintendent can assert actions belonging to creditors; and (2) the alter ego action in New York belonged to the insolvent corporation. The court first found that because New York's insurance law specifically gave the Superintendent the right to assert creditor claims in certain situations and has been interpreted to give the Superintendent expansive jurisdiction, the Superintendent could assert the alter ego claim on behalf of the creditors. In Illinois, however, the Director is not given the authority to assert creditors' claims. The Corcoran court also interpreted New York law as allowing a corporation to assert an alter ego action against its parent and cited Koch Refining as an example of such an action. However, as explained above, we do not adopt this position in Illinois. The Director finally argues that our ruling today will have an unfair impact on Centaur's smaller creditors and policyholders. We disagree. The Director first argues that this decision will undercut the general policy objective of the Code of ensuring that all similarly situated creditors are treated equally. The Director believes that small creditors, without the resources of a large creditor, will be forced to pursue alter ego claims on their own. However, as Hartford notes, creditors of all sizes will have to pursue claims for fraud, reckless misrepresentation, or estoppel themselves without the benefit of the Director's involvement. Moreover, while larger creditors may have more incentive to bring suit, and more resources to do so, this is true in any case in our justice system. We further note that the Director is not without power to assert claims against Borg-Warner, having Centaur's right to assert claims for breaches of fiduciary duties. One commentator has noted in this area that the alter ego claim, if had by the trustee or rehabilitator, would be an excess cause of action. This commentator argues that the alter ego claim would succeed or fail with the claim for breach of fiduciary duties because it would involve the same assertions of shareholder misbehavior. (See Wilmore, The Bankruptcy Trustee: Can An Alter Ego Sue In Alter Ego?, 65 S.Cal.L.Rev. 705, 732 (1991).) Thus, in a practical sense, it is arguable that there is no need at all for the Director to even assert an alter ego action, as he already has a similar action. However, the alter ego action is needed by the creditors, who do not have standing to bring actions for breaches of fiduciary duties. The Director also argues that such a decision will likely create a proliferation of wasteful and potentially inconsistent lawsuits. However, creditors such as Hartford already may pursue other individual claims against third parties such as Borg-Warner which may yield inconsistent results. Finally, the Director argues that if the appellate court's decision is left to stand, it would effectively strip the bankruptcy trustee of the right to bring an alter ego claim against the debtor's parent shareholder. This is not true, however, as the Koch Refining decision was based on three rationales, only one of which was based on an interpretation of Illinois alter ego law. Accordingly, the judgment of the appellate court is affirmed. Affirmed. Justice McMORROW took no part in the consideration or decision of this case.