Court Opinion

ID: 3140270
Source: CourtListenerOpinion
Date Created: 2015-10-22 17:51:18.318834+00
Date Added: 2024-06-11T12:14:57.095764
License: Public Domain

No. 3--06--0452
_________________________________________________________________
Filed June 29, 2007.
                             IN THE

                       APPELLATE COURT OF ILLINOIS

                             THIRD DISTRICT

                               A.D., 2007

CHARLES H. SEMANDE,           )    Appeal from the Circuit Court
                              )    of the 9th Judicial Circuit
     Plaintiff-Appellant,     )    McDonough County, Illinois
                              )
     v.                       )    05--CH--31
                              )
NICHOLAS H. ESTES,            )    Honorable
                              )    David F. Stoverink
     Defendant-Appellee.      )    Judge, Presiding.
_________________________________________________________________

PRESIDING JUSTICE LYTTON delivered the Opinion of the court:
_________________________________________________________________

     Plaintiff,    Charles   Semande,   obtained   a   judgment   against

Heartland Pottery Company in the amount of $294,340.80.             After

discovering that Heartland had no assets, Semande filed a complaint

against defendant, Nicholas Estes, alleging that Estes was the

alter ego of Heartland and, thus, liable for the judgment Semande

obtained against Heartland.        Estes filed a motion to dismiss

plaintiff’s complaint, asserting that plaintiff lacked standing to

bring an alter ego action against him.      The trial court granted the

motion.   We affirm.

     In 1995, Semande and Estes entered into several written

agreements for the purpose of forming a corporation, Heartland

Pottery Company.    Estes agreed to provide the financing necessary
for Heartland to perform a pottery manufacturing operation, and

Semande agreed to be Heartland’s president and chief executive

officer with full responsibility for all of Heartland’s operations.

The parties agreed that Semande would receive a salary of $110,000

per year, plus bonuses.

     According to the agreements between Estes and Semande, Estes

was to be the primary shareholder of Heartland and possess 500

shares of stock in exchange for a payment of $5,000.   Semande was

to pay Heartland $50.00 and receive five shares of stock initially.

Semande was also given the option to purchase up          to 50% of

Heartland’s shares of stock by a specified date or all of its

shares if he was terminated as president. Semande and Estes agreed

to elect themselves as the only members of Heartland’s board of

directors.

     In 1998, Heartland terminated all of its employees, except

plaintiff.   Soon thereafter, Semande filed an     action against

Heartland for unpaid salary and expense reimbursements owed to him.

In 2001, Heartland was administratively dissolved by the Illinois

Secretary of State for failing to file necessary reports and pay

franchise taxes.   Heartland has never been reinstated.

     In 2002, Estes provided deposition testimony in connection

with Semande’s case against Heartland.   At his deposition, Estes

admitted that no shares of Heartland stock were ever issued to

anyone, including Semande.    Estes also admitted that Heartland

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never held a formal annual meeting and executed only one corporate

resolution, which allowed him to open a Heartland bank account.

     The trial court entered judgment in favor of Semande and

against Heartland for $294,340.80.         Semande then filed a citation

to discover assets against Heartland.         Under oath, Estes testified

that Heartland had no assets.

     Thereafter, Semande filed a complaint against Estes, alleging

that Estes was the alter ego of Heartland and should be liable for

the $294,340.80 judgment Semande obtained against Heartland.                In

his complaint, Semande alleged that although he held the titles of

“director”   and   “president”   of   Heartland,     Estes    controlled   all

aspects of the company.         According to Semande, “Heartland was a

mere facade for the [d]efendant’s business operations” such that

“adherence to the fiction of a separate corporate existence for

Heartland    would   sanction    a    fraud   and   promote    injustice   or

inequitable consequences.”       Semande alleged that Estes took income

and assets from Heartland and placed them in his personal accounts.

     Estes filed a motion to dismiss the complaint, asserting that

Semande, as an officer and director of Heartland, lacked standing

to assert an alter ego action against him.          The trial court granted

Estes’ motion to dismiss.

     Semande argues that the trial court should not have granted

Estes’ motion to dismiss because Semande was a director and officer

of Heartland in name only and, therefore, had standing to pursue

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his alter ego action.

     In Illinois, lack of standing is an affirmative defense.

Greer v. Illinois Housing Development Authority, 122 Ill. 2d 462,

494, 524 N.E.2d 561, 575 (1988).       We review a trial court’s

dismissal order based on a lack of standing de novo.   Scachitti v.

UBS Financial Services, 215 Ill. 2d 484, 493, 831 N.E.2d 544, 549

(2005).

     A corporation is a legal entity separate and distinct from its

shareholders, directors, and officers.    In re Rehabilitation of

Centaur Insurance Co., 158 Ill. 2d 166, 172, 632 N.E.2d 1015, 1017

(1994).   However, a court may find corporate officers, directors

or shareholders personally liable for corporate obligations through

a remedy known as piercing the corporate veil.     People v. V & M

Industries, Inc., 298 Ill. App. 3d 733, 739, 700 N.E.2d 746, 750

(1998). Piercing the corporate veil is an equitable remedy invoked

to assist third parties who have been defrauded.   See Crum v. Krol,

99 Ill. App. 3d 651, 661, 425 N.E.2d 1081, 1088 (1981).

     A corporate entity will be disregarded, and the corporate veil

pierced, where the corporation is an alter ego or business conduit

of the governing or dominant personality.    V & M Industries, 298
Ill. App. 3d at 739, 700 N.E.2d at 751. The alter ego doctrine was

developed for and has historically been used by third persons

injured by their reliance on a distinct corporate entity.   Centaur

Insurance Co., 158 Ill. 2d at 173, 632 N.E.2d at 1018; see also

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Sinquefield v. Sears Roebuck and Company, 209 Ill. App. 3d 595,

598, 568 N.E.2d 325, 327 (1991).                   According to the supreme court:

     “The doctrine of alter ego fastens liability on the

     individual         who    uses       a    corporation         merely      as   an

     instrumentality           to    conduct       his    or   her   own    personal

     business,      and       such    liability          arises    from    fraud    or

     injustice perpetrated not on the corporation but on third

     persons dealing with the corporation. The corporate form

     may be disregarded only where equity requires the action

     to assist a third party.”                     Centaur Insurance Co., 158
Ill. 2d     at   173, 632 N.E.2d     at    1018,     quoting    1   W.

     Fletcher, Private Corporations §41.10, at 615 (rev. ed.

     1990).

     Piercing of the corporate veil is limited to protecting those

who have relied on the existence of a distinct corporate entity.

See Centaur Insurance Co., 158 Ill. 2d at 173-74, 632 N.E.2d at

1018. The corporate veil will generally not be pierced for the

benefit   of   a   corporation            or   its    stockholders.          See    Centaur

Insurance Co., 158 Ill. 2d at 173, 632 N.E.2d at 1018.                                   The

rationale for this prohibition is that “[a] party should not be

allowed to utilize the corporate form on the one hand to protect

himself or herself from liability for a corporation’s debts, and

then on the other hand to nullify the existence of the corporation

to avoid reckoning with the obligations incurred by the corporation

                                               5
while it was a viable entity.”    18 C.J.S. Corporations, §20 (2007),

citing In re Lane, 215 B.R. 810, 812 (E. D. Va. 1997).                  When

shareholders have deliberately adopted the corporate form to obtain

its   advantages,   they   will   not   be   allowed   to   disregard   the

corporation’s existence for their benefit. See Schenley Distillers

Corp. v. United States, 326 U.S. 432, 437, 66 S. Ct. 247, 249, 90
L. Ed. 181 (1946); Board of Transportation v. Martin, 296 N.C. 20,

29, 249 S.E.2d 390, 396 (N.C. Sup. Ct. 1978).

      While no Illinois authority has expressly ruled that directors

may not pierce the corporate veil for their benefit, we believe

that the rationale for prohibiting shareholders from piercing the

corporate veil applies equally to directors.           Like shareholders,

directors are generally not personally liable for a corporation’s

obligations.   See Jacobson v. Buffalo Rock Shooters Supply, Inc.,

278 Ill. App. 3d 1084, 1088, 664 N.E.2d 328, 331 (1996).           Giving

directors the ability to pierce the corporate veil would improperly

allow them to hide behind the corporate veil when it benefits them

and then discard it when it is no longer useful.            C.f. Schenley

Distillers Corp., 326 U.S. at 437, 66 S. Ct. at 249, 90 L. Ed. 181

(one who has created a corporate arrangement to carry out his

business purposes does not have the choice of disregarding the

corporate entity).

      Moreover, directors should be precluded from piercing the

corporate veil because, like shareholders, they are not innocent

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third party creditors.    In order to fulfill their fiduciary duties

to the corporation and its shareholders, directors have a right and

responsibility to obtain information about the corporation that

they serve.     See Drake v. Newton Amusement Corp., 123 N.J.L. 560,

9 A.2d 636 (N.J. Sup. Ct. 1939); Cohen v. Cocoline Products, Inc.,

309 N.Y. 119, 127 N.E.2d 906 (N.Y. App. Ct. 1955).             To that end,

directors may compel inspection         of   a corporation’s books and

records.   See Kunin v. Forman Realty Corp., 21 Ill. App. 2d 221,

157 N.E.2d 785 (1959); Stone v. Kellogg, 62 Ill. App. 444 (1895).

A director is chargeable with knowledge of the facts that corporate

books and records disclose.    See F.H. Hill Co. v. Barmore, 220 Ill.

App. 222 (1920).

     Furthermore, a director’s right to inspection is even broader

than a shareholder’s.    See O’Neal v. Home Town Bank of Villa Rica,

237 Ga. App. 325, 514 S.E.2d 669 (Ga. App. Ct. 1999).             Directors

have an “absolute” and “unqualified” right to examine books and

records (18A Am Jur. 2d Corporations § 297, at 170 (2d ed. 2004)),

while shareholders may only examine corporate books for a “proper

purpose” (805 ILCS 5/7.75(c) (West 2006)).          Thus, directors have

the ability to determine the financial condition of the corporation

and do not need the equitable protection afforded to third party

creditors who may have been injured.

     Here, the trial court found as a matter of law that, as a

director   of    Heartland,   Semande    had   no   standing     to   pierce

                                   7
Heartland’s corporate veil.        We agree.     As a director, Semande had

an obligation to obtain information about the corporation that he

served.     See Drake, 123 N.J.L. 560, 9 A.2d 636; Cohen, 309 N.Y.
119, 127 N.E.2d 906.     Thus, he did not stand in the position of an

innocent third party creditor and should not be allowed to employ

the equitable      doctrine   of   piercing     the   corporate    veil.     See

Centaur Insurance Co., 158 Ill. 2d at 173, 632 N.E.2d at 1018.               The

trial court properly dismissed Semande’s complaint for lack of

standing.

     The judgment of the circuit court of McDonough County is

affirmed.

     Affirmed.

     WRIGHT, J.,     concurs.

     JUSTICE HOLDRIDGE, dissenting:

     The    only   information     used   by   the    majority    to   ascertain

Semande's status comes from agreements drawn up by the parties at

the inception of the corporation.              But Semande claims that the

agreed-upon relationship did not exist in practice.                There is no

evidence of record rebutting this claim.                In fact, Estes gave

deposition testimony indicating that no shares of stock were ever

issued to Semande, and that Semande never participated in corporate

meetings in any capacity because no meetings were ever held.

Considering the nature of Semande's claim, I believe the record

                                      8
contains insufficient facts to support dismissal at this stage.   I

thus respectfully dissent.

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