“Mere Continuation” Doctrine Requires Common Ownership

Corporate Law Roundup

Sharp Thinking

No. 146      Perspectives on Developments in the Law from Sharp-Hundley, P.C.      January 2018

“Mere Continuation” Doctrine

Requires Common Ownership

          By John T. Hundley, John@sharp-hundley.com, 618-242-0200

Hundley

            The absence of significant common ownership between the alleged predecessor and successor dooms a creditor’s attempt to hold the latter responsible for the debts of the former under the “mere continuation doctrine,” a panel of the Appellate Court in Chicago has held.

            Ruling in Groves of Palatine Condo. Ass’n v. Walsh Contr. Co., 2017 IL App (1st) 161036, the panel said the lack of significant common ownership was “dispositive” of a creditor’s attempts to thwart a sale of assets by imposing “successor liability.”

            In Groves, K&K Iron Works, Inc. sold its assets to K&K Iron Works, LLC,  expressly excluding liabilities.  Though the LLC continued to operate from the same facilities the corporation had, for six years prior to the sale the corporation had been owned by a holding company, in which the former corporation’s owner’s interest had varied from 12.5% to .9%. The court refused to find the LLC was simply the corporation with “different clothes.”                                                      

            It said Illinois courts have “consistently required identity of ownership before imposing successor liability” under the continuation exception.  That being the case and the court finding that the indirect ownership of the minority interest was “no identity of ownership that would make the LLC merely a continuation of the corporation,” it ruled the attempt to impose successor liability was barred under Illinois’ general rule for sale-of-assets cases.

            That rule provides that the purchaser of assets is not liable for the liabilities of the seller except (1) when there is an express or implied agreement of assumption; (2) when the transaction amounts to a consolidation or merger; (3) where the purchaser is merely a continuation of the seller; or (4) when the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations.

Appellate Panel Pierces Veil Of LLC

                Inadequate capitalization, a nonfunctioning “shareholder” and commingling of funds were the factors upon which a panel of the Appellate Court’s Third District relied in “piercing the corporate veil” in Benzakry v. Patel, 2017 IL App (3d) 160162.

            Actually dealing with a limited liability company, the panel in Benzakry noted that courts in corporate veil piercing cases usually look at a longer list of factors, including failure to issue stock, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation, nonfunctioning of officers and directors, absence of corporate records, diversion of assets from the corporation by or to a shareholder, and failure to maintain arms-length relations among related entities.

            In discussing only three factors in its opinion, the panel did not appear to establish a new rule for LLCs.  Rather, it appeared that the showing was so strong on the three discussed factors that the others were unnecessary.

Major Wage Payment Act Award Affirmed

            An employer that refuses to pay a departing employee the usual severance compensation because he refuses to sign a release of claims under the Illinois Wage Payment & Collection Act (820 ILCS 115) may find itself liable for both.

            That’s the message of Schultze v. ABN AMRO, Inc., 2017 IL App (1st) 162140, which affirmed a trial court award of more than $2 million under the act. 

            In Schultze, the defendant had an established history of paying lucrative bonuses to top executives, and the evidence indicated a bonus of $2 million to $5 million would have been appropriate for the plaintiff for 2008.  However, defendant gave plaintiff only $200,000, and terminated his employment shortly thereafter.  It offered him severance of $300,000 if he would sign a release of, among other things, claims under the act.  He replied that severance properly calculated should be $375,000 and that he would not release his claims under the act.  The employer refused to pay any severance and paid only $200,000 of the bonus.

            The appellate panel first dealt with ABN’s argument that the bonuses were discretionary and not pursuant to an “employment contract or agreement.”  It said that a formal contract is not required to recover under the act, and that the term “agreement” in the act was “more expansive” than “contract.”  Reviewing the history of the bonus program and Schultze’s participation therein, it said “there was an ‘agreement’ and ‘unequivocal promise’ that Schultze’s compensation included a bonus and payment of that bonus as part of Schultze’s compensation was not discretionary.”

            The panel affirmed a $2 million award, which it termed “the minimum bonus commensurate with [plaintiff’s] increased responsibilities and undisputed satisfactory performance.”     

            Turning to the severance, the panel said that “settlement of claims in the form of a release signed by an employee relating to an employer’s violation of the act is not permissible.”  It affirmed the trial court award of $375,000 severance. 

            Leave to appeal to the Supreme Court has been denied.

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