Corporate Law Roundup

Sharp  Thinking

No. 210      Perspectives on Developments in the Law from Sharp-Hundley, P.C.    June 2022

“Dead” Corporation Can’t Claim Attorney-Client Privilege

A dissolved corporation which is not engaging in winding up activities and has no active management may not assert the attorney-client privilege, a panel in the Appellate Court’s Second District has held.

Acting in John Doe Corp. 1 v. Huizenga Mgrs. Fund, LLC, 2021 IL App (2d) 200513, the panel dealt with corporations which were not merely dissolved but “dead”.  It said that in “determining whether a corporation is dead courts should look at practical business realities rather than technical legal status.”  It distinguished “dead” corporations from those “in some other state, such as a windup phase, bankruptcy or liquidation”.

In Doe, two corporations affiliated with financier A.R. Thane Ritchie attempted to institute litigation anonymously and then dissolved midstream.  They attempted to assert the privilege over documents requested during discovery, however.  But when the trial court insisted on testimony from them, they said they had no officers, directors or employees.

“A corporation must have a legal successor or management that can assert the privilege for it to apply,” the panel stated.  Finding there was no such management for the John Doe corporations, the panel rejected their invocation of the attorney-client privilege.

Plaintiff Can’t Use Federal Rule 27 To Discover LLC Members

A prospective plaintiff cannot use Federal Rule of Civil Procedure 27 to discover the identities of unknown members of a limited liability company (LLC) in order to sue them in federal court, the Seventh Circuit Court of Appeals has held.

Acting in Qin v. Deslongchamps, 31 F.4th 576 (7th Cir. 2022), the court said “Rule 27 allows for a particular and narrow form of inquiry to take place before a suit is filed.”  Rule 27 in pertinent part provides that a “person who wants to perpetuate testimony about any matter cognizable in a United States court may file a verified petition in the district court for the district where any expected adverse party resides.  The petition must ask for an order authorizing the petitioner to depose the named persons in order to perpetuate their testimony.”

In Qin, the prospective plaintiff sought to depose an official of the manager of an LLC against which the prospective plaintiff believed he had a claim.  He wanted to sue in federal court under diversity jurisdiction, but under Seventh Circuit case law the complaint would have to allege the citizenship of each of the LLC’s 165 members, which citizenships he did not know.  Thus, he sought to use Rule 27 to discover such information pre-suit.

The court said “Qin’s petition fails in the first instance because it does not show that Qin’s prospective lawsuit is one cognizable in district court.”  “Qin’s rationale presumes that Rule 27 is, or can be, a vehicle for obtaining pre-suit discovery in order to ascertain or confirm the existence of a fact necessary to bringing suit. . . . But this rationale attributes a breadth and purpose to the rule that it does not possess.”

The court said Qin’s remedy was to sue in state court.

Promissory Note Is Not A Security

A promissory note under which the plaintiff was solely a passive lender who did not look to profit from the transaction other than by its ordinary charges for lending money was not a security under the Illinois Securities Law (815 ILCS 5), a panel of the Appellate Court in Chicago has ruled.

Acting in Dvorkin v. Soderquist, 2022 IL App (1st) 201368, the panel said “a security within the meaning of the securities laws is a contract, transaction or scheme whereby one person invests his money in a common enterprise on the theory that he expects to receive profits solely from the efforts of others.”

The panel rejected an attempt by the investors to claim that a profit-sharing arrangement was present in the case before it.  The plaintiffs claimed that arrangement was evidenced by language in the documents that “Lender is a member of” the company.  The panel concluded that language was “a cut-and-paste error” in preparing the documents from templates and disregarded it.

Relying on an integration clause, other language in the documents, and the principle that an exhibit to the complaint controls over contrary allegations of the pleading, the panel said the note and loan agreement “were not a security under the Securities Laws despite the allegations in the body of the complaint to the contrary.”

Court Recognizes Retaliation Claim Under Illinois Wage Act

An amendment to § 14(c) of the Illinois Wage Payment and Collection Act, 820 ILCS 115/14(c), created a statutory cause of action for retaliatory discharge for an employee who has been terminated for exercising his or her rights under that Act, a panel of the Appellate Court’s Second District has held.

Ruling in Dichiarro v. Woodland Maintenance Group, LLC, 2021 IL App (2d) 210418, the panel said, however, that there was no common-law cause of action for retaliatory discharge for violations of the Act.

Section 14(c), as amended effective in 2011, provides that an employee “who has been unlawfully retaliated against shall be entitled to recover through a claim filed with the Department of Labor or in a civil action, but not both, all legal and equitable relief as may be appropriate,” including, in civil actions, “costs and all reasonable attorney’s fees.”

• John T. Hundley