Limits on Life after Death: Only Accrued Claims Are Viable Against Corporations Post-Dissolution

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According to the Illinois Business Corporation Act, the dissolution of a corporation “shall not take away nor impair any civil remedy available” to or against the corporation, its directors or shareholders “for any right or claim existing, or any liability incurred, prior to such dissolution” as long as the lawsuit is filed within five years after dissolution. 805 ILCS 5/12.80.

But what does “right or claim existing” mean? What if the claim doesn’t accrue until after the demise of the corporation? The Illinois Supreme Court faced that question last week in Pielet v. Pielet. [pdf].

Pielet potentially posed a significant threat to Illinois business. The idea that dissolving corporations might face years of potential long-tail liability, based on conduct which occurred after the corporation’s demise, would have made winding down any corporation’s affairs considerably more difficult. In the end, the Supreme Court declined to permit such claims, holding that only claims which had actually accrued on the date of corporate dissolution were subject to the Business Corporation Act’s five-year survival statute.

Pielet arose from a generational transition at a family business. The plaintiff’s husband retired, selling the business to his sons. The sons gave their father a consulting contract, which would survive the father’s death and benefit their mother. Two years after the sale, one brother bought out the other. A series of complex corporate transactions followed, as the remaining brother moved to combine the business with a new partner from outside the family: (1) he sold an undivided one-half interest in the company to PBS One, Inc., the new partner’s business, and PBS agreed to assume half Pielet’s liabilities (including the consulting contract); (2) they formed a limited partnership, PBSIM, LP; and (3) both sides contributed their ½ interests in Pielet to PBSIM, LP. A few years later, PBS One sold its half interest in the partnership to National Material, LP, which the outside partner also owned, and PBS dissolved (National Material assumed PBS’ obligations). PBSIM, LP changed its name to Midwest Metallics in 1993, but continued to issue checks under the consulting agreement until 1998. The following year, Midwest Metallics declared bankruptcy, and the checks stopped.

The mother and father sued everyone concerned. Three counts of their complaint are relevant to our discussion here: breach of contract against National Material and NM Holding, Inc., the general partner of National Material; breach of contract against the same two entities as a “mere continuation” of PBS One; and breach of contract against PBS One – which had been dissolved for nearly five years. The parties filed cross-motions for summary judgment. The trial court granted the mother (the father by this time having died) summary judgment on all three claims, and both sides appealed. The Appellate Court reversed, saying that although the breach of contract claim against PBS was subject to the Business Corporation Act’s survival provision – despite not having accrued until after PBS’ dissolution – there were genuine issues of material fact regarding whether there had been a novation amongst all the corporate transactions. Then, for the sake of judicial economy, the court found that National Material and NM Holding would be liable if PBS was, since National Material was PBS’ successor, and NM Holding was the general partner of National Material.

Writing for a five-Justice majority of the Supreme Court, Justice Lloyd A. Karmeier affirmed in part and reversed in part. The Court rejected the plaintiff’s argument that the plaintiff's contract rights were a “claim or right” within the meaning of the Business Corporation Act sufficient to make the survival provision applicable. Following In re Johns-Manville Asbestosis Cases, 516 F.Supp. 375 (N.D. Ill. 1981), the Court held that since the consulting contract had not been breached until years after PBS’ dissolution, the breach of contract claim against PBS necessarily failed, whether there had been a novation or not.

On the other hand, the question of whether a novation had occurred was central to determining whether or not National Material and NM Holding could be held liable. Finding that there was a considerable material dispute as to that question, the Court affirmed the denial of summary judgment.

The remainder of Pielet – and the dissenters’ only disagreement with the majority – turned on an interesting but seldom touched-on area of appellate law: what constitutes an impermissible advisory opinion. National Material and NM Holding had sought and been granted leave to appeal to the Supreme Court despite having won at the Appellate Court. Why? Because they argued that the Appellate Court’s comments that National Material was a “mere continuation” of PBS were an improper advisory opinion. The majority of the Court agreed, holding that once the Appellate Court had found a triable issue on novation, there was no need to go further.

Writing for herself and Justice Charles E. Freeman, Justice Anne E. Burke disputed the majority's view. Justice Burke pointed out that National Material and NM Holding had also argued that they should have been granted summary judgment.   That necessarily involved proving either that there was a novation extinguishing liability, or that they were entitled to judgment on the merits. Therefore, in the view of Justices Burke and Freeman, the Appellate Court had to consider the status of National Material and NM Holding, and setting aside that portion of the opinion was erroneous.

 

Published In: Business Organization Updates, Civil Procedure Updates, Civil Remedies Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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