Failure To Maintain Corporation Creates Personal Liability – Attempt To Shift To Attorney Fails

Date: 12/22/2011
 Business Group Update 12-21-2011

For a number of years, Illinois courts have imposed personal liability on officers and directors of involuntarily dissolved corporations. (Gonnella Baking Co. v Clara's Pasta Di Casa, Ltd., 337 Ill App 3d 385, 786 NE 3d 1058 (2003)). Illinois courts have taken this to another level, by imposing personal liability during the period of dissolution, even when the corporation is reinstated. "… [A]n officer of a corporation that has been involuntarily dissolved and is later reinstated is not relieved of personal liability for debts incurred by the business during the dissolution." (Cardem, Inc. vs. Marketron International, Ltd., 749 N.E.2d 477 (Ill. App. 2nd Dist. 2001))

As a result, Illinois corporations should avoid involuntary dissolution. This is generally not difficult to do, as the Illinois Secretary of State provides numerous opportunities for a corporation that may be delinquent in its filings (and, therefore, at risk of involuntary dissolution) to correct its delinquency before suffering involuntary dissolution. If the corporation is not active, voluntary dissolution is simple and inexpensive.

The issue of director and officer liability for an involuntarily dissolved corporation came up recently in another Illinois case, but with an unusual twist. The individuals who had settled claims of personal liability sought to shift the liability to their lawyer, who had tried, without success, to reinstate the corporation. However, the Illinois Appellate Court rejected this effort to shift liability. (Reddick v. Suits, Ill. App. 2nd, No. 09-L-10 (November 8, 2011)).

In July 2005, RPF Holdings, Inc. was incorporated by an attorney, M. Thomas Suits. RPF was a troubled corporation and struggling financially. It sought to sell its assets to a third party. However, in the meantime, Mark Reddick, the President of RPF, died on March 3, 2007. His brother, Haul Reddick, became the executor of Mark's estate and was eventually elected president and director of RPF. Debra Reddick, Mark's widow, was a director of RPF.

In March 2007, Haul Reddick learned that RPF had been administratively dissolved. To sell its assets, RPF needed to be in good standing. Haul contacted the General Manager of RPF, who then contacted Suits to reinstate RPF and "take care of this pronto."

What followed was what the court described as "a parade of missteps and errors." From March 12, 2007 Mr. Suits tried, without success, to reinstate RPF. He first submitted a package of documents to the Illinois Secretary of State, which was rejected for failure to include an application for reinstatement or the reinstatement fee. Then Suits heard that someone else was handling the reinstatement. But this other filing was also rejected for failure to include the application for reinstatement. Suits then tried again, but the application was rejected again because the registered agent was changed on the reinstatement application, not the correct procedure to change the registered agent. Finally, in May 2007 Suits tried a third time, only to learn that Haul had retained a law firm in Springfield which successfully handled the reinstatement of RPF, which was effective on May 25, 2007. But, although RPF was reinstated, the troubles for its officers and directors were just beginning.

While RPF was administratively dissolved, it continued its business under the General Manager's daily direction. A troubled business to begin with, RPF had trouble paying one of its suppliers. In June 2007, the supplier (or its counsel), taking advantage of Illinois law, sued, in addition to RPF, Haul Reddick and Debra Reddick individually, in their capacities as officers or directors of RPF, for $400,000 for the unpaid goods. Haul and Debra eventually settled for $135,000, and paid an additional $80,000 to their attorneys to defend them.

Then, in June 2009, RPF's landlord, also taking advantage of Illinois law on this point, brought suit for unpaid rent for $39,000 incurred during the period of administrative dissolution, a suit still unresolved at the time this case started.

Haul and Debra Reddick filed suit against Suits alleging he, as legal counsel, was negligent in failing to take the necessary steps to have RPF reinstated in a timely fashion and for failing to advise them of the potential individual liability. The trial court held that Suits was not liable, with which the appellate court agreed.

First, both the trial court and appellate court found that, while Suits owed his client, the corporation, a duty of care, this did not extend to third persons, such as Haul Reddick and Debra Reddick, officers or directors of the corporation. Second, neither were Haul and Debra intended third-party beneficiaries of Suits' representation of RPF.

So, in the end, Suits, RPF's attorney, was not responsible for the personal liability of the officers or directors of the corporation that he failed to reinstate. This may provide comfort for corporate attorneys, although the court left open the possibility that an attorney could be liable in different circumstances.

However, the result, and the amounts paid by the directors, should not provide comfort for those officers and directors whose corporations risk being administratively dissolved. Maintaining the good standing of a corporation, especially in Illinois, is as important as ever.

For more information about this or any other corporate law topic, please contact Stephen Proctor, Chair of the Business Group, at 847.734.8811 or via e-mail at sproctor@masudafunai.com.