Corporation, Securities & Business Law Forum
May 1999 Vol. 44, No. 3
Statements or expressions of opinion or comments appearing herein are those of
the editors or contributors, and not necessarily those of the association or section.
Contents
* Individual held personally liable for corporation's failing to comply with statutory formalities
Our third issue of the newsletter was developed by council member, Patricia C. Holland, and includes our regular columns and some interesting new ones. As always, we welcome your comments and suggestions, as well as material for the next issue of the newsletter.
Robert C. Knuepfer, Jr.
Baker & McKenzie
Editor
By James J. Moylan, Arnstein & Lehr, Chicago
One of the primary responsibilities of the section council is to provide for the professional educational needs of our members. We fulfill this task in a variety of ways, one of which is keeping our members up to date with developments in our field of law by the publication of articles in our newsletter. Another way is by presenting legal education seminars under the auspices of the ISBA's Law Ed Series.
On Tuesday, May 25, 1999, at 9:00 a.m. at the Chicago Regional Office, the section council will present, "What Every Business Lawyer and General Practitioner Should Know About the Issuance of Stock or Other Securities." I am pleased to report that this seminar is co-sponsored with the General Practice, Solo and Small Firm Section Council.
The sub-caption of this seminar puts it in perspective: "What You Do Not Know Can Hurt You and Your Client." Certainly, as practitioners we know not to accept engagements for legal representation in unfamiliar areas of law. This seminar will address practicing in areas where we are comfortable, but where we may not see the subtle application of the federal and state securities laws to the situation at hand.
We have a very good program prepared. Our speakers are very knowledgeable. The seminar materials will serve as a useful resource. In short, this will be a worthwhile program for any attorney who practices in the business arena.
Individual held personally liable for corporation's failing to comply with statutory formalities
By Loren R. Stone, Esq. and A. Jay Goldstein, Esq.
In a recent decision, the Illinois Appellate Court has held that a corporation's failure to comply with filing requirements of the Business Corporation Act regarding the adoption and use of assumed names, will subject an individual to personal liability for breach of contract.1
Hoskins Chevrolet, Inc., the plaintiff, was in the business of selling automobiles and parts. Hoskins filed a collection action against defendant, Ronald Hochberg individually and doing business as Diamond Auto Construction. Hoskins alleged that defendant ordered and received automobile parts valued at $40,198.16 for which Hoskins was never paid.
The defendant answered that he had indeed received the automobile parts in question, but only in his capacity as president of Diamond Auto Body & Repair, Inc., an Illinois corporation, and not individually.
In Hoskins' successful motion for summary judgment, it stated that at all pertinent times it had done business with Hochberg and Diamond Auto Construction. Furthermore, Hoskins stated that Diamond Auto Construction was not a corporation, nor had it ever been registered with the secretary of state as the assumed name of a corporation, as required by the Illinois Business Corporation Act.2
Defendant asserted that Illinois law did not impose personal liability upon a corporation's shareholders, directors or officers simply because the corporation used an unauthorized name.
After a hearing, the trial court granted the Hoskins' motion for summary judgment and awarded Hoskins $28,198.16, plus costs.
On appeal by Hochberg, the appellate court noted that the Business Corporation Act requires a corporation to conduct business under its corporate name unless the corporation follows specific procedures to adopt an assumed name.3 The Business Corporation Act also provides that a corporation may use the "name of a division, not separately incorporated...provided the corporation clearly discloses its corporate name."4
In upholding the trial court's decision, the appellate court noted that, in this case, the defendant neither registered the assumed name, nor did he disclose the corporate name as required by the Act. Indeed, the appellate court could not find even a good faith effort on the part of the defendant to comply with the statutory formalities which the defendant had hoped would render him the status of a de facto corporation.5
In a growing climate of client fee sensitivity, this case should serve both as an attorney reminder and client awakening of the necessity to comply with all statutory formalities of the Business Corporation Act. Furthermore, attorneys should take note that individual counties may also have assumed name filing and notice requirements in addition or in connection with those of the state.
The practice of law is rife with traps to snare the unwary. A corporation exists, generally, because the state says it does. The best course of action is to know and be familiar with all the filings required for any business entity you create. File and, if necessary, record. Failure to comply with all required corporate formalities can result in personal liability exposure for the client and legal malpractice for the practitioner.
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1 Hoskins Chevrolet, Inc. v. Hochberg, 294 Ill.App.3d 550, 691 N.E.2d 28 (Illinois Appellate Court, First Dist., 1998).
2 Business Corporation Act of 1988, 805 ILCS 5/4.15, sec. 4.15 (West 1994).
3 Id.
4Id. at 4.15(b)(2).
5 See Duvane, Inc. v. Mongreig, 193 Ill.App.3d 636, 140 Ill.Dec. 573, 550 N.E.2d 85 (1990).
Purchase of assets--The duty to WARN
By Rob Seigel
Frequently, when one corporation contracts to purchase the assets of another, the purchaser has no intention of continuing to operate the seller's business as an ongoing concern. The result is that at the time of the asset purchase closing, the seller's facility is also closed, and the seller's workforce is laid off. Assuming that the corporations are subject to the provisions of the WARN Act, two primary questions must be resolved in order to avoid potentially costly liability to the laid off employees: 1. Do the WARN Act notice requirements apply to asset purchase agreements where the employees of the seller will not be transferred to the purchaser; and 2. If notice is required, which party is responsible for providing such notice?
A recent case decided by the Eighth Circuit Court of Appeals addresses both questions. In Burnsides v. MJ Optical, 128 F.3d 700 (8th Cir. 1997), cert. den. 118 S.Ct. 1997, a corporation initially intended to purchase substantially all of the assets of a competitor and to continue operation of the competitor's business for at least 45 days. Shortly before closing the purchaser decided to buy only the equipment and inventory of the seller. Plans to continue operating the plant were abandoned. As a result, on the day the asset purchase agreement closed, the seller announced that the business was closing. The employees were laid off effective that same day. The employees filed suit under the WARN Act against both the seller and purchaser, alleging that both parties failed to comply with the 60 day notice requirements of the Act prior to closing.
The court of appeals ruled that under the WARN Act the seller is responsible for notice in the case of a sale up to and including the effective date of the sale. After that date the purchaser becomes responsible for providing notice. The court then held that because the plant closing took place on the effective date of the sale, the requirement to provide notice never passed to the purchaser. The court rejected the employees' claim that because the sale was closed early in the day, before the plant closing was announced, the purchaser became liable to provide notice. In the court's view the seller remained liable as the employer for the entire day encompassed by the sale, no matter what time of the day the asset purchase agreement was closed. The court then concluded that the seller had failed to provide adequate notice of the sale. Although the seller could not have been aware of the necessity to close until three days before the closing was announced, the seller was obligated, in the court's view, to provide notice of the closing to its employees at that time.
In announcing its decision, the Eighth Circuit expressed its view that the notice provisions of the WARN Act probably would not apply to the purchaser in this case. The court indicated its inclination to accept the view of other courts that have read the WARN Act to impose an obligation on a purchaser only if at least some employees of the seller are to be transferred to the purchaser's employ after the sale. The lead case supporting this proposition is Headrick v. Rockwell International Corp., 9 IER Cases 865, 24 F.3d 1272 (10th Cir. 1994). In this case the seller was a government contractor operating a nuclear power plant. The assets of the seller were transferred to another company which hired all of the predecessor's employees and assumed the collective bargaining agreement. Two years later, some employees filed a WARN Act claim since no notice of termination had been given even though the employees of the predecessor had technically been terminated before being "hired" by the successor. The court (Justice White sitting on the panel by designation) found that no loss of employment had occurred for WARN Act purposes. The court concluded that this was not a plant closing or mass layoff, and that the obligation to warn skipped directly from the seller to buyer without being triggered by the sale. Since the requisite number of employees were not laid off or terminated following the sale, no notice obligation was created. See also, Wiltz v. M/G Transport Services, 128 F.3d 957 (6th Cir. 1997); Theatrical Employees v. Compact Video, 10 IER Cases 612 (9th Cir. 1995) (cert. den. 116 S.Ct. 514).
These case highlights the importance of consulting with labor counsel when negotiating an asset purchase agreement in situations in which the WARN Act could apply. Whenever a sale of assets will result in an employment loss of sufficient significance to trigger a WARN Act obligation, notice of the anticipated lay off should be provided by the seller at least 60 days before the lay off if possible, or if less than 60 days remain, as soon as possible. If the asset purchaser has no intention of purchasing the business as a going concern or retaining any of the seller's employees, the purchaser will likely be found by the courts to have no WARN Act obligation. Even so, the parties are advised to discuss the issue of notice prior to the closing in order to ensure that proper notice is provided by the proper party. Sellers should not rely upon the purchaser to provide notice just because the plant closing will not occur until later in the day of the transaction closing. The seller should presume that it will continue to be regarded as the employer until the close of the business day in which the transaction closing took place.
Recent developments in restrictive covenants
By David E. Doyle
Two recent cases involve the enforceability of noncompetition agreements under Illinois law. In the first case, the court was asked to determine the type and amount of activity that a person can perform in the restricted area without violating the covenant. In the second case, the court was asked to determine whether noncompete payments were still required to be made after an assignment of the agreement.
Sheehy v. Sheehy, 702 N.E.2d 200 (1st Dist. 1998), arose out of a petition filed pursuant to section 12.56 of the Illinois Business Corporation Act by the plaintiff, John Sheehy, against the defendant, James Sheehy, and others, back in 1995. The result of such action was the sale of the defendant's shares in the corporation, which operated a funeral home, pursuant to a negotiated purchase agreement. The purchase agreement provided for the payment of the purchase price over four years, and it contained a restrictive covenant. The restrictive covenant stated that for four years the defendant would not, among other things, directly or indirectly, manage, operate, join, participate in, or be connected as an employee with, any funeral home business within 10 miles of the plaintiff's funeral home. Several months after the purchase, the defendant became the managing funeral director of a branch of a larger, multi-facility funeral home company. The branch he joined was located outside of the noncompete area, but the company had other facilities within the restricted area. The defendant attended continuing education classes and two business meetings within the restricted area, and he appeared as an employee of the new company at funeral services within the restricted area.
The First District Appellate Court held that the defendant's employment described above did not violate the restrictive covenant. The court stated that if the clause was interpreted so that he could not be employed by a company that had a branch in the noncompete area, even though he did not work at the branch, it would be too broad to enforce. The court also held that participation at the meetings and classes within the noncompete area did not violate the restrictive covenant, and even if they did, it would be a technical violation and the effect on plaintiff would be de minimus. Moreover, the court stated that there was no threat of a loss of business as a result of such meetings and classes. Finally, the court stated that the defendant could enter into cemeteries to conduct funerals in the noncompete area without violating the covenant, as any other interpretation would render him unemployable.
Grundstad v. Ritt, WL 25621 (7th Cir. 1999), involved a dispute over another noncompete agreement, but it focused on the enforceability of the guarantee of noncompete payments after the agreement was assigned. In this case, a first company, Atlantic Associates, Ltd. ("Atlantic") agreed to pay a second company, Atlantic International Vending and Gaming, Ltd. (the "assignor") for a period of 13 years in exchange for the assignor's agreement to refrain from competition. The plaintiff, Grundstad, personally guaranteed Atlantic's promise to make payments. The assignor then assigned its rights under the agreement to an individual named Ritt. Both companies subsequently ceased doing business, the assignor stopped making payments, and the assignee of the payment rights, Ritt, sued Grundstad under the personal guaranty. Grundstad claimed that the guaranty had been voided by the assignment.
The Seventh Circuit Court of Appeals noted that under Illinois law, if the creditor and principal obligor have entered into an agreement materially different from that contemplated by the original guaranty, the guarantor will be released. It also stated that Illinois law does not generally favor the assignment of guarantees, but the court will look to the facts of each case to determine whether the assignment materially changed the risks to the guarantor. In this case, the court held that the assignment did not materially change the risks to the guarantor, as the assignment could not transfer the duty not to compete without Atlantic's consent. The court also refused to accept the plaintiff's argument that upon the dissolution of the assignor, there was no further consideration for the remaining payments. This issue had already been determined by an arbitrator, who determined that there was a single contract calling for 13 years of forbearance, and the court would not review the arbitrator's decision. The court indicated, however, that if a noncompete covenant was interpreted as a series of yearly covenants not to compete (as opposed to a single contract), there would be merit in the argument that dissolution would terminate the obligation to make subsequent noncompete payments.
