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Parting v. Nalco Chemical Co.





Appeal from the Circuit Court of Du Page County; the Hon. Charles R. Norgle, Judge, presiding.


Nalco Chemical Company appeals from the trial court's dismissal of its counterclaim against Peter Parting in which it sought to pierce the corporate veil of Specialist Window Cleaning Service, Inc., and impose individual liability on Parting, president of Specialist. The sole issue on review is whether the trial court erred in dismissing Nalco's counterclaim against Parting on the ground that the issues raised by the counterclaim should have been raised in Specialist's bankruptcy proceedings.

Peter Parting filed a two-count complaint against Nalco Chemical Company (Nalco), alleging that as an employee of Specialist Window Cleaning Service, Inc. (Specialist), he was engaged in window washing on Nalco's premises, and that while standing on a plank which was on scaffolds erected by Nalco, one of the scaffolds collapsed and Parting was thrown from the plank and sustained serious injuries. Count I alleged violations of the Structural Work Act (Ill. Rev. Stat. 1981, ch. 48, par. 60 et seq.), and count II was founded on common law negligence.

After filing an answer in which Nalco denied responsibility for the equipment and scaffolding, Nalco filed a third-party complaint against Specialist on July 6, 1982, alleging that there was an indemnification clause in the contract between Nalco and Specialist in which Specialist expressly agreed to idemnify Nalco for the exact claims and demands sought by Parting against Nalco. The contract was attached to the third-party complaint, and was signed by Parting on behalf of Specialist.

On August 2, 1982, Specialist filed a voluntary debtor's petition in bankruptcy court that was signed by Parting as president of Specialist. On August 4, 1982, Specialist filed an answer to the third-party complaint, admitting the existence of the indemnification clause but denying that Nalco was entitled to indemnification, stating that Specialist filed its voluntary petition in bankruptcy listing Nalco as a contingent creditor, and contending that Specialist was absolved from liability pursuant to the Federal Bankruptcy Act.

On July 11, 1983, Nalco filed a counterclaim against Parting, alleging that Parting, as shareholder and president of Specialist, had negotiated the contract and executed it on behalf of Specialist; that pursuant to the contract, Specialist agreed to indemnify and hold Nalco harmless from all claims arising out of bodily injury incurred as a result of the performance of window cleaning services; that a bankruptcy petition was voluntarily filed on behalf of Specialist on August 2, 1982; that at all relevant times, Parting exercised ownership control over Specialist such that there was unity of ownership and interest in that the separate personalities of the corporation and the individual no longer existed, as evidenced by Parting's failure to maintain adequate corporate books and financial requirements in compliance with statutory corporate formalities, by his commingling of the corporate funds and assets with his personal funds and assets, and by disbursing corporate funds to pay for Parting's personal expenses; and that adherence to the fiction of separate corporate existence would sanction a fraud and promote injustice.

Parting filed a motion to strike the counterclaim pursuant to section 2-615 of the Code of Civil Procedure (Ill. Rev. Stat. 1983, ch. 110, par. 2-615), stating that Specialist voluntarily filed a bankruptcy petition; that Nalco was listed as a creditor in the bankruptcy petition and was given notice of the petition; that Nalco had an opportunity to be heard at the first meeting of creditors but chose not to appear and never objected to the bankruptcy petition; that at no time during the bankruptcy proceeding did Nalco claim that Specialist was a "sham" corporation or assert that the bankruptcy petition was unfair or unjust; and that given that Nalco failed to object after being properly notified and given an opportunity to be heard, the preservation of the separate corporate existence of Specialist became necessary to prevent injustice. The affidavit of the bankruptcy trustee, corroborating the statements in the motion as to Nalco's nonparticipation in the bankruptcy proceedings, was attached.

In a written memorandum and during oral argument at the hearing on the motion to strike the counterclaim, Parting contended that the bankruptcy court, by virtue of 11 U.S.C. § 523 (Supp. 1978), had exclusive jurisdiction to determine the dischargeability of the debt in question. By Nalco's failure to appear, object, or litigate the issue in the bankruptcy proceedings, the issue was not properly before the trial court. Parting further argued that the determination of whether he had violated a fiduciary duty should have been made in bankruptcy court so that the benefit could inure to all the creditors and not merely Nalco.

Nalco responded by stating that while bankruptcy courts had exclusive jurisdiction to resolve issues arising under 11 U.S.C. sec. 523 (Supp. 1978), jurisdiction extends to the individual debtor before the bankruptcy court, which was Specialist, not Parting. Nalco added that the bankruptcy court decides whether there are enough assets to satisfy liabilities, not whether shareholders are liable to any individuals.

At the hearing on Parting's motion to strike the counterclaim, the trial court asked what orders were entered in the bankruptcy proceeding, and Parting answered that the petition was heard and there was a meeting of creditors and that there is no absolute discharge for a corporation because it is assumed that the corporation will dissolve, which occurred here.

The trial court granted the motion to strike pursuant to section 2-619 of the Code of Civil Procedure (Ill. Rev. Stat. 1983, ch. 110, par. 2-619), stating that as a result of the failure of Nalco to participate in the bankruptcy proceedings involving Specialist, when Parting appeared as an officer of the corporation, those issues were decided by the bankruptcy court; that notice having been given, issues involving piercing of the corporate veil or any debts of the corporation which may have also been the debts of Parting as a result of any malfeasance or unlawful conduct on his part should have been brought to the attention of the bankruptcy court; and that since the opportunity was not taken, there should be a bar to pursuing any relief as to obtaining monies from Parting.

Both parties relied below on section 523 of the Bankruptcy Code (11 U.S.C. § 523 (Supp. 1978)) as the controlling provision in the determination of whether the bankruptcy court had exclusive jurisdiction to decide the issue of piercing the corporate veil. However, our review of section 523 discloses that it is not jurisdictional, but rather merely delineates the types of debts that are not discharged under an order of discharge. Because corporations that file voluntary petitions for bankruptcy under chapter 7 of the Bankruptcy Code, as Specialist did, never receive an order of discharge (see 11 U.S.C. § 727(a)(1) (Supp. 1978); 4 Collier on Bankruptcy par. 727.01, at 727 (15th ed. 1983)), section 523 has no application to the facts before us.

Congress conferred jurisdiction on the bankruptcy courts when it enacted 28 U.S.C. § 1471 (Supp. 1978), which provides:

"(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive ...

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