Appeal from the Circuit Court of McHenry County. No. 97--LA--245 Honorable Michael J. Sullivan, Judge, Presiding.
The opinion of the court was delivered by: Justice O'malley.
Defendants, Allen D. Petersen, William F. Wright, Robert W. Brady, Charles D. Peebler, Jr., American Tool Companies, Inc., and Petersen Manufacturing Company, Inc., appeal from an order of the circuit court denying their motion to dismiss the second amended complaint of plaintiff, Newell Company. On this interlocutory appeal, the supreme court has directed us to answer two certified questions.
The first certified question is as follows:
"Whether the Illinois borrowing statute for limitations periods, 735 ILCS 5/13--210 [(West 1994)], is inapplicable where none of the parties to a cause of action was an Illinois resident at the time the action accrued, but where one of the parties later becomes an Illinois resident within the foreign limitations period."
We hold that our borrowing statute is applicable in the above situation.
The second certified question is as follows:
"Whether section 218(c) of the Delaware Corporate Code [Del. Code Ann. tit. 8, §218(c) (1985)] mandated, pursuant to the internal affairs doctrine, a maximum ten year term for Section 5(a)-(c) of the Shareholder Agreement entered into by the parties regardless of whether the parties actually agreed upon or intended a longer term."
We hold that the 10-year time limit in section 218(c) of the Delaware corporate code applied to section 5(a)-(c) of the shareholder agreement. We remand.
On August 22, 1997, plaintiff filed a nine-count complaint against defendants Allen D. Petersen (Petersen), William F. Wright, Robert W. Brady (Brady), American Tool Companies, Inc. (ATC), and Petersen Manufacturing Co., Inc. (PMC). On January 25, 1999, plaintiff filed a second amended complaint (complaint) adding Charles D. Peebler, Jr., as a defendant.
In relevant part, the complaint alleges that in 1985 Petersen, Brady, plaintiff, and others who are not parties to this appeal acquired the stock of PMC from other Petersen family members during a leveraged buyout. To effectuate the buyout, ATC was created as a holding company for all outstanding PMC common stock. ATC is a Delaware corporation with its principal place of business in Illinois. Petersen is chairman and chief executive officer of ATC and currently resides in Illinois. Since the buyout PMC has been a wholly owned subsidiary of ATC. Plaintiff also is a Delaware corporation with its principal place of business in Illinois. PMC is a Nebraska corporation with its principal place of business in Nebraska.
In connection with the buyout, a shareholders' agreement and irrevocable proxy were executed on June 21, 1985. Plaintiff attached a copy of the agreement to its complaint. The parties to the agreement include plaintiff, Petersen, Brady and others not relevant to this appeal. The agreement refers to all shareholders other than plaintiff as "Management Shareholders." The agreement provides that all Management Shareholders have the right to transfer shares among themselves. Section 5 of the agreement contains a voting agreement pursuant to which the parties pledged that each of them would vote their ATC stock so as to elect a board of directors for ATC composed of four directors designated by Petersen and three designated by plaintiff.
A provision in the shareholders' agreement entitled "Governing Law" provides:
"This agreement shall be governed by, and construed and enforced with the laws of Nebraska without giving effect to the provisions, policies or principles thereof respecting conflict or choice of laws."
Following the buyout of PMC stock, plaintiff owned 3,500 shares, or about 39%, of the 9,000 outstanding shares of ATC's class A voting stock. Petersen owned 3,972, or about 44%, of the class A shares. Subsequently, plaintiff acquired an additional 1,000 class A shares for a total of 4,500, or 45%, of the outstanding shares.
In June 1992 and November 1994 Petersen purchased stock from other Management Shareholders and thereby obtained a total of 5,530, or 55%, of the class A shares. Plaintiff continued to own the remaining 4,400 class A shares comprising 45% of the total shares. When the June 1992 stock purchases occurred by which Petersen obtained 50.44% of the class A stock, no parties to this action were residents of Illinois. In 1994, Petersen became a resident of Illinois, where he resides today. In December 1996 Petersen removed two of the ATC directors that plaintiff had designated and reduced the board of directors from seven members to five members.
In counts I through IX of its complaint plaintiff alleged, respectively, breach of fiduciary duty, breach of a shareholders' agreement, breach of an employment agreement, breach of covenants of good faith and fair dealing, fraud and fraudulent concealment, oppression of a minority shareholder, civil conspiracy, tortious interference with a shareholders' agreement, and tortious interference with an employment agreement. Each count alleged numerous acts of wrongdoing by defendants.
Counts I, II, IV, V, VI, VII, and VIII of the complaint are all premised partly on Petersen's purchase of the class A voting stock of ATC from other Management Shareholders. Plaintiff asserted that these purchases were coerced by Petersen, who threatened to fire the other Management Shareholders if they refused to sell him their stock. Counts I, II, IV, VI, VII, and VIII are all premised partly on Petersen's removal of the directors plaintiff had designated, which, plaintiff asserted, contravened the voting agreement in section 5 of the shareholders' agreement. Defendants moved to dismiss the complaint pursuant to sections 2--603(b), 2--615, and 2--619(a)(5) of the Code of Civil Procedure (735 ILCS 5/2--603(b), 2--615, 2--619(a)(5) (West 1998)). They contended, inter alia, that plaintiff's causes of action based on Petersen's June 1992 purchases of the class A voting stock of ATC arose in Nebraska while none of the parties were Illinois residents. Therefore, defendants argued, section 13--210 of the Code of Civil Procedure (735 ILCS 5/13--210 (West 1994)) requires that the limitations law of Nebraska, not Illinois, be applied to plaintiffs' contract and tort claims based on Petersen's 1992 stock purchases. Those claims, defendants observe, are barred under Nebraska law.
Defendants also argued that, because the voting agreement contained in section 5 of the shareholders' agreement concerned the internal operations of ATC, the "internal affairs doctrine" mandated that the agreement be deemed controlled by the law of the state of ATC's incorporation, that is, Delaware. Defendants asserted that, by operation of section 218(c) of the Delaware corporate code, which then imposed a 10-year limit on shareholder voting agreements, the voting agreement expired on June 21, 1995, well before Petersen removed the directors plaintiff had designated.
Plaintiff replied that Petersen's establishment of Illinois residency before the Nebraska limitations periods expired triggered an exception to section 13--210 as set forth in McGuigan v. Rolfe, 80 Ill. App. 256 (1899), and subsequent cases. Plaintiff also argued that the parties' choice of Nebraska law to govern the shareholders' agreement superseded the internal affairs doctrine.
The trial court, holding that section 13--210 did not apply to plaintiff's claims and that Nebraska law governed the shareholders' agreement, denied defendants' motion to dismiss but granted their subsequent motion under Supreme Court Rule 308 (155 Ill. 2d R. 308) to certify the questions indicated above for interlocutory appeal. We initially denied defendants' application for leave to file an interlocutory appeal under Rule 308. The supreme court denied defendants' petition for leave to appeal but, exercising its supervisory power, ordered this court to grant the application for interlocutory appeal and answer the two certified questions.
Concerning the first certified question, defendants first argue that no Illinois case has authoritatively announced that section 13--210 applies only if all parties to the action remain non-Illinois residents until the expiration of the limitations period of the state in which the cause of action accrued. Defendants acknowledge that this "continuous non-Illinois residency requirement" has been recited in many Illinois cases. Nonetheless, defendants assert, the requirement was first announced in the dicta of very early supreme court cases such as Hyman v. Bayne, 83 Ill. 256 (1876), and Wooley v. Yarnell, 142 Ill. 442 (1892), and has since survived exclusively in the dicta of later cases, the most recent being Employers Insurance of Wausau v. Ehlco Liquidating Trust, 309 Ill. App. 3d 730 (1999). Defendants claim that the correct state of the law is represented in the First District case of First National Bank of Boulder v. Hurlbut, 224 Ill. App. 297 (1922), in which the court applied the foreign statute of limitations despite the fact that not all the parties maintained non-Illinois residency continuously until the foreign limitations period expired.
Defendants next argue that the continuous non-Illinois residency requirement contravenes the legislature's purpose in enacting section 13--210 of promoting uniformity of limitations periods and discouraging forum shopping. Defendants maintain that the requirement encourages forum shopping by permitting a plaintiff to gain the benefit of Illinois limitations law simply by taking up residence in Illinois prior to the expiration of the applicable foreign limitations period. Defendants also urge that the requirement permits a plaintiff to seize upon the fact that any party to the suit happens to establish Illinois residency before the expiration of the foreign limitations period. The requirement also destroys uniformity, defendants submit, by making the controlling limitations period change with the residencies of the parties.
Plaintiff responds that the Illinois courts' construction of section 13--210 as containing a continuous non-Illinois residency requirement enjoys the force of law because it has been stated unequivocally in Illinois cases for over a 100 years. Plaintiff contends that Hurlbut is consistent with the requirement, as was later recognized by the First District itself in Orschel v. Rothschild, 238 Ill. App. 353 (1925).
Concerning the second certified question, defendants argue that Illinois, Nebraska, and Delaware all follow the "internal affairs" doctrine, according to which a state should not regulate the internal operations of a foreign corporation but leave such governance to the state of incorporation. Relying primarily on the Delaware cases of Rosenmiller v. Bordes, 607 A.2d 465, 469 (Del. Ch. 1991), and McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987), the defendants submit that the internal affairs doctrine is grounded not only in sound policy but in the constitutional principles of due process, equal protection, and full faith and credit. The parties' choice of law provision must yield to these interests, defendants assert.
In response, plaintiff argues that it is the internal affairs of PMC, not ATC, that plaintiff's claims concern because ATC was a mere "shell" company for PMC when the wrongful acts plaintiff alleges occurred. As PMC is incorporated in Nebraska, whose law the parties chose to govern the shareholders' agreement, there is no conflict between the choice of law provision and the internal affairs doctrine. Plaintiff alternatively argues that this case falls within an exception to the internal affairs doctrine because ATC's only contact with Delaware is the fact that it was incorporated there.
I. The First Certified Question
Because they only fix the time within which the remedy for a particular wrong may be sought and are not designed to alter substantive rights, statutes of limitations generally are considered procedural in nature. Fredman Brothers Furniture Co. v. Department of Revenue, 109 Ill. 2d 202, 209 (1985). Generally, the lex fori, or law of the forum in which relief is sought, governs matters of procedure. Marchlik v. Coronet Insurance Co., 40 Ill. 2d 327, 329 (1968). Thus, an action cannot be maintained in the forum state if it is barred either by the statute of limitations of the forum state or by a statute of limitations that the forum state has "borrowed" from another jurisdiction in accordance with the forum state's "borrowing statute." Restatement (Second) of Conflicts of Law §142, at 396-97 (1971). The Illinois borrowing provision, codified in section 13--210, states:
"Foreign limitation. When a cause of action has arisen in a state or territory out of this State, or in a foreign country, and, by the laws thereof, an action thereon cannot be maintained by reasons of the lapse of time, an action thereon shall not be maintained in this State." 735 ILCS 5/13--210 (West 1994).
The borrowing provision is identical to its former embodiment in section 20 of the Limitations Act (Ill. Rev. Stat. 1969, ch. 83, par. 21). We use section 13--210 and section 20 interchangeably in what follows.
According to the most recent published Illinois case construing section 13--210, the section applies where (1) the cause of action accrued in another jurisdiction; (2) the limitations period of that jurisdiction has expired; and (3) all parties were non-Illinois residents at the time the action accrued and remained so until the foreign limitations period expired. Ehlco, 309 Ill. App. 3d at 737. The parties do not dispute that plaintiff's causes of action accrued in Nebraska when no party was an Illinois resident. Thus, we are concerned only with the question of whether Illinois has a continuous non-Illinois residency requirement that would preclude the application of the Nebraska limitations statute due to Petersen's having established Illinois residency before the Nebraska limitations period expired.
Relevant to the discussion that follows is the interplay of section 13--210 with section 13--208(a) of the Code of Civil Procedure (735 ILCS 5/13--208(a) (West 1994)), which provides:
"Absence from State. (a) If, when the cause of action accrues against a person, he or she is out of the state, the action may be commenced within the times herein limited, after his or her coming into or return to the state; and if, after the cause of action accrues, he or she departs from and resides out of the state, the time of his or her absence is no part of the time limited for the commencement of the action." 735 ILCS 5/13--208(a) (West 1994).
Section 13--208(a) formerly was section 18 of the Limitations Act (Ill. Rev. Stat. 1969, ch. 83, par. 19) (section 18). Section 18 included a provision that immediately followed the above text:
"But the foregoing provisions of this section shall not apply to any case, when, at the time the cause of action accrued or shall accrue, neither the party against nor in favor of whom the same accrued or shall accrue, were or are residents of this state." Ill. Rev. Stat. 1969, ch. 83, par. 19.
In Haughton v. Haughton, 76 Ill. 2d 439, 444-46 (1979), the supreme court held that this residency requirement violated equal protection guarantees. The residency requirement does not appear in the present text of section 13--208(a).
After close review of the relevant cases, we conclude that the continuous non-Illinois residency requirement is the product of a misinterpretation of our supreme court's analysis and holding in Bayne, 83 Ill. 256, decided in 1876. Notably, while the requirement that all parties to a suit be non-Illinois residents at the time the cause of action accrues has been carefully justified through statutory construction, there has been no attempt at a rationale for the requirement that all parties to a cause of action remain non-Illinois residents until the expiration of the limitations period of the jurisdiction in which it arose. Instead, the requirement has been continually recited without a question as to its underpinnings in legal analysis or policy. Moreover, the most recent supreme court cases applying section 20 seem to ignore the requirement, giving us reason to believe it is at least disfavored if it has not been discarded sub silentio.
We explain our holding by tracing the development of the continuous non-Illinois residency requirement. As authority for its recitation of the requirement, Ehlco relies on Miller v. Lockett, 98 Ill. 2d 478 (1983), Coan v. Cessna Aircraft, 53 Ill. 2d 526 (1973), Delta Bag Co. v. Frederick Leyland & Co., 173 Ill. App. 38 (1912), and National Bank of Denison v. Danahy, 89 Ill. App. 92 (1899). Coan relies on Davis v. Munie, 235 Ill. 620 (1908), Strong v. Lewis, 204 Ill. 35 (1903), Wooley, 142 Ill. 442, Delta Bag, 173 Ill. App. 38, Berry v. Krone, 46 Ill. App. 82 (1891), and Story v. Thompson, 36 Ill. App. 370 (1890). Miller relies on Orschel v. Rothschild, 238 Ill. App. 353 (1925), Chicago Mill & Lumber Co. of Cairo v. Townsend, 203 Ill. App. 457 (1916), and Delta Bag, 173 Ill. App. 38. From these cases and the cases they cite, the lineage of the continuous non-Illinois residency requirement can be traced back to three foundational cases: Wooley, Bayne, and Hyman v. McVeigh, 87 Ill. 708 (1877) (unpublished opinion). McVeigh is unpublished, but its full text is reproduced in 10 Chicago Legal News, at 157 (1877).
The continuous non-Illinois residency requirement is in its nascency in Wooley. In Wooley, the plaintiff's cause of action accrued in Illinois while she and the defendant were residents of Illinois. The defendant subsequently left Illinois and established residence first in Massachusetts and then in New Hampshire, where he remained when plaintiff filed suit. Citing section 20 (then Ill. Rev. Stat. 1874, ch. 83, §20) defendant argued that ...