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Buckley v. Abuzir

Court of Appeals of Illinois, First District, Fourth Division

April 10, 2014

JOHN BUCKLEY and MAMA GRAMM'S BAKERY, INC., an Illinois Corporation, Plaintiffs-Appellants,
v.
HAITHAM ABUZIR, a/k/a Mike Abuzir, Defendant-Appellee

Page 1167

Appeal from the Circuit Court of Cook County. No. 10 CH 27736. Honorable LeRoy K. Martin, Jr., Judge Presiding.

Reversed and remanded.

SYLLABUS

In an action to pierce the corporate veil of a corporation and collect directly from defendant a judgment entered against the corporation for violating the Illinois Trade Secrets Act by wrongfully acquiring plaintiffs' recipes and customer lists, the trial court erred in dismissing plaintiffs' complaint, notwithstanding defendant's contentions that he was not a shareholder, officer, director, or employee of the corporation and there were no allegations that he engaged in any wrongdoing, since defendant's status as a nonshareholder did not preclude veil-piercing and plaintiffs' allegations were sufficient to survive dismissal; therefore, the judgment was reversed and the cause was remanded for further proceedings.

FOR APPELLANTS: John P. Brattoli, Joseph L. Planera, Joseph L. Planera & Assoc.

FOR APPELLEE: Arthur E. Rosenson, Cohen Rosenson & Zuckerman LLC.

JUSTICE EPSTEIN delivered the judgment of the court, with opinion. Presiding Justice Howse and Justice Lavin concurred in the judgment and opinion.

OPINION

EPSTEIN, JUSTICE.

Page 1168

[¶1] Plaintiffs Mama Gramm's Bakery, Inc. (Mama Gramm's) and John Buckley seek to pierce the corporate veil of Silver Fox Pastries, Inc. (Silver Fox) and collect a judgment directly from defendant Haitham Abuzir. The trial court granted defendant's motion to dismiss plaintiffs' amended complaint pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2010)). Plaintiffs argue on appeal that their complaint should not have been dismissed, because they alleged sufficient facts to show that defendant created Silver Fox as a dummy corporation through which he violated the Illinois Trade Secrets Act (765 ILCS 1065/1 et seq . (West 2006)). We reverse the trial court's judgment and remand for further proceedings.

[¶2] BACKGROUND

[¶3] In the underlying action, the circuit court entered a default judgment in plaintiffs' favor in the amount of $421,582.50 for Silver Fox's violation of the Illinois Trade Secrets Act (765 ILCS 1065/1 et seq .), including Silver Fox's wrongful acquisition of Mama Gramm's recipes and customer lists. Unable to collect from Silver Fox, plaintiffs turned their attention to defendant. On June 29, 2010, plaintiffs filed a complaint in a separate cause of action seeking to pierce Silver Fox's corporate veil. Plaintiffs alleged that, although defendant's sister, Suna Abuzir, " held herself out as being Silver Fox's 'owner,'" and his brother-in-law, Ali Alsahli, was Silver's Fox's president and registered corporate agent, defendant funded Silver Fox, " made all business decisions," and " exercised ownership control over the corporation SILVER FOX to such a degree that separate personalities of the corporation and [defendant] did not exist."

[¶4] Defendant filed a motion to dismiss the complaint on August 17, 2010, arguing that the corporate veil could not be pierced, because he was never a director, officer, shareholder, or employee of Silver Fox. On December 22, 2010, the trial court granted defendant's motion. On January 13, 2011, plaintiffs filed a motion to reconsider and cited Fontana v. TLD Builders, Inc., 362 Ill.App.3d 491, 840 N.E.2d 767, 298 Ill.Dec. 654 (2005), for the proposition that the defendant need not be a shareholder for the court to pierce the corporate veil and hold the defendant personally liable. The circuit court granted plaintiffs' motion on April 6, 2011.

[¶5] Plaintiffs filed an amended complaint on April 13, 2011, expanding some of the allegations they set forth in the original complaint. Defendant filed a section 2-619 motion to dismiss on May 2, 2011, arguing that he merely supported Silver Fox, a business owned and managed by his sister and brother-in-law, and that providing funds to start the business, negotiating Silver Fox's lease, and arranging accounts and sales agreements provided an insufficient basis for piercing the corporate veil. Defendant further argued that plaintiffs failed to allege that he was involved in violating the Illinois Trade Secrets Act. On July 1, 2011, the circuit court granted defendant's motion to dismiss with prejudice.

[¶6] A different panel of this court held on appeal that the motion to dismiss was improperly brought under section 2-619.

Page 1169

Buckley v. Abuzir, 2012 IL App (1st) 112246-U. Accordingly, the circuit court's judgment was reversed and the cause remanded for further proceedings. Id. On remand, on September 19, 2012, defendant again filed a motion to dismiss, this time pursuant to section 2-615. On January 23, 2013, the circuit court again granted defendant's motion with prejudice. The court also denied plaintiffs' request for leave to amend their claim. Plaintiffs timely appealed.

[¶7] ANALYSIS

[¶8] Plaintiffs argue that the trial court should have denied defendant's motion to dismiss, because their amended complaint alleged sufficient facts to pierce the corporate veil, where they claimed defendant created Silver Fox as a sham corporation, through which he obtained plaintiffs' recipes and customer lists. Defendant counters that Illinois courts only pierce the corporate veil to impose liability on a corporation's shareholders, officers, directors, or employees, and he was none of these. Defendant further argues that plaintiffs failed to allege that he engaged in any wrongdoing. Before we discuss the merits of the section 2-615 dismissal, we address another concern raised by the parties: whether it is proper to bring a separate action to pierce the corporate veil.

[¶9] Defendant complains that he was not a party to the underlying trade secrets action and, therefore, the instant action deprived him of the ability to defend himself against those allegations. Piercing the corporate veil is not a cause of action, but, rather, a means of imposing liability in an underlying cause of action. Peetoom v. Swanson, 334 Ill.App.3d 523, 527, 778 N.E.2d 291, 268 Ill.Dec. 305 (2002). Parties may, however, bring a separate action to pierce the corporate veil for a judgment already obtained against a corporation. Lange v. Misch, 232 Ill.App.3d 1077, 1081, 598 N.E.2d 412, 174 Ill.Dec. 215 (1992); see also Pyshos v. Heart-Land Development Co., 258 Ill.App.3d 618, 624, 630 N.E.2d 1054, 196 Ill.Dec. 889 (1994) (" [A] judgment creditor may choose to file a new action to pierce the corporate veil to hold individual shareholders and directors liable for the judgment of the corporation." ); Westmeyer v. Flynn, 382 Ill.App.3d 952, 956, 889 N.E.2d 671, 321 Ill.Dec. 406 (2008) (same); Miner v. Fashion Enterprises, Inc., 342 Ill.App.3d 405, 414-15, 794 N.E.2d 902, 276 Ill.Dec. 652 (2003) (same). The instant suit was therefore the proper method for attempting to pierce the corporate veil. We also note that, if it is proved in the corporate veil suit that defendant was the alter ego of the corporation, then the decision not to defend the underlying suit would have been defendant's, ipso facto .

[¶10] We turn now to the merits. Under section 2-615, courts must ask whether the facts alleged in the complaint, when viewed in the light most favorable to the plaintiff, are sufficient to state a cause of action upon which relief may be granted. Doe-3 v. McLean County Unit District No. 5 Board of Directors, 2012 IL 112479, ¶ 16, 973 N.E.2d 880, 362 Ill.Dec. 484. Courts must accept all well-pleaded facts and all reasonable inferences drawn from those facts as true. Marshall v. Burger King Corp., 222 Ill.2d 422, 429, 856 N.E.2d 1048, 305 Ill.Dec. 897 (2006). Courts should grant a section 2-615 motion to dismiss only if no set of facts could be proved that would entitle the plaintiff to recovery. Duffy v. Orlan Brook Condominium Owners' Ass'n, 2012 IL App (1st) 113577, ¶ 14, 981 N.E.2d 1069, 367 Ill.Dec. 341. Review of a section 2-615 dismissal is de novo. Doe-3, 2012 IL 112479, ¶ 15, 973 N.E.2d 880, 362 Ill.Dec. 484.

Page 1170

[¶11] Piercing the veil is the most litigated issue in corporate law. Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036, 1036 (1991). It is also poorly understood. Id.; Berkey v. Third Avenue Ry. Co., 244 N.Y. 84, 94, 155 N.E. 58, 61 (N.Y. 1926) (Justice Benjamin Cardozo famously wrote that veil-piercing has been " enveloped in the mists of metaphor." ). Illinois courts, like courts across the nation, frequently claim to be reluctant to pierce the corporate veil. See, e.g., Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 371 Ill.App.3d 1019, 1033, 864 N.E.2d 927, 309 Ill.Dec. 686 (2007); Roiser v. Cascade Mountain, Inc., 367 Ill.App.3d 559, 566, 855 N.E.2d 243, 305 Ill.Dec. 352 (2006); Cosgrove Distributors, Inc. v. Haff, 343 Ill.App.3d 426, 429, 798 N.E.2d 139, 278 Ill.Dec. 292 (2003); Ted Harrison Oil Co. v. Dokka, 247 Ill.App.3d 791, 795, 617 N.E.2d 898, 187 Ill.Dec. 441 (1993); see also Stephen B. Presser, Piercing the Corporate Veil, § 2.14 (2013) (" Illinois follows the familiar two-part test for piercing the veil, and the courts of the state appear to apply the test in a relatively conservative manner, so that it is comparatively difficult to pierce the corporate veil in the state." ). Yet studies show that Illinois courts pierce the corporate veil in approximately 42% to 52% of cases, near the average for American courts. Thompson, supra ¶ 11, at 1048 (Illinois courts pierce approximately 42% of the time); Peter B. Oh, Veil-Piercing, 89 Tex. L. Rev. 81, 107, 115 (2010) (American courts pierce the corporate veil 48.51% of the time; Illinois does so 52.50% of the time). Veil-piercing occurs almost exclusively in closely held corporations, especially one-person corporations, such as the one here. Id. at 110; Thompson, supra ¶ 11, at 1055.

[¶12] Despite the haze surrounding veil-piercing, Illinois courts have developed fairly uniform rules on the subject. A corporation is an entity separate and distinct from its shareholders, directors, and officers. In re Rehabilitation of Centaur Insurance Co., 158 Ill.2d 166, 172, 632 N.E.2d 1015, 198 Ill.Dec. 404 (1994). Indeed, the primary purpose of corporations is to insulate stockholders from unlimited liability. Peetoom, 334 Ill.App.3d at 526. Courts may pierce the corporate veil, however, where the corporation is so organized and controlled by another entity that maintaining the fiction of separate identities would sanction a fraud or promote injustice. Id. at 527. A party seeking to pierce the corporate veil must make a substantial showing that one corporation is a dummy or sham for another. In re Estate of Wallen, 262 Ill.App.3d 61, 68, 633 N.E.2d 1350, 199 Ill.Dec. 359 (1994).

[¶13] Illinois courts will pierce the corporate veil " where: (1) there is such a unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exist, and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances." Tower Investors, 371 Ill.App.3d at 1033-34. To overcome a section 2-615 motion to dismiss, the party seeking to pierce the corporate veil must adequately plead facts to satisfy both of these prongs. South Side Bank v. T.S.B. Corp., 94 Ill.App.3d 1006, 1010, 419 N.E.2d 477, 50 Ill.Dec. 369 (1981); Divco-Wayne Sales Financial Corp. v. Martin Vehicle Sales, Inc., 45 Ill.App.2d 192, 197, 195 N.E.2d 287 (1963). The allegations will be insufficient to withstand a motion to dismiss if they amount to conclusory statements or are unsupported by facts which justify piercing. Hills of Palos Condominium Ass'n v.

Page 1171

I-Del, Inc., 255 Ill.App.3d 448, 479-80, 626 N.E.2d 1311, 193 Ill.Dec. 760 (1993). We examine the two prongs in turn.

[¶14] Unity of Interest and Ownership

[¶15] In determining whether the first prong is satisfied, courts will examine many factors, including " (1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) non-functioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm's-length relationships among related entities; and (11) whether, in fact, the corporation is a mere faç ade for the operation of the dominant stockholders." Gass v. Anna Hospital Corp., 392 Ill.App.3d 179, 186, 911 N.E.2d 1084, 331 Ill.Dec. 854 (2009) (citing Fontana, 362 Ill.App.3d at 503).

[¶16] Plaintiffs alleged the presence of the majority of these factors in paragraphs 12 through 23 of their amended complaint:

" 12. SILVER FOX never filed any annual reports with the Secretary of State.
13. SILVER FOX never had any officers. If SILVER FOX did have any officer named, any such officer had no duties whatsoever, nor any decision making ...

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