Introduction
Research of Illinois cases
that support the argument that a shareholder or officer of
a corporation cannot be held personally liable for injuries
sustained by an employee of that corporation.
Relevant Cases
1. JMH PROPERTIES, INC.,
D/B/A QUINCY BUILDING MATERIALS v. THE INDUSTRIAL COMMISSION
et al 332 Ill. App. 3d 831 (2002)
An employee was injured
in a work-related accident and he filed two claims for workers'
compensation benefits: the first seeking compensation from
the company that employed him and the second seeking compensation
from the principal stockholder of that company. An arbitrator
awarded the employee temporary benefits and medical expenses,
but denied the employee's claim against the stockholder.
Six months later, the employee
filed a lawsuit against the company and the stockholder, alleging
that he had not been paid. The trial court entered judgment
against the company, but it refused topierce the corporate
veil and dismissed the employee's action against the stockholder.
The employee appealed the judgment dismissing his claim against
the stockholder, but abandoned his appeal. Thereafter, the
employee filed a new complaint with the Industrial Commission
that asked it to pierce the corporate veil. The Commission
agreed and issued an order holding the stockholder personally
liable for the judgment against his company. The appellate
court held that the Commission exceeded its authority under
the Illinois Worker's Compensation Act, 820 Ill. Comp. Stat.
Ann. 305/1 et seq. (West 2000).
The Court of Appeals held
that the Illinois Act specifically provides for the award
of additional compensation and attorney fees when an employer
delays or fails to make payments pursuant to an award. 820
Ill. Comp. Stat. Ann. 305/16, 19(k), (l) (West 2000). However,
the Act does not grant the Illinois Industrial Commission
the power to grant equitable relief, such as the piercing
of the corporate veil when an employer does not pay an award,
nor does the Act provide for individual liability against
a corporation's officers and directors or its shareholders.
Any alteration in the Act so as to allow the piercing of the
corporate veil and reaching officers, directors, and shareholders
must come from the legislature and not the courts.
2. WEBB v. WEBB 180 Ill.
App. 3d 619 (1989)
The claimant obtained a
judgment against a corporation for workers' compensation benefits,
which included sanctions and attorney fees. The corporation
became insolvent and the claimant filed an action against
the sole stockholder of the corporation to collect on the
unsatisfied award. The trial court dismissed his complaint
for failure to state a claim and he challenged the decision.
On appeal the court affirmed and held that claimant failed
to prove that corporation was an alter ego of the stockholder.
There was no statutory authority for holding a corporate officer
or stockholder responsible for the workers' compensation claims
against a corporation and the claimant failed to show any
factors that would justify piercing the corporate veil.
3. JACOBSON v. BUFFALO ROCK
SHOOTERS SUPPLY 278 Ill. App. 3d 1084 (1996)
Two employees were killed
in an explosion while working for the corporate employer.
The employees' survivors sought recovery from the corporation's
shareholders, two of which were also killed. The Court of
Appeals found that the evidence did not support piercing the
corporate veil and imposing liability on the shareholders.
Thus, the trial court's ruling was not against the manifest
weight of the evidence. The court did not agree with the survivors
that the employer did not observe corporate formalities. The
bare fact that two businesses owned by a shareholder operated
out of the same building did not show that corporate funds
or assets were commingled with the funds or assets of the
shareholder's separate businesses. The court concluded that
the employer was adequately capitalized. There was no evidence
presented that the employer minimized its assets to the detriment
of its creditors or was undercapitalized in relation to the
amount of business conducted or its corporate obligations.
Also, the employer's failure to obtain workers' compensation
insurance was not an adequate basis for piercing the corporate
veil.
4. MAX SHEPARD, INC. v. THE
INDUSTRIAL COMMISSION, et al 348 Ill. App. 3d 893 (2004)
The Court of Appeals held
that The Illinois Workers' Compensation Act, 820 Ill. Comp.
Stat. Ann. 305/1 et seq. (1998), does not provide for individual
liability against corporate officers and directors, and the
Illinois Industrial Commission lacks the power to pierce the
corporate veil even in circumstances where a corporate employer
does not, or cannot, pay an award.
5. LYLE PEDERSON v. PARAGON
POOL ENTERPRISES 214 Ill. App. 3d 815 (1991)
The facts of the case were
that the victim was injured while he was cleaning a condominium's
pool and filter. The victim filed an action but failed to
attach a summons, the action was never served on the defendant,
and over a year later, the victim obtained a voluntary dismissal
of the action. A year after the dismissal, the victim refiled
the action, but it was dismissed for want of prosecution.
A month after that dismissal, the trial court reinstated the
action. The pool company filed a motion raising the issue
of forum non convenience, then filed an answer. The pool company
filed a motion for summary judgment, and the victim responded
by attempting to persuade the court to pierce the pool company's
corporate veil. The trial court granted the summary judgment
motion and denied the victim's motion. The victim sought review.
The court held that the victim did not present evidence that
would have justified piercing of the corporate veil, and that
the trial court properly entered summary judgment in favor
of the pool company. The court affirmed the trial court's
findings and held that:
“Piercing a corporate
veil is a task which courts should undertake reluctantly.
In order to pierce the corporate veil: (1) there must be
such unity of interest and ownership that the separate personalities
of the corporation and the individual no longer exist, (2)
and circumstances must be such that an adherence to the
fiction of a separate corporate existence would promote
injustice or inequitable consequences. A party seeking to
have a corporate identity disregarded must come forward
with a substantial showing that one corporation is really
a dummy or sham for another.”
(II) Illinois cases that
support the “piercing of the corporate veil” concept.
1. ELEANOR GALLAGHER v. RECONCO
BUILDERS, INC. 91 Ill. App. 3d 999 (1980)
The court held personal
liability should be imposed upon a shareholder operating a
corporate contracting firm which failed to complete a construction
job as agreed. The court stated that a corporate entity will
be disregarded where it would otherwise present an obstacle
to the protection of private rights and where the corporation
is merely the alter ego of a dominating personality. The court
went on to say that the decision to disregard the corporate
entity involves the consideration of many factors, such as
- inadequate capitalization;
- failure to issue stock;
- failure to observe corporate formalities;
- nonpayment of dividends;
- insolvency of the debtor corporation at the time;
- nonfunctioning of other officers or directors;
- absence of corporate records; and
- whether in fact the corporation is only a mere facade
for the operation of the
dominant stockholders.
2. PEOPLE v. V& M INDUS., 298 Ill. App.
3d 733 (1998)
In this case the Plaintiff
state brought an action against a corporation for civil penalties
under the Illinois Environmental Protection Act (IEPA), 415
Ill. Comp. tat. 5/1 et seq. (1994), for burning 40,000 tires.
The corporation was then dissolved. Plaintiff then brought
an action against defendant individual, as the corporation's
alter ego.
The trial court dismissed
the action because defendant was not personally liable for
his actions or for violations of the IEPA. Plaintiff appealed
from the decision, arguing that the trial court erred in failing
to find defendant responsible for air pollution. The court
reversed, holding that the trial court's refusal to pierce
the corporate veil and refusal to hold defendant personally
responsible was against the manifest weight of the evidence.
The court found that the corporation was undercapitalized.
No stock was issued. The corporation failed to observe corporate
formalities. No dividends were paid. The corporation was insolvent
at the time of the trial.
The corporate officers
and directors were nonfunctioning. There were no corporate
records. And the corporation was a mere facade for the operation
of the dominant stockholder, defendant. Therefore the court
reversed the lower court's judgment that defendant individual
was not liable for a corporation's violation of the Illinois
Environmental Protection Act by burning 40,000 tires.
The court held that the
lower court's refusal to pierce the corporate veil and refusal
to hold defendant personally responsible was against the manifest
weight of the evidence. It further held that in determining
whether to disregard a corporate entity, a court should consider
the following variables, with no single factor being determinative:
(1) inadequate capitalization, (2) the failure to issue stock,
(3) the failure to observe corporate formalities, (4) the
payment of dividends, (5) the insolvency of the debtor corporation
at the time, (6) the nonfunctioning of other corporate officers
or directors, (7) the absence of corporate records, and (8)
whether the corporation is a mere facade for the operation
of dominant stockholders.
3. EASTERN SEAFOOD CO. v.
BARONE 252 Ill. App. 3d 871 (1993)
In this case, the court
held in favor of piercing the corporate veil. Defendant argued
that he cannot be held personally liable for the debts because
he was acting as an officer of the restaurant. Plaintiff,
a supplier who was owed money from the restaurant sued Defendant
in his personal capacity. The Court of Appeals held that the
evidence at the trial court evidenced that plaintiff satisfied
its burden of establishing that Defendant exercised dominion
and control over the restaurant individually rather than in
a corporate capacity.
The Court explained that
for the doctrine to apply, two requirements must be met: First,
there must be such a unity of interest and ownership that
the separate personalities of the corporation and the dominating
individual or entity no longer exist. Second, the facts must
be such that an adherence to the fiction of separate corporate
existence would endorse a fraud or promote injustice.
The Court noted that the
trial court had found that plaintiff's witnesses were convincing
and that defendants' were not. Plaintiff's witnesses testified
to the effect that the operation of the restaurant during
the relevant period was at least a partnership, if not Defendant’s
sole proprietorship. The Court reasoned that Defendant used
the restaurant for his personal benefit as well (e.g., taking
money from the cash register at will), without regard for
the corporations' separate identities. The Court ultimately
held:
“In short, although
sole stockholders in close corporations may play an active
role the management of the corporation's affairs, Barone's
[Defendant] conduct was inconsistent with the existence of
the separate corporate personality required for limited liability,
so to adhere to the fiction in this case would promote injustice.”
Id. at 879.
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