As 2007 approaches, many of us will make resolutions that will be long forgotten before the snow has melted. Perhaps we would all be more successful in our commitments to dropping a couple of holiday pounds if those promises were documented with the gravity of a corporate resolution, stamped with our personal seal and completed with an attestation clause.
January is the month that most Corporations, in accordance with their Bylaws, hold their annual meetings, documenting their intentions for the new year and ratifying previous acts. This is also a good time for attorneys to make a resolution of their own, however, to be more diligent in their corporate maintenance practice, specifically in ensuring the timely filing of Annual Reports with the Secretary of State.
Corporate maintenance is the ugly duckling of many a law office. While many firms specialize in this area and are proficient in maintenance and compliance with Secretary of State filings, a fair number also moonlight in corporate maintenance as a courtesy to their clients and as a way to develop relationships. Given the lack of urgency (and some may argue mundane routine) with which the process is often associated, corporate maintenance is often an overlooked area of practice. The ever urgent motion, looming discovery deadlines, client calls, and other pressing matters can easily move corporate compliance to the back burner. Clients slow to sign and return documents only serve to encourage the complacency which often surrounds this area of practice. And the typical penalty for a late annual report B which adds up to less than the cost of lunch — is hardly an incentive likely to create a sense of urgency in most offices.
There is more at stake than a $3.75 late filing fee, however. And the failure to timely file an annual report can have weighty implications.
Administrative Dissolution and Reinstatement.
Under the Illinois Business Corporation Act, the birth of a corporation’s legal existence begins with the filing of the Articles of Incorporation with the Secretary of State.2 Among other requirements to maintain its existence, a corporation must file an "Annual Report" which includes disclosure of its officers and payment of franchise fees to the Secretary of State.3 If a corporation fails to timely file its Report, and upon the Secretary’s determination that the corporation has failed to comply, 4 a 90 day notice is sent to the registered agent. At this point, the failure to comply will result in "administrative dissolution" a.k.a.. "involuntary dissolution" (as opposed to a corporation desiring dissolution and voluntarily filing articles of dissolution.).5
A corporation that finds itself dissolved may file for reinstatement and, as of January of 2006, section 12.45 (a) of the Corporation Act no longer imposes five year time limit in which to apply for reinstatement.6 Section 12.45 of the Act also provides that following administrative dissolution, a corporation seeking reinstatement may do so provided an application for reinstatement is made, outstanding annual reports are filed, and all franchise taxes, fees and penalties are paid.7
Effects of Administrative Dissolution on Liability.
At first glance, the Illinois Business Corporation Act provides language that would seem, to give any panic-stricken attorney cause to breathe a sigh of relief. Commonly referred to as the "relation back" doctrine, it provides:
"Upon the filing of the application for reinstatement, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution, and the corporation shall stand revived with such powers, duties and obligations as if it had not been dissolved; and all acts and proceedings of its officers, directors and shareholders, acting or purporting to act as such, which would have been legal and valid but for such dissolution, shall stand ratified and confirmed."8
Sounds simple enough. End of story right? As it would appear, a dissolved corporation is protected, effectively ratifying any actions taken or contracts entered into on its behalf during the lapse in its corporate existence. The doctrine allows the lapsed corporation to enforce its own contracts and does not allow a defendant to use a plaintiff’s corporate dissolution as a defense.9 To hold otherwise would impose the responsibility of verifying the standing of every corporation with whom a contract is entered. Although a dissolved corporation may not sue or have judgment entered on its behalf, an application for reinstatement and payment of all obligations for franchise taxes, fees, and penalties are an easy remedy.10
However, what does not revert back (notwithstanding what the BCA would seem to imply) is the liability shield that corporations normally provide to ownership. Section 12.45 (d) is silent as to the effect of dissolution on corporate liability, or that of its directors and shareholders. And the Illinois courts have not shown a great deal of sympathy toward individuals and corporations who find themselves in the unpleasant position of defending matters that span a lapse in corporate existence. The courts have repeatedly refused to allow administratively dissolved corporations to avoid corporate or personal liability based on the relation back theory.11 Instead, the courts have interpreted 12.45 (d) to protect the state and public interests, 12 designed to coerce corporations to meet annual filing requirements and allow a parties to enforce contracts made with a dissolved corporation. 13
In Chicago Title & Trust Co. v. Brooklyn Bagel Boys, Inc., for example, the court refused to allow a corporation to avoid creditors based on its own failure to comply. In Brooklyn Bagel Boys, the court found that the relation back statute did not transform individual liability into corporate liability contrary to true nature of events. To hold otherwise, the court concluded, would allow for the possibility that a company could replace valuable private debt with worthless corporate debt thereby creating a legal fiction.14
In Cardem, Inc. v. Marketron Intern., Ltd., the court imposed personal liability on the President of a corporation for a note signed on behalf of the corporation when the president knew that the corporation had been dissolved at the time, despite its later reinstatement. Specifically the court found that:
"[The Defendant] took the affirmative step to sign, purportedly as president of a corporation which he owned and which had been dissolved nearly three years earlier, a new note with different terms. He was motivated to do so, in part, because the creditor threatened to try and hold him personally liable on the debt. Thus, by signing the [new note],[the defendant] received the personal benefit of forestalling legal action against him....[The President] was aware that Marketron had no assets and that he should not transact business under the guise of conducting Marketron’s business while Marketron was dissolved".15
Knowledge of the dissolution, however, is not necessarily required. Courts have imputed knowledge on officers who knew or should have known of the dissolution in order to impose personal liability.16 In Affiliated Capital Corp. v. Buck, for example, the court found that the president held office and conducted business on behalf of the corporation in such a manner that he should have known of the entity’s dissolution.17 The court held that:
"Whether an individual incurs personal liability for an obligation undertaken for a dissolved corporation depends upon the knowledge of the parties. An individual incurs personal liability only if at the time he entered into the contract on behalf of the dissolved corporation, he knew or because of his position should have known that the corporation had been dissolved.... As president... Mr. Buck presumably knew or at a minimum should have known that MSHI had been dissolved. He is therefore individually bound by the lease... and is personally liable for the amount due Affiliated."
The personal liability shield may also be found to have ceased to exist as to contracts entered during, as well as those that may have continued through the dissolution. In Mid-American Elevator Co., Inc. v. Norcon, Inc., for example, the court held that the Business Corporation Act made directors liable for the continuation of business after dissolution, but created liability only for debts incurred during and as result of continuing to transact business throughout dissolution. In an action to recover a judgment against owners of a dissolved corporation, the court held that:
"The fact that the judgment was entered after dissolution is of no consequence, because the judgment was based exclusively upon the conduct of Norcon prior to dissolution. A corporation is an entity separate and distinct from its officers, directors, and shareholders, and the officers, directors and shareholders are generally not liable for corporate debts or liabilities.... In light of the fact that Norcon’s liability to Mid-American was incurred prior to dissolution, the court erred in holding the Kaulases liable for the judgment against Norcon."18
Given the liability implications for involuntarily dissolved entities, a question arises as to an attorney’s responsibilities following discovery that a corporation for which he or she is responsible has been administratively dissolved. Most assuredly, the longer an entity remains dissolved the larger the possibility for personal liability. If by some chance a claim against the corporation results in personal liability for any of the officers, an attorney may find himself or herself knee-deep in a malpractice action.
To prove a claim for legal malpractice in Illinois, the plaintiff must show: an attorney-client relationship existed; a duty owed by the attorney to the plaintiff as a result of that relationship; a breach of that duty on the part of the attorney; causation; and damages.19 An attorney who serves as registered agent, and regularly oversees the corporate maintenance of an entity, would be hard pressed to deny the existence of an attorney-client relationship or a duty to that client. In the simplest of scenarios, in which the annual filings are merely overlooked, the lack of a filed annual report would serve to evidence a breach of that particular duty. So, any imposition of personal liability on a corporate officer due to the involuntary dissolution of his or her corporation, coupled with the entry of a hefty judgment against that corporate officer, would provide a fairly decent recipe for a malpractice case.
This scenario may be ameliorated slightly by an open and swift disclosure to the corporate client of the possible risks associated with any lapse in existence, ideally prior to any litigation. Such disclosure would not only allow for the corporation and its individual officers to take protective measures, it emphasizes the need for corporate officers to be cognizant of potential liability in any matter involving the corporation’s business affairs.
While the violation of the Rules of Professional Conduct do not in themselves provide for a separate cause of action, they do provide guidance to the relevant standard of care when considering malpractice claims. 20 The bright side may (or may not) be that negligence as opposed to mere error in judgment is required. In Gray v. Hallett, it was said that "[a]n attorney is liable to his client for damages when he fails to exercise the reasonable degree of care and skill expected from members of the legal profession. The law draws a distinction, however, between negligence and errors in judgment..." 21
Most basically, Rule 1.3 provides that an attorney "shall act with reasonable diligence and promptness in representing a client."22 The filing of documents would seem to fall under its purview, A similarly basic concept is the obligation imposed by Rule 1.4:
"(a) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information. (b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation."23
In In re Smith, the court found that an attorney has an affirmative duty to make appropriate efforts to keep a client informed so that he may make intelligent choices as to litigation matters.24 While the dissolved corporation may have no pending litigation matters, knowledge of the risk of personal liability could arguably affect a corporation’s litigation decisions (to settle or not to settle, that is the question). Rule 7.1 further provides that an attorney shall not make a false or misleading communication about the lawyer or his services, including omissions made that might make a statement misleading.25 This might also arguably include statements commonly made to calm client concerns that their life’s dream is lost, reassurances that the reinstatement reverts back, and there is therefore "nothing to worry about".
However, perhaps more troubling is the possibility an attorney who remains silent could wake up one day and find that he has an adverse interest to his or her own client. The attorney’s own acts and omissions have created an additional element of concern for the client’s litigation and the existence of a potential malpractice claim could, however minutely, impact his or her judgment, creating a possibility of conflict of interest.26
Given the potential significance of individual liability for administratively dissolved entities, those entrusted with the arguably simple task of filing annual reports bear a tremendous burden and procrastination can thus be a firm’s worst enemy. The passage of time can change the nature of a corporation’s very existence. So, while the failure to file a corporation’s annual report may be the result of an innocent oversight or a client who simply failed to return properly signed documents in a timely manner, the scenario demands immediate attention.
2. 805 ILCS 5/14.05 et seq.
3. 805 ILCS 5/14.10.
4. 805 ILCS 5/12.35 (a)-(c).
5. 805 ILCS 5/12.40 (a)-(b).
6. 805 ILCS 5/12.45 (a).
7. 805 ILCS 5/12.45 (a).
8. 805 ILCS 5/12.45 (d).
9. See Henderson-Smith & Associates, Inc. v. Nahamani Family Service Center, Inc., 256 Ill.Dec. 488, 492, 323 Ill.App.3d 15, 19, 752 N.E.2d 33, 37 (1st Dist. 2001).
10. Henderson-Smith & Associates, Inc. v. Nahamani Family Service Center, Inc., 256 Ill.Dec. 488, 495 323 Ill.App.3d 15, 23, 752 N.E.2d 33, 40 (1st Dist. 2001). (Once a corporation pays outstanding franchise taxes, it should be allowed to resume business including legal matters) See also Merchants Environmental Industries, Inc. v. Montgomery Ward and Co., Inc., 252 Ill.App.3d 906, 913, 625 N.E.2d 689, 694, 192 Ill.Dec. 534, 539 (1st Dist.1993)
11. Chicago Title & Trust Co. v. Brooklyn Bagel Boys, Inc., 164 Ill.Dec. 930, 222 Ill.App.3d 413, 584 N.E.2d 142 (1st Dist.1991). (Reinstatement did not prevent director from being held jointly and severally liable). See also Department of Revenue v. Semenek, 141 Ill.Dec. 321, 194 Ill.App.3d 616, 551 N.E.2d 314 (1st Dist. 1990)(When gas station continued to sell gasoline after dissolution, they assumed personal obligation to collect and remit taxes).
12. See Henderson-Smith & Associates, Inc. v. Nahamani Family Service Center, Inc., 256 Ill.Dec. 488, 492, 323 Ill.App.3d 15, 19, 752 N.E.2d 33, 37 (1st Dist. 2001).
13. See Henderson-Smith & Associates, Inc. v. Nahamani Family Service Center, Inc., 256 Ill.Dec. 488, 495, 323 Ill.App.3d 15, 23, 752 N.E.2d 33, 40 (1 Dist,.2001).
14. Chicago Title & Trust Co. v. Brooklyn Bagel Boys, Inc., 164 Ill.Dec. 930, 936, 222 Ill.App.3d 413, 420, 584 N.E.2d 142, 146 (1 Dist., 1991). See also Regal Package Liquor, Inc. v. J.R.D., Inc., 80 Ill.Dec. 957, 125 Ill.App.3d 689, 466 N.E.2d (5 Dist .1984).
15. Cardem, Inc. v. Marketron Intern., Ltd., 322 Ill.App.3d 131,137, 749 N.E.2d 477, 481, 255 Ill.Dec. 376, 380 (2nd Dist. 2001).
16. Gonnella Baking Co. v. Clara’s Pasta di Casa, Ltd., 272 Ill.Dec. 224, 228,337 Ill.App.3d 385, 389, 786 N.E.2d 1058, 1062 (1st Dist. 2003).
17. Affiliated Capital Corp. v. Buck, 886 F.Supp. 647, 649 (N.D. Ill.1995).
18. Mid-American Elevator Co., Inc. v. Norcon, Inc., 223 Ill.Dec. 202, 206, 287 Ill.App.3d 582, 588, 679 N.E.2d 387, 391 (1st Dist. 1996).
19. Metrick v. Chatz, 266 Ill.App. 3d 649, 639 N.E.2d 198, 200-202 (1st Dist. 1994).
20. See, e.g. Levine v. Kling, 922 F.Supp. 127 (N.D, .1996) (Rules of Ethics do not provide a separate cause of action), Owens v. McDermott, Will & Emery, 316 Ill.App.3d 340, 249 Ill.Dec. 303, 736 N.E.2d 145, 157 (2000).("An attorneys violatation of professional ethics does not, in and of itself, give rise to a cause of action.").
21. Gray v. Hallett, 170 Ill.App.3d 660, 663, 525 N.E.2d 89, 91,121 Ill.Dec. 283, 285
22. RPC Rule 1.3
23. RPC Rule 1.4
24. In re Smith, 213 Ill.Dec. 550, 556, 168 Ill.2d 269, 282, 659 N.E.2d 896, 902 (1995).
25. RPC Rule 7.1. ("A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. A communication is false or misleading if it:(a) contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading;(b) is likely to create an unjustified expectation about results the lawyer can achieve....").
26. A conflict which may, as in all things, be surmountable when early disclosure is made of any foreseeable risks, disclosure of any potential conflicts, followed by consent of the client as required by RPC Rule 1.7 (b).
Melissa Piwowar is the President of Legal Support Solutions, Inc., and a paralegal providing support to law firms in the western suburbs of Chicago, in legal research, case file management, litigation support, and corporate maintenance. She attended Judson College and is an AAS graduate (paralegal studies) from Elgin Community College, where she was awarded a Judge Ernest B. Akemann Scholarship and ECC Trustee Leadership Scholarship in Paralegal Studies.