Corporation, Not 50/50 Shareholders, Responsible for Provisional Director Fees in Shareholder Dispute
In a recent order, the Illinois Appellate Court held that Section 12.56(g) of the Business Corporation Act of 1983 (the “Act”) must be read to provide compensation for provisional directors by the corporation as opposed to it shareholders. Sinkus v. BTE, 2016 IL App (1st) 152135-U. In Sinkus, the plaintiff, Sinkus, and one of the defendants, Carl Thomas (“Thomas”), were 50/50 shareholders of BTE. Id. at ¶ 5. Sinkus and Thomas could not reach an agreement on the dissolution and liquidation of BTE, which led Sinkus to resign as an officer and director of BTE, leaving Thomas to manage the corporation. Shortly thereafter, Sinkus learned of Thomas’ solicitation of BTE’s business and sale of all corporate assets for his own benefit. Sinkus brought derivative and direct claims for breach of fiduciary duties, conspiracy to breach fiduciary duties, and minority shareholder oppression. Id. at ¶ 5.
The trial court appointed retired judge Daniel J. Kelley (“Kelley”) as “a provisional director of BTE pursuant to sections 12.56(b)(4) and 12.56(c) of the Act” to “direct the litigation” and “ensure that Thomas does not unduly influence” BTE’s counsel. Id. at ¶ 6. In order to compensate Kelley for his time as BTE’s provisional director, Kelley made capital calls from each shareholder for $25,000.00 and later $30,000.00. Id. at ¶¶ 8-10. Sinkus refused to make either capital contribution stating that he was under no obligation to make additional capital contributions and “that he was not responsible for BTE’s debts.” Id. at ¶ 8. The trial court ordered Sinkus to make both capital contributions, but he continued to refuse and was eventually held in indirect civil contempt. Id. at ¶¶ 9-10.
On appeal, the Court analyzed whether the trial court had the authority to order the shareholders to compensate a provisional director under the Act. Id. at ¶ 14. Section 12.56(b) of the Act provides for several remedies the court may order, including the appointment of a provisional director. Section 12.56(g) of the Act, however, states:
"the court shall allow reasonable compensation to the custodian, provisional director, appraiser, or other such person appointed by the court for services rendered and reimbursement or direct payment of reasonable costs and expenses, which amounts shall be paid by the corporation."
805 ILCS 5/12.56(g).
BTE argued that Sections 12.56(b)(1) and 12.56(c) give the trial court the authority to order shareholders to pay a provisional director’s fee. Sinkus, 2016 IL App (1st) 152135-U, ¶ 19. Section 12.56(b)(1) of provides the trial court authority to order the “performance . . . of its shareholders” and Section 12.56(c) provides the court authority to fashion “equitable remedies.” See 805 ILCS 5/12.56(b)(1), (c).
The Appellate Court rejected BTE’s argument because if Sections 12.56(b)(1) and 12.56(c) were interpreted to provide trial courts authority to order shareholders to compensate a provisional director, then the “specific directive of section 12.56(g) that the provisional director be compensated by the corporation is rendered meaningless.” Sinkus, 2016 IL App (1st) 152135-U, at ¶ 20. Any interpretation that would render a portion of a statute meaningless must be avoided. Id. at ¶ 15. Therefore, the Appellate Court concluded that Section 12.56(g) of the Act controls and the trial court erred by ordering the shareholders to compensate a provisional director. Id. at ¶ 20.
In sum, pursuant to Section 12.56(g), the coporation itself, and not its shareholders, must must compensate a provisional director appointed pursuant to Section 12.56 of the Business Corporation Act.
Illinois Court Orders 51% Shareholder to Pay 49% Shareholder's Attorneys' Fees in Case Involving Misuse of Corporate Funds and Bad Faith Counterclaim
The Appellate Court of Illinois recently affirmed an award of attorney fees in a Section 12.56 proceedings. In Thazhathuputhenpurac v. JT Enterprises of Chicago, the Court held that minority shareholder was entitled to reasonable attorney fees due to the 51% shareholder’s failure to act in good faith in “filing a frivolous counterclaim and forcing [the 49% shareholder] to defend himself against the accusations contained therein.” 2016 IL App (1st) 130775-U, ¶ 47. The Court further affirmed that in the case of two separate claims where only one claim is covered by a fee-shifting provision, the recovering party is still entitled to attorney fees where the issues are “so intertwined that the time spent on each issue cannot and should not be distinguished.” Id.
In Thazhathuputhenpurac, the parties were former investors and shareholders of JT Enterprises of Chicago, Inc., a corporation which operated a Shell service station. Id. at ¶ 5. The shareholders each invested $115,000 of their own money in the corporation, but Shell insisted that one party be the majority shareholder. Id. The parties agreed that defendant would hold 51% of the shares. Id. Shortly thereafter, defendant formed two more service station corporations, TVA and G&P, in which he was the sole shareholder. Id. at ¶ 6.
From 1997 through 2002, the minority, 49% shareholder solely managed JT, though he frequently met with the 51% shareholder to discuss the business. Id. at ¶ 7. In 2002, due to health issues and a disagreement with defendant, plaintiff stopped working at JT and eventually relocated to Florida. Id. at ¶ 8. Prior to his relocation, Shell had substantially increased JT’s rent, and the parties had agreed to sue on behalf of JT. Id. at ¶ 9. Defendant also independently sued Shell on behalf of TVA. Id. Both cases settled in 2005, and defendant signed on behalf of both JT and TVA. Id. Defendant had agreed to surrender “JT to Shell, for a credit of $225,000” and defendant applied the entirety of JT’s credit – excluding the 49% shareholder – to his purchase of the TVA property. Id. at ¶ 9-10.
At no point did the 51% owner discuss or inform the 49% owner of this settlement offer. It was later determined that the 51% owner had also been transferring substantial sums of money between all three entities throughout the years without notifying the 49% owner. Id. at ¶ 12-13. In 2006, the 49% owner sued the 51% owner under Section 12.56 of the Act, tortious interference, and for an accounting, and defendant counterclaimed for breach of fiduciary duty. Id. at ¶ 14. The court awarded the 49% owner $158,699.73 and reasonable attorney fees “as he was successful on his claim brought under the Act,” and found against the 51% owner for his counterclaim. Id. at ¶ 15.
Following a motion to reconsider, the court found that the 49% partner’s award should not be reduced by 49% of the attorney fees incurred by the 51% partner in the settlement with Shell as “there is no evidence that the attorney fees reduced the $225,000 benefit as opposed to being just another cost associated with the closing.” Id. at ¶ 17. The court further held that the 51% partner’s counterclaim “was not litigated in good faith and pursuant to section 12.60(j) of the Act, [and] awarded attorney fees to [the 49% partner] for defending the counterclaim” despite the fact that only one of the claims was covered. Id. The court affirmed that “in fee shifting cases, such as this one, where there are covered and non-covered claims, a party is entitled to fees on a non-covered claim where the two claims ‘arise out of a common core of facts and related legal theories.’” Id. at ¶ 19 (citing Hensley v. Eckerhart, 461 U.S. 424, 435 (1983)).
On appeal, the Appellate Court affirmed the circuit court’s award of reasonable attorney fees to the 49% partner pursuant to Section 5/12.60(j), finding that the 51% partner’s counterclaim was not brought in good faith. Further, the Appellate Court held that the fees should not be limited to the defense of the counterclaim because the claims were “so intertwined that the time that [the 49% shareholder’s] attorney spent on each issue cannot and should not be distinguished.” Id. at ¶ 47.
Thazhathuputhenpurac serves as a warning to business owners and attorneys litigating cases under the Illinois Business Corporation Act. First, despite the emotional nature of “business divorces,” it is prudent for shareholders and their attorneys to carefully consider the strength of their claims before proceeding all the way through a trial. Second, litigants and attorneys should be careful to avoid the unfortunately common litigation practice of lodging weak counterclaims as a strategic counterbalance to plaintiffs' counts. In a Business Corporation Act case, doing so may be costly.