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The Illinois Supreme Court’s recent decision in Pielet v. Pielet, 2012 IL 112064, has again raised the question of the survival of claims against a dissolved corporation. For example, a seller of a business relying on continuing compensation from the buyer needs to be aware of the risks if the buyer is dissolved, even if it appears the compensation is being assumed by a reliable third party.
The Pielet case involved a breach of contract claim against a dissolved company, P.B.S. One. As part of the sale of his scrap metal company to P.B.S. One, owner Arthur Pielet, was to receive a series of payments until his death. After, his widow would receive the fee for as long as she lived. The contract specified that the agreement would be binding “upon the parties [thereto], and their respective heirs, legal representatives, successors and assigns.” The scrap metal company changed hands several times, finally belonging to Midwest Metallics. Mrs. Pielet, individually and as executor for Mr. Pielet’s estate, brought suit against all of the prior owners of the scrap metal company, including P.B.S. One. However, at the time Midwest Metallics had stopped making its annual payments to Pielet, its corporate predecessor, P.B.S. One had dissolved.
The Illinois Supreme Court determined that Pielet could not bring a claim against P.B.S. One. Although the Illinois Business Corporation Act of 1983 (the “Act”) allowed for claims against dissolved companies for up to five years after dissolution, the liability must be incurred prior to dissolution. The Pielet Court followed prior Illinois appellate court decisions interpreting the Dissolution Statute to require accrual prior to dissolution. The Court suggested that legislative failure to amend the statute over a long period of such interpretations demonstrated legislative support for this interpretation. Dorothy Pielet’s claim was therefore denied.
What does this mean for you?
Sellers of businesses must consider the effect of the Pielet decision. Specifically, consider all personal guarantees, the purchase of third party annuities, or other means to assure payment under buy-sell arrangements where payments for seller stock or assets are guaranteed by an Illinois business corporation -- or any other corporate contract obligation.
Company buyers (and other corporate contract debtors) need some certainty that if, after closing, they distribute purchased entity assets to themselves and dissolve the entity, they will face no retroactive liabilities, absent proof of their fraudulent intent at the time of making the agreement. This assurance comes at the expense of sellers, since no breach of contract claim would have “accrued” before the dissolution.
The Pielet Court’s interpretation of Section 12.80 has made possible such scenarios. So instead of “buyer beware”, Pielet is a warning to sellers and to drafters of any other long-term corporate contracts.
Corporate finance sources increase in availability as deals get larger. If you, or a person you can arrange to bring into your group, is a CEO or former CEO of a company with more than $5 million in EBITDA (earnings before income taxation, depreciation, and amortization), and your group can find a way to significantly increase earnings for a target company or company division where the parent company might agree to a spinoff has more than $5 million in EBITDA, and up to $100 million in annual sales, you might be able to interest private equity funds in providing capital to invest in your proposed acquisition.
What does this mean for you?
If you are a qualified CEO or group, and want to talk about business plans and finance source referrals, Bill Price can provide introductions to equity sources. Email him at firstname.lastname@example.org or call 800-630-4780 to discuss your group, your acquisition interests, and the reasons you think your group can add value to an acquisition target entity or division in your field.
35 ILCS 5/201 imposes a 2.5% income tax on C corporations, and a 1.5% tax on S corporations, partnerships, and trusts. This means you would rather receive income (or have it attributed to you) as an individual than as a shareholder, partner, or trust beneficiary.
The planning opportunity is simple: Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property. Real estate or equipment can therefore be jointly purchased, and expenses for same (repairs, taxes, etc...) shared, without incurring the 1.5% personal property replacement tax. Such assets can be leased to companies owned by the joint owners. Creditors of such operating entities would not be able to claim the assets, if that company goes bankrupt. The lease costs should, if the assets can properly be used in the business, be deductible to the business, as should any costs incurred by joint owners. Lease payments would be subject to the asset owners' individual income tax rates, not to the personal property replacement tax. An opinion letter can be sought from the Illinois Department of Revenue to make sure any proposed transaction will have the tax treatment you expect.
What you should do:
Look at what makes sense for your business asset ownership arrangements. Email Bill Price at email@example.com for ideas.
Bill Price is our lawyer of reference at CEntrance. He's helped us with intellectual property, software and hardware development contracts, and other business law issues. I would recommend him to anyone as a thorough, effective counselor.
Call 800-630-4780 for a free half-hour introductory meeting to discuss your business needs.