Tag: Illinois Appellate Court

Administrative Dissolution May Breach a Company’s Third-Party Contracts

Under Illinois law, corporations and limited liability companies (“LLCs”) are required to file annual registrations with the Illinois Secretary of State in order to maintain their entities in good standing.  Pursuant to the Limited Liability Company Act (the “LLC Act”), the Secretary of State may administratively dissolve an LLC if it fails to timely file its annual registration, mirroring the requirement imposed upon corporations in the Business Corporation Act (the “Corporation Act”).

If a company is administratively dissolved, the company will be reinstated upon the filing of the outstanding annual report(s) and an application for reinstatement, along with payment of all outstanding taxes and fees.  Upon reinstatement, the actions made by the company during the period of administrative dissolution are “ratified and confirmed” pursuant to the “relation-back” provisions of the LLC Act or the Corporation Act.

Recently, a provision of the LLC Act was examined by the Illinois Appellate Court in CF SBC Pledgor 1 2012-1 Trust v. Clark/School LLC, 2016 IL App (4th) 150568 (Sep. 8, 2016).  In this case, the Plaintiff, a Delaware mortgage trust, assumed a mortgage and security interest in an eight-building apartment complex which was owned by the defendant, Clark/School LLC.  Under the security agreement, the loan was made on the lender’s reliance of the Defendant mortgagor’s “continued existence” as an LLC, including “all things necessary to preserve and maintain [its] existence and to ensure its continuous right to carry on its business.”  The Defendant unfortunately failed to timely file its annual registration with the Illinois Secretary of State, ultimately leading to its administrative dissolution in December 2013.

Due to the Defendant’s administrative dissolution, the Plaintiff initiated a mortgage foreclosure action against the Defendant for failing to “preserve and maintain its existence” as an LLC.  The lower court determined, and the Illinois Appellate Court subsequently affirmed, that the Defendant committed an event of default by failing to maintain its status in good standing and held for the Plaintiff.  The Defendant unsuccessfully argued that the relation-back provision of the LLC Act prevented the Defendant from liability under the security agreement because it validated any actions that were taken from the date of the Defendant’s dissolution through the date of its reinstatement by the Secretary of State.

The predicament in CF SBC Pledgor was a novel issue under established Illinois LLC law; thus, the Illinois Appellate Court looked to precedent under the Corporation Act.  The relation-back application of the Corporation Act only pertained to ratification of the corporation’s actions; however, it did not automatically protect the corporation from possible breaches under third-party contracts.  Looking to the Corporation Act, the Court found that the relation-back provision will not “impose a legal fiction that belies actual real world facts.”

In that regard, a company cannot use the relation-back provision of its respective governing law in order to escape liability for committing a breach in a contractual agreement whereby the contracting party is relying upon the company to maintain its “continued existence” as a legal entity in good standing with the Secretary of State.

A company should pay prudent attention to its required filings and its obligations under its third-party contracts so as not to inadvertently breach such contracts.  Otherwise, as was the case in CF SBC Pledgor  the consequences may be harsh.

For more information on this topic or how you can protect your corporation or limited liability company, please contact:

Pamela Szelung at:

pszelung@lgattorneys.com or 312-368-0100.

Employer’s Abuse of Discretion When Denying Employee’s Purely Discretionary Bonus

In McCleary v. Wells Fargo Securities, LLC, the Illinois Appellate Court for the First District held that a former employee sufficiently stated a claim for an unpaid bonus under a written bonus plan that expressly stated that bonuses were made at the sole discretion of the plan administrator, that bonuses were not guaranteed, and that bonuses could be awarded or denied for any reason.

The bonus plan provided that former employees who were discharged for non-performance reasons, had worked at least three months during the bonus period and met their performance objectives, would remain eligible to receive pro-rated bonuses. Although the bonus plan could be amended or terminated at any time pursuant to its terms, the bonus plan also stated that no amendment to the bonus plan would adversely affect bonuses earned prior to the effective date of the amendment.

The former employee had worked for more than three months of the bonus plan year and alleged that he met his performance goals before his discharge. The company exercised its discretion not to pay bonuses to any former employees who had not worked at least six months during the plan year.

The Appellate Court held that the former employee had alleged sufficient facts to state claims under the Illinois Wage Payment and Collection Act, and for breach of contract and unjust enrichment, because he had a reasonable expectation to receive a bonus and the company had abused its contractual discretion by increasing the bonus eligibility requirement from three months to six months of employment during the bonus plan year.

To discuss your company’s employment agreements, bonus plans, or employment law generally, please contact:

Mitchell S. Chaban at:

mchaban@lgattorneys.com or 312-368-0100

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