Westmeyer v. Flynn

Opinion

SECOND DIVISION Date Filed: May 20, 2008

No. 1-07-2946

DORIE WESTMEYER, ) Appeal from the ) Circuit Court of Plaintiff-Appellant, ) Cook County. ) v. ) No. 04 CH 009299 ) BRIAN FLYNN, PATRICK M. DALEIDEN, ) JOHN L. DEARLOVE, TERRAGLYPH ) INTERACTIVE, L.P., VICTOR CASINI, as ) Trustee of The 62524 Trust, and ) KEITH SKIBICKI, ) ) Honorable Defendants-Appellees ) Bernetta Bush, ) Judge Presiding. (David Daleiden, ) ) Respondent in Discovery).)

JUSTICE HALL delivered the opinion of the court:

The plaintiff, Dorie Westmeyer, appeals from an order of the

circuit court of Cook County dismissing her complaint seeking to

hold defendants Brian Flynn, Patrick M. Daleiden, John L.

Dearlove, Terraglyph Interactive, L.P. (Terraglyph), Victor

Casini, as trustee of the 62524 Trust, and Keith Skibicki

personally liable for a judgment she received against the

corporate defendants. On appeal, the plaintiff contends that the

circuit court erred in dismissing her complaint on res judicata

grounds. We reverse and remand for further proceeding.

The following facts are taken from the pleadings. The

plaintiff was employed by iMatchNetwork, LLC (iMatchNetwork), a

Delaware limited liability company, as its chief marketing No. 1-07-2946

officer. In addition to their ownership interests, Messrs.

Flynn, Dearlove and Daleiden comprised the board of directors of

iMatchNetwork. Defendant TerraGlyph also held an ownership

interest in iMatchNetwork.

On April 4, 2003, the plaintiff filed an amended five-count

complaint against TerraGlyph, iMatchNetwork and Messrs. Daleiden

and Dearlove.1 On January 8, 2004, the plaintiff obtained a

default judgment against TerraGlyph and iMatchNetwork. According

to the order, judgment for the plaintiff and against those two

defendants was entered on count I, a claim under the Wage and

Collection Act (the Wage Act) (820 ILCS 115/1 et seq. (West

2002)), of the amended complaint and count II (breach of

contract) and in the amount of $108,064.58.

On June 10, 2004, the plaintiff filed a verified complaint

against the defendants in this case. In count I, the plaintiff

1 The plaintiff's original complaint

was filed on March 13, 2001. The

circuit court granted Mr. Daleiden's

and Mr. Dearlove's motions for summary

judgment. 2 No. 1-07-2946

sought to pierce the corporate veil, alleging that iMatchNetwork

was undercapitalized and that the members failed to observe the

formalities of a legitimate company, operated it as the alter ego

of its members and operated it so as to perpetrate a fraud on its

creditors, including the plaintiff. Count II alleged that the

defendants violated the Uniform Fraudulent Transfer Act (740 ILCS

160/1 et seq. (West 2002)) in that they transferred the assets of

iMatchNetwork to themselves, causing iMatchNetwork to become

insolvent and preventing the plaintiff from recovering monies

owed to her. The plaintiff requested that the court void the

sale or transfer of assets in an amount necessary to satisfy the

plaintiff's judgment, injunctive relief against the further

disposition of the assets transferred and the imposition of a

constructive trust upon any of the assets the defendants received

from iMatchNetwork.

The defendants filed separate motions to dismiss pursuant to

section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619

(West 2004)). They argued that the plaintiff's complaint was

barred by res judicata and barred by a prior judgment and that

another action was pending between the parties. See 735 ILCS

5/2-619(a)(3), (a)(4), (a)(9) (West 2004). Except for Mr.

Dearlove's motion, the defendants' motions to dismiss were

3 No. 1-07-2946

granted.2

On September 16, 2005, the circuit court denied Mr.

Dearlove's motion to dismiss. On December 14, 2005, the court

granted the plaintiff's oral motion to dismiss voluntarily Mr.

Dearlove. The plaintiff filed her notice of appeal.3

ANALYSIS

The parties address two grounds raised in the circuit court

for the dismissal of the complaint: res judicata and other

affirmative matter, i.e., the inapplicability of the doctrine of

piercing the corporate veil to a limited liability company.

I. Standard of Review

2 No order disposing of count III of the complaint naming

David Daleiden a respondent in discovery could be located.

However, respondents in discovery are not parties to the action

in which they are so named. Shanklin v. Hutzler, 277 Ill. App.

3d 94, 100, 660 N.E.2d 103 (1995). 3 Initially, we dismissed this appeal for lack of

jurisdiction because there was no order dismissing Terraglyph.

Westmeyer v. Flynn, No. 1-06-0082 (2007) (unpublished order under

Supreme Court Rule 23). After the plaintiff remedied the

jurisdictional defect, we granted her motion to consider the case

on the original briefs, record and the oral arguments.

4 No. 1-07-2946

"Appellate review of a dismissal under section 2-619 is de

novo." Nosbaum v. Martini, 312 Ill. App. 3d 108, 114, 726 N.E.2d

84 (2000). "An appeal from such a dismissal is similar to one

following the grant of summary judgment." Nosbaum, 312 Ill. App.

3d at 114. "'The appellate court must consider whether the

existence of a genuine issue of material fact should have

precluded the dismissal or, absent such an issue of fact, whether

dismissal is proper as a matter of law.'" Nosbaum, 312 Ill. App.

3d at 114, quoting Kedzie & 103rd Currency Exchange, Inc. v.

Hodge, 156 Ill. 2d 112, 116-17, 619 N.E.2d 732 (1993).

"In a section 2-619 motion, all well-pleaded allegations in

support of the claim are taken as true and all reasonable

inferences are drawn in the plaintiff's favor." Nosbaum, 312

Ill. App. 3d at 113. "Under section 2-619 a motion to dismiss

should be granted if, after construing the pleadings and

supporting documents in the light most favorable to the nonmoving

party, the trial court finds that no set of facts can be proved

upon which relief could be granted." Owens v. McDermott, Will &

Emery, 316 Ill. App. 3d 340, 344, 736 N.E.2d 145 (2000).

II. Res Judicata

The plaintiff contends that the circuit court erred when it

dismissed her complaint pursuant to section 2-619(a)(4). That

section provides in pertinent part as follows:

5 No. 1-07-2946

"(4) That the cause of action if barred by a prior

judgment." 735 ILCS 5/2-619(a)(4) (West 2004).

"Res judicata precludes subsequent litigation between the

same parties on a claim after a court renders final judgment on a

matter." Cload v. West, 328 Ill. App. 3d 946, 949, 767 N.E.2d

486 (2002). "In order to invoke this defense, the following

elements must be shown: (1) that a court of competent

jurisdiction rendered a final judgment on the merits; (2) that

there is an identity of the parties or their privies; and (3)

that there is an identity of cause of action." Cload, 328 Ill.

App. 3d at 949-50. "Res judicata bars not only those issues that

were actually litigated in a prior suit; it bars those that could

have been raised as well." Cload, 328 Ill. App. 3d at 950.

However, "the doctrine of res judicata need not be applied where

fundamental fairness so requires." Weisman v. Schiller, Ducanto

& Fleck, 314 Ill. App. 3d 577, 581, 733 N.E.2d 818 (2000).

In order to determine if the causes of action are the same,

the court applies the transactional test. See River Park, Inc.

v. City of Highland Park, 184 Ill. 2d 290, 313, 703 N.E.2d 883

(1998). "Under this test, claims are part of the same cause of

action if they arise from the same transaction or series of

connected transactions." Cload, 328 Ill. App. 3d at 950.

"Subsequent claims may be barred if they originate from a single

6 No. 1-07-2946

group of operative facts." Cload, 328 Ill. App. 3d at 950.

"This proposition applies regardless of whether the claims assert

different theories of relief or are based on evidence that does

not substantially overlap, as long as they arise from the same

transaction. Cload, 328 Ill. App. 3d at 950.

The defendants maintain that the causes of action in the

plaintiff's original complaint and her present complaint are

identical because each complaint sought to hold iMatchNetwork,

via its members, liable for the claims related to the plaintiff's

employment. However, the plaintiff's original complaint alleged

that iMatchNetwork had breached its contract to her and violated

the Wage Act by failing to pay her salary and benefits. The

complaint also alleged that the plaintiff left her previous

employment to take the job with iMatchNetwork based on the

misrepresentations made to her by the individual defendants,

Messrs. Dearlove and Daleiden. In contrast, in the present

complaint, the plaintiff is attempting to collect the judgment

she obtained against iMatchNetwork.

In Miner v. Fashion Enterprises, Inc., 342 Ill. App. 3d 405,

794 N.E.2d 902 (2003), the plaintiff was awarded a default

judgment against Karen Lynn, Ltd. During supplementary

proceedings, the plaintiff discovered the corporation had

insufficient assets. The plaintiff then instituted a suit

7 No. 1-07-2946

against defendant Fashion Enterprises, Inc., and individual

defendants alleging that they were liable for the judgment on the

basis that Karen Lynn, Ltd., had been formed to defraud

creditors, had no assets and the corporate formalities were not

observed. The circuit court granted the defendants' motion to

dismiss on res judicata grounds. This court rejected the

argument that the plaintiff was limited to supplementary

proceedings to collect on the judgment. Relying on Peetoom v.

Swanson, 334 Ill. App. 3d 523, 778 N.E.2d 291 (2002), and Pyshos

v. Heart-Land Development Co., 258 Ill. App. 3d 618, 630 N.E.2d

1054 (1994), this court held that "a judgment creditor may choose

to file a new action to pierce the corporate veil of a judgment

debtor in order to hold individual shareholders and directors

liable for a judgment against the corporation." Miner, 342 Ill.

App. 3d at 415.

As in Miner, the plaintiff seeks to pierce the corporate

veil of iMatchNetwork and collect her judgment from the defendant

owners and directors. The defendants make no effort to

distinguish Miner. We agree with the plaintiff that her

complaint to collect the default judgment from the defendants is

not barred by res judicata.

III. Piercing the Corporate Veil

The plaintiff invoked the doctrine of piercing the corporate

8 No. 1-07-2946

veil in order to hold the defendants liable for the judgment she

received against iMatchNetwork. The defendants maintain that the

doctrine of piercing the corporate veil does not apply to

iMatchNetwork because it is a limited liability company (or LLC).

A. Application of Corporate Veil Piercing to LLCs

iMatchNetwork is a Delaware limited liability company.

"Efforts to pierce the corporate veil are governed by the law of

the state of incorporation." Retzler v. Pratt & Whitney Co., 309

Ill. App. 3d 906, 917, 723 N.E.2d 345 (1999). Therefore,

Delaware law applies to this issue.

Delaware's Limited Liability Company Act provides in

pertinent part as follows:

"(a) Except as otherwise provided by this chapter, the

debts, obligations and liabilities of a limited liability

company, whether arising in contract, tort or otherwise,

shall be solely the debts, obligations and liabilities of

the limited liability company, and no member or manager of a

limited liability company shall be obligated personally for

any such debt, obligation or liability of the limited

liability company solely by reason of being a member or

acting as a manager of the limited liability company.

(b) Notwithstanding the provisions of subsection (a)

of this section, under a limited liability company agreement

9 No. 1-07-2946

or under another agreement, a member or manager may agree to

be obligated personally for any or all of the debts,

obligations and liabilities of the limited liability

company." Del. Code Ann. tit. 6, §18-303 (2006).

The defendants maintain that, under Delaware law, they

cannot be liable for the judgment against iMatchNetwork based on

their interests in iMatchNetwork and because the plaintiff failed

to allege any facts to establish that they agreed to be obligated

personally for the liabilities of iMatchNetwork.

The defendants point out the cases relied on by the

plaintiff consist of unreported decisions, decisions applying the

law of states other than Delaware and decisions not dealing with

piercing the corporate veil. Nonetheless, there is authority for

the application of the doctrine of piercing the corporate veil to

a Delaware limited liability company.

A limited liability company "is a relatively new entity that

has emerged in recent years as an attractive vehicle to

facilitate business relationships and transactions." Elf Atochem

North America, Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1999).

"The wording and architecture of the [Delaware] Act is somewhat

complicated, but it is designed to achieve what is seemingly a

simple concept - to permit persons or entities ('members') to

join together in an environment of private ordering to form and

10 No. 1-07-2946

operate the enterprise under an LLC agreement with tax benefits

akin to a partnership and limited liability akin to the corporate

form." Jaffari, 727 A.2d at 287. Therefore, for liability

purposes, a limited liability company should be subject to the

same treatment as a corporation. See Wellman v. Dow Chemical

Co., No. 05-280-SLR, at 2 (D. Del. March 20, 2007) ("Under

Delaware law, a limited liability company formed under the

Delaware Limited Liability Company Act is treated for liability

purposes like a corporation").

The doctrine of piercing the corporate veil applies to

Delaware corporations. "Delaware law allows a court to pierce

the corporate veil of an entity when there is fraud or when a

subsidiary is the alter ego of its owner." In re Kilroy, 357

B.R. 411, 425 (Bankr. S.D. Texas 2006); see SR International

Business Insurance Co. v. World Trade Center Properties, LLC, 375

F. Supp. 2d 238, 243 (S.D.N.Y. 2005), quoting Geyer v. Ingersoll

Publications Co., 621 A.2d 784, 793 (Del. Ch. 1992); see also

Miller v. Raytheon Aircraft Co., 229 S.W.3d 358 (Tex. App. 2007)

(under Delaware law, members of an LLC are generally not liable

for the obligations of the LLC, absent a showing that the court

should pierce the corporate veil).

The defendants argue that the fact that corporations and

limited liability companies have some similar legal

11 No. 1-07-2946

characteristics does not mean that they should be treated the

same for purposes of piercing the corporate veil. They point out

that in Advanced Telephone Systems, Inc. v. Com-Net Professional

Mobile Radio, LLC, 846 A.2d 1264 (Pa. Super 2004), cited by the

plaintiff, the court rejected the application of corporate veil

piercing to a limited liability company. However, the defendants

misread that case. First, although the defendant was a Delaware

limited liability company, the court determined that Pennsylvania

law applied to determine if the plaintiff had the right to have a

jury determine its right to a jury trial on the corporate veil

piercing claim. Having determined that the there was no right to

a jury trial on that issue, the court then applied Pennsylvania

law to uphold the trial court's determination that the plaintiff

was not entitled to pierce the corporate veil. The court noted

that there were no Pennsylvania decisions permitting the piercing

of the corporate veil of a limited liability company. The court

found that cases from other jurisdictions piercing the corporate

veils of limited liability companies were distinguishable on

their facts. Advanced Telephone Systems, Inc., 846 A.2d at 1281.

Advanced Telephone Systems, Inc. does not control the result

in this case because it applied Pennsylvania law. Moreover, as

the court in that case noted, Pennsylvania's Limited Liability

Company Act of 1994 contemplated that, in the appropriate case,

12 No. 1-07-2946

the doctrine of piercing the corporate veil would be applied to a

limited liability company. Advanced Telephone Systems, Inc., 846

A.2d at 1281 n.11. In Filo America, Inc. v. Olhoss Trading Co.,

L.L.C., 321 F. Supp. 2d 1266 (M.D. Ala. 2004), the court listed

Advance Telephone Systems Inc. in its collection of cases in

which courts had determined that the corporate veil piercing

doctrine applied to LLCs. See Filo America, Inc., 321 F. Supp.

2d at 1269.

The defendants rely on Puleo v. Topel, 368 Ill. App. 3d 63,

856 N.E.2d 1152 (2006). In that case, this court addressed

whether a member or manager of an LLC may be held personally

liable for obligations incurred by an involuntarily dissolved

LLC. Section 10-10(a) of the Limited Liability Company Act (Act)

provides that a member of an LLC is not personally liable for the

obligations of the LLC unless the LLC agreement specifically

provides for such liability, and the member agrees in writing to

be bound by the provision. 805 ILCS 180/10-10(a) (West 2004).

This court determined that, as the plaintiff failed to establish

the existence of an agreement assented to by the defendant to

assume the LLC's liabilities, the defendant had no personal

liability for the LLC's obligations. Puleo, 368 Ill. App. 3d at

68.

This court further noted that, unlike the Illinois Business

13 No. 1-07-2946

Corporation Act (805 ILCS 5/12.30 (West 2004)), the Act did not

contain a provision whereby the unauthorized exercise of

corporate powers rendered the person liable for debts and

liabilities incurred as a result. In addition, while the Act

imposed personal liability on a member for an obligation incurred

beyond the scope of his authority, the liability was owed to the

company, not to third parties. Puleo, 368 Ill. App. 3d at 68;

805 ILCS 180/35-7(b) (West 2004).

Finally, this court observed that, prior to amendment,

section 10-10 had imposed personal liability for the obligations

of an LLC on its members to the extent that a shareholder of an

Illinois corporation was personally liable in analogous

circumstances under Illinois law. Puleo, 368 Ill. App. 3d at 69;

805 ILCS 180/10-10 (West 1996). The court then stated as

follows:

"In 1998, however, the legislature amended section 10-

10 and in doing so removed the above language which

explicitly provided that a member or manager of an LLC could

be held personally liable for his or her own actions or for

the actions of the LLC to the same extent as a shareholder

or director of a corporation could be held personally

liable. As we have not found any legislative commentary

regarding that amendment, we presume that by removing the

14 No. 1-07-2946

noted statutory language, the legislature meant to shield a

member or manager of an LLC from personal liability."

Puleo, 368 Ill. App. 3d at 69.

There is no dispute that under both the Delaware Act and the

Act, the members of an LLC have no personal liability absent an

agreement. However, Puleo did not address the doctrine of

piercing the corporate veil. Moreover, while the Act provides

specifically that the failure to observe the corporate

formalities is not a ground for imposing personal liability on

the members of an LLC, it does not bar the other bases for

corporate veil piercing, such as alter ego, fraud or

undercapitalization. See 805 ILCS 180/10-10(d) (West 2004).

We conclude that under Delaware law, the doctrine of

piercing the corporate veil applies to a limited liability

company. Just as with a corporation, the members of an LLC are

not generally liable for the obligations of the LLC. However,

under Delaware law, just as with a corporation, the corporate

veil of an LLC may be pierced, where appropriate. Therefore, the

granting of the defendants' motions to dismiss on the ground that

the doctrine of piercing the corporate veil did not apply to the

defendants' LLC was error.

The circuit court's order dismissing the plaintiff's

complaint is reversed and the cause remanded for further

15 No. 1-07-2946

proceedings consistent with the views expressed in this opinion.

Reversed and remanded.

HOFFMAN, P.J., and SOUTH, J., concur.