2020 IL App (1st) 191597
Ill. App. Ct.2021Background
- FASI is a small, family-owned Illinois security-alarm corporation whose stock is held by four shareholders: Elleby (33.5%), Lichtenauer (33.5%), Lyngen (16.5%), and Coyle (16.5%); Coyle is president and secretary.
- In 2017 Elleby sought to force a buyout or to sell her shares and repeatedly requested FASI books and records to value her shares under 805 ILCS 5/7.75.
- Most of Elleby’s early written demands were sent to counsel for the individual shareholders (not to the corporation); she sent a demand to Coyle as FASI’s president/registered agent on August 28, 2018.
- FASI’s CPA and Coyle produced financial statements and other records by October 1–10, 2018; Elleby filed suit on October 11, 2018 alleging (Count I) violation of section 7.75 and (Count II) a derivative breach of fiduciary duty.
- The circuit court dismissed both counts (2-615) and entered judgment on the pleadings for FASI; Elleby appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Elleby made the requisite written demand upon the corporation to examine books and records under 805 ILCS 5/7.75(b) | Elleby argues her written requests (including the Aug. 28 letter to Coyle) with a detailed list satisfied the statute | Defendants argue most demands were to the shareholders’ lawyer (not the corporation) and she did not allege a proper written demand to "examine" records | Court: Elleby made at most one written demand to FASI (Aug. 28), but that single demand was insufficiently pleaded as to prior demands to the corporation |
| Whether Elleby alleged a refusal/denial to examine books and records (statutory prerequisite to relief under §7.75) | Elleby contends the production was inadequate and effectively a refusal | Defendants contend FASI responded by producing financials by the deadline and thus did not refuse access | Court: FASI produced records on or shortly after the deadline; Elleby did not plead a denial—Count I fails |
| Whether demand to corporations was excused (demand futility) for the derivative fiduciary-duty claim | Elleby alleges demand would be futile because the defendants control FASI and would not sue themselves | Defendants say Elleby failed to plead who sits on the board or facts showing a majority of directors were conflicted | Court: Pleading is conclusory; Elleby failed to plead particularized facts showing demand was excused |
| Whether Elleby pleaded plausible, particularized facts showing a fiduciary duty and breach (derivative claim) | Elleby alleges FASI is closely held and lists alleged misconduct (blocked online access, unauthorized expenditures, bonuses, vehicle sales, contract transfers, suspicious bookkeeping) | Defendants say (1) minority shareholders generally owe no fiduciary duty absent a close-corp or written shareholder agreement, (2) alleged harms are conclusory or lack specifics (who, when, what) | Court: Even assuming duties existed for some defendants, the allegations are speculative or conclusory and fail to plead specific conduct amounting to breach; Count II fails |
Key Cases Cited
- Hagen v. Distributed Solutions, Inc., 328 Ill. App. 3d 132 (Ill. App. Ct. 2002) (holding a request that "documents be provided" satisfied §7.75 written-demand/examination requirement in context)
- Kamen v. Kemper Financial Servs., Inc., 500 U.S. 90 (U.S. 1991) (explaining derivative-suit demand requirement and circumstances for excusal)
- Marshall v. Burger King Corp., 222 Ill. 2d 422 (Ill. 2006) (describing Illinois fact-pleading standard)
- Gidwitz v. Lanzit Corrugated Box Co., 20 Ill. 2d 208 (Ill. 1960) (minority shareholders not entitled to manage corporation absent agreement)
- Hagshenas v. Gaylord, 199 Ill. App. 3d 60 (Ill. App. Ct. 1990) (discussing common-law close-corporation characteristics)
- Valiquet v. First Federal Savings & Loan Ass’n of Chicago, 87 Ill. App. 3d 195 (Ill. App. Ct. 1979) (demand excused where majority of directors implicated so demand would be futile)