Midwest M & D Services, Inc.
OPINION
The Debtor, Midwest M & D Services, Inc., an Illinois corporation, has moved for a finding that Matthew Porter violated the automatic stay of
I
The Debtor filed a voluntary bankruptcy petition under Chapter 11, subchapter V, in November 2020. Page 1 of Document 1 in this case disclosed that Douglas B. Hanabarger and Matthew L. Porter each had a 50% ownership stake in the Debtor. When the Debtor filed its subchapter V plan in February 2021, however, it inserted a curious description of Class 6: “The equity security holder(s), which is anticipated to be only Douglas Hanabarger, will not be impaired by this Plan. The pre-petition equity security holder(s) will continue to own 100% of the reorganized Debtor.” The plan, which called for a five-year repayment schedule, was confirmed without objection under
Nearly a year later, Mr. Porter filed a lawsuit against Douglas and Dawn Hanabarger in the Circuit Court for Bureau County, Illinois. In his complaint, entitled “Complaint for Shareholder Remedies under 805 ILCS 5/12.56,” he alleged that the Hanabargers controlled the Debtor and had failed to observe the corporate formalities of annual meetings or resolutions to conduct the corporate business, “leaving [him] in the dark.” He alleged he had sought corporate records from Mr. Hanabarger without success. The records he had been able to obtain—financial statements provided by the Hanabargers to Sauk Valley Bank, a creditor—convinced him that they were mismanaging the company. Mr. Porter alleged that he feared the company would be unable to comply with the subchapter V plan as a result of the Hanabargers’ mismanagement, potentially leaving him on the hook for a personal guarantee.
The complaint contained two counts. Count I alleged, in the language of
The Hanabargers quickly removed the suit to the U.S. District Court for the Central District of Illinois (Case No. 4:22-cv-4084-SLD-JEH). The district court referred the case to this Court, where it was docketed as adversary proceeding No. 22-8005. The Court eventually dismissed the lawsuit in October 2022, on the Hanabargers’ motion, due to Mr. Porter‘s failure to prosecute the action. In doing so, however, the Court revisited the Chapter 11 plan‘s treatment of the equity security holders in Class 6.
In their efforts to dismiss the adversary proceeding, the Hanabargers argued that the plan had operated to divest Mr. Porter of his ownership interest in the Debtor based on the language describing Class 6 noted above. The Court disagreed:
The plan does not say that Porter will be divested of his shares upon confirmation. The plain fails to clearly and conspicuously give notice to the affected party, Mr. Porter, that confirmation would result in the loss of his ownership interest in the Debtor. The Court concludes that notice is deficient for Fifth Amendment purposes.
Indeed, the Hanabargers’ argument troubled the Court:
[T]he plan[] fail[s] to provide any rationale or business justification for a divestiture of Mr. Porter‘s 50% ownership interest and resulting increase in Mr. Hanabarger‘s ownership interest to 100%, which would, in effect, result in a gift of Mr. Porter‘s shares to Mr. Hanabarger for no consideration and without a stated justification. The absence of any justification or consideration implies that the proposed equity restructuring was nothing more than an arbitrary attempt to get Mr. Porter out of the picture without having to pay him anything and without having to afford him the rights of a shareholder under the Illinois Business Corporations Act.
The Court thus modified the order confirming the plan to clarify that confirmation of the plan had no effect on the equity interests that existed when the case was filed. Mr. Porter‘s rights as a shareholder remained unimpaired and were “exercisable in a non-bankruptcy forum, subject to modification of the automatic stay, to the extent applicable.”
The Debtor—not the Hanabargers—now argues that the automatic stay was applicable to the exercise of Mr. Porter‘s shareholder rights, and it seeks sanctions for Mr. Porter‘s alleged violation of the stay. The matter has been fully briefed on one question, as articulated by the Debtor: “Did the Complaint constitute a derivative cause of action under Illinois law such that it was property of the Bankruptcy Estate and therefore subject to the provisions of §362?” Doc. #236 at 2. The parties also disagree as to whether sanctions are available or appropriate under either
II
By filing a bankruptcy petition, a debtor obtains a stay, applicable to all entities, of “any act to obtain possession of
Whether a cause of action belongs to the estate depends upon whether under applicable state law the debtor could have raised the claim. Matter of Educators Group Health Trust, 25 F.3d 1281, 1284 (5th Cir. 1994). If the cause of action belongs to the estate, then the trustee (or here, the debtor in possession, see
A
It has “long been held that rights of action against officers, directors and shareholders of a corporation for breaches of fiduciary duties ... become property of the estate” that the trustee (or debtor in possession) alone may pursue. Koch Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339, 1343 (7th Cir. 1987). Under Illinois law, a shareholder may step into the shoes of a corporation and bring a derivative action to prosecute the breach of a duty to the corporation by an officer, director, or controlling shareholder. Lower v. Lanark Mutual Fire Ins. Co., 502 N.E.2d 838, 840 (Ill. App. Ct. 1986). By contrast, a shareholder may bring an action on his own behalf against a corporate wrongdoer who has directly injured the shareholder. Zokoych v. Spalding, 344 N.E.2d 805, 813 (Ill. App. Ct. 1976). “A suit brought by a stockholder upon a personal claim is by its nature distinguishable from a proceeding to recover damages or other relief for the corporation.” Id. Recovery in a derivative case inures to the corporation while recovery in a direct case inures to the individual shareholder. Spillyards v. Abboud, 662 N.E.2d 1358, 1363 (Ill. App. Ct. 1996). To distinguish between the two types of action, Illinois courts look to the “gravamen” of the pleadings to see whether they state injury to the plaintiff individually or injury that affects the shareholders as a whole. Zokoych, 344 N.E.2d at 813.
Under Illinois common law, to have standing to sue individually, a plaintiff must allege a special injury—either an injury that is separate and distinct from that suffered by other shareholders, or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists
B
The parties have briefed this motion as though Mr. Porter brought an action against the Hanabargers under a common-law theory of breach of fiduciary duty. Their arguments thus focus on whether the gravamen of the complaint states a direct or a derivative claim. But Mr. Porter did not file a complaint alleging that the Hanabargers had violated their common-law fiduciary duties. He filed a complaint under
Section 12.56 was added to the Illinois Business Corporation Act in 1995. Before then, the only remedy available under Illinois law for shareholder oppression was dissolution of the corporation. Schirmer v. Bear, 672 N.E.2d 1171, 1176 (Ill. 1996). Now, a shareholder may seek a number of remedies upon proof that the defendant engaged in “illegal, oppressive, or fraudulent conduct.” Id.;
A plaintiff may bring an individual suit under §12.56 even if he does not have standing to bring a derivative suit. That contrast is illustrated well in Toscano v. Koopman, where the plaintiff pleaded two relevant counts in his complaint: (1) a claim for relief as a minority shareholder under §12.56, and (2) a claim for relief based on fellow shareholders’ breach of their fiduciary duties. 148 F. Supp. 3d 679, 687–88 (N.D. Ill. 2015). Neither count alleged that the plaintiff had suffered a separate injury distinct from a generalized injury suffered by all shareholders. Id. The court held that the plaintiff did have standing to pursue §12.56 relief, because that statute permits individual shareholder claims. Id. By contrast, the plaintiff did not have standing to assert a breach of fiduciary duties, because an individual shareholder cannot maintain a direct action for breach of those duties without alleging a distinct injury. Id. at 688. Illinois courts would likely agree with the Toscano analysis. See, e.g., Bone v. Coyle Mechanical Supply, Inc., 2017 IL App (5th) 150117-U, at *10 (Ill. App. Ct. 2017) (unpublished) (“Under Illinois common law, a shareholder seeking relief for an injury to the corporation ... must bring his suit derivatively on behalf of the corporation. ... However, no such requirement exists with regard to a cause of action brought pursuant to [§12.56], which clearly gives a shareholder standing to proceed directly.“).
Apart from asserting that Mr. Porter‘s claim was derivative, the Debtor also relies upon language from In re Schepps Food Stores, Inc., 160 B.R. 792, 799 (Bankr. S.D. Tex. 1993), to argue that Mr. Porter violated the stay by seeking to “interfere with the operations of the Debtor in performing under the plan.” Schepps Food Stores was not an automatic-stay case, though. Shareholders there waited until the Chapter 11 plan was confirmed before filing a derivative suit against the debtor corporation. Id. at 795. Because property of the estate vests in the debtor upon confirmation of a traditional Chapter 11 plan,
C
Mr. Porter relied exclusively on §12.56 as the basis for his complaint of shareholder oppression against the Hanabargers. That cause of action belonged to him, not the corporation, so he did not violate the automatic stay of §362(a)(3) by exercising control over a cause of action that was property of the estate. Further, even assuming for the sake of argument that the suit posed the potential to interfere with the confirmed plan, the Debtor has not sought sanctions for anything other than a violation of the automatic stay. It would be inappropriate to award sanctions under a legal theory different from that advanced by the movant. United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020).
Because Mr. Porter did not violate the automatic stay, it is unnecessary to address potential sanctions, which would be available to the Debtor, a corporation, only under
§1191(b), is confirmed.
The motion to find Mr. Porter in violation of the automatic stay is denied. This opinion serves as the Court‘s findings of fact and conclusions of law. Fed. R. Bankr. P. 7052. A separate order shall be entered.
# # #