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.
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,
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
By filing a bankruptcy petition, a debtor obtains a stay, applicable to all entities, of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
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
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 independently of any right of the corporation. Spillyards, 662 N.E.2d at 1363. The fact that a plaintiff includes a direct claim in his pleadings does not foreclose a finding that he has also stated a derivative claim, though. “The same set of facts may give rise to both an individual and a derivative claim where a shareholder has suffered an injury different from his fellow shareholders.” Staisz v. Resurrection Physicians Provider Group, Inc., 209 N.E.3d 361, 367 (Ill. App. Ct. 2022).
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
Indeed, the primary case the Debtor relies upon, Staisz, analyzes the two types of claims differently for purposes of standing. The plaintiff in Staisz lacked individual standing to bring a breach of fiduciary duty claim because the claim was derivative. 209 N.E.3d at 367–68. She lacked standing to bring a
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
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
That is not to say that the Court endorses Mr. Porter‘s decision to forgo seeking this Court‘s permission to proceed in his lawsuit. “[A]ll this trouble might have been avoided had [Mr. Porter] simply moved for relief from the automatic stay” in March 2022. Richard B. Vance & Co., 289 B.R. at 698. The Court takes seriously the Seventh Circuit‘s view that disputes concerning a bankrupt entity ought to be aggregated first in the bankruptcy forum. Havlik, 20 F.3d at 708–09. That is particularly so under subchapter V, in which the automatic stay persists when a non-consensual plan,
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.
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