Under Uniform Commercial Code Supplier Can Terminate Distributor

ECHO, INCORPORATED v. TIMBERLAND MACHINES & IRRIGATION, INC., Court of Appeals, 7th Circuit 2011 - Google Scholar:

This is a commercial case in which Echo terminated its business relationship with Timberland Machines & Irrigation, Inc. (TMI) a distributor. Echo then turned that particular sales territory over to another distributor.

Echo sued TMI to recover on unpaid invoices and TMI sued Echo claiming that the distributor agreement was improperly terminated.

The easy issue is the unpaid invoices. Echo brought an account stated claim under Illinois law. The district court granted summary judgment in favor of Echo. As is typical in these cases, the issue was delivery and acceptance. Because the goods were delivered to TMI and accepted by TMI, TMI was obligated to pay under the UCC. As the court holds:

"TMI accepted the goods at issue, and thus is contractually obligated to pay the interest stated on the invoice under the Uniform Commercial Code, codified at 810 Ill. Comp. Stat. 5/2-207 (West 2011); See K-Koncrete, Inc. v. Mack Trucks, Inc., No. 85 C 9538, 1987 WL 9337, at *7 (N.D. Ill. Apr. 3, 1987) ("Illinois law . . . impose[s] a contractual duty to pay interest on a party who (1) accepts goods accompanied by an invoice stating an interest obligation and (2) offers no objection to the stated terms") (referencing U.C.C. § 2-207(2)(c)); Inspec Foams, Inc. v. Claremont Sales Corp., No. 01 C 8539, 2002 WL 1765630, at *3 (N.D. Ill. July 30, 2002) (under section 5/2-207, "overdue payment interest penalty clauses in a seller's shipping documentation are not considered material alterations of the parties' contract and thus are incorporated into the parties' contract terms"); Extel Corp. v. Cermetek Microelectronics, Inc.,539 N.E.2d 320, 323 (Ill. App. Ct. 1989) (buyer required to pay interest pursuant to the terms set forth in seller's invoices where "there was no showing that acceptance was limited to the terms of the offer or that plaintiff objected to the interest provision within a reasonable time"). We affirm the interest award."

Comment: as always, the account stated claim is very difficult to resist when the buyer takes delivery of the goods and uses them in its business.

Edward X. Clinton, Jr.
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AGRI-BEST HOLDINGS, LLC v. ATLANTA CATTLE EXCHANGE, INC, Dist. Court, ND Illinois 2011 - Google Scholar

AGRI-BEST HOLDINGS, LLC v. ATLANTA CATTLE EXCHANGE, INC, Dist. Court, ND Illinois 2011 - Google Scholar:

The District Court for the Northern District of Illinois has held that a secured creditor has the right - under the Uniform Commercial Code - to step into the shoes of the debtor and pursue collection of outstanding receivables.

This entry cannot begin to do proper justice to the excellent opinion of the District Judge.

Edward X. Clinton, Jr.
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Corporate Law - LLC Statute Shields Member From Personal Liability

Carollo v. Irwin, Ill: Appellate Court, 1st Dist., 4th Div. 2011 - Google Scholar:

The Illinois Appellate Court recently decided the above-captioned case. The case is routine - plaintiff was to receive certain funds if a parcel of real estate did not sell in a specific time period. The court concluded that there was no sale, and thus the plaintiff was entitled to the additional money.

The Court also included a lengthy and thoughtful discussion of the Illinois Limited Liability Company Act - specifically the Act's provision regarding the personal liability of a member who signs a contract on behalf of the LLC.

The Court attempted to determine whether a third party - Scott Mason - who signed a contract on behalf of an LLC that was never formed could be held personally liable on that contract. The Court comments: "Second, we also hold that there was no sale because there was no enforceable contract due to the fact that there was no party who could be held liable as a buyer. The LLC was never formed and thus never ratified the contract on behalf of the LLC or gave Scott Mason authority to enter into the contract."

The Court then held that the Limited Liability Company Act gives greater protection to the person who signs a contract on behalf of an LLC that is never formed than a person who signs on behalf of a corporation that is never formed:

"48 Defendants argue that the articles of agreement were valid even if the unformed LLC could not be held liable because the individual who signed, Scott Mason, would then be personally liable. However, here there is an important distinction between corporations and LLC's that neither party recognizes which is dispositive of this issue. We explain that, by statute, as a matter of law Scott Mason cannot be personally liable.

¶ 49 Defendants contend that H.F. Philipsborn, Tin Cup Pass, and Estate of Plepel all stand for the proposition that courts will impose personal liability on individuals who incur corporate debts prior to corporate formation. However, we note that the result in H.F. Philipsborn andTin Cup Pass was the opposite of the result sought here by defendants; the corporations were held liable, not the individual, because the corporations were ultimately formed and adopted and ratified the contracts. See H.F. Philipsborn, 59 Ill. 2d at 472; Tin Cup Pass, 195 Ill. App. 3d at 851. In Estate of Plepel, on the other hand, the decedent's estate was liable because there was no evidence that the parties intended to hold the corporation liable, or that the claimants even knew they were dealing with a corporation. Estate of Plepel, 115 Ill. App. 3d at 807-08.

¶ 50 In determining whether a corporate officer has contracted in his own behalf, we apply the general rules of agency. Polivka v. Worth Dairy, Inc., 26 Ill. App. 3d 961, 966 (1974). The question of whether an agency relationship exists is normally a question of fact; however, a court may decide the issue as a matter of law if only one conclusion may be drawn from the undisputed facts. Ioerger v. Halverson Construction Co., 232 Ill. 2d 196, 202 (2008) (citingChurkey v. Rustia, 329 Ill. App. 3d 239, 243 (2002)). The common law rule is that where an agent signs contract in his own name and the contract nowhere mentions the existence of agency or the identity of the principal, the agent is personally liable and parol evidence is not admissible to rebut the presumption of the agent's personal liability. Bank of Pawnee v. Joslin, 166 Ill. App. 3d 927, 935 (1988). A corporate officer who signs his name on a contract, without more, is individually liable on the contract. 84 Lumber Co. v. Denni Construction Co.,212 Ill. App. 3d 441, 443 (1991).

¶ 51 On the other hand, when an agent signs a document and indicates next to his signature his corporation affiliation, then, absent evidence of contrary intent in the document, the agent is not personally bound. Central Illinois Public Service Co. v. Molinarolo, 223 Ill. App. 3d 471, 475 (1992) (citing Knightsbridge Realty Partners, Ltd-75 v. Pace, 101 Ill. App. 3d 49, 53 (1981)). Directors or other officers of corporations are not liable for the debts contracted in the name of, and on behalf of, the corporation and which are binding upon it unless they are expressly made liable by statute or unless they also contract on their own behalf. Polivka, 26 Ill. App. 3d at 966. "`One of the purposes of a corporate entity is to immunize the corporate officer from individual liability on contracts entered into in the corporation's behalf.'" People ex rel. Madigan v. Tang, 346 Ill. App. 3d 277, 284 (2004) (quoting National Acceptance Co. of America v. Pintura Corp., 94 Ill. App. 3d 703, 706 (1981)). However, an unauthorized agent purporting to enter into a contract for a principal is personally liable. Polivka, 26 Ill. App. 3d at 966.

¶ 52 Here, Scott Mason clearly indicated he was signing the articles of agreement on behalf of Cal City Apartments, LLC, thus seemingly insulating himself from liability. See Baker v. Daniel S. Berger, Ltd., 323 Ill. App. 3d 956, 969 (2001) (holding that the individual's signature on the face of the agreement was clear that he signed the agreement in his representative capacity on behalf of the corporation and therefore would not be personally bound). However, the LLC was never formed and so it never adopted and ratified the articles of agreement for deed. Thus, it would appear that Scott Mason should be liable on the contract, as he acted without authority of the LLC because the LLC was never formed and therefore never ratified his action in entering the articles of agreement.

¶ 53 However, there is an important statutory distinction between LLC's and corporations that provides members or managers of unformed LLC's with more protection from personal liability than officers of corporations in this context. Section 3.20 of the Business Corporation Act of 1983 specifically directs:

"All persons who assume to exercise corporate powers without authority to do so shall be jointly and severally liable for all debts and liabilities incurred or arising as a result thereof." 805 ILCS 5/3.20 (West 2006).

¶ 54 The Limited Liability Company Act had a provision similar to section 3.20 of the Business Corporation Act. Prior to its amendment, section 10-10 provided:

"(b) A manager of a limited liability company shall be personally liable for any act, debt, obligation, or liability of the limited liability company or another manager or member to the extent that a director of an Illinois business corporation is liable in analogous circumstances under Illinois law." 805 ILCS 180/10-10(b) (West 1996).

¶ 55 However, when the legislature amended section 10-10 of the Limited Liability Company Act in 1997, it specifically removed the provision that allowed a member or manager of an LLC to be held personally liable for the unauthorized exercise of corporate powers in the same manner as provided in the Business Corporation Act. Puleo v. Topel, 368 Ill. App. 3d 63, 69-70 (2006). See Pub. Act 90-424 (eff. Jan. 1, 1998) (deleting 805 ILCS 180/10-10(b) (West 1996)).

¶ 56 In addition, the remaining provisions of the Limited Liability Company Act provide that a member or manager is not liable for acting on behalf of an LLC:

"A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager." 805 ILCS 180/10-10(a) (West 2006).

¶ 57 Section 10-10(a) of the Limited Liability Company Act provides the only means by which an individual can be liable for contracts entered into on behalf of an LLC:

"(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company." 805 ILCS 180/10-10(a) (West 2006).

¶ 58 Subsection (d) in turn provides that an LLC member can be liable to a third party for debts or obligations only if: (1) there is a provision to that effect in the LLC's articles of organization; and (2) the member has consented in writing to that provision. 805 ILCS 180/10-10(d) (West 2006).

¶ 59 Subsection (c) further provides that "[t]he failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company." 805 ILCS 180/10-10(c) (West 2006).

¶ 60 We have recognized the clear legislative intent to shield individuals from personal liability in transactions on behalf of LLCs, where the LLC did not exist because it was dissolved. In Puleo, we held that a managing member was not personally liable for debts that an LLC incurred after its dissolution because there was no evidence of a provision establishing the managing member's personal liability was contained in the LLC's articles of organization or that the managing member consented in writing to the adoption of such a provision, which are the requirements of section 10-10(d) of the Limited Liability Company Act. Puleo, 368 Ill. App. 3d at 68. We declined to imply into the Limited Liability Act a provision similar to section 3.20 of the Business Corporation Act that would hold an individual member liable for obligations incurred when the member was without authority because the LLC was not in existence. Puleo, 368 Ill. App. 3d at 69. We held that "[a]s we have not found any legislative commentary regarding that amendment, we presume that by removing the 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. Thus, other than the very limited circumstances specified in section 10-10(d), there is no individual liability for members for any debts and obligations entered into on behalf of an LLC even where, as here, such acts were unauthorized due to the fact that the LLC had not yet been formed.

¶ 61 Here, there is no evidence that the requirements of section 10-10(d) were met, and thus there is no basis for holding Scott Mason bound by the contract. While in Puleo the LLC was dissolved at the time the contract was entered into, whereas here the LLC was never formed in the first place, the holding of Puleo is equally applicable, as in both instances the LLC was not in existence at the time of contract. In this case it is undisputed that the LLC was never formed, and there is no evidence offered by defendants that there were articles of organization providing for Mason's liability, nor any writing in which Scott Mason agreed to be liable. See Puleo, 368 Ill. App. 3d at 68 (independent contractors could not establish a managing member's personal liability for debts that the LLC incurred after its dissolution without showing that a provision establishing the managing member's personal liability was contained in the LLC's articles of organization and that the managing member consented in writing to the adoption of such a provision). Thus, Scott Mason could not be held individually liable for the articles of agreement for deed because he is statutorily shielded from liability. Therefore, neither the unformed LLC nor Scott Mason could be held liable on the contract and the articles of agreement could not be enforced."

This is an interesting and thoughtful discussion on the Limited Liability Company Act that demonstrates a close reading of the statute.

Edward X. Clinton, Jr.

www.clintonlaw.net

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