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1-00-1526 

First Division
May 28, 2001

The parties entered into a contract for the plaintiffcorporation to provide accounting services for the defendantcorporation. Subsequently, the Illinois Secretary of Stateadministratively dissolved the plaintiff for failure to pay statefranchise taxes. The plaintiff alleges that after it wasdissolved it provided services for the defendant pursuant to thecontract, however, the defendant never rendered payment for thoseservices.

The plaintiff filed suit in municipal court, but failed toattach a copy of the contract to its complaint as required by theCode of Civil Procedure. 735 ILCS 5/2-606 (West 1998). On theday of trial, the trial court, over the defendant's objection,allowed the plaintiff to amend its complaint by attaching thecontract. The defendant moved to dismiss based on theplaintiff's administrative dissolution. The trial court deniedthe motion and, after a bench trial, entered judgment for theplaintiff.

The plaintiff attempted to execute the judgment by issuing acitation to discover assets. A second judge, on the motion ofdefendant, quashed the citation to discover assets and, on thecourt's own motion, sanctioned the plaintiff for issuing it. Theplaintiff then paid its franchise taxes and was reinstated.

The defendant filed a motion for a new trial before theoriginal judge. In this motion, the defendant argued that it wasimproper to grant judgment for an administratively dissolvedcorporation and further argued that the plaintiff should not havebeen permitted to amend its complaint on the day of trial. Theplaintiff filed a reply accompanied by a copy of itsreinstatement notice. The judge denied the motion for a newtrial. The defendant then appealed to this court.

We affirm.

BACKGROUND

The plaintiff, Henderson-Smith & Associates, Inc. (Henderson-Smith) is an Illinois corporation that provides bookkeeping andaccounting services. The defendant, Nahamani Family ServiceCenter, Inc. (Nahamani) is an Illinois nonprofit corporation thatoperates a group home for children who are wards of the State.

On January 3, 1997, the parties entered into a contract. According to the contract, Henderson-Smith was to performaccounting services for Nahamani for a fee of $1,500 per month. The parties agreed that at the end of each fiscal year,Henderson-Smith would "close the books" and assist withNahamani's year-end audit for an additional fee of $5,000. Thecontract was terminable by either party on thirty days' notice.

Subsequently, Henderson-Smith failed to pay its franchisetaxes. As a result, the Secretary of State administrativelydissolved Henderson-Smith effective June 1, 1998, as directed bysection 12.40 of the Business Corporation Act (the Act). 805 ILCS5/12.40 (West 1998). Henderson-Smith continued to keepNahamani's books.

In October 1998, Henderson-Smith performed Nahamani's auditfor the fiscal year ending June 30, 1998. Henderson-Smithalleges that it never received its $5,000 fee for the year-endaudit. On March 16, 1999, Henderson-Smith filed suit in theCircuit Court seeking $5,000 in damages. It attached a copy ofNahamani's invoice to the complaint instead of attaching a copyof the contract as required by the Code of Civil Procedure. 735ILCS 5/2-606 (West 1998).

The matter was set for a bench trial on November 9, 1999. Prior to trial, Nahamani moved to dismiss based on theadministrative dissolution of Henderson-Smith. Nahamani attacheda copy of the certificate of dissolution to its motion. Thetrial judge denied the motion. Nahamani also moved for dismissalpredicated on the failure of Henderson-Smith to attach a copy ofthe contract to its complaint. Nahamani argued that without thecopy of the contract, the complaint only stated a claim forquantum meruit. Nahamani further argued, as a quantum meruitclaim will not lie where there is a written contract governingthe matter in question (Industrial Lift Truck Service Corp. v.Mitsubishi International Corp., 104 Ill. App. 3d 360-61, 432N.E.2d 999, 1002 (1982)), the complaint was legally insufficient. In response, Henderson-Smith moved to amend its complaint toattach a copy of the contract. The court granted the motion overNahamani's objection. Nahamani then moved for a continuance,arguing that it needed time to adjust its defense based on(according to Nahamani) the new theory of the complaint. Thejudge denied the motion and the trial went forward. The courtfound for Henderson-Smith and entered an order for $5,000 pluscosts. Nahamani filed a motion for a new trial.

Henderson-Smith then attempted to collect the judgment. OnNovember 24, 1999, counsel for Henderson-Smith appeared beforethe supplementary proceeding judge and caused a citation todiscover assets to be issued upon Nahamani's bank, resulting inNahamani's bank account being frozen. Nahamani filed anemergency motion to quash. On December 14, 1999, thesupplementary proceeding judge granted the motion to quash. Onhis own motion, the judge also ordered that a hearing be held todetermine whether Henderson-Smith should be assessed Rule 137sanctions for availing itself of the court's supplementaryproceedings when it did not have legal authority to do so havingpreviously been administratively dissolved.

Henderson-Smith then paid its franchise taxes, with itscorporate status being reinstated on January 6, 2000. Henderson-Smith attached a copy of the certificate of reinstatement to itsresponse to Nahamani's motion for a new trial.

On February 14, 2000, the hearing on the motion forsanctions proceeded before the supplementary proceeding judge. Counsel for Henderson-Smith did not appear and a default orderwas entered.

On March 29, 2000, the trial judge entered a memorandumorder denying Nahamani's motion for a new trial.

Nahamani now appeals, arguing that the trial judge erred in:(1) allowing Henderson-Smith to proceed to trial and obtain ajudgment despite its administrative dissolution; and (2) allowingHenderson-Smith to amend its complaint on the day of trial andthen not granting Nahamani a continuance to revise its defense.

ANALYSIS

The secretary of state may "administratively dissolve" acorporation that neglects its obligations by failing to pay itsfranchise tax, not filing an annual report or not maintaining aregistered agent in the state. 805 ILCS 5/12.35 (West 1998). Ifthe administratively dissolved corporation corrects thedeficiency within five years, however, the secretary of state mayreinstate it to its former status. 805 ILCS 5/12.45 (West 1998).

The primary question to be addressed in this appeal iswhether reinstatement of an administratively dissolvedcorporation will serve to retroactively validate a judgment that:(1) arose out of a cause of action that accrued during the periodof dissolution; and (2) was entered during the period ofdissolution. This precise question is one of first impression inIllinois.

Henderson-Smith initially argues that Nahamani's motion todismiss should be properly understood as an objection tostanding, which this court should consider waived since not pledas an affirmative defense. Greer v. Illinois Housing DevelopmentAuthority, 122 Ill. 2d 462, 509, 524 N.E.2d 561, 582 (1988). Wefeel that waiver is inappropriate in this situation. Theadministrative dissolution provisions are for the protection ofthe State and the public (Regal Package Liquor, Inc. v. J.R.D.,Inc., 125 Ill. App. 3d 689, 693, 466 N.E.2d 409, 411-12 (1984)),not private civil defendants. Accordingly, a private civildefendant should not be able to waive such an objection. If heldotherwise, the interests of an innocent third party would becompromised by the defendant's oversight. Inability to sue dueto administrative dissolution is a matter of public policy, which"may be raised by the court on its own motion or at any timeduring the course of the proceedings." Elsberry Equipment Co. v.Short, 63 Ill. App. 2d 336, 352, 211 N.E.2d 463, 471 (1965).

Under common law, a dissolved corporation could not sue orbe sued. All of its pending legal proceedings would abate. Blankenship v. Demmler Manufacturing Co., 89 Ill. App. 3d 569,572, 411 N.E.2d 1153, 1155 (1980). The Business Corporation Actof 1983 (805 ILCS 5/1.01 et seq. (West 1998)), sets outexceptions to this principle. The first exception holds,"[d]issolution of a corporation does not *** [a]bate or suspend acriminal, civil or any other proceeding pending by or against thecorporation on the effective date of dissolution." 805 ILCS5/12.30(c) (West 1998).

The second exception is a "corporate survival" provision,which extends the exception concerning actions that are pendingat the time of dissolution to any causes of action that haveaccrued at that time.

"Survival of remedy after dissolution. The dissolutionof a corporation either (1) by the issuance of acertificate of dissolution by the Secretary of State,or (2) by a judgment of dissolution by a circuit courtof this State, or (3) by expiration of its period ofduration, shall not take away nor impair any civilremedy available to or against such corporation, itsdirectors, or shareholders, for any right or claimexisting, or any liability incurred, prior to suchdissolution if action or other proceeding thereon iscommenced within five years after the date of suchdissolution." 805 ILCS 5/12.80 (West 1998).

In addition to these rules pertaining to corporatedissolution generally, the Act contains rules pertaining only toadministrative dissolution. According to the Act, "[n]ocorporation required to pay a franchise tax, license fee, penaltyor interest under this Act shall maintain any civil action untilall such franchise taxes, license fees, penalties and interesthave been paid in full." 805 ILCS 5/15.85 (West 1998). However,when an administratively dissolved corporation is reinstated, a"relation back" provision retroactively validates corporatestatus.

"Upon the issuance of the certificate of reinstatement,the corporate existence shall be deemed to havecontinued without interruption from the date of theissuance of the certificate of dissolution, and thecorporation shall stand revived with such powers,duties and obligations as if it had not been dissolved;and all acts and proceedings of its officers, directorsand shareholders, acting or purporting to act as such,which would have been legal and valid but for suchdissolution, shall stand ratified and confirmed." 805ILCS 5/12.45(d) (West 1998).

One such case is Amman Food & Liquor, Inc. v. HeritageInsurance Co., 65 Ill. App. 3d 140, 382 N.E.2d 562 (1978). InAmman, the court set out to reconcile section 15.85 of the Act,stating that a delinquent corporation cannot maintain a civilaction until it pays its taxes, and section 12.80, the corporatesurvival provision, allowing a dissolved corporation to commencea suit for a cause of action that accrued prior to itsdissolution until two (now five) years from the dissolution. Thecourt harmonized the two provisions by holding that anadministratively dissolved corporation could commence an action,i.e., file suit, within two (now five) years of the dissolution,but could not maintain the suit, i.e., pursue it to a judgment,until it had been reinstated. Amman, 65 Ill. App. 3d at 147,382 N.E.2d at 567.

The significance of a corporation being able to file suit,while administratively dissolved, is that the filing effectivelystops the statute of limitations from running. The Amman courtreasoned that when the corporation was reinstated, itsreinstatement would relate back and retroactively validate thefiling, and the date of the filing would be the operative datefor the statute of limitations. Amman, 65 Ill. App. 3d at 148,382 N.E.2d at 568.

Amman was decided before the relation back doctrine wascodified in 1983. Merchants Environmental Industries, Inc. v.Montgomery Ward & Co., Inc., 252 Ill. App. 3d 906, 625 N.E.2d 689(1993), although decided afterward, also did not apply the newlaw, because the provision had not taken effect when suit wasfiled. Merchants Environmental held, consistent with Amman:

"[The predecessor to section 15.85] should not beseen as an absolute bar to the prosecution of claimsbrought by corporations which are delinquent in thepayment of their franchise taxes. Nor should thesection be deemed to extinguish those claims which werefiled pursuant to [the corporate survival statute] by acorporation so dissolved. Rather it serves merely as atemporary impediment to the completion of the action, abarrier which can be removed by the simple expedient ofremitting to the State the franchise tax which is past-due." Merchants Environmental, 252 Ill. App. 3d at911-12, 625 N.E.2d at 693.

The first aspect of the question that we address is whetherHenderson-Smith could validly sue for breach of contract eventhough the cause of action accrued after it had been dissolved. Amman and Merchants Environmental interpret the relation backdoctrine, as it existed prior to its codification in 1983, toallow a delinquent corporation to file--but not obtain judgmenton-- a suit that otherwise could be filed under the corporatesurvival statute. Amman, 65 Ill. App. 3d at 147, 382 N.E.2d at567; Merchants Environmental, 252 Ill. App. 3d at 911-12, 625N.E.2d at 693. As mentioned above, however, in the case at barHenderson-Smith could not avail itself of the corporate survivalstatute because its cause of action did not accrue until after itwas dissolved.

More closely on point, in Regal Package Liquor, Inc. v.J.R.D., Inc., 125 Ill. App. 3d 689, 466 N.E.2d 409 (1984) (alsointerpreting the Act as it stood before the 1983 revision) thecourt did hold that a reinstated corporation could maintain anaction even though the agreement at issue was entered into andthe cause of action accrued while the corporation wasadministratively dissolved. The relation back provision seems tohave been codified in a form that is broader than the common lawversion. See Jacquelyne Sularz, The Effects of ReinstatementUpon Involuntarily Dissolved Corporations, 81 Ill. Bar J. 474(1993). Thus, the result in Regal Package is all the morecertain now.

Nahamani calls our attention to Korte Trucking Co. v.Broadway Ford Truck Sales, Inc., 877 S.W.2d 218 (Mo. App. 1994). In Korte Trucking a Missouri court, interpreting Illinois law,decided that an administratively dissolved Illinois corporationdid not have the power to sue for claims arising afterdissolution. However, this case looked only to the corporatesurvival statute and did not mention the provisions relating toadministrative dissolution. It did not consider whether therelation back provision applied. The Illinois case that KorteTrucking cited, Blankenship v. Demmler Mfg. Co., 89 Ill. App. 3d569, 411 N.E.2d 1153 (1980), did not deal with anadministratively dissolved corporation and was decided prior toRegal Package and prior to the codification of the relation backprovision. Accordingly, we do not find Korte Truckingcontrolling on this question.

Exploring the law in other jurisdictions, we find Florida'srelation back provision has language almost identical to thelanguage in Illinois' ("Whenever the application forreinstatement is approved and filed by the Department of State,the corporate existence shall be deemed to have continued withoutinterruption from the date of dissolution." Section 607.271(5),Florida Statues (1985)). Florida courts interpreting thatlanguage have held that involuntary dissolution for failure topay fees does not bar a corporation from suing on a claim thatarose after dissolution but before reinstatement. LeLac PropertyOwners' Ass'n, Inc. v. Routh, 493 So.2d 1131, 1133 (Fla. App.1986); Capital Construction Services, Inc. v. Rubinson, 541 So.2d748, 750 (Fla. App. 1989). We think this is the proper course. In coming to this conclusion we have focused our analysis on thepurposes behind the statute.

First and foremost, the portions of the Act dealing withadministrative dissolution are intended to ensure payment oftaxes and fees by corporations. Merchants Environmental, 252 Ill.App. 3d at 913, 625 N.E.2d at 694. Thus, a delinquent corporationshould not be able to obtain--or at any rate collect on--ajudgment until it pays its taxes and fees.

Conversely, once a delinquent corporation does make good thedeficiency, it should be allowed to carry on its business andconduct its legal affairs. The statute is intended to becoercive rather than punitive. Amman, 65 Ill. App. 3d at 148,382 N.E.2d at 568. This is especially clear in light of thebroad language of the relation back provision. "This fiction ofuninterrupted corporate existence promotes the stability,certainty and predictability of commercial transactions."Jacquelyne Sularz, The Effects of Reinstatement UponInvoluntarily Dissolved Corporations, 81 Ill. Bar J. 474 (1993).

Finally, we note that Illinois courts have understood theintent of the legislature to be that, so far as it is consistentwith the protection of the State's interest, parties should notbe able to employ these provisions to evade otherwise legitimatedebts. For instance, in Estate of Plepel v. Industrial Metals,Inc., 115 Ill. App. 3d 803, 450 N.E.2d 1244 (1983), the officerof a corporation made a contract while the corporation wasdissolved. The court found that the parties had intended thatthe officer be individually liable on the contract. The courtheld that reinstatement did not relate back and transform thedebt into an uncollectible corporate obligation. In Departmentof Revenue v. Semenek, 194 Ill. App. 3d 616, 551 N.E.2d 314(1990), the court found that gas station operators who continuedto do business after their corporation was administrativelydissolved showed an intent to do business as individuals. Thus,despite the corporation's reinstatement, the court held theoperators personally liable for retailers' occupation tax (ROTA)obligations. The statute could not be used to "impose a legalfiction that belies the real world fact that [the operators] soldgasoline, and thus personally assumed the ROTA liability."

Regal Package held that a party could not evade itscontractual obligations to a corporation merely because, as ithappens, the corporation had been administratively dissolved atthe time of contracting. Regal Package, 125 Ill App. 3d at 692-93, 466 N.E.2d at 411. The court noted that the administrativedissolution provisions were for the benefit of the State and thepublic. "It would not serve that purpose to allow thoseprovisions to be used as a defense to an action brought by adelinquent corporation to enforce a contract." Regal Package, 125Ill App. 3d at 693, 466 N.E.2d at 412. Furthermore, "it would beinequitable for that other party to avoid its obligations to thecorporation by pointing to the corporation's derelictions withrespect to the State, especially when its default has been curedby subsequent compliance with statutory requirements." RegalPackage, 125 Ill App. 3d at 692-93, 466 N.E.2d at 411. As theFlorida court of appeals stated in LeLac:

"We can perceive no reason to construe the legislativeintent in this scheme so narrowly as to provide awindfall to the parties who may create a cause ofaction during the grace period by allowing them toescape their obligations to the reinstatedcorporation." LeLac, 493 So.2d at 1133.

It could be argued that since Semenek states that therelation back provision does not "create a legal fiction contraryto the true nature of events" (Semenek, 194 Ill. App. 3d at 618-19, 551 N.E.2d at 315), Henderson-Smith's corporate status shouldnot be given retroactive effect. This would be amisunderstanding of the holding of Semenek. The "legal fiction"that the relation back provision cannot create is not the legalfiction that a reinstated corporation had valid corporate statusprior to reinstatement. Imposing that legal fiction is theentire point of the relation back provision, which mandates thatthe reinstated corporation "shall be deemed to have continuedwithout interruption from the date of the issuance of thecertificate of dissolution." 805 ILCS 5/12.45(d) (West 1998). The legal fictions that Semenek deplored were those that wouldbelie the intentions of the parties and those that wouldfrustrate their reasonable expectations. Here, consistent withSemenek, we think that the statute should not be used to impose alegal fiction that belies the real world facts. The relevantfacts, as found by the trial court, are that Nahamani contractedfor accounting services from Henderson-Smith, received thoseaccounting services, and then did not pay for them.

Although we conclude that Henderson-Smith had the power tofile suit for this cause of action despite the fact that itaccrued after Henderson-Smith's dissolution, the court should nothave entered judgement for Henderson-Smith before it paid itstaxes. Amman, Merchants Environmental, as well as public policy,all establish that a court should not enter judgment for adelinquent corporation. No change to the Act occurred in 1983that would alter this, thus, we conclude that the trial courterred in granting judgment for Henderson-Smith. However, thesecases do not address whether the relation back doctrine willserve to retroactively validate a judgment that has beenerroneously entered for an administratively dissolvedcorporation. The cases fail to tell us whether such a judgmentis void or merely voidable. The question remains whetherHenderson-Smith will have to go back to the trial court and startover.

There are cases in jurisdictions with similar relation backprovisions that have features in common with the case at bar. InFarmers State Bank v. Place-Wiederholt Chevrolet-Oldsmobile,Inc., 747 S.W.2d 170 (Mo. App. 1988), the trial court had grantedsummary judgment in favor of Farmers State Bank because, at thetime, Place-Wiederholt was administratively dissolved. Shortlyafterwards, Place-Wiederholt was reinstated. It filed a motionto reconsider the grant of summary judgment, which the trialcourt denied. The court of appeals reversed.

"The reinstatement of the charter closed the gapbetween the revocation and the reinstatement. Lookingback from the point of the reinstatement, it was as ifthe corporate existence had never been interrupted[Citation.] The reinstatement of the charterannihilated the ground upon which the summary judgmenthad been granted. The summary judgment should havebeen set aside on defendant's motion." Farmers StateBank, 747 S.W. 2d at 172.

According to Farmers State Bank, reinstatement can mandate thesetting aside of a judgment although it was correct when entered.

It has also been held that reinstatement can retroactivelyvalidate a judgment that was erroneous when entered. The onlycase we have found that is squarely on point with the case at baris Chrysler Credit Corp. v. Superior Dodge, Inc., 538 F.2d 616(4th Cir. 1976). In Chrysler Credit, the fourth circuitinterpreted Maryland's relation back provision 2B Ann. Code ofMd. Art. 23,