Illinois law, consistent with other states, requires a corporation to have a board of directors and requires "the business and affairs of the corporation" to be managed "by or under the direction of the board of directors." (Illinois Business Corporation Act of 1983 Section 8.05) Even so, questions frequently arise as to whether any particular act requires explicit board approval, particularly when corporate by-laws, as they often do, give broad discretion to officers to act on behalf of the company. A recent Illinois case reaffirms the role of the board of directors of a corporation in voiding actions taken by an individual acting as secretary/treasurer of a corporation. (Fritzsche and Fritzsche Industrial Park vs. LaPlante and Rock, Illinois Court of Appeals, Second District, No. 2--09-0329, April 5, 2010)
Herbert Fritzsche, the plaintiff, was a businessman who had developed a family business, Fritzsche Industrial Park, in Lakemoor, Illinois. But Mr. Fritzsche was elderly and not in good health, suffering a brain hemorrhage in July, 2006 at the age of 89. In many respects, the case is a familiar story of family squabbling by the next generation over the business that Mr. Fritzsche had created.
In December 2005, the Fritzsche family incorporated Fritzsche Industrial Park, Inc. (FIP). At the first board meeting the following month, the board elected the officers, all of whom were related to Herbert Fritzsche. Ms. Rock, Herbert Fritzsche's daughter, was elected secretary/treasurer. In addition, Ms. Rock also had a power of attorney since 1999 to act on behalf of her father, Herbert Fritzsche.
On August 1, 2006, three weeks after Herbert Fritzsche's brain hemorrhage, Ms. Rock entered into some questionable transactions on behalf of FIP. She first signed a lease agreement, as secretary/treasurer, with Gregory LaPlante, her live-in boyfriend, under which FIP leased a substantial portion of the FIP properties to Mr. LaPlante on very favorable terms to him. In addition, she signed, on behalf of FIP, a promissory note on behalf of FIP to Gerald Shaver for $450,000 purportedly in payment for work Mr. Shaver had done for FIP through a trucking company he owned. The other family members challenged these acts, claiming they were void without board approval.
The court's opinion, directly and indirectly, questioned the honesty and integrity of Ms. Rock. In a footnote, it mentioned that Ms. Rock had been arrested for financial exploitation of an elderly person, theft by deception, and conspiracy to commit theft.
Mr. LaPlante was charged with theft and theft by deception. The court also noted the highly favorable terms of the lease to Mr. LaPlante and that it was ambiguous, poorly drafted and not reviewed by legal counsel or real estate professionals.
Whether Ms. Rock was actually secretary/treasurer at the time of signing the lease and promissory note was disputed. But it was undisputed that the board did not approve either transaction, and, on this basis, the trial court voided the transactions, a decision upheld by the Illinois appeals court.
What is unusual about the case is that the court voided the transactions on the summary judgment motions of the plaintiffs. It would seem that the defendants could have raised factual issues regarding Ms. Rock's authority, interpretation of by-laws, or other facts or circumstances that would at least get the case past summary judgment. But they could not do so successfully.
In voiding both transactions on summary judgment, the court looked at the following points:
- The bylaws of FIP provided that "[N]o loans shall be contracted and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors." So Ms. Rock's execution of the note on behalf of FIP exceeded her authority and was a clear violation of the bylaws
- The lease, as a matter of law, was so unusual and extraordinary (the common law standard) that board approval would be required.
- The lease involved "all, or substantially all" of the property and assets of FIP. The court cited the Illinois' Business Corporation Act in finding that proper procedures, requiring board and shareholder approval, were not followed. (Illinois Business Corporation Act of 1983 Section 11.60)
But shouldn't the determination of whether the lease involved "all, or substantially all" of FIP's assets be a factual question not appropriate for summary judgment? The appeals court said no. The plaintiffs alleged that there were no properties in the industrial park not covered by the lease. So "the burden then falls upon defendants to name any corporate property and/or assets not covered by the Lease, so that the court may decide if a question of fact exists as to whether the Lease includes "substantially all" of FIP's assets. This, the defendants failed to do.
There is a notable omission in the opinion that receives little comment. Were there any third parties that relied on the voided lease? The court does not mention this. And what about the payee under the note, Mr. Shaver? The court only states that Mr. Shaver was not a party to the proceedings and neither party explained his absence.
So, as between two sets of feuding officers/shareholders, the case may not have been difficult to decide. It would likely have been more difficult if third parties, relying on Ms. Rock's authority to sign documents on behalf of the corporation, had been parties to the case.
The court's decision is a reminder of the importance of boards of directors in corporate governance and the critical role they play in corporate management. It is also a reminder to officers of corporations of the limits of their authority in the absence of board approval.