Page 28 - John Hundley 2013

“Duty to Shut Down” Argument Rejected. In Montalbano, the owner
had made more than $36 million in loans and capital advances to the corporation.
The employees thus argued that he knew the business was not viable without
continued advances and that he had a duty to prevent them from reporting to work
when he ceased making advances. Conceding that the loans evidenced that the
owner knew the business was within the “vicinity of bankruptcy,” the court found that
fact “too attenuated” to impose personal liability. It found the capital infusions to be
signs of the owner’s good faith and said that, absent deception, a corporate owner
contributing capital would not be held to a higher standard than a third party contributing such capital.

The court likened claimants’ arguments to the “deepening insolvency” theory urged to support
owner liability in insolvency cases generally. Noting that the logical conclusion of that theory is that
owners have a duty to shut down operations at the very onset of insolvency, the court rejected that
argument both as a matter of Illinois law and as a bankruptcy principle.

As to Illinois law, the court compared claimants’ arguments to other attempts to
pierce corporate veils, and said the invitation to do so would be declined absent
fraud or a separate corporate existence which was only fictional. As to bankruptcy
law, it said that “[i]f the court were to adopt claimants’ arguments, then in every
instance where the risk of bankruptcy may exist, those in control of a
corporation must immediately cease operations and send its employees home,
or face individual liability. This argument is in direct conflict with the
principles of the Bankruptcy Code, which favors rescue of businesses”.

Several observations may be offered with respect to Montalbano.

First, as a bankruptcy court opinion, it has little force as binding precedent, but its
value as persuasive authority seems much greater. It is well-reasoned, and in accord
with controlling precedent where that precedent exists.

Second, the opinion will be of no assistance where the businessman has
operated his business as a “d/b/a”. This is because in such circumstances there is
no corporate shield – the individual is the business and is directly liable.

Third, the implications of the decision for limited liability companies are unclear.
An LLC was not at issue, and IWPCA § 13 does not address them.

Fourth, the court’s leaving a potential exception for cases of fraud and deception may be an
invitation to further litigation. Often will be the situation where employees make some inquiry about
the company’s viability as a going concern, the precise terms of the inquiry and of the response being
as various as language permits. On its face, Montalbano only covers the situation where no inquiry is
made and no assurances given. In the real world, real employees – and creative plaintiffs’ lawyers –
often may be outside that premise.
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