In a case of first impression, the Illinois Appellate Court, First District, ruled that litigants may be awarded attorneys’ fees under Section 12.60(j) of the Illinois Corporation Act (805 ILCS 5/1 et seq. --the “Corporation Act” or the “Act”) based on their adversaries’ arbitrary or vexatious conduct outside of the lawsuit.  Machnicki v. Kurowski, 2018 IL App 1st 171077.  

In Machnicki three shareholders in an Illinois corporation operated a Polish sausage shop and bakery (“Kurowski’s”) from a building that was not a corporate asset, but was instead owned by the individual shareholders as joint tenants.  Two of the shareholders (the “Pulaski Shareholders”) decided to open a new Polish deli and bakery (“Pulaski Polish Deli & Bakery”) and excluded the third (the “Kurowski Shareholder”) from participating in the new enterprise.  Not only did the Pulaski Shareholders start a new business without the third, they sued the Kurowski Shareholder seeking to partition the property from which Kurowski’s deli operated.  The Kurowski Shareholder asserted various counterclaims, including claims for breach of fiduciary duty and breach of contract.  Those claims sought, among other things, relief under Section 12.56 of the Corporation Act.

Following a trial, the court ordered the building to be sold, with the proceeds to be divided among all parties and found in favor of the Kurowski Shareholder on his breach of fiduciary duty claim.  Pursuant to Section 12.56 of the Corporation Act, the judgment ordered, among other things, the Pulaski Shareholders to buy the shares of the Kurowski Shareholder, punitive damages and prejudgment interest.  Thereafter, the Kurowski Shareholder filed a petition for attorneys’ fees under Section 12.60(j) of the Corporation Act.  That provision states:

If the court finds that a party to any proceeding under Section 12.50, 12.55 or 12.56 acted arbitrarily, vexatiously, or otherwise not in good faith, it may award one or more other parties their reasonable expenses, including counsel fees and the expenses of appraisers or other experts, incurred in the proceeding.

 The Kurowski Shareholder argued that his former colleagues acted “arbitrarily, vexatiously, or otherwise not in good faith” in trying to squeeze him out of his Kurowski shares for less than fair market value, misused corporate funds and engaged in discovery misconduct.  The trial court initially denied the fee petition, relying on Abreu v. Unica Industrial Sales, Inc., 224 Ill. App. 3d 439 (Ill. App. Ct. 1991), which interpreted the predecessor to Section 12.60(j).  In Abreu, the court held that the predecessor to Section 12.60(j) permitted attorneys’ fees only where a party has acted “arbitrarily, vexatiously or not in good faith” in the course of the lawsuit itself.  Id. at 451.  However, after initially denying fees, the trial court in Machnicki granted a motion to reconsider -- in which it was pointed out that Abreu was based on an out-of-date version of the Corporation Act.  Ultimately the trial court awarded attorneys’ fees to the Kurowski Shareholder.  

On appeal, the Pulaski Shareholders argued that Section 12.60(j) was not meaningfully different from its predecessor and the holding in Abreu should apply.  The Appellate Court disagreed and affirmed the award of attorneys’ fees.  

In its decision, the Appellate Court observed that the relevant section of the Corporation Act had meaningfully changed after the Abreu decision.  The previous version of the Act provided that if a party to an action “commenced under Section 12.50 has acted arbitrarily, vexatiously, or not in good faith in such action or in connection with any alternative relief provided in this Section, the court may, in its discretion, award attorneys’ fees . . . .”  (2018 Il App 1st 171077 at ¶18 (quoting 805 5/12.55(h) (West 1994); emphasis supplied by the Court).)  The current version of the Act removed the italicized language requiring that the arbitrary or vexatious conduct be “in such action.”  Accordingly, the Court determined that the plain language of the statute did not limit attorneys’ fees to those incurred as a result of improper conduct in the proceeding.

Further, the Appellate Court observed that the legislature clearly knows how to draft language that narrows the applicability of attorneys’ fees -- indeed, it did so in the pre-1995 version of the Act.  The legislature’s change of the language, especially after the Abreu decision, indicated its intent to broaden the availability of attorneys’ fees.

The Appellate Court did, however, identify a couple of limitations that would apply to the award of attorneys’ fees.  First, before fees may be awarded, the trial court must make a specific finding of “an offending party’s arbitrary, vexatious or otherwise not in good faith actions.”  When determining whether to award fees, the trial court may consider litigants’ actions that were unrelated claims brought under Section 12.50, 12.55 or 12.56.  

Second, when calculating the amount of fees, trial courts may only award fees tied to the Section 12.50, 12.55 or 12.56 claim.  Thus, fees for unrelated claims are not recoverable under the Act and the amount of the attorneys’ fees award may not exceed the fees and costs incurred in connection with pursuing the Section 12.50, 12.55 or 12.56 action.

The trial court awarded the Kurowski Shareholder $339,000 in attorneys’ fees (even though his compensatory and punitive damages were only $212,000) for his Section 12.56 claim.  The Appellate Court affirmed this award.  In doing so, it noted that counsel for the Kurowski Shareholder submitted his invoices and an affidavit averring that the total fees and expenses in the litigation were $339,210.  Although counsel did not specifically identify which fees were attributable to the Corporation Act claim, in affirming the fees award the Appellate Court noted that:  (a) the trial court stated that it would review the billing records in detail; (b) the Pulaski Shareholders failed to articulate which fees were or were not allocable to the Section 12.56 action; and (c) all of the parties’ claims revolved around disputes involving Kurowski’s deli.  

In light of the ruling in Machnicki, a couple of points should be considered when litigating claims brought under the Corporations Act.  First, the Corporation Act does provide an avenue for seeking attorneys’ fees in certain cases.  Second, plaintiffs should be clear in their complaints that they are pursuing relief pursuant to Sections 12.50, 12.55 or 12.56.  Third, attorneys should identify in their time entries work they’ve performed for claims brought under Sections 12.50, 12.55 or 12.56 of the Act, in particular when the litigation involves other types of claims.  Fourth, parties opposing fees should zealously challenge fees that are not clearly linked to claims brought pursuant to Sections 12.50, 12.55 or 12.56.

At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact Andy Campbell at 312.419.6900 or