1-95-4299 & 96-1513 (Consol.)

MID-AMERICAN ELEVATOR COMPANY, INC.

Plaintiff and Citation Petitioner- )

Appellee and Cross-Appellant, )

v. )

NORCON, INC., )

)

Defendant, )

)

(DOUGLAS KAULAS and PATRICIA KAULAS, )

Citation Respondents-Appellants )

and Cross-Appellees.) )

PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:

The petitioner, Mid-American Elevator Company, commenced

supplementary proceedings against the respondents, Douglas and

Patricia Kaulas, to discover assets belonging to the judgment

creditor, Norcon, Inc. The court determined that the Kaulases were

unlawfully holding property belonging to Norcon and entered

judgment against them for the unpaid balance of an underlying

judgment against Norcon in favor of Mid-American. The Kaulases now

appeal, raising as issues whether (1) the court relied upon an

inapplicable statute in holding them liable for the remainder of

the judgment against Norcon; (2) the court denied them due process

by entering judgment against them without a trial; and (3) the

court erroneously entered judgment against Patricia Kaulas when

there was no evidence that she was involved in the continuation of

business of Norcon after dissolution. On cross-appeal, Mid-

American argues that the court erred in denying its motion to

recover attorney fees and costs for the citation proceedings.

Norcon was a closely-held corporation engaged in construction

contracting. At all times relevant, its primary shareholders were

Douglas and Patricia Kaulas, who alternated as its president and

secretary. On March 6, 1991, Norcon was employed as general

contractor for a comprehensive renovation job, and subcontracted

with Mid-American to install a service elevator for the project.

On November 18, 1991, Mid-American brought suit against Norcon for

breach of this subcontract.

On September 1, 1994, while Mid-American's suit remained

pending, Norcon was involuntarily dissolved by the Secretary of

State for failing to pay franchise taxes. It is undisputed that

although the corporation was never reinstated, it continued doing

business from the date of dissolution until after the initiation of

the citation proceedings at issue.

On May 19, 1995, the court in the contract suit entered

judgment in favor of Mid-American and against Norcon in the amount

of $75,930, plus prejudgment interest and costs. When the judgment

remained unpaid on May 25, 1995, Mid-American served the Kaulases,

as Norcon's officers of record, with the citation petition at

issue. See 735 ILCS 5/2-1402 (West 1994). The citation contained

a standard restraining provision, prohibiting the Kaulases from

transferring or disposing of Norcon's property until after the

resolution of the citation proceedings.

The evidence at the citation proceedings was undisputed. At

a June 2, 1995, hearing, Douglas admitted that Norcon was still in

business and that he was its president and Patricia was its

secretary. Mid-American offered uncontested documentary proof that

from the date of the dissolution through the time of the

proceedings, Norcon maintained an active bank account, paid Douglas

from corporate proceeds, and continued to employ workers and pay

them from a corporate account. Since the dissolution, Norcon had

bid on several projects, two of which it had been awarded and was

currently performing; namely, one for Frederic Lane, dated August

29, 1994, and executed by Frederic Lane on October 3, 1994, and

another for Linda and Benjamin Ruff, dated June 1995.

The evidence also showed that on June 2, 1995, Douglas

endorsed a $20,474 check, payable to Norcon from Lane, over to

Henry Electric Company, Inc., a subcontractor on the Lane project.

The check was to settle a Norcon debt to Henry in the amount of

$12,150, and at Douglas's instruction, the $8,324 overpayment was

then returned by Henry in the form of a check made payable to

Patricia Kaulas. Additionally, a check in the amount of $10,000

was issued to Patricia by Henry Electric on June 2, 1995.

Further, upon receipt of the citation, Douglas began

depositing checks made payable to Norcon into a separate account

designated "Norenco". He deposited into the Norenco account a

check from Lane to Norcon in the amount of $10,485 and a check from

the Ruffs to Norcon totalling $38,550. Douglas also admitted

making disbursements from the Norenco account after June 2, 1995,

to pay Norcon's suppliers and subcontractors.

In June and July of 1995, checks totalling over $9000 were

drawn on the Norenco account and deposited into a personal account

held by Patricia at the Midtown Bank and Trust Company. Funds from

Patricia's account were then disbursed to pay Norcon's employees

and other creditors. Money was also withdrawn from this account to

cover the Kaulas' personal expenses.

On August 22, 1995, Mid-American filed motions seeking the

turnover of $11,026.15 held in a Norenco account, and $545.82 held

in a Norcon account, all in partial satisfaction of the unpaid

underlying judgment. The court granted the motion, and also

extended temporary restraining orders previously entered against

the Kaulases precluding them from withdrawing certain funds from

Midtown Bank.

The Kaulases subsequently filed a motion seeking return of

these funds and to dissolve the temporary restraining orders

entered against them. In support of their motion, the Kaulases

offered the affidavit of Douglas Kaulas, which admitted that Norcon

had continued doing business after the dissolution. Douglas

averred that he received notice of the dissolution but did not

understand its significance. Attached to Douglas's affidavit was

a statement of Norcon's assets as of September 1994, most of which

Douglas still had in his possession. Douglas offered to tender the

assets, which totalled less than $7,792, to the court as Norcon

assets. Douglas averred that accounts receivable existing at the

time of dissolution were paid to suppliers, subcontractors, and

other employees for services rendered on Norcon jobs, and that he

mistakenly disbursed Norcon funds from the Lane and Ruff contracts

to pay creditors.

On November 13, 1995, Mid-American moved for the entry of

judgment against the Kaulases, jointly and severally, for the

outstanding balance of the judgment against Norcon. Mid-American

alleged that, as of that date, only $59,233.66 of the judgment had

been satisfied and more than $40,000 remained outstanding. Mid-

American further alleged that Douglas was the beneficial owner of

real estate at 1922 N. Burling and that he had exclusive power of

direction over the land trust having title to the property. Mid-

American requested that the power of direction over the Burling

land trust be turned over to Mid-American or that the property be

sold and the proceeds applied in satisfaction of the judgment

against Norcon.

On November 14, 1995, the trial court entered judgment against

Douglas and Patricia Kaulas, jointly and severally, in the amount

of $44,045.01. The court found that, notwithstanding the

dissolution, the Kaulases had continued doing business as Norcon

until the citation proceedings, carrying out contracts and

receiving and disbursing funds on behalf of the corporation. The

court denied the Kaulas' motion for a return of the funds turned

over to Mid-American and for a dissolution of the restraining

orders entered against them. It also denied a motion by Mid-

American for attorney fees and costs it incurred in the citation

proceedings. The instant appeal and cross-appeal followed.

Supplementary proceedings under section 2-1402 of the Code of

Civil Procedure ("Code")(735 ILCS 5/2-1402 (West 1994)) are

designed to assist a judgment creditor in discovering assets of the

judgment debtor in order to satisfy an unpaid judgment. Pyshos v.

Heart-Land Development Co., 258 Ill. App. 3d 618, 622-23, 630

N.E.2d 1054 (1994). The procedure authorizes the creditor to

conduct an examination of a third party (735 ILCS 5/2-1402(a) (West

1994)), and upon a showing that the third party is holding assets

belonging to the judgment debtor, empowers the court to summarily

compel the application of discovered assets or income to the

satisfaction of the judgment, as long as the judgment debtor would

have the right to recover such assets from the third party.

Pyshos, 258 Ill. App. 3d at 623; Bentley v. Glenn Shipley

Enterprises, Inc., 248 Ill. App. 3d 647, 651, 619 N.E.2d 816

(1993); see also 735 ILCS 5/2-1402(b)(3), (b)(4) (West 1994). The

provisions of section 2-1402 are to be liberally construed, and the

burden lies with the petitioner to show that the citation

respondent possesses assets belonging to the judgment creditor.

Bentley, 248 Ill. App. 3d at 652.

The Kaulases first argue that in holding them liable for the

remainder of the judgment against Norcon, the trial court

erroneously relied upon section 8.65(a)(3) of the Business

Corporation Act of 1983 ("Act")(805 ILCS 5/8.65(a)(3) (West 1994)),

which is inapplicable to the situation at bar. Section 8.65(a)(3)

provides:

"The directors of a corporation that carries on its

business after the filing by the Secretary of State of

articles of dissolution, otherwise than so far as may be

necessary for the winding up thereof, shall be jointly and

severally liable to the creditors of such corporation for

all debts and liabilities of the corporation incurred in so

carrying on its business." (Emphasis added.)

The Kaulases maintain that this section is inapplicable

because, inter alia, it pertains solely to debts and liabilities

incurred after dissolution, and Mid-American's case against Norcon

was initiated on November 18, 1991, almost three years before

Norcon was dissolved. Additionally, the Kaulases assert that the

court wrongly concluded that the money they made from post-

dissolution contracts belonged to Norcon, when Norcon was no longer

in existence. In response, Mid-American argues that because the

Kaulases continued doing business as Norcon in complete disregard

of laws requiring a winding up process and payment of creditors,

they must be held liable for the outstanding judgment against the

corporation. We agree that section 8.65(a)(3) cannot reasonably be

interpreted to impose liability on the Kaulases for the outstanding

judgment against Norcon.

In construing a statute, a court must give the language its

plain and ordinary meaning. The statute should be read as a whole

and all its material aspects considered together. Trittipo v.

O'Brien, 204 Ill. App. 3d 662, 666, 561 N.E.2d 1201 (1990). The

court must interpret the statute on the basis of what was written

and not search for any subtle or not readily apparent meaning.

Trittipo, 204 Ill. App. 3d at 666.

The opening phrase of section 8.65(a)(3) is directed

specifically towards directors of a corporation that "carries on

its business after *** dissolution", and the predicate imposes

liability "for all debts and liabilities *** incurred in so

carrying on its business." (Emphasis added.) The plain meaning of

this language creates liability only for debts incurred during and

as a result of the illicit continuation of business after

dissolution.

In the case at bar, there is no dispute that Mid-American's

case against Norcon was initiated nearly three years before

Norcon's dissolution. The fact that the judgment was entered after

dissolution is of no consequence, because the judgment was based

exclusively upon the conduct of Norcon prior to dissolution. A

corporation is an entity separate and distinct from its officers,

directors, and shareholders, and the officers, directors and

shareholders generally are not liable for corporate debts or

liabilities. In re Rehabilitation of Centaur Insurance Co., 158

Ill. 2d 165, 172-73, 632 N.E.2d 1015 (1994); McCracken v. Olson

Cos., 149 Ill. App. 3d 104, 109, 500 N.E.2d 487 (1986). In light

of the fact that Norcon's liability to Mid-American was incurred

prior to dissolution, the court erred in holding the Kaulases

liable for the judgment against Norcon.

Mid-American also refers us to section 3.20 of the Act, which

is similarly unavailing. That section states:

"All persons who assume to exercise corporate powers

without authority so to do shall be jointly and severally

liable for all debts and liabilities incurred or arising as

a result thereof." 805 ILCS 5/3.20 (West 1994).

This section by its plain language pertains to debts or liabilities

incurred or arising as a result of the illicit continuation of

business. Again, the conduct giving rise to the judgment at issue

occurred long before Norcon's dissolution, and was not the result

of the fact that the Kaulases wrongfully continued doing business

as Norcon, Inc., thereafter.

However, to the extent the Kaulases retained or disposed of

Norcon assets after dissolution, they are responsible for a full

accounting. Dissolution effects neither a transfer of title to

corporate assets (805 ILCS 5/12.30(c)(1) (West 1994); In re Lipuma,

167 B.R. 522 (N.D. Ill. 1994)), nor an abatement of pending civil

claims against the corporation. 805 ILCS 5/12.30(c)(5) (West

1994). A corporation must adhere to all corporate formalities

during the winding up process; shareholders are entitled to the

residue of corporate funds only after providing for the rights of

corporate creditors and the legal claims of third persons. Lasday

v. Weiner, 273 Ill. App. 3d 461, 466, 652 N.E.2d 1198 (1995);

Snyder v. Nathan, 353 F. 2d 3 (7th Cir. 1965).

A shareholder may not treat corporate assets as his own prior

to completion of the winding up process (Lasday, 273 Ill. App. 3d

at 466), and a corporate officer cannot serve himself first by

manipulating corporate affairs to the detriment of creditors.

O'Connell v. Pharmaco, Inc., 143 Ill. App. 3d 1061, 1070-71, 493

N.E.2d 1175 (1986); see also Dean v. Kellogg, 327 Ill. App. 520,

526, 64 N.E.2d 551 (1946), aff'd, 394 Ill. 495, 68 N.E.2d 898. In

any transaction in which an officer acquires corporate property,

the burden of proof lies with him to establish that the transaction

was fair. O'Connell, 143 Ill. App. 3d at 1070. Further, a

majority stockholder who, after dissolution, converts corporate

property and assets to his own use, becomes an equitable trustee of

that property for the benefit of corporate creditors. Blankenship

v. Demmler Manufacturing Co., 89 Ill. App. 3d 569, 572, 411 N.E.2d

1153 (1980); see also Dean, 327 Ill. App. at 526; 16A W. Fletcher,

Cyclopedia Corporations _8130, at 258 (1991-95).

In this case, there is no question that Norcon's assets as of

September 1, 1994, should have been set aside for the benefit of

Norcon's creditors, including Mid-American. However, the record in

this case is insufficient for this court to ascertain the value of

Norcon's property on that date; thus, remand is necessary. Douglas

admitted in his affidavit that upon dissolution, he retained Norcon

property in the amount of $7,792. This amount unquestionably must

be held in trust for the benefit of Mid-American and Norcon's other

creditors.

A determination must be made as to whether the Lane contract

belonged to Norcon or the Kaulases. A copy of the contract in the

record dated August 29, 1994, was not executed by Frederic Lane

until October 3, 1994; however, the contract also indicates that

work was to begin on August 29, 1994. On remand, the court should

determine whether the Lane contract commenced before or after

dissolution. Any funds or assets found to belong to Norcon that

were used for the Kaulas' benefit must be disgorged and placed in

trust for Norcon's creditors. In view of our decision on this

issue, we do not reach the Kaulas' other arguments for reversal,

that the court denied them due process, and that it erred in

entering judgment against Patricia Kaulas.

On cross-appeal, Mid-American challenges the court's denial of

its petition for attorney fees and costs.

After granting its motion for turnover, the court gave Mid-

American leave to file a petition for attorney fees and costs. In

this petition, Mid-American sought compensation for the substantial

expense it allegedly incurred in fighting the Kaulas'

"contemptuous" violations of the citation lien and the restrictions

against transfer of Norcon property. Mid-American claimed that the

Kaulases repeatedly sought to conceal Norcon's property by

diverting funds into the Norenco and Patricia Kaulas checking

accounts, and then disbursing money out of Patricia's account to

pay subcontractors on the Lane and Ruff projects and to cover

personal expenses. Mid-American further asserted that Douglas

testified untruthfully at the citation proceedings, stating that

Norcon had no employees, and attempting to mislead Mid-American's

counsel regarding the whereabouts and availability of documents

responsive to the citation. Mid-American requested reasonable

attorney fees in the amount of $24,520, plus expenses totalling

$3,098.25, incurred in prosecuting the citation proceedings. The

trial court awarded it costs in the amount of $2,346.20, but

otherwise denied the petition.

Mid-American now argues that the court erred in refusing to

find the Kaulases in contempt either under section 2-1402(d)(1) or,

alternatively, under the court's inherent power.

Section 2-1402(d)(1) authorizes a court to "punish any party

who violates the restraining provision of a citation as and for a

contempt, or if the party is a third party[, to] enter judgment

against him or her in the amount of the unpaid portion of the

judgment and costs allowable under this section***." 735 ILCS 5/2-

1402(d)(1) (West 1994). Apart from this section, judges have

inherent discretion to punish contemptuous behavior, and they are

not strictly bound in this regard by the Code (735 ILCS 5/1-101 et

seq. (West 1995)). See, e.g., Welch v. City of Evanston, 181 Ill.

App. 3d 49, 56, 536 N.E.2d 866 (1989); Comet Casualty Co. v.

Schneider, 98 Ill. App. 3d 786, 793, 424 N.E.2d 911 (1981). The

court may properly assess attorney fees as a sanction as long as

the fees have been proven reasonable through detailed records.

Welch, 181 Ill. App. 3d at 56; see also Frank B. Hall & Co. v.

Payseur, 99 Ill. App. 3d 857, 860, 425 N.E.2d 1002 (1981); Comet,

98 Ill. App. 3d at 793 (an appropriate sanction is fees covering

the cost of the contempt proceeding).

However, the determination to enter a contempt finding is a

matter of discretion with the trial court that cannot be disturbed

on review absent an abuse of that discretion. Frank B. Hall, 99

Ill. App. 3d at 860. Further, the supreme court has restricted the

propriety of a contempt finding under 2-1402(d)(1) against third

parties who dispose of property of the judgment debtor in good

faith, though erroneously. Specifically, in interpreting that

portion of section 2-1402(d)(1) quoted above, the court stated the

following:

"It would appear, however, that the appropriate punishment

for a third-party respondent in a citation proceeding who

has a color of a legitimate claim to the property and

disposes of the property in violation of the prohibition of

the citation, and the claim later proves not to be valid,

would be by way of the judgment remedy provided."

Bank of Aspen v. Fox Cartage, Inc., 126 Ill. 2d 307, 320, 533

N.E.2d 1080 (1989), citing 735 ILCS 5/2-1402(d)(1) (West 1994).

In this case, the court declined to make a finding of contempt

against the Kaulases, apparently concluding that Mid-American's

proof was conclusory and otherwise insufficient, and that the

Kaulases were entitled to a hearing before such a finding. The

court also apparently found that, although Douglas violated the

restriction against the transfer of Norcon's assets, "he did not do

it with malice aforethought."

However, it is impossible to verify this fact, or to ascertain

whether the court abused its discretion in refusing to find the

Kaulases in contempt, because Mid-American has failed to include

the transcript of the fee hearing in the record on appeal. The

judge may have determined under Aspen that the Kaulases, as third

parties in this case, appropriated Norcon's property believing they

had a right to do so.

In any event, the award of sanctions lies within the

discretion of the trial court, and there is no basis to conclude

that the court abused its discretion in this case.

Mid-American also argues that it should be awarded its costs

on appeal. It has failed to cite relevant authority on this point,

and in any event, an award of costs would be inappropriate in light

of our determination above. Thus, Mid-American's request must

fail.

For the foregoing reasons, the judgment of the circuit court

denying Mid-American's request for attorney fees is affirmed. The

judgment against the Kaulases on the citation petition is reversed,

and this case is remanded for proceedings consistent with this

opinion.

Affirmed in part, reversed in part and remanded.

CAHILL and O'BRIEN, JJ., concur.