Common Law Accounting

In Illinois there is an equitable right to an accounting. Loosely described, there is also statutory right of a shareholder to an “accounting” from a corporation. More accurately, the latter is a shareholder’s right to inspect corporate books, records, minutes, voting trusts, etc., under Section 7.75 of the the Illinois Business Corporation Act, our discussion of which is here.

The common law right to an “accounting” is an equitable right, because the claim does not seek money damages but seeks information from a fiduciary. The claim for an accounting need not arise in the absence of a legal remedy if the claim arises in the context of a fiduciary relationship. Accordingly, it is wise to plead an accounting claim with particularity, as many accounting claims are a predicate for fraud or breach of fiduciary duty claims in partnership, joint venture or trust-based relationships. This does not mean wrongdoing is the gist of an accounting claim.

The common denominators for accounting claims or shareholders’ demands to inspect corporate records are usually a confidential, fiduciary or trust-based relationship; the putative defendant exclusively controls the records or entity, and ultimately is or was in the best position to identify all such accounting items, misspent funds or misappropriated property, etc. Frequently, exact damage computations may be impossible. Records may have been recopied or destroyed. In short, the cause of uncertainty, trouble, self-dealing or shareholder oppression usually rests solely with the defendant.

An action for an accounting involves two separate and distinct determinations. The first phase of an accounting trial requires a determination that the plaintiff is entitled to an accounting. The second phase where the defendant carries the burden of proof involves: (a) setting a certain sum owed by defendants; or (b) ordering other appropriate equitable relief, such as creation of a constructive trust to compensate plaintiffs if money damages are inadequate or difficult to determine due to the nature of defendants’ wrongdoing.

The Illinois Chancery Court should order defendants to account at the conclusion of the first phase, if plaintiff has established either: (a) a breach of fiduciary duty or fraud; or (b) the existence of complex accounts and the lack of an adequate remedy at law. However, there is no need to prove lack of adequate remedy at law when the plaintiff shows a breach of fiduciary duty. Illinois Chancery Courts require an accounting, because equity jurisdiction exists where a fiduciary relation exists, a duty rests upon the defendant to render an account, and equity courts have jurisdiction to compel the accounting. This is because equity has traditionally recognized and enforced fiduciary duties, so equity gives an accounting remedy against fiduciaries.

To make a prima facie showing of fiduciary breaches that warrant an order for the defendant to account, the plaintiff must plead the existence of a fiduciary relationship, breach of a fiduciary duty and damages proximately flowing from such breach. Ill will, malice or intentional misconduct, although needed to demonstrate a right to punitive damages, are not required elements of a fiduciary breach claim.

It is irrelevant that a corporate the director may have acted without fraudulent intent. Liability will attach if the director placed himself in a position of conflicting loyalties and subsequently violated his primary obligation to the corporation. The duty of fair dealing requires that officers disclose all material information relevant to corporate decisions from which they may derive a personal benefit.

A text book example of a breach of fiduciary duty based on self-dealing for which an accounting would be appropriate, is where a fiduciary causes a jointly owned entity to fund the fiduciary’s separate solely owned business, and uses the corporation’s assets, e.g., office space, to help another corporation in which he has an interest. In this situation, the courts will find that a breach of fiduciary duty has occurred when fiduciaries use joint employees and office space to fund their solely owned business. A fiduciary’s use of corporate assets to further his or her own goals is breach of fiduciary duty. Fiduciaries may not use corporate assets without compensating the corporation, and preferably should not put themselves in a conflicts position with temptation to misuse corporate assets.

Illinois courts recognize that danger is persistently imminent in fiduciary breach cases. To advance the public policy of requiring the removal of any incentive for a fiduciary to betray his or her corporation, courts have barred agent self-dealing at every opportunity, imposed stinging penalties to discourage it, and will impose constructive trusts on profits from breach of fiduciary duty – not to compensate the injured party for losses, but to deprive the wrongdoer of the gains.

The business and commercial litigation attorneys at Lubin Austermuehle have over thirty years of experience defending and prosecuting accounting actions, corporate and LLC freeze-out and breach of fiduciary duty lawsuits. We are knowledgeable regarding the changes and complexities of this evolving area of the law. We are committed to fighting for our clients’ rights in the courtroom and at the negotiating table. We have successfully tried a number of these cases to verdict or settled the cases after the start of trial for large six and seven figure dollar judgment or settlements. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated business separation, accounting and breach of fiduciary duty case for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.