The president of a small manufacturing business, one of the firm’s three equal founding shareholders, decided to buy out one partner’s interest at market value. He convinced the third shareholder, who at the time was gravely ill with cancer and on leave from the business, to go along with the buyout, making each of them 50% shareholders in the business.
Not long after the buyout, the gravely ill shareholder passed away and MPS Law, representing his designated executor, opened an estate. When the executor and MPS Law met with the company president and remaining 50% shareholder, the president produced a Shareholders Agreement that allowed the company to buy a deceased shareholder’s shares at a fraction of the current valuation and demanded to purchase the shares at the discounted rate. Recognizing that the estate had several defenses to the company’s claim to purchase the shares, the executor refused the demand for the shares.
Whether because the company did not want to incur the cost immediately or because it was concerned about paying for likely lengthy litigation over its rights, the company delayed filing a lawsuit to enforce its claimed right to the shares. Nearly five years after the decedent’s death, however, the company finally filed an action against the executor seeking a court-ordered transfer of the estate’s shares to the company. The lawsuit set the stage for potentially lengthy and expensive litigation.
The executor turned to MPS litigator Charles Valente for a defense. Under Illinois law, claims against an estate must be filed no later than two years after the decedent’s death. The company’s lawsuit fell outside that timeframe, but the company filed its lawsuit against the executor, not the estate, claiming that the executor breached her duties to transfer the shares under the Shareholders Agreement. Moreover, because the lawsuit sought only to order the sale of an asset which would result in putting more funds into the estate, it was unclear whether the lawsuit would be considered a claim.
To avoid long and costly litigation, Charlie filed a motion to dismiss, arguing that all claims whether for specific performance, money damages, or otherwise were subject to the 2-year limitation. Charlie further argued that the claim was in reality a claim against the estate because it sought to impact the estate’s assets and not the executor personally. The court agreed with Charlie’s arguments and entered a judgment dismissing the company’s claims with prejudice.
As a result, the estate has the right to participate in the management of the company as a 50/50 shareholder. The end result of the even split: the estate retains the ability to seek the sale or liquidation of the company assets at market prices.