An Illinois lawsuit alleging fraud filed by three of a corporation’s directors and officers against its remaining directors and officers. Zahl v. Krupa, et al., No. 2-08-0844 (April 13, 2010), had previously been reviewed by the Illinois Appellate Court after plaintiffs’ three counts of fraud and breach-of-contract were dismissed, at which point it was reversed and remanded back to the lower court. The case came before the Appellate Court a second time, this time regarding the dismissal of all but one of the corporation’s directors and officers.
The majority of the corporation’s directors and officers alleged that they should be dismissed from the case because they had no knowledge of the fraud committed by Krupa, an officer of the corporation. The main issue in the plaintiffs’ complaint was that Krupa had conned plaintiffs into giving him their money for a special “investment fund” he alleged was limited to the corporation’s officers and directors. The issue before the Appellate Court was whether the remaining officers and directors are liable for Krupa’s actions.
The Appellate Court referred to Murphy v. Walters, 87 Ill.App.3d 415 (1980) when considering the remaining officers and directors’ liability.
As a general rule, a corporation’s officer or director is not liable for the fraud of other officers or agents merely because of its official character, but he is individually liable for fraudulent acts of his own or in which he participates. . . He is liable only if he with knowledge, or recklessly without it, participates or assists in the fraud.
In Zahl, a review of the case facts led the court to believe that Krupa’s fraud was not so “openly committed as to have been easily detected upon proper supervision” by the remaining board members of the corporation. Furthermore, in Lowell Hoit & Co. v. Detig, 320 Ill.App. 179 (1943), a director is personally liable for the acts of a subordinate if he fails to exercise ordinary care, but he is personally liable for the acts of co-equals, i.e., co-directors only if he participates, actively or passively, in the acts.”
The additional directors and officers cited in the complaint were not aware of Krupa’s fraud and therefore did not actively or passively participate. Furthermore, there was no evidence that proved that the remaining defendants should have suspected Krupa of any wrongdoing or fraud and supervised him accordingly. Therefore, the court held that there was no issue of material fact as to any recklessness or negligence on behalf of the additional defendants.
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