Technically Non-Final Default Judgment Still Final Enough to Support Post-Judgment Enforcement Action – IL Fed Court (From the Vault)

Dexia Credit Local v. Rogan, 629 F.3d 612 (7th Cir. 2011) reminds me of a recent case I handled in a sales commission dispute.  A Cook County Law Division Commercial Calendar arbitrator ruled for our client and against a corporate defendant and found for the individual defendant (an officer of the corporate defendant) against our client on a separate claim.  On the judgment on award (JOA) date, the corporate defendant moved to extend the seven-day rejection period.  The judge denied the motion and entered judgment on the arbitration award.

Inadvertently, the order recited only the plaintiff’s money award against the corporate defendant: it was silent on the “not liable” finding for the individual defendant.  To pre-empt the corporate defendant’s attempt to argue the judgment wasn’t a final order (and not enforceable), we moved to correct the order retroactively or, nunc pro tunc, to the JOA date so that it recited both the plaintiff’s award against the corporation and the corporate officer’s award versus the plaintiff.  This “backdated” clarification to the judgment order permitted us to immediately issue a Citation to Discover Assets to the corporate defendant without risking a motion to quash the Citation.

While our case didn’t involve Dexia’s big bucks or complicated facts, one commonality between our case and Dexia was the importance of clarifying whether an ostensibly final order is enforceable through post-judgment proceedings.

After getting a $124M default judgment against the debtor, the Dexia plaintiff filed a flurry of citations against the judgment debtor and three trusts the debtor created for his adult children’s’ benefit.

The trial court ordered the trustee to turnover almost all of the trust assets (save for some gifted monies) and the debtor’s children appealed.

Affirming, the Seventh Circuit first discussed the importance of final vs. non-final orders.

The defendants argued that the default judgment wasn’t final since it was silent as to one of the judgment debtor’s co-defendants – a company that filed bankruptcy during the lawsuit.  The defendants asserted that since the judgment didn’t dispose of plaintiff’s claims against all defendants, the judgment wasn’t final and the creditor’s post-judgment citations were premature.

In Illinois, supplementary proceedings like Citations to Discover Assets are unavailable until after a creditor first obtains a judgment “capable of enforcement.”  735 ILCS 5/2-1402.  The debtor’s children argued that the default judgment that was the basis for the citations wasn’t enforceable since it did not resolve all pending claims.   As a result, according to debtor’s children, the citations were void from the start.

The Court rejected this argument as vaunting form over substance.  The only action taken by the court after the default judgment was dismissing nondiverse, dispensable parties – which it had discretion to do under Federal Rule 21.  Under the case law, a court’s dismissal of dispensable, non-diverse parties retroactively makes a pre-dismissal order final and enforceable.

Requiring the plaintiff to reissue post-judgment citations after the dismissal of the bankrupt co-defendant would waste court and party resources and serve no useful purpose.  Once the court dismissed the non-diverse defendants, it “finalized” the earlier default judgment.

Afterwords:

A final order is normally required for post-judgment enforcement proceedings.  However, where an order is technically not final since there are pending claims against dispensable parties, the order can retroactively become final (and therefore enforceable) after the court dismisses those parties and claims.

The case serves as a good example of a court looking at an order’s substance instead of its technical aspects to determine whether it is sufficiently final to underlie supplementary proceedings.

The case also makes clear that a creditor’s request for a third party to turn over assets to the creditor is not an action at law that would give the third party the right to a jury trial.  Instead, the turnover order is coercive or equitable in nature and there is no right to a jury trial in actions that seek equitable relief.

 

7th Circuit Provides Primer on Fraudulent Transfer and Alter Ego Doctrine In Contract Dispute

The Seventh Circuit affirmed an almost $3M judgment against the defendants under fraudulent transfer, successor liability and alter ego rules in Center Point v. Halim, 2014 WL 697501.

The plaintiff energy company entered into a written contract to supply natural gas to defendants’ 41 Chicago area rental properties.  The individual defendants – a husband and wife – managed the properties through a management company (Company 1).

Over a two-year period, defendants used over $1.2M worth of plaintiff’s gas and didn’t pay for it.  Plaintiff sued Company 1 in state court and got a $1.7M judgment.  When plaintiff discovered that defendants transferred all of Company 1’s assets to Company 2, plaintiff sued Company 2 and the husband and wife in Federal court alleging a fraudulent transfer and successor liability.  The Northern District entered summary judgment for plaintiff in the amount of $2.7M on all claims and defendants appealed.

Affirming, the Seventh Circuit first found that the defendants’ conduct violated the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 (the “Act”).  The Act punishes debtor attempts to avoid creditors through actual fraud or constructive fraud.

Constructive fraud applies where (1) a debtor transfers assets without receiving a reasonably equivalent value in exchange for the transfer and (2) the debtor intends to incur or reasonably should believe he will incur debts beyond his ability to pay them as they become due.  Halim, *2, 740 ILCS 160/5.

The Court found that the defendants’ actions were constructively fraudulent. First, the Court noted that during a three-year time span, Company 1 (the state court judgment debtor) transferred almost $11M to the individual defendants; ostensibly to repay loans.

But the Court found it odd there was no documentation of loans or a paper trail showing where the millions of dollars went.  The suspicious timing of defendants’ creation of a new company – Company 2 – coupled with the defendants’ inability to account for the millions’ whereabouts, bolstered the Court’s constructive fraud finding.

Since the individual defendants’ depletion of Company 1’s assets made it impossible for it to pay the state court judgment, the defendants’ actions were constructively fraudulent under the Act. *3.

The Court also affirmed summary judgment for the plaintiff under successor liability and alter ego theories.  In Illinois, the general rule is that a company that purchases assets of another company does not assume the liabilities of the purchased company.

A common exception to this rule is where there is an express assumption (of liability) by the purchasing company.  Here, the record showed that Company 2 assumed all rights, obligations, contracts and employees of Company 1.  As a result, the unsatisfied state court judgment attached to Company 2 under successor liability rules.

The Court also affirmed the judgment under the alter ego doctrine.  Alter ego applies where there is virtually no difference between the business entity and that entity’s controlling shareholders.  That is, the dominant shareholders don’t treat the corporation as a separate entity and fail to follow basic corporate formalities (e.g. minutes, stock issuance, incorporation papers, etc.).

The individual defendants treated Company 1 as their personal piggy bank by commingling their personal assets with the corporate assets.  There were no earmarks of “separateness” between the individual defendants’ assets and Company 1’s corporate assets.  *3-4.

Because of this, the husband and wife defendants were responsible (in the Federal suit) for the unsatisfied state court judgment entered against the defunct Company 1.

Take-away: Halim illustrates that where a judgment debtor corporation or controlling shareholders of that corporation transfer all corporate assets to a new, similarly named (or not) entity shortly after a lawsuit is filed, it will likely look suspicious and can lead to a constructive fraud finding.

The case also underscores the importance of following corporate formalities and keeping corporate assets separate from individual/personal assets – especially where the corporation is controlled by only two individuals.  A failure to treat the corporation as distinct from the dominant individuals, can lead to alter ego liability for those individuals.