Business Expectancy Not A Transferrable ‘Asset’ Under IL Fraudulent Transfer Statute [Deconstructing Andersen Law LLC v. 3 Build Construction LLC]

Andersen Law LLC v. 3 Build Construction, LLC, 2019 IL App (1st) 181575-U, the subject of my most recent post, here , examines the nature and reach of Illinois’s Fraudulent Transfer Act, 740 ILCS 160/1 et seq. [“IFTA”] and the ‘continuation’ exception to the successor liability rule.

The Plaintiffs’ IFTA claims were based on allegations that former members of the LLC debtors’ systematically raided company bank accounts and formed a new business entity to evade a money judgment.

A colorable IFTA claim – whether it sounds in actual or constructive fraud – requires a creditor-debtor relationship.  It also requires the plaintiff to allege a transfer of an identifiable asset.

Here, the Court found the Plaintiffs failed to allege either a debtor-creditor relationship between the judgment creditor and the individual LLC members or a transfer of debtor assets.  The Plaintiffs’ failure to allege that the debtor made transfers without receiving a reasonably equivalent value in exchange for the transfer also doomed their constructive fraud complaint count.

Next, the Court jettisoned the Plaintiffs’ actual fraud claims under IFTA Section 5(a)(1).  In an actual fraud claim, the plaintiff must show a specific intent to defraud a creditor. This Section goes on to list some eleven (11) “badges” of fraud ranging from whether the transfer was concealed, to whether the transferee was a corporate insider to whether a transfer encompassed the bulk of a debtor’s assets.  740 ILCS 160/5(b)

The Plaintiffs’ allegation that the transfers were fraudulent because they occurred within a year of the judgment or went to pay members’ personal expenses were deemed too conclusory to satisfy the pleading requirements for an IFTA actual fraud claim.

The Court then rejected the Plaintiffs’ IFTA Section 6(a) [which governs claims arising before a transfer] claim based on the debtors forming a new corporation and diverting debtors’ business opportunities to that new entity.

An IFTA claim requires a transfer.  “Transfer” is defined as “every mode….of disposing of or parting with an asset or an interest in an asset…” 740 ILCS 160/2(l).

“Asset” is defined as “property of a debtor” while “property,” in turn, means anything that may be the subject of ownership.  740 ILCS 160/2(b), (j) [¶ 84]

But a transfer is not made until the debtor acquires rights in the asset transferred.

The Court held the plaintiffs did not allege an asset or a transfer under the IFTA.  Following Illinois case precedent, the Court found that unfulfilled business opportunities were not transferrable assets under the statute.  [¶¶ 84-85]

Finally, the Court rejected the Plaintiffs’ successor liability claim.  The Plaintiffs alleged the debtors’ members formed a new business entity for the purpose of avoiding the judgment.

The general rule is that a corporation that purchases the assets of another business is not liable for the debts or liabilities of the purchased corporation.  An exception to this rule applies where the purchaser is a mere continuation of the seller. [¶ 95]

To invoke the continuation exception, the plaintiff must show the purchasing corporation maintains the same or similar management and ownership as the purchased entity.

The test is whether there is a continuation of the selling business’s entity; not merely a continuation of the seller’s business.  A commonality among the seller and buyer businesses’ officers, directors, and stock are the key ingredients of a continuation. [¶ 97]

The Court found the plaintiffs’ continuation exception arguments lacking.  The plaintiffs failed to allege a purchase or transfer of the corporate debtors’ assets or stock by/to the new entity.  And while the plaintiffs did allege some common management between the corporate debtors and the new entity, the plaintiffs failed to allege a commonality of stock between the companies.

Afterwords:

A conjectural business expectancy is not tangible enough to constitute a transferable asset under IFTA;

A creditor’s attempt to impute a corporate judgment to individual shareholders is improper in a post-judgment fraudulent transfer case.  Instead, the creditor should file separate action against the individual shareholder(s) for breach of fiduciary duty, usurpation of corporate opportunities, piercing the corporate veil or similar theories;

An identify of ownership between former and successor corporation is key element to invoke continuation exception to rule of no successor liability.

 

 

 

 

Plaintiffs’ Are ‘SOL’ Based on IFTA’s SOLs

The First District recently considered when the discovery rule can mitigate the harshness of a statute of limitations [the SOL] in a fraudulent transfer case.

The plaintiffs in Andersen Law LLC v. 3 Build Construction, LLC, 2019 IL App (1st) 181575-U, a judgment creditor’s former counsel and her new law firm who secured a $200K judgment against two limited liability companies, sued under the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 et seq. [the “IFTA”] alleging two members of the debtor LLCs pilfered corporate bank accounts and formed a corporation to avoid the judgment.

The judgment debtors and third party defendants moved to dismiss the IFTA claims on statute of limitation grounds and for failure to state a cause of action. The trial court granted the motion to dismiss and the plaintiff appealed.

Affirming the lower court’s dismissal, the First District noted that while an SOL motion to dismiss is normally brought under Code Section 2-619 [which involves affirmative matter], the SOL issue can be disposed of on a Code Section 2-615 [which looks at the four-corners of a pleading] motion where the complaint’s allegations make clear that claim(s) is time-barred.

An IFTA actual fraud [a/k/a fraud-in-fact] claim is subject to a four year limitations period, measured from the date of transfer. [740 ILCS 160/10(a)]. This section has a built-in discovery rule:  where the fraud could not have reasonably been discovered within the 4-year post-transfer period, the fraud-in-fact claim must be brought within one year after the transfer was or could have reasonably been discovered. [¶42]

To determine whether the discovery rule preserves a too-late claim, the court considers whether an injured party has (1) sufficient knowledge that its injury was caused by actions of another, and (2) sufficient information to ‘spark inquiry in a reasonable person’ as to whether the conduct of the party causing an injury is actionable. [¶51]

Constructive fraud [a/k/a fraud-in-law] claims, by contrast, must be brought within 4 years of the transfer.  There is no discovery rule that extends the limitations term.

Looking to the plain text of IFTA Section 10, the First District affirmed the trial court’s dismissal of the plaintiffs’ constructive fraud claims.  It held that the IFTA statute of limitations runs from the date of transfer, not, as plaintiffs argued, from the judgment. [¶48]

The Court then rejected plaintiffs’ assertion that IFTA’s discovery rule saved the otherwise time-barred actual fraud claims.  It found the plaintiffs failed to allege specific facts or a chronology as to when they reasonably learned the defendants’ diverting funds from the corporate debtors’ accounts.  As a result, the Court affirmed trial court’s dismissal of plaintiffs’ actual fraud claim.

The Court also nixed the plaintiffs’ related argument that the discovery rule applied based on the obstructionist actions of their former client [from whom the IFTA claim was assigned].  It made clear that the fraudulent concealment of a cause of action must be based on the conduct of thedefendant, not a third-party. The lone exception is where the person concealing a claim is in privity with or an agent of the defendant.  In such a case, the statute of limitations period can be tolled. [¶59]

Here, the plaintiffs failed to plead facts that the former client/underlying creditor acted in concert with the judgment debtor or the transferees.

Take-aways:

Some key take-aways from the Anderson Law LLCcase include that in a fraudulent transfer case, the four-year limitations period runs from the date of transfer, not from the date of the underlying judgment.

The case also makes clear that it is the plaintiff’s burden to successfully invoke the discovery rule to breathe life into a stale IFTA fraud-in-fact claim. [The one-year discovery extension period doesn’t apply to fraud-in-law claims.]  If a plaintiff fails to plead specific facts to carry its burden of demonstrating that its time-barred claim should be saved by the discovery rule, its claim is subject to Code Section 2-615 dismissal.

 

 

E-Mails, Phone Calls, and Web Activity Aimed at Extracting $ From IL Resident Passes Specific Jurisdiction Test – IL First Dist.

In Dixon v. GAA Classic Cars, LLC, 2019 IL App (1st) 182416, the trial court dismissed the Illinois plaintiff’s suit against a North Carolina car seller on the basis that Illinois lacked jurisdiction over the defendant.

Reversing, the First District answered some important questions concerning the nature and reach of specific jurisdiction under the Illinois long-arm statute as informed by constitutional due process factors.

Since the defendant had no physical presence or office in Illinois, the question was whether the Illinois court had specific jurisdiction [as opposed to general jurisdiction] over the defendant.

Specific jurisdiction requires a plaintiff to allege a defendant purposefully directed its activities at the forum state and that the cause of action arose out of or relates to those contacts.  Even a single act can give rise to specific jurisdiction but the lawsuit must relate specifically to that act. [¶ 12]

In the context of web-based companies, the Court noted that a site that only imparts information [as opposed to selling products or services] does not create sufficient minimum contacts necessary to establish personal jurisdiction over a foreign defendant.  Here, though, the defendant’s site contained a “call to action” that encouraged visitors like the plaintiff to pay the defendant.  [¶ 14]

The court found that plaintiff’s allegations that defendant falsely stated that the Bronco’s frame was restored, had new brakes and was frequently driven over the past 12 months [when it hadn’t] were sufficient to allege a material misstatement of fact under Illinois fraud law.  It further held that fraudulent statements in telephone calls are just as actionable as in-person statements and can give an Illinois court jurisdiction over a foreign defendant.  [¶ 17]

Viewed in the aggregate, the plaintiff’s allegations of the defendant’s Illinois contacts were enough to confer Illinois long-arm jurisdiction over the defendant.

The plaintiff alleged the defendant (i) advertised the Bronco on a national website, and (ii)  e-mailed and telephoned plaintiff several times at his Illinois residence.

Next, the court considered whetherspecific jurisdiction over the defendant was  consistent with constitutional due process considerations.

The due process prong of the personal jurisdiction inquiry focuses on the nature and quality of a foreign litigant’s acts such that it is reasonable and fair to require him to conduct his defense in Illinois.

Factors the court considers are (1) the burden on the defendant to defend in the forum state, (2) the forum’s interest in adjudicating the dispute, (3) the plaintiff’s interest in obtaining effective relief, (4) the interstate judicial system’s interest in obtaining the most efficient resolution of the case, and (5) the shared interests of the several states in advancing fundamental social policies.

Once a plaintiff shows that a defendant purposely directed its activities at the forum state, the burden shifts to the out-of-state defendant to show that litigating in the forum is unreasonable.

The Dixon court held the defendant failed to satisfy this burden and that specific jurisdiction over it was proper.

Next, the Court declined to credit defendant’s Terms & Conditions (“T&C”) – referenced in the Defendant’s on-line registration form and that fixed North Carolina as the site for any litigation.

Generally, one written instrument may incorporate another by reference such that both documents are considered as part of a single contract.  However, parties must clearly show an intent to incorporate a second document.

Here, the court found such a clear intent lacking. Defendant did not argue that it sent the T&C to Plaintiff or referenced them in its multiple e-mail and telephone communications with Plaintiff.

The court also pointed out that defendant’s registration form highlighted several of the T&C’s terms.  However, none of the featured [T&C] terms on the registration form mentioned the North Carolina venue clause.  As a result, the bidder registration form didn’t evince a clear intent to incorporate the T&C into the contract.

Afterwords:

A foreign actor’s phone, e-mail and on-line advertisements directed to Illinois residents can meet the specific jurisdiction test;

Where a Terms and Conditions document contains favorable language to a foreign defendant, it should make it plain that the T&C is a separate document and is to be incorporated into the parties’ contract by using distinctive type-face [or a similar method];

If the defendant fails to sufficiently alert the plaintiff to a separate T&C document, especially if the plaintiff is a consumer, the defendant runs the risk of a court refusing to enforce favorable (to defendant) venue or jurisdiction provisions.