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.

Commercial Tenant’s Promise to Refund Broker Commissions Barred by Statute of Frauds – IL First Dist.

The plaintiff property owner in Peppercorn 1248 LLC v. Artemis DCLP, LLP, 2016 IL App (1st) 143791-U, sued a corporate tenant and its real estate brokers for return of commission payments where the tenant never took possession under a ten-year lease for a Chicago daycare facility.  Shortly after the lease was signed, the tenant invoked a licensing contingency and terminated the lease.

The lease conditioned tenant’s occupancy on the tenant securing the required City zoning and parking permits.  If the tenant was unable to obtain the licenses, it could declare the lease cancelled.  When the tenant refused to take possession, the plaintiff sued to recoup the commission payment.

Affirming summary judgment for the broker defendants, the Court addressed some recurring contract formation and enforcement issues prevalent in commercial litigation along with the “interference” prong of the tortious interference with contract claim.

In Illinois, where a contracting party is given discretion to perform a certain act, he must do so in good faith: the discretion must be exercised “reasonably,” with a “proper motive” and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” (73-74)

Here, there was no evidence the tenant terminated the lease in bad faith.  It could not get the necessary permits and so was incapable of operating a daycare business on the site. 

Next, the court found the plaintiff’s claim for breach of oral contract (based on the brokers’ verbal promise to refund the commission payments) unenforceable under the Statute of Frauds’ (“SOF”) suretyship rule. A suretyship exists where one party, the surety, agrees to assume an obligation of another person, the principal, to a creditor of the principal.

The SOF bars a plaintiff’s claim that seeks to hold a third party responsible for another’s debt where the third party did not promise to pay the debt in writing.

An exception to this rule is the “main purpose” defense. This applies where the “main purpose” of an oral promise is to materially benefit or advance the promisor’s business interests.  In such a case, an oral promise to pay another’s debt can be enforced.

The court declined to apply the main purpose exception here.  It noted that the brokers’ commission payments totaled less than $70K on a 10-year lease worth $1.4M. The large disparity between the commission and total lease payments through the ten-year term cut against the plaintiff’s main- purpose argument.

The plaintiff sued the corporate tenant for failing to return the commission payments to the brokers. Since the tenant and the broker defendants were separate parties, any promise by the tenant to answer for the brokers’ debt had to be in writing (by the tenant) to be enforceable.

The court also upheld summary judgment for the defendant on the plaintiff’s tortious interference count. (See here for tortious interference elements.)  A tortious interference with contract plaintiff must show, among other things, the defendant actively induced a breach of contract between plaintiff and another party.  However, the mere failure to act – without more – usually will not rise to the level of purposeful activity aimed at causing a breach.

The Court found one of the broker defendant’s alleged failure to help secure business permits for the tenant didn’t rise to the level of  intentional conduct that induced tenant’s breach of lease.  As a result, the plaintiff failed to offer evidence in support of the interference prong of its tortious interference claim sufficient to survive summary judgment.


1/ A promise to pay another’s debt – a suretyship relationship – must be in writing to be enforceable under the SOF;

2/ A contractual relationship won’t give rise to a duty to disclose in a fraudulent concealment case unless there is demonstrated disparity in bargaining power between the parties;

3/ Tortious interference with contract requires active conduct that causes a breach of contract; a mere failure to act won’t normally qualify as sufficient contractual interference to be actionable.


















How to Buy Environmental Consulting Like a Pro: The Phase 1 ESA (A Guest Post)

Today’s Q & A guest post is courtesy of Winfield, Illinois’ A3 Environmental, LLC , a full-service environmental consulting and testing firm representing lenders, developers, private and governmental buyers and sellers of commercial and industrial properties across the country.  

A3’s contact information: (888) 405-1742 (phone); [email protected] (e-mail); contact: Alisa Allen and Tim Allen (www.a3environmental.com)(company web page). 

How to buy Environmental Consulting like a Pro: The Phase 1 ESA (Environmental Site Assessment)

Q: Who Pays For The Phase 1 ESA?

A: Like most real estate deals, it is negotiable. Typically, the party borrowing money is required by the bank to purchase the Phase 1 ESA as part of their due diligence.  A seller can commission their own Phase 1 ESA and provide it as part of their marketing materials to help speed a sale, but it is up to the buyer to make sure they have done their due diligence in order to qualify for liability protection under the innocent landowner defense.

Q:How Long Is A Phase 1 ESA Good For?

A: The Phase 1 ESA has a shelf life of six months (180 days). After six months, the Phase 1 ESA should be updated or a new one commissioned. The original consultant should complete the updated report and it should be less expensive than purchasing a new one. A buyer can rely upon a seller’s Phase 1 ESA, but they will not qualify for liability protection unless issued a reliance letter from the consultant who performed it. Costs for a reliance letter vary and are dependent upon the consultant.

Q: How Much Should A Phase 1 ESA Cost?

A: Different types of properties have different levels of complexity, which will be reflected in the price. An industrial property in an urban setting will be more difficult than a hotel built on a former cornfield. A simple Phase 1 ESA should start at less than $2,000.

Q: How Long Will A Phase 1 ESA Take To Complete?

A: The goal at A3 Environmental is to complete the Phase I ESA in two weeks. Other consultants typically take three to four weeks to complete a Phase 1 ESA. Properly done, a Phase 1 ESA will include an environmental database search, a historical records review, interviews, FOIA requests to appropriate entities, a site inspection, and a report that needs to be written by an environmental professional. Scheduling the site visit to coordinate with the on-site contact’s schedule and getting responses from FOIA requests are two things that can significantly prolong the process.

Q: Does The Bank Pick The Environmental Consultant?

A: Banks often pick the environmental consultant but pass the costs on to you.  They do this for two reasons: convenience and familiarity.  The problem with this arrangement is that the consultant isn’t accountable to the buyer; their client is the bank. Borrowers who shop for prices can often save themselves hundreds, if not thousands of dollars.  Most banks have their own ‘approved’ consultants and are commissioned before the buyer even knows it.   It’s important that your consultant be accountable to you, the buyer, because the risk you are taking and their associated costs are primarily yours. A3 Environmental is owned by Alisa Allen; a Licensed Professional Geologist, certified by the State of Illinois Office of Professional Regulation. A sample of our work can be provided upon request to any bank.

Q: What’s The Most Important Thing To Be On The Lookout For? Where Are You The Most Vulnerable?

To buy environmental consulting like a pro, there are two places to be on the lookout to guard against vulnerability. The first is to protect yourself against shoddy science. Make sure your consultant is familiar with the local area, is insured for errors and omissions, and has a track record of providing quality work product. The second, and possibly most important thing to guard against is the recommendation of further investigation, also known as a Phase 2 ESA. When getting ready to spend large sums of money the lender and buyer are both in vulnerable positions. Some consultants take advantage of this vulnerability and recommend a Phase 2 ESA when it may not be completely necessary. It’s difficult for banks and buyers to say no.

If a Phase 2 ESA is recommended, you can protect yourself by going back to the seller and renegotiating for them to pay some, or all, of the bill. Another way to protect yourself is to bid out any Phase 2 ESA work to your current consultant and other consultants in order to keep your consultant honest.  You can also get a second opinion from a different consultant, for a few hours of consulting time. The time and money you save can be well worth it. A3 Environmental would be happy to review a Phase 1 ESA report from consultants recommending a Phase 2 ESA. We offer a half hour of consulting time for free per project.

Q: What’s The Best Way To Save Money When Buying Environmental Consulting?

A: There are three ways to save money when buying environmental consulting services: (1) negotiate for the seller to pay for any possible investigation before you have a contract on the property; (2) don’t accept the bank’s environmental consultant; shop for pricing; (3) if further investigation is necessary, obtain several consulting proposals.

Q: What’s Your Best Advice?

A: Build a good relationship with one environmental consultant after you have done your initial research and a project or two. True, it’s important to hire a competitively priced consultant; however, having a solid relationship with a consultant you can call and have meaningful conversations, often at no charge, can be very valuable. If a consultant knows you are a reliable repeat buyer of environmental services they will work extra hard to be a trusted resource to help you save money, frustration and time.

Parting Thought:

This document is a complete listing of our best advice for purchasing environmental consulting. It’s a sample of the level of honesty, integrity and value we here at A3 Environmental live every day. We hope that you recognize this and consider us when choosing a trusted resource to achieve your goals.