The Illinois Fraudulent Transfer Act – An Illinois Case Note

Heartland Bank v. Goers, 2013 IL App (3d) 12084-U illustrates the procedural and substantive hurdles a creditor’s counsel must clear to enforce a judgment against a guarantor who transfers his personal assets into a trust.

The plaintiff bank in sued the defendant for breach of a commercial guarantee after defendant’s company defaulted on a $650,000 loan.  The bank obtained a money judgment against the defendant and issued citation proceedings against him.  During post-judgment proceedings, the bank learned that before the money judgment entered against the defendant, he transferred all  his assets, including a house, cars and bank accounts into a family trust (the Trust).

The trial court ordered the defendant to relinquish one-half of his bank and stock accounts, two cars, and 50% of the sale proceeds of his residence. Defendant appealed.

Result and Reasons:

The Court first held that the trial court wrongly ordered the sale and turnover of 50% of the house sale proceeds under the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (the UFTA).

The UFTA deems a transfer fraudulent against a creditor where (1) for claims arising before or after the transfer, the debtor transfers property with the actual intent to impede the creditor; or (2) for claims arising before the transfer, the debtor was insolvent or became insolvent as a result of the transfer.  740 ILCS 160/5, 6; ¶ 16.

A “transfer” means the disposal of an “asset” – defined by the UFTA as property of the debtor that is not held in tenancy by entirety. ¶ 16

It’s difficult to prove a debtor’s subjective intent to impede a creditor (a UFTA Section 5 claim) so most UFTA claims are brought under UFTA Section 6: that the debtor’s transfer caused its insolvency.

The court found the defendant and his wife owned the home in tenancy by entirety at the time they transferred the home to the trust.  Because of this, the UFTA didn’t apply to the transfer.

An interest in tenant-by-the-entirety property cannot be fraudulently transferred against a creditor of only one of the tenants. (¶ 18).

Reversing the turnover and sale of the house, the Court cited Illinois’ post-judgment statute which dictates that real property held in tenancy by the entirety is not liable to be sold upon judgment entered against only one of the tenants.  (¶ 18,) 735 ILCS 5/12-112.

The Court did uphold the trial court’s turnover order involving the defendant’s investment account funds.

Under UFTA Section 6 – which governs pre-transfer claims – a creditor must show by a preponderance of the evidence (it’s “more likely than not”) that:

  • its claim arose before the transfer,
  • the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transferred property; and
  • the debtor was insolvent at the time of the transfer or was rendered insolvent as a result of the transfer.

Here, the corporate borrower’s default in July 2009 immediately triggered defendant’s obligations under the guarantee.  And since the corporation’s default predated defendant’s transferring his bank account to the trust by two months, plaintiff’s claim against defendant arose before he transferred the investment account to the Trust. ( ¶¶ 31-33)

The court also found that at the time defendant transferred the account, he was insolvent within the meaning of the UFTA.  The defendant’s financial statements revealed that the guaranteed loan amount far exceeded defendant’s total assets.  As a result, plaintiff established all required elements of a UFTA Section 6 constructive fraud claim. ( ¶ 35)

Take-aways:

1/ A judgment creditor can’t force the sale of debtor’s real estate that’s held in tenancy by entirety property;

2/ A UFTA claim applies to any right to payment; regardless of whether or not the claim is liquidated (reduced to a fixed numerical amount);

3/ The Court’s UFTA  insolvency calculus takes into account a debtor’s contingent liabilities; not just its current ones.

Like Pulling Teeth: The Struggles of Collecting Judgments from Corporate Debtors

 

image

As someone who does some collection work, I experience first-hand how difficult it is to collect on judgments – especially from small corporate debtors.  A 2011 Second District case illustrates in stark relief just how challenging and frustrating enforcing a judgment can be.

In Conserv v. Von Bergen Trucking, 2011 IL App (2d) 101225U (2011), the Court followed Pyshos v. Heart-Land Development Co., 258 Ill.App.3d 618 (1994) and held that a judgment creditor cannot try to pierce the corporate veil of a corporate defendant in citation proceedings.  In doing so, the court narrowly construed post-judgment proceedings (or supplementary proceedings) and clarified that a piercing claim (one where the creditor tries to hold the corporate officer personally liable for the corporate debt) is beyond the scope of a citation/supplementary proceeding.

If ever there was a case for piercing, this was it.  Even when the trial court denied the creditor’s motion to pierce the corporate veil, the court noted that the defendant was “definitely getting away with something.  But the law allows him to get away with something.”  Cold comfort for the creditor indeed.

In Conserv, once the money judgment was entered, the corporate debtor immediately emptied its bank accounts and began operating under a different (though similar) name.  The “new” corporation was grossly undercapitalized, commingled personal and corporate funds and failed to follow any corporate formalities (keeping minutes, filing annual reports, paying required fees, etc).

The reincarnated corporation was a blatant sham or alter-ego of the principal officer.  Still, the court denied the creditor’s piercing motion stating that a citation proceeding’s only relevant inquiries are (1) whether the judgment debtor possesses assets that can be applied toward the judgment; or (2) whether a third party is holding assets of the judgment debtor.  Period.

So – what should a creditor do when it learns that a corporate debtor is an alter-ego of an individual?  The answer:  (1) issue a third-party citation  against the shareholders or against another corporation the creditor believes ha s assets of the debtor corporation; or (2) file a new breach of contract claim against the corporation.

Under option (2) above, you argue that the officer is responsible for the corporation’s debts because that corporation is a hollow front for the officer’s business dealings.