Opinion
Civ. No. 97 C 1909.
February 25, 2000.
MEMORANDUM OPINION AND ORDER
Plaintiffs Aureo Rivera Davila and Aureo E. Rivera (the "Riveras") filed a two-count first amended Complaint against Defendants Magna Holding Company and/or Magna Holding, Inc. ("Magna"), formerly known as Chapman Products, Inc. ("CPI"), Chapman Security Systems, Inc. ("CSSI"), Code-Alarm, Inc. ("Code-Alarm") (collectively "the Code defendants"), and ACME Insurance Companies ("ACME"). Count I seeks to enforce a 1990 judgment of $19,385,766.00 in favor of the Riveras against Chapman Industries Corporation ("CIC") for patent infringement and to hold Magna and the Code defendants liable as successors-in-interest to the corporate personality of CIC. Count II alleges that "ACME" is a fictitious name representing insurance companies that are unknown to the Riveras which allegedly have issued policies covering the defendants, allegedly making "ACME" jointly and severally liable with the other defendants to the Riveras for the judgment. Defendant Magna filed a motion for summary judgment on the Riveras' enforcement claim against them in Count I. The Code defendants also filed a motion for summary judgment on the Riveras' enforcement claim against them in Count I. The Riveras filed an objection to a preclusion order entered by Magistrate Judge Rosemond. For the reasons set forth below, both Defendant Magna and the Code defendants' motions for summary judgment are GRANTED. The Riveras' objection to the preclusion order is MOOT.
STANDARD OF REVIEW
Under Rule 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). In ruling on a motion for summary judgment, the evidence of the nonmovant must be believed and all justifiable inferences must be drawn in the nonmovant's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513 (1996). This court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial.
A party who bears the burden of proof on a particular issue, however, may not rest on its pleadings, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact that requires trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 106 S.Ct. 2548, 2553 (1986). There is no issue for trial "unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson, 477 U.S. at 249, 106 S.Ct. at 2511.
STATEMENT OF FACTS
The background facts come from the parties' Local Rule 56.1 Statements of Material Facts and accompanying exhibits.
On July 28, 1967, the Riveras applied to the United States Patent Office for a patent on their "Theft Prevention System for Vehicles" invention, which was issued in December 1970. In early 1985, the Riveras filed a patent infringement action against, inter alia, Asset Conservation, Inc. (the "Asset Group") in the United States District Court for the District of Puerto Rico. The Riveras alleged that the Asset Group was the exclusive distributor of CIC's line of auto theft prevention products in Puerto Rico. Several years later, in 1987, the Riveras added CIC as a defendant in the Puerto Rican Litigation. That action was dismissed in 1989 on procedural grounds.
At the time the 1985 litigation began in Puerto Rico, CIC was a wholly owned subsidiary of Chapman Performance Products ("CPP"), engaged in the business of manufacturing and selling automotive security systems. CPP, in turn, was owned 50% by Robert Chapman and 50% by David Arlasky. In 1986, Chapman sold his 50% interest in CPP to Arlasky. As part of the transaction, the parties formed a new corporation, Chapman Acquisition Corp. ("CAC"). Chapman received $3,500,000 in cash from CAC, as well was a subordinated promissory note payable by CAC in the amount of $6,250,000. LaSalle National Bank ("LaSalle") provided the funding for this transaction, loaning $5,000,000 to CIC and receiving a lien on all CIC's assets in return. The owners of CAC, and thus CIC (as a wholly owned subsidiary of CAC) were then Arlasky (95%) and Mulkerin (5%). Arlasky and Mulkerin were the directors of CIC and operated CIC on a day to day basis. William Duffy was the sales manager of CIC.
Beginning in 1987, CIC began experiencing financial difficulties and defaulted on its indebtedness to LaSalle. By May 1987, the loan was undercollateralized by almost $1,100,000 and CIC's sales dropped 15% in the first quarter. In December 1987, CIC was added as a defendant in the Puerto Rico litigation. In 1988, CIC's financial troubles worsened. In March 1988, LaSalle's collateral shortfall increased to $3,667,000. By April, 1988, CIC was unable to make payments to most of its vendors because it had no cash flow. By April 30, 1988, CIC's internal financial statements showed a negative net worth of approximately $800,000.
By November 2, 1988, CIC had defaulted on approximately $4,700,000 in obligations to LaSalle. Under the terms of the lien LaSalle held on CIC's assets, LaSalle was entitled to exercise the rights of a secured party under the UCC, including the right to sell the collateral and apply the proceeds to its debt in accordance with § 9-504. The parties debate the extent to which LaSalle attempted to find purchasers for CIC's assets, but it is undisputed that LaSalle approached David Shelby at IMC Industries, Inc. ("IMC") as a potential buyer for the assets. Shelby had never heard of CIC prior to being approached by LaSalle about the purchase. IMC was wholly owned by Jack Rutherford and David Shelby. Shelby was responsible for negotiating with LaSalle on behalf of IMC.
The negotiations between LaSalle and IMC resulted in a Final Asset Purchase Agreement whereby Benco Acquisition, Inc. ("Benco"), a shell corporation set up by IMC, would purchase the CIC assets for approximately $3,500,000 and LaSalle would finance the transaction. The terms of the loans to Benco were negotiated on an arms-length basis between LaSalle and Benco. None of the parties involved in the negotiations could testify in their depositions to the exact basis for the purchase price, or how the parties arrived at $3,500,000. However, Shelby testified that the price was the result of a long series of negotiations, and that IMC looked at "normal due diligence material, past financials upon which we make judgments." Shelby testified that he looked at the state of CIC's business, projected what IMC could do with it, and considered the debt it would have to carry. Larry Ryan negotiated on behalf of LaSalle and testified that it was LaSalle's objective to obtain the most it could for the CIC assets. As a condition of making the loans, LaSalle insisted that IMC capitalize Benco with $300,000 cash and that IMC deliver a $750,000 guarantee on the revolving loan from LaSalle to Benco. The Final Asset Purchase Agreement was predated by a letter of intent dated August 26, 1988 and a financial outline on October 19, 1988. The Purchase Agreement and financial outline provided for a UCC § 9-504 sale, but the letter of intent did not.
The Riveras dispute the extent to which LaSalle sought other potential buyers for the CIC assets. LaSalle apparently never negotiated with anyone other than IMC, and did not identify any other potential purchasers. LaSalle's Larry Ryan testified that he would have welcomed better offers, but no other bidders came forth. LaSalle advertised the UCC sale one time in the Chicago Tribune Legal Notice section on October 23, 1988. The advertisement did not reveal the location of the assets to be sold, and the sale was not held at the location of the assets. LaSalle chose the manner of advertising the sale. The terms of the sale provided that LaSalle had the right to reject higher bids, and that successful bidders (other than Benco) would be required to pay the balance of the purchase price within 48 hours.
Approximately four months prior to the date of the sale, on June 30, 1988, CIC's balance sheet reflected total assets of $5,176,850. As of October 24, 1988, Benco listed the value of CIC as $4,500,000 in its application for certificate of authority to conduct business.
On November 2, 1988, LaSalle foreclosed on its security for the CIC indebtedness and sold substantially all of CIC's assets to Benco in a private sale conducted pursuant to Article 9-504 of the UCC, effectively ending CIC's operations. No other prospective purchasers attended the sale or bid on the assets. Prior to the closing of the 1988 sale, and as part of the negotiation price, LaSalle hired a professional appraisal firm, Valuation Consultants, to conduct an independent valuation of CIC's assets. According to the appraisal, the value of CIC's assets was $2,900,000, approximately $600,000 less than the amount LaSalle received for the assets. As a result of the 1988 sale, LaSalle incurred a loss of approximately $1,000,000. Sometime after the sale, Robert Chapman instituted a lawsuit alleging that the price paid by Benco at the 1988 sale was substantially less than the fair market value of CIC's assets.
Immediately after the 1988 sale, Benco Acquisition, Inc. changed its corporate name to Chapman Products, Inc. ("CPI"). LaSalle loaned the money for the purchase to CPI, in effect financing Benco's acquisition of CIC's assets. LaSalle then took a lien upon the assets of CPI. Neither Shelby at IMC nor Mulkerin at CIC discussed the Puerto Rican litigation in connection with the 1988 sale, but they were aware that it was pending; Mulkerin had discussed the litigation with CIC's patent counsel and Arlasky.
Following the sale, CPI was a wholly owned subsidiary of IMC, and thus wholly owned by Shelby and Rutherford. The executive management team at CPI consisted of McClure, Shelby, and Rutherford. Mulkerin, who had been a 5% owner and manager of CIC, acted as vice president of finance at CPI. William Duffy, who had been the sales manager at CIC, became the vice president of sales at CPI. Alarsky, part owner of CIC, retained possession of the premises upon which CIC had done business and leased that premises to CPI. Thus, there was an overlap of management and business conduct between CIC and CPI, but no overlap of ownership interest between the two companies.
CPI suffered continued financial difficulty and sales continued to decline after the close of the 1988 sale, and CPI found itself with a non-competitive product in a changing market place. CPI attempted to turn the company around, but was running out of money. CPI's product could not compete in the marketplace without substantial new assets being put into the company. CPI explained the situation to LaSalle and told LaSalle that it would be best to try and sell the company to a stronger competitor as a result of CPI's lack of liquidity and declining sales. LaSalle agreed.
In May 1989, the Riveras' Puerto Rican Litigation was dismissed on procedural grounds and the case was transferred to and refiled in the Northern District of Illinois. In addition to their patent infringement claims against CIC, the complaint also asserted claims against CPI and LaSalle arising out of the 1988 transaction. On December 29, 1989, the district court dismissed the claims against CPI and LaSalle for lack of jurisdiction, but allowed the action to continue against CIC.
Prior to the July 1989 judgment the Riveras ultimately obtained against CIC, CPI defaulted on its outstanding indebtedness to LaSalle. LaSalle therefore faced the necessity of selling the assets which secured its claim. LaSalle again sought buyers. One person contacted was Rand Mueller, the president of Code-Alarm (one of the Code defendants), which was a publicly owned company. Code-Alarm and LaSalle entered into a asset purchase agreement providing that Code-Alarm would bid for the CPI assets at a UCC sale. Again, the agreement was preceded by a letter of intent. No other potential buyers have been identified by the parties in their filings, and no one testified to notice of the sale being given to any other persons. Mueller testified that Code-Alarm initially rejected the potential purchase because the price was too high, but ultimately determined that the acquisition may be in the company's interest and began negotiating for the purchase of the assets. Code-Alarm was initially interested in purchasing only the Chapman name, but after much negotiating, purchased the other inventory and assets of CPI in order to obtain the name, because it was necessary to complete the transaction. There were extensive negotiations regarding the possible sale of the CPI assets between Code-Alarm, CPI, and LaSalle. Sometime during the negotiations, Code-Alarm created Code Acquisition, Inc. ("CSSI") as a wholly owned subsidiary of Code-Alarm to purchase the CPI assets. Essentially, Code-Alarm sought to minimize the price CSSI would pay for the CPI assets and CPI sought to maximize the price paid. Muller ultimately agreed to purchase the CPI assets at their "fair market value" as determined by Code-Alarm's accountant. The purchase price was determined on the basis of that accountant's appraisal.
The Riveras dispute this characterization of the sale, but do not support their denial with any facts from affidavits, parts of the record, or any other evidentiary material. Accordingly, the facts are deemed admitted pursuant to Local Rule 55.1(b)(3)(B).
As a result of those negotiations, on January 19, 1990, LaSalle foreclosed on its security for the CPI indebtedness and sold substantially all of CPI's operating assets and selected liabilities to CSSI in a private sale conducted pursuant to § 9-504 of the UCC. Code-Alarm bid pursuant to the asset purchase agreement, and was the only bidder at the sale. The sale price was $1,358,045.00. The proceeds of the sale were applied against the outstanding obligations of CPI to LaSalle. CPI, LaSalle, and IMC agreed that IMC was released from any obligation arising out of the 1988 loan from LaSalle. In connection with that sale, Code-Alarm hired an investment banking firm, First of Michigan, to render a fairness opinion as to whether a purchase price of approximately $1,400,000 for CPI's assets was fair from a financial point of view. Mueller was aware of the Rivera litigation and requested indemnification from LaSalle because of the that and other litigation. Mueller understood prior to the sale that he was not purchasing CPI's liabilities.
As a result of CIC and CPI's defaults on their loans and LaSalle's inability to recover its losses through the 1988 sale of CIC's assets to CPI and the subsequent 1990 sale of CPI's assets to CSSI, LaSalle lost more than $3,000,000, which it has never recovered and has since written off.
Benco had ceased all operations in January, 1990, when substantially all of its assets were sold by LaSalle to CSSI. In February 1990, CPI changed its corporate name back to Benco Acquisition, Inc. In May 1992, Benco Acquisition, Inc. changed its name to Magna Holding Company or Magna Holding, Inc. ("Magna").
PROCEDURAL BACKGROUND OF THE ENFORCEMENT ACTION
CIC ultimately failed to contest the pending Rivera litigation against it. On July 26, 1990, Judge Charles P. Kocoras of this United States District Court entered default judgment against CIC in the amount of $19,385,766, which was affirmed by the United States Court of Appeals for the Federal Circuit on May 7, 1990. The default judgment was entered against CIC only, not against any of the defendants in this litigation. In August of 1990, the Riveras refiled their patent infringement action against the Asset Group and CIC in the District Court of Puerto Rico. In June 1992, the Asset Group filed a third-party complaint against CIC, CPI, CSSI and Code-Alarm. Then, on March 17, 1995, the Riveras filed an amended complaint in the second Puerto Rican Litigation and added the present defendants, CPI (now Magna), CSSI and Code-Alarm as defendants, seeking to enforce the $19 million judgment against them under the equitable theory of successor liability. The District Court of Puerto Rico dismissed the Riveras' claims on March 20, 1996 based on the doctrine of collateral estoppel, and stated in its order that the Riveras' claims against CPI, CSSI, and Code-Alarm were properly raised in the Northern District of Illinois — where the $19 million judgment was originally obtained.
On March 20, 1997, the Riveras filed their current lawsuit against Magna (formerly known as CPI), CSSI, and Code-Alarm ("the Code defendants") alleging the exact same claims, and seeking the same relief as they did in the second Puerto Rican Litigation. In essence, the Riveras contend that CIC sought to avoid its potential liability to them by engaging in a series of fraudulent transfers of its assets. The first such transaction took place in 1988, when CIC's assets were sold to CPI/Magna. The second transaction occurred in 1990, when the assets of CPI were sold to Code-Alarm/CSSI. In Count I of the amended complaint, the Riveras allege that Magna and the Code defendants are successors-in-interest of CIC, and consequently, that they are liable for the $19 million judgment granted in favor of the Riveras. Count II asserts claims of insurance fraud on the part of the alleged insurance company which the Riveras have fictitiously named, "ACME," making "ACME" liable with Defendants to the Riveras for all alleged damages. Only Count I, the successor-in-interest claim, is the subject of the present motions.
The current lawsuit was originally assigned to Judge George M. Marovich of this United States District Court. All defendants (with the exception of "ACME," a fictitious entity) responded to the Riveras' complaint by filing a motion to dismiss for failure to state a claim upon which relief can be based. Judge Marovich denied the motion to dismiss as to all the defendants. Davila v. Magna Holding Co., 1998 WL 578032, 97C1909 (N.D.Ill.). Judge Marovich reasoned that because the Riveras had alleged that Alarsky and Mulkerin were involved in the management and held ownership interests in both CIC and Benco/CPI (now Magna), they had alleged an identity of ownership between Magna and CIC sufficient to state a claim under the merger, continuation, and/or fraudulent purpose exceptions to the rule against successor nonliability as to Magna. However, because the Riveras had not alleged a continuity of ownership between CSSI or Code-Alarm (now the Code defendants), they could not state a claim against the Code defendants under the merger or continuation exceptions. Judge Marovich did find that the Riveras had pled sufficient facts to state a claim against the Code defendants under the fraudulent purpose exception, however.
During discovery, the parties encountered discovery disputes. The Code defendants filed a motion for preclusion as a sanction for the untimely filing of the Riveras' discovery responses. The motion was referred to Magistrate Judge Rosemond. Judge Rosemond granted the motion on April 4, 1990, precluding the Riveras from introducing any evidence responsive to "certain defendants" first set of interrogatories and first request for production of documents and barring them from supporting or opposing any claims or defenses based upon matters requested in the interrogatories and requests for production. The Riveras filed a written objection to the preclusion order, and both the Code and Magna defendants argued that it should be enforced.
On February 1, 1999, this case was reassigned to this court pursuant to an order of the Executive Committee. At that time, Magna and the Code defendants' motions for summary judgment, as well as the Riveras' objection to the preclusion order entered by Judge Rosemond were pending. However, none of the parties identified with specificity what evidence or claims they believed to be barred by Judge Rosemond's preclusion order in their summary judgment motions and responses thereto. Accordingly, this court accepted all of the Riveras' evidence as set forth in their Local Rule 56.1(b) responses to Magna and the Code defendants' statements of material facts and the Riveras' statement of additional facts. Because summary judgment is appropriate even considering all of that evidence, the Riveras' objection to the preclusion order is moot.
ANALYSIS
The Riveras assert a claim to enforce the $19 million judgment against CIC handed down by the district court in 1990 against Magna and the Code Defendants under a theory of successor liability. As applied to this facts of this case, the common-law theory of successor liability is not a free-standing cause of action, but rather a means of enforcing and collecting the outstanding $19 million judgment. The traditional rule with respect to successor corporate liability, that of nonliability for successors, has developed in Illinois to protect bona fide purchasers from unassumed liability. Vernon v. Schuster, 179 Ill.2d 338, 344, 688 N.E.2d 1172, 1175 (1997) (quoting Tucker v. Paxson Mach. Co., 645 F.2d 620, 623 (8th Cir. 1981)). In order to mitigate the potential harshness of the successor nonliability rule, Illinois law developed exceptions that were intended to protect the rights of corporate creditors after the dissolution of a corporation, including an exception to successor nonliability for transactions carried out for a fraudulent purpose. Id.
The general rule for successor liability in Illinois is that when one corporation sells its assets to another corporation, the successor corporation does not become liable for the debts and liabilities of the seller merely by reason of succession. Meyers v. Putzmeister, Inc., 232 Ill. App.3d 419, 422, 596 N.E.2d 754, 755 (1st Dist. 1992); see also Ruiz v. Blentech Corp., 89 F.3d 320, 324 (7th Cir. 1996), cert. denied, 519 U.S. 320, 117 S.Ct. 737, 136 L.Ed.2d 677 (1997). Illinois recognizes four exceptions to the general nonliability rule for successors where: (1) there is an express or implied agreement of assumption; (2) the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) the purchaser is merely a continuation of the seller; or (4) the transaction is for the fraudulent purpose of escaping liability for the seller's obligations. Id.; see also Steel Co. v. Morgan Marshall Indus., Inc., 278 Ill. App.3d 241, 248, 662 N.E.2d 595, 599-600 (1st Dist. 1996); Green v. Firestone Tire Rubber Co., 122 Ill. App.3d 204, 209, 460 N.E.2d 895, 898-99 (2d Dist. 1984) (quoting Hernandez v. Johnson Press Corp., 70 Ill. App.3d 664, 667, 388 N.E.2d 778, 780 (1st Dist. 1979)). Here, the Riveras claim that Magna and the Code Defendants are liable as successors to CIC under the second, third and fourth exceptions — the "de facto merger," "continuation," and "fraudulent purpose" exceptions, respectively. However, in ruling on the defendants' motion to dismiss, Judge Marovich found that the Riveras had not properly pled facts sufficient to demonstrate liability as to the Code defendants under either the de facto merger or continuation exceptions. This court agrees with Judge Marovich's analysis. Accordingly, this court will analyze Magna's potential liability under the merger and continuation exceptions (as well as the fraudulent purpose exception), but will analyze the Code Defendants' potential liability only under the fraudulent purpose exception.
A. The Merger and Continuation Exceptions
Illinois has expanded the merger exception to include a "de facto merger." A de facto merger may occur when all four of the following criteria are present: (1) There is a continuity of the business enterprise between seller and buyer, including continuity of management, employees, location, and assets; (2) there is a continuity of shareholders, in that shareholders of the seller become shareholders of the buyer; (3) the seller ceases operations and dissolves as soon as possible after the transaction; and (4) the buyer assumes those liabilities and obligations necessary for the uninterrupted continuation of the seller's business. Nguyen v. Johnson Mach. Press Corp., 104 Ill. App.3d 1141, 1143, 433 N.E.2d 1104, 1106-07 (1st Dist. 1982); see also Hernandez, 70 Ill. App.3d at 677, 388 N.E.2d at 780 (quoting Shannon v. Langston, 379 F. Supp. 797, 801 (W.D.Mich. 1974)). When determining whether a de facto merger has occurred, the most important factor to consider is the identity of ownership between the new and former corporation. Nilsson v. Continental Mach. Mfg. Co., 251 Ill. App.3d 415, 417, 621 N.E.2d 1032, 1034 (2d Dist. 1993).
The continuation exception applies when the purchasing corporation is merely a continuation or reincarnation of the selling corporation. Vernon, 179 Ill.2d at 346, 688 N.E.2d at 1176 (citing Grand Lab., Inc. v. Midcon Labs of Iowa, Inc., 32 F.3d 1277, 1282 (8th Cir. 1994)). In other words, the purchasing corporation maintains the same or similar management and ownership, but merely wears "different clothes." Vernon, 179 Ill.2d at 346, 688 N.E.2d at 1176. The exception is designed to prevent a situation in which the specific purpose of the successor's acquiring assets is to place those assets out of the reach of the predecessor's creditors. Thus, the underlying theory of the exception is that a corporation should not be allowed to escape liability if it goes through a mere change in form, without a significant change in substance. Id. (citing Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282, 297, 562 A.2d 1286, 1293 (Md.App.Ct. 1989)). Evidence of continuity of ownership is necessary to assert liability under the continuation exception.See Myers, 232 Ill. App.3d at 424, 596 N.E.2d at 756-57.
In deciding the Code defendants' Motion to Dismiss, Judge Marovich found that the continuation and/or merger exceptions had been sufficiently alleged against CPI/Magna because the Riveras had alleged common ownership between the two companies. However, the evidence produced by the Riveras in response to this motion for summary judgment has failed to support that allegation. CIC, the original debtor, was owned by solely Arlasky and Mulkerin. Magna, on the other hand, was a wholly owned subsidiary of IMC, which was owned solely by Rutherford and Shelby. The Riveras claimed in their amended complaint that Arlasky, Mulkerin, or both were involved in the management and held ownership interests in both CIC and CPI. The Riveras have not, however, produced any evidence to support the allegation that Arlasky or Mulkerin held ownership interests in CPI, its parent, IMC, or the present corporation, Magna. The only evidence the Riveras present of continuity of ownership in these sales is between IMC's Rutherford and Shelby and Code-Alarm/CSSI, the sellers and purchasers in the 1990 sale. Because the Riveras failed to present any evidence of continuity of ownership between CIC, the only party with potential liability to avoid, and any successor, there can be no successor liability against Magna or the Code Defendants on CIC's debts under the merger and/or continuation exceptions.
C. The Fraudulent Purpose Exception
The Riveras allege that both Magna and the Code Defendants carried out the 1988 and 1990 transactions for the fraudulent purpose of avoiding payment of the $19 million judgment. The Riveras' Amended Complaint alleges that the 1988 and 1990 transactions are properly viewed as exceptions to the rule of successor nonliability because they were undertaken for the "fraudulent purpose" of escaping CIC's liability. The Code defendants argued, in their motion to dismiss, that in order to meet the "fraudulent purpose exception," the Riveras must first demonstrate that they are able to state a claim under Illinois' Uniform Fraudulent Transfer Act ("UFTA"), 740 ILCS 160/5 (West 1994). Judge Marovich rejected that argument, reasoning that "[w]hile the elements necessary to state a claim under the UFTA have a great many similarities to the elements required under fraudulent purpose exception, see Steel Co. v. Morgan Marshall Indus., Inc., 278 Ill. App.3d 241, 250-51, 662 N.E.2d 595, 601 (1996), the two nevertheless appear to be separate and distinct legal animals." Davila v. Magna Holding Co., 1998 WL 578032, 97C1909, at *6 (N.D.Ill.). This court agrees with Judge Marovich's reasoning and conclusion. Unlike the doctrine of successor liability, the UFTA is a discrete statutory cause of action with specific pleading requirements. There is no requirement in Illinois that a plaintiff must first be able to state a claim under the UFTA before he or she can take advantage of the fraudulent purpose exception to successor nonliability.
Nevertheless, in order to survive summary judgment under this exception, the Riveras must demonstrate the existence of a genuine factual dispute that the 1988 and 1990 sales were made with the "with actual intent to hinder, delay, or defraud any creditor." If there is no triable issue of fact of fraudulent intent as to the 1988 sale from CIC to IMC/CPI/Magna, then there is likewise no triable issue of fact as to the 1990 sale. If a rational trier of fact could not conclude that the 1988 sale was made with the intent of avoiding CIC's liability, then Magna could not be held liable as a successor to CIC. If Magna could not be held liable under any theory of successor liability, then its 1990 sale to the Code defendants could not have been for the fraudulent purpose of avoiding Magna's liability, because Magna would have no liability to avoid. In other words, if there is no genuine issue of fact as to CIC or LaSalle's fraudulent intent in the 1988 sale, then CIC's successor liability is cut off, and there is no need to examine the circumstances of the 1990 sale from IMC/CPI/Magna to the Code defendants.
1. The 1988 Sale to Magna
a. Commercial Reasonableness Under the UCC
The Riveras first argue that the 1988 sale was commercially unreasonable under § 9-504 of the Uniform Commercial Code. The UCC provides that a secured party may sell collateral securing a debt, but that "every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable" and that "reasonable notification" of a public sale must be given. 810 ILCS 5/9-504(3). The Riveras argue that LaSalle's advertisement failed to bring about competitive bidding, and this court must therefore scrutinize the sale closely for the possibility that LaSalle engaged in self-dealing.See Boender v. Chicago North Clubhouse Ass'n, Inc., 240 Ill. App.3d 622, 628, 608 N.E.2d 207, 211 (1st Dist. 1992) (finding that improper notice may be inferred where secured creditor purchases collateral for price well below market value as the only bidder at a § 9-504 sale); Voutirittas v. Intercounty Title Co. of Illinois, 279 Ill. App.3d 170, 664 N.E.2d 170, 179, 183 (1st Dist. 1996).
The Riveras' reliance on Boender and Voutirittas is misplaced for several reasons. First, those cases concerned claims for damages against a secured creditor that purchased its own collateral. Here, the Riveras' claim is against the purchasers of the assets: first Benco/CPI/Magna, in 1988, and then Code-Alarm/CSSI, in 1990, not LaSalle, their secured creditor. The Riveras do not allege that LaSalle, as the secured creditor, acted with the intent of avoiding liability. As such, the Riveras bear the burden of proving that the CIC assets were transferred to CPI and then to CSSI for the purpose of evading liability on the Riveras' claim, not that LaSalle conducted the sale in a commercially unreasonable manner. An examination of the commercial reasonableness of the 1988 sale under the UCC would be appropriate only if the Riveras were alleging that LaSalle was acting to avoid liability or if they had produced any evidence that LaSalle conspired with CIC or CPI to help them avoid liability. While the factors to be considered in determining the reasonableness of a § 9-504 sale may overlap with those for determining whether a party acted with the fraudulent purpose of avoiding liability under the fraudulent purpose exception and the UFTA, a finding that a sale was commercially unreasonable does not, by itself, demonstrate that the debtor transferred the assets with an intent to defraud a creditor. Second, the sales in both Boender and Voutirittas were suspect because the secured creditor was the only bidder at the foreclosure sale and gained a profit by reselling the assets according to pre-arranged contracts. Here, it is undisputed that LaSalle solicited another buyer in advance of the sale, negotiated with the potential buyer at arms-lengthy and incurred a loss of approximately $1,000,000. Lastly, Boender and Voutirittas concerned sales where the price was clearly below fair market value. See Boender, 240 Ill. App.3d at 628, 608 N.E.2d at 211 (sale suspicious where price paid was "well below market value"); Voutirittas, 279 Ill. App. at 184, 664 N.E.2d at 179 (price is the key component in assessing commercial reasonableness). In Voutirittas, the court considered the fact that the sales price was significantly lower than the debt, that the bid was lacking in foundation, and that the parties considered the value of the assets to be greater than the purchase price, to be suggestive of commercial unreasonableness.See id., 664 N.E.2d at 179. Here, it is undisputed that the purchase price was the result of an arms-length negotiation between two parties with adverse interests. As such, unlikeBoender and Voutirittas, there is no reason to suspect LaSalle of self-dealing, thereby necessitating this court to scrutinize the fairness of the sale. Moreover, the purchase price exceeded the objectively appraised value of the assets by $600,000, and was not "pulled out of thin air," as in Voutirittas. The Riveras have not presented sufficient evidence to raise a genuine issue of fact that the 1988 sale was commercially unreasonable.
In fact, LaSalle had no incentive to avoid the Riveras' claims to the CIC assets. LaSalle was a secured creditor whose claims had attached before CIC was named as a defendant in the Rivera litigation. Accordingly, LaSalle had priority in the CIC assets over the Riveras, who would have, at most, a claim as a general unsecured creditor. In fact, the Riveras have never even alleged that they had rights which were equal or greater to LaSalle's.
To the contrary, the Riveras admit that the 1988 sale was the result of arms-length negotiations, that IMC/CPI had not heard of CIC prior to being approached by LaSalle, and that LaSalle had no ownership interests in any of the corporations involved in this litigation. Under such facts, the Riveras clearly could not demonstrate the existence of a conspiracy between IMC/CPI and LaSalle.
The Riveras attempt to create a genuine issue of fact as to the reasonableness of the 1999 sale price by pointing to the value of CIC at the time of LaSalle's initial loan in 1986. CIC's "value" in 1986 is irrelevant for purposes of determining its value in 1988, especially in light of the unrefuted evidence of CIC's financial difficulties in those years. The Riveras also point to CIC's June, 1988 balance sheet showing a book value for its assets of $5,176,858. However, the Riveras have presented no evidence that the book value of the assets corresponded to the value of the actual assets sold five months later at a forced sale. Lastly, the Riveras point to Benco's October 24, 1988 certificate of authority to transact business, which lists the value of CIC as $4,500,000. It is undisputed, however, that LaSalle lost at least $1,000,000 on the sale. Thus, because LaSalle had the highest priority claim to the assets, no other creditor could have been harmed by any shortfall in the price unless it fell short of the actual value of the assets by over $1,000,000. The Riveras have presented no evidence suggesting that the true value of the assets on November 2, 1998, approached $4,700,000, the amount of LaSalle's outstanding balance at the time of the sale.
b. Badges of Fraud Under the UFTA
The Riveras can only defeat summary judgment if they can point to evidence which demonstrates that the 1988 and 1990 sales were made with the actual intent of escaping liability on a judgment, and thereby defrauding a creditor. There is scant case law in Illinois explaining what constitutes a "fraudulent purpose" for the purpose of avoiding successor nonliability. For that reason, the courts look to the UFTA and its resultant case law for guidance in determining whether a conveyance was made "with actual intent to hinder, delay, or defraud any creditor." The UFTA lists "badges of fraud" which, when present in sufficient number, may support an inference of actual fraudulent intent. Accordingly, this court must look to the factors listed in the UFTA in order to determine whether the Riveras have produced sufficient evidence to support a reasonable inference that the 1988 and 1990 sales were made for the purpose of escaping liability on the Riveras' judgment.
Both defendants attempt to characterize LaSalle as the seller in both the 1988 and 1990 sales, rather than CIC or CPI, respectively. However, in Steel Company, the court found a triable issue of fact as to the debtor's fraudulent intent of avoiding liability even though the secured creditor foreclosed on the assets and then resold them, as if the purchaser had purchased the assets directly from the debtor, borrowing money from the secured creditor in order to do so. Steel Co. v. Morgan Marshall Indus., Inc., 278 Ill. App.3d 241, 245, 662 N.E.2d 595, 598 (1st Dist. 1996). In that case, there was evidence that the secured creditor was actually working with the debtor to avoid liability, making an inference that the secured creditor shared the debtor's fraudulent intent more reasonable. The Riveras have presented no evidence of LaSalle conspiring with either CIC or CPI/Magna as the sellers. Nevertheless, drawing all inferences in favor of the plaintiff, this court will analyze the sales as if the sellers had been either CIC, CPI/Magna, or LaSalle.
The Riveras present evidence falling under only 3 of the 11 "badges of fraud" listed in the UFTA, 2 of which are present in almost every forced sale of a debtor's collateral by a secured creditor. The evidence raised by the Riveras as to the circumstances of the 1988 sale is thus insufficient to raise a reasonable inference that the sale was made for the purpose of avoiding liability on the Riveras' claim. Because the Riveras have not created a genuine dispute as to a sufficient number of the "badges," there can be no reasonable inference of fraudulent intent.
The Riveras attempt to defeat summary judgment by combining evidence of the 1988 and 1990 sales and applying it to the "badges of fraud." However, as stated above, the proper inquiry is as to whether each individual sale was made for the purpose of avoiding CIC's liability. Combining the sales into a single inquiry would be proper only if the Riveras had presented evidence that CPI/Magna acted only as a conduit for the ultimate sale to the Code defendants. Moreover, the Riveras have presented no evidence that Magna was an insider of CIC's, shared ownership with CIC, or otherwise acted as CIC's alter ego either in purchasing the assets from CIC or later in selling them to the Code defendants, resulting in only one "true" sale. As such, the 1988 and 1990 sales must be viewed separately from each other.
The "badges of fraud" enumerated in the UFTA are as follows:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor's assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.740 ILCS 160/5(b)(1)-(11). According to the plain language of the statute, the factors listed in the Act to determine intent are merely considerations. Lindholm v. Holtz, 221 Ill. App.3d 330, 334, 581 N.E.2d 860, 863 (1991). However, when these "badges of fraud" are present in sufficient number, it may give rise to an inference or presumption of fraud. Kaibab Indus., Inc. v. Family Ready Homes, Inc., 80 Ill. App.3d 782, 786, 372 N.E.2d 139, 142 (1978). Considering these factors, it is clear that the Riveras have presented insufficient evidence to support a finding of fraudulent intent by CIC or LaSalle in the 1988 sale.
The court considers the evidence presented by the parties in the light most favorable to the Riveras under each of the badges of fraud listed in the statute, as follows:
1) The transfer or obligation was to an insider:
IMP/CPI/Magna was not an insider of either CIC or LaSalle. The Riveras do not argue that there was any common owners (or any persons with control over those owners) between CIC and CPI/Magna, only that there was some continuity of management. In fact, the Riveras admit that Shelby, who negotiated the sale on behalf of IMC, had never heard of CIC prior to being approached by LaSalle in connection with the 1988 sale. Likewise, there was no common ownership between LaSalle and IMC/CPI/Magna.
(2) The debtor retained possession or control of the property transferred after the transfer:
Neither CIC nor its owners, Arlasky and Mulkerin, retained possession or control of the CIC assets after the transfer. The Riveras argue that Arlasky, part owner of CIC, maintained possession and control to the extent he leased premises to CPI. However, the premises upon which CIC did business was not the subject of the transfer, and the Riveras have produced no evidence that Arlasky somehow maintained control of CIC's assets by leasing the real property upon which those assets were used.
(3) The transfer or obligation was disclosed or concealed:
The transfer was disclosed, and not concealed; in fact, it was advertised in the Chicago Tribune. Even if that notice was insufficient to satisfy the "reasonable notice" requirements of the UCC, inadequate notice does not equate to concealment of the transfer. There is simply no evidence that either LaSalle or CIC attempted to hide the sale.
(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit:
The single significant "badge of fraud" present in the 1988 sale is that CIC was threatened with suit before the time of the transfer. While CIC had not actually been named as a defendant at the time of the 1988 sale, Arlasky and Mulkerin admitted to being aware of the litigation and had discussed it with CIC's corporate counsel. However, a finding that CIC knew that it faced potential liability does not, without more, give rise to an inference that the sale of its assets was made with the intent of escaping that liability.
(5) The transfer was of substantially all the debtor's assets:
The parties do not dispute that the transfer was for substantially all of CIC's assets. However, LaSalle held a lien on substantially all of CIC's assets and was entitled to sell all the assets in satisfaction of CIC's debt.
(6) The debtor absconded:
Neither CIC, Arlasky nor Mulkerin absconded after the sale.
(7) The debtor removed or concealed assets:
There is no evidence that CIC, Arlasky, or Mulkerin removed or concealed assets.
(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred:
According to unrefuted evidence, the value of the consideration LaSalle received in the transfer was reasonably equivalent to the value of CIC's assets. Important factors in determining "reasonably equivalent value" is the fair market value of the assets being transferred and whether the sale was an "arm's length transaction between a willing buyer and a willing seller."Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir. 1997). It is undisputed that the negotiations for the sale between LaSalle and IMC/CPI/Magna were at arms' length and that the sale price was supported by the appraisal of an independent appraisal firm. While the Riveras have produced some evidence that the assets were valued differently prior to the sale, they have produced no evidence which suggests that $3,500,000 was not reasonably equivalent to the forced liquidation value of CIC's assets in November of 1988.
(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred:
The parties do not dispute that CIC was insolvent at the time of the transfer. In fact, CIC's insolvency was the reason for the transfer, just as it is in every forced sale of collateral by a secured creditor conducted under the UCC.
(10) The transfer occurred shortly before or shortly after a substantial debt was incurred:
There is no evidence of CIC incurring a substantial debt shortly before or shortly after the transfer.
(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor:
There is no evidence that CIC transferred its essential assets to a lienor who then transferred them to an insider.
In the end, the only meaningful badge of fraud the Riveras have shown evidence of is that CIC was facing liability under the Rivera litigation at the time of the transfer. Even that "badge" is not particularly compelling, however. The Riveras have presented no evidence of how CIC as a corporation, Arlasky or Mulkerin as its owners, or LaSalle could have used the 1988 sale in order to avoid liability from the Riveras. Again, it is undisputed that LaSalle held a secured claim on all of CIC's assets prior to the time that CIC was named as a defendant in the Rivera litigation. As such, LaSalle had a claim to CIC's assets in the amount of CIC's outstanding debt, approximately $4,700,000 at the time of the sale. CIC, Arlasky, and/or Mulkerin would only have an incentive to avoid the Riveras' claim if CIC was worth more than LaSalle's claim. The closest the Riveras come to supporting a claim that CIC's assets were worth more then the $3,500,000 for which they were sold is Benco's October 24, 1988 application for a certificate of authority to transact business, in which Benco represented CIC's value to be $4,500,000. However, even if CIC's true value was closer to $4,500,000 than to the purchase price of $3,500,000, CIC, Arlasky, and/or Mulkerin would still have no reason to transfer the assets for less than their true value, because there would be no excess to satisfy their own claims or that of other creditors. LaSalle, likewise, had no incentive to attempt to avoid the Riveras' claim. As a secured creditor, its rights were superior to those of general unsecured creditors such as the Riveras. Because LaSalle could not possibly be liable for the Riveras' claim, it could not have sold CIC's assets with the fraudulent intent of avoiding liability from the Riveras, especially because it faced a $1,000,000 loss in the sale.
The only other badges of fraud present in the 1988 sale are that the transfer was for substantially all of CIC's assets and that CIC was insolvent at the time of the transfer. Of course, almost all debtors are insolvent at the time of UCC foreclosure sales against them. Moreover, CIC had incurred the obligation to LaSalle prior to the time it was involved in the litigation against it, and the Riveras do not contend that CIC granted a lien on its assets to LaSalle in order to avoid liability or otherwise question the legitimacy of LaSalle's lien. As such, there is nothing suspicious about the fact that the transfer was for all of CIC's assets; LaSalle was entitled to sell all of CIC's assets in order to secure its rights. In fact, the sale of all of CIC's assets still left LaSalle approximately $1,000,000 short.
Because the badges of fraud listed in the UFTA are not present in sufficient number to permit a rational trier of fact to determine that the 1988 sale was made for the fraudulent purpose of avoiding liability on the Riveras' claims, Magna cannot be held liable for the Riveras' judgment against CIC under any successor liability theory.
2. The 1990 Sale to the Code Defendants
Because the 1988 sale could not have been made for the fraudulent purpose of avoiding liability on the Riveras' claim, successor liability is cut off. Magna is not liable as a successor to CIC, so it could not possibly have passed liability on to the Code defendants in the 1990 sale. Again, the Riveras do not contend that Magna is a debtor to them based on any claim independent of CIC. Thus, the 1990 sale could not have been made by "a debtor for the purpose of escaping liability," because it was not made by a debtor at all. As such, the 1990 sale could not fall into the fraudulent purpose exception to successor nonliability. The Riveras also have not presented any evidence to suggest that Magna was a mere shell through which CIC transferred its assets to an insider, rendering the 1988 sale a nullity and making the 1990 sale the "real" sale.
Even if the Riveras had presented such evidence, the 1990 sale, through which the Code defendant's acquired CPI's assets, also lacks sufficient "badges of fraud" to allow a reasonable factfinder to conclude that it was made by a debtor for the purpose of escaping liability on a judgment. Specifically, the Riveras point to no evidence that the purchase price was less than, the reasonably equivalent value of the assets at the time of the sale, whereas the Code defendants point to undisputed evidence that the sales price was the result of arms length negotiations and was supported by an independent audit. Plaintiff argues that the sale was made to an insider because Rutherford and Shelby owned stock in Code-Alarm. However, Shelby was not an insider of CIC, the only party with potential liability to avoid. Moreover, the stock was publicly traded and purchased after the sale of CPI's assets. Otherwise, the commercial reasonableness and badges of fraud analysis of the 1988 sale finding no liability to Magna under the fraudulent purpose exception applies equally to the 1990 sale. It also was not concealed, even though it was not advertised. It was a private sale, authorized by the UCC, and the Riveras have produced no evidence that there was any attempt made to conceal it. Accordingly, the 1990 sale, like the 1988 sale, lacked sufficient badges of fraud to allow a reasonable factfinder to find successor liability under the fraudulent purpose exception against the Code defendants. As discussed above, none of the other exceptions to successor liability apply to the Code defendants because there is no continuity of ownership between CIC and the Code defendants. Accordingly, the Code defendants cannot be held liable for CIC's debts, including the Riveras' default judgment against CIC.
CONCLUSION
For the above stated reasons, defendants Magna Holding Company and/or Magna Holding, Inc.'s motion for summary judgment is GRANTED. Chapman Products, Inc., Chapman Security Systems, Inc., and Code-Alarm, Inc.'s motion for summary judgment is also GRANTED. This court dismisses Count I of plaintiff's amended complaint. Because the named defendants are not liable on the Riveras' claims, "ACME," the unknown and unnamed insurance companies which the Riveras allege are jointly and severally liable for the defendants' liability, also cannot be held liable. Accordingly, this court dismisses Count II of the amended complaint sua sponte. This case is dismissed in its entirety. Plaintiffs Aureo Rivera Davila and Aureo E. Riveras' objection to the preclusion order entered by Magistrate Judge Rosemond is MOOT. All other pending motions are moot.