Archive for April 2015

Illinois Appellate Court Unwinds Fraudulent Transfers: A.G. Cullen Construction, Inc. v. Burnham Partners, LLC et al.

April 8, 2015

The Illinois appellate court has dealt a decisive blow to debtors who attempt to escape liability from creditors by dissipating assets by enforcing the Uniform Fraudulent Transfer Act (“UFTA”) and avoidance of transfers that violated it.

Defendant Westgate Ventures (“Westgate”) hired A.G. Cullen Construction, Inc. (“Plaintiff’) to build a warehouse and distribution facility.  Westgate was primarily owned by Burnham Partners, LLC, (“Burnham”) which, in turn, was owned by Robert Halpin (“Halpin”).  Following a dispute and arbitration at the end of the project, Plaintiff was awarded $457,416.37 against Westgate.  However, before the arbitration award was entered, Burnham, through Robert Halpin, began to liquidate all of Westgate’s assets.  Westgate paid a $2.5 million secured construction loan, the majority of Westgate’s remaining cash was disbursed to Burnham in the form of a $400,000 development fee and to the Halpins, to repay a loan they made to Westgate.  This left Westgate with no funds to pay the arbitration award.  Plaintiff filed a lawsuit against defendants in the circuit court to recover the amount awarded, alleging, among other things, fraudulent conveyance and breach of fiduciary duty.

The circuit court entered judgment in Defendants’ favor on all counts and dismissed the complaint.  Plaintiff appealed and contended: (i) the trial court abused its discretion by refusing its request for an adverse inference when defendants failed to produce numerous corporate records they claimed had been lost; (ii) defendants violated §5 of UFTA (740 ILCS 160/5 (West 2012)) by liquidating all of Westgate’s assets before the arbitration hearing; (iii) defendants violated §18-804 of the Delaware Limited Liability Company Act by fraudulently preferring one unsecured creditor over the other; (iv) the trial court erred in refusing to piece the corporate veil to hold Halpin personally liable for the money Westgate owes to Plaintiff; and (v) Defendants owed Plaintiff a fiduciary duty once Westgate became insolvent.

In reversing the trial court decision, the appellate court cited §8 of the UFTA as a basis for “avoidance of [fraudulent] transfer or obligation to the extent necessary to satisfy” a creditor’s claim.  740 ILCS 160/8.  In this case, the appellate court found that Defendant’s actions to be a violations of §5(a)(1) of the UFTA, often referred to as “fraud in fact” and found an actual intent to hinder, delay, or defraud the creditors.  The decision included an analysis of the eleven (11) factors under the UFTRA in determining an actual intent to defraud: (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.  Notably, the AG Cullen court found that the presence of the “badges of fraud” may, in sufficient number, give rise to an inference or presumption of fraud under the UFTA.  In contrast, “fraud in law” does not require proof of actual intent to defraud.  The ultimate test for determining the validity of a transfer under the UFTA is “whether or not it directly tended to or did impair the rights of creditors.  If the transfer hinders, delays, or defrauds his creditors, it may be set aside as fraudulent.”

Accordingly, the AG Cullen court found that Defendants engaged in fraud in fact and violated §5 of the UFTA by making the two transfers to themselves and other unsecured creditors when knew of their potential liability to Plaintiff.  Specifically, the court found that Defendant Burnham was not entitled to the $400,000 development fee and that the other transfers were not made in good faith in the absence of documentary evidence to support that finding.  The court found that Defendants had violated nine (9) of the eleven (11) “badges of fraud,” allowing for a presumption of fraud in fact.  Further, the court found that the transfers “directly tended to or did impair the rights of creditors” thereby violating §5 of the UFTA.  The court further found that the Westgate Defendant was used as a shield to avoid personal liability.  As such, the court allowed the corporate veil to be pierced and Defendants were personally liable for the full judgment amount, plus interest.  The appellate court further remanded the matter to the trial court with directions to enter judgments in favor of Plaintiffs.

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