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Alan Drey Co. v. Generation

AUGUST 6, 1974.




APPEAL from the Circuit Court of Cook County; the Hon. ROBERT J. DOWNING, Judge, presiding.


Rehearing denied October 9, 1974.

Plaintiff-appellee, Alan Drey Co., Inc. (hereinafter Alan Drey), recovered a judgment by confession against defendant, Generation, Inc. (hereinafter Generation) in March 1971, in the amount of $98,376. Shortly thereafter, defendant moved to vacate the judgment. While this motion was still pending and while all proceedings on the judgment were stayed, defendant, Generation, Inc., sold subscription lists to McGraw-Hill, Inc. (hereinafter McGraw-Hill), for $150,000 cash. After Drey's judgment against Generation had been confirmed and in a supplementary proceeding, plaintiff sought judgment against McGraw-Hill, citation-defendant, on the theory that the transfer by Generation was a fraudulent conveyance and that McGraw-Hill, having notice of the fraudulent intent of the vendor, was a participant in the fraud. After a hearing, the trial court found that McGraw-Hill had notice of the fraudulent intent of defendant, Generation, in making said sale, and entered judgment against McGraw-Hill in the amount of $98,376. The vendee, McGraw-Hill, brings this appeal.

In rendering its decision the court premised its findings of fact upon the pleadings, documentation, affidavits, and the citation examinations of Stuart Handler, president of Generation, and Ralph Blackburn, an officer of McGraw-Hill. From the record, the following factual setting emerges:

In the course of its business, Generation, a business-magazine publisher, purchased lists of potential subscribers from Alan Drey, a list broker, and executed a promissory note in lieu of immediate payment. The note was subsequently defaulted, and on March 9, 1971, Alan Drey took judgment by confession against Generation in the amount of $98,376.68. Stuart Handler received a letter, dated March 10, 1971, from Alan Drey's attorney, warning the former that judgment had been confessed, execution placed with the sheriff, and that the judgment was then a lien on the assets of Generation. On March 19, 1971, Generation filed a motion to vacate the confessionary judgment, but no decision on the motion was made until subsequent to the events in question.

Thereafter, apparently Generation and Alan Drey unsuccessfully engaged in negotiations in attempting to reach some solution by which Generation could pay the monies due Alan Drey. Generation's financial difficulties continued and the last issue of the magazine was published in July 1971. Stuart Handler admitted that Generation was insolvent during the period March 9, 1971, through the date of the alleged fraudulent transfer, September 30, 1971, and that during the period July, August, and September 1971, the only substantial unencumbered asset owned by Generation was its customers' subscription lists of its "Generation Magazine."

In an attempt to raise money Generation commenced calling upon other people in the industry endeavoring to sell the names and addresses on its subscription and prospect list. In late July 1971, Stuart Handler contacted Ralph Blackburn, a representative of McGraw-Hill, and offered to sell the lists for $500,000. On August 5, 1971, Blackburn conferred with Handler regarding the possible purchase of the lists. On or about that same day, Blackburn, who had previously learned of the outstanding judgment through a Dun and Bradstreet report, called John E. McNichols, an officer of Alan Drey, to inquire whether the judgment was still effective. McNichols assured Blackburn that Alan Drey was still a judgment creditor of Generation. Blackburn also related to McNichols that Handler had approached McGraw-Hill with an offer to sell the subscription list. Shortly thereafter, McNichols phoned Handler to find out "what was up." Handler assured McNichols that "they [Generation] are not going out of business nor are they selling."

Subsequent to the conference of August 5, a purchase price of $150,000 was agreed upon. On August 16, 1971, Blackburn sent a letter to Handler requesting that Generation and Handler, individually, protect McGraw-Hill from any claims in connection with the purchase of the lists; Blackburn admitted that he had Alan Drey in mind when he inserted the indemnity paragraph. The requested indemnification was not, however, given. Blackburn further admitted that he had reservations about the transaction, and at one point, inquired of an officer of the Continental Illinois National Bank and Trust Company regarding Generation's solvency. No definite answer was given. However, based upon his knowledge that the subject matter of the negotiations was the sole customers' subscription list of Generation, and upon his knowledge of Generation's desire to sell the same, Blackburn assumed that Generation was in severe financial straits. No officer or agent of McGraw-Hill ever asked for a list of Generation's creditors, and Blackburn admitted that no notice, other than the telephone conversation of August 5, was given to Alan Drey prior to closing the sale.

Stuart Handler admitted that he had requested Blackburn to keep the proposed sale confidential, and Blackburn told Handler that he would. The reason for keeping the negotiations confidential, Handler explained, was to obtain the best possible price for the lists, and also to prevent Generation's creditors from interfering with any proposed sale. Handler admitted that the sale of the lists put Generation out of the magazine publishing business.

Prior to the closing of the sale on September 30, 1971, Generation established a secret trust checking account at the First National Bank of Chicago, the legal title to which was held in the name of a law firm. At the closing of the sale, Generation received McGraw-Hill's check for $142,853.42, and at Handler's request, McGraw-Hill also delivered two other checks in the sums of $4,481 and $2,656 to other creditors of Generation. Immediately after the sale, Generation deposited the sale proceed in the secret trust account, and subsequently, some $40,000 from this account was used by Generation to purchase stock in a new business venture, the Allen Bennett Company, formed in July 1971.

Stuart Handler admitted that he acquired 45% of the shares in the Allen Bennett Company in his own name, and that Robert Tomarkin, another officer of Generation, received 45% of said shares in his own name, for which neither Handler nor Tomarkin paid any cash consideration. The remaining 10% of the shares were registered in the name of Generation.

Apart from the $40,000, the remainder of the proceeds from the trust account was paid to general creditors, for back salaries, taxes, and general operating expenses. However, none of the proceeds were paid to Alan Drey, a judgment creditor. Handler explained that he was under the impression that, while the motion to vacate the confessionary judgment was still pending, Alan Drey was not considered a creditor; the record reveals that Generation's motion to vacate was not denied until January 21, 1972.

Citation-defendant's initial contention is that, because the statutes which govern supplementary proceedings require that a third party having an interest in the subject property be given a trial (see Ill. Rev. Stat. 1971, ch. 110, par. 73(5), ch. 62, par. 42), the procedure followed here below must be analogized to the procedure governing a motion by plaintiff for summary judgment. The predicate of defendant's argument is that, in rendering its decision, the trial court did not hear evidence presented in open court, but relied upon the pleadings, citation examinations, affidavits, and documents submitted by the parties. Defendant argues that since it was not afforded a trial, our standard of review is limited to a determination of whether the matters considered by the trial judge give rise to a genuine issue of material fact.

Plaintiff contends that a citation examination pursuant to Supreme Court Rule 277(e) (Ill. Rev. Stat. 1971, ch. 110A, par. 277(e)) adduces evidence, and that, therefore, the ...

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