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07/02/87 Bank of Aspen, v. Fox Cartage

July 2, 1987





511 N.E.2d 1234, 158 Ill. App. 3d 939, 110 Ill. Dec. 914 1987.IL.950

Appeal from the Circuit Court of Kane County; the Hon. James F. Quetsch, Judge, presiding.


JUSTICE UNVERZAGT delivered the opinion of the court. LINDBERG, P.J., and REINHARD, J., concur.


This case involves an appeal by Batavia Bank, a third-party citation respondent, and a cross-appeal by the plaintiff. The plaintiff, Bank of Aspen (hereinafter referred to as Aspen), made a loan to the judgment debtor, David L. Thomas, in 1981. Thomas eventually defaulted on the loan, and on April 19, 1984, a Colorado court entered judgment against him and in favor of Aspen. Aspen recorded that judgment in Illinois on December 18, 1984. The Illinois judgment included an order enjoining Thomas from transferring his property. On January 7, 1984, prior to either judgment, however, Thomas, as president and sole shareholder of Roselaine Construction, Inc. (hereinafter Roselaine), borrowed money (in an apparent refinancing of an earlier debt) from Batavia Bank (hereinafter Batavia) and pledged 1,430 shares of Batavia Concrete, Inc., stock (the stock) as security for that loan. Batavia acquired possession of the stock certificate on that date. Batavia made an additional loan to Roselaine on December 22, 1984, which was secured by an additional security interest in the stock. When Roselaine defaulted on the Batavia loans on September 20, 1985, Batavia foreclosed on the stock and prepared to sell it, believing it had a superior right to the stock as a secured creditor than Aspen had. Batavia informed Aspen of its intention to sell the stock.

On September 30, 1985, one day before the sale was to take place, Aspen served a citation to discover assets on Batavia pursuant to section 2-1402 of the Code of Civil Procedure (Code) (Ill. Rev. Stat. 1983, ch. 110, par. 2-1402). The citation was issued by the court clerk and included language prohibiting Batavia from transferring or otherwise disposing of the judgment debtor's property. (Ill. Rev. Stat. 1983, ch. 110, par. 2-1402(d)(1).) The trial court, over Batavia's objections, permitted the citation and its transfer prohibition to remain in effect through a trial on the merits held on December 23, 1985, and until it reached its decision on May 16, 1986. At that time, the court denied Aspen's request to have the stock turned over to it, finding that Batavia's interest was superior. It also dissolved the citation against Batavia with respect to the stock on that date.

Batavia has contended since the citation was issued that it was an inappropriate procedure and, effectively, an injunction. Prior to the trial held on December 23, 1985, Batavia moved the trial court to quash the citation (alternately calling it a motion to dissolve the temporary injunction). The court refused, and Batavia appealed that decision on the theory that an interlocutory appeal was appropriate pursuant to Supreme Court Rule 307 (87 Ill. 2d R. 307(a)(1)), which allows immediate appeal from a trial court's refusal to dissolve an injunction. This court held that the court's order denying Batavia's motion was "not encompassed within the Rule 307 provision," and dismissed the appeal. Bank of Aspen v. Fox Cartage, Inc. (1986), 141 Ill. App. 3d 369, 373.

In its instant appeal, Batavia contends that, notwithstanding the inapplicability of Rule 307, the citation was an inappropriate remedy which effectively enjoined it from exercising its right to sell its property without the procedural due process protections guaranteed by the United States Constitution. (U.S. Const., amend. XIV.) In addition, it claims that the injunctive relief was wrongfully allowed and that it is therefore entitled to recover damages from Aspen under section 11-110 of the Code. (Ill. Rev. Stat. 1983, ch. 110, par. 11-110.) In its cross-appeal, Aspen contends that the trial court erred in finding that Batavia had a superior interest in the stock than Aspen had. I

We will first consider Aspen's arguments on cross-appeal concerning the relative rights of Aspen and Batavia to the stock.

On March 26, 1981, shortly after obtaining the loan from Aspen, Thomas and his wife created separate living trusts and purported to divide their assets between them. Thomas listed the stock as an asset to be transferred to his own trust. On October 20, 1981, Thomas assigned his beneficial interest in his trust to his wife "as collateral" in exchange for her agreement to use the assets in her trust to guarantee an unrelated bank loan to Roselaine. Aspen argues that these conveyances were fraudulent in law.

The elements of fraud in law are: (1) a voluntary gift; (2) a preexisting or contemplated indebtedness against the donor; and (3) the donor's failure to retain property sufficient to pay his indebtedness. (Mills v. Susanka (1946), 394 Ill. 439, 448; Kardynalski v. Fisher (1985), 135 Ill. App. 3d 643, 647; Anderson v. Ferris (1984), 128 Ill. App. 3d 149, 153.) Where the elements of fraud in law are established, fraud is presumed, and the donor's intent is immaterial. (Anderson v. Ferris (1984), 128 Ill. App. 3d 149, 153.) A fraudulent conveyance which defeats the rights of creditors may be set aside. Kardynalski v. Fisher (1985), 135 Ill. App. 3d 643, 647.

Although the evidence may arguably support the inference that the March 26, 1981, transactions were fraudulent in law, that result would have no effect on the relative rights of Aspen and Batavia to the stock. Aspen apparently argues that in creating the two trusts and dividing his assets between them, Thomas made a fraudulent gift of some of his property to his wife. The stock in question was not among the assets transferred, however, and setting aside the March 26 transaction would not affect its ownership. As to the October 20, 1981, transfer, the evidence supports the inference, apparently accepted by the trial court, that Thomas did not transfer the stock to Mrs. Thomas without reservation, but merely gave her a security interest in all of the assets in his trust. That transfer was supported by consideration -- her agreement to guarantee a loan -- and therefore cannot have been fraudulent in law, because no gift was made. (See Mills v. Susanka (1946), 394 Ill. 439, 448.) In any case, the trial court's Conclusion is consistent with Aspen's position -- that Thomas still owned the stock after the purported transfer.

Similarly, Thomas' transfer of the security interest in the stock to Batavia was supported by consideration and could not have been fraudulent in law, but only fraudulent in fact (see Gary-Wheaton Bank v. Meyer (1984), 130 Ill. App. 3d 87, 94) -- an entirely distinct legal theory requiring the proponent to demonstrate a fraudulent intent. (Third National Bank v. Norris (1928), 331 Ill. 230, 234; Tcherepnin v. Franz (N.D. Ill. 1978), 457 F. Supp. 832, 836, aff'd (7th Cir. 1978), 570 F.2d 187, cert. denied (1978), 439 U.S. 876, 58 L.Ed.2d 190, 99 S.Ct. 214.) Aspen produced no evidence of an intent to defraud. We therefore conclude that ownership of the stock was not affected by any fraudulent conveyance and summarily ...

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