Before November 15, 1982, the defendant, Chicago Produce, Inc. , and S&M were owned and operated by the Mided family. Sam Mided and his sons Donald and Adam served as directors and officers of both corporations, which were engaged in the wholesale produce business. Another son, Lance, served as secretary of CPS. CPS and S&M were sister corporations as defined by the Internal Revenue Code because Sam, Donald and Adam held common ownership of the two corporations. 26 U.S.C. § 1563 (1986).
APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, SECOND DIVISION
540 N.E.2d 505, 184 Ill. App. 3d 578, 132 Ill. Dec. 765 1989.IL.848
Appeal from the Circuit Court of Cook County; the Hon. Glynn J. Elliot, Jr., Judge, presiding.
JUSTICE EGAN* delivered the opinion of the court. BILANDIC, P.J., and HARTMAN, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE EGAN
The garnishee-defendant, S&M Produce Company , appeals from an order of the circuit court imposing a lien in the amount of $12,532.63 against S&M's beneficial interest in a land trust pursuant to the plaintiff's motion to set aside improper payments. The issue is whether a debtor transferred property to S&M in a manner that improperly defeated the rights of the plaintiff-creditor.
Disagreements between Donald and Adam regarding the business operations of CPS led to the resignations of Donald and Sam from their respective positions with CPS on November 15, 1982. Additionally, they sold their shares in CPS stock to Adam, the chief executive officer. Adam Mided severed his association with S&M by resigning from his positions of director and officer of that corporation. He also sold his shares of S&M stock to Donald and Sam. Hence, the two companies ceased to be sister corporations as of that date because Adam Mided became the sole director, officer and shareholder of CPS. CPS owed S&M $240,928 primarily for loans beginning in May of 1979 and continuing through July of 1981, as well as some goods advanced on credit.
The accountant serving both corporations at the time of change in structure, Ruben Vernof, testified that Discussions had been ongoing during this period as to how CPS would satisfy the debt. On December 6, 1982, CPS assigned its beneficial interest in two pieces of real estate, 1615 S. Peoria and 96 South Water Market, from which it operated its business, to S&M in partial satisfaction of its debt. S&M credited CPS with $227,646 against its debt of $240,928 on the corporate books. A debt of about $10,000 remained after the transaction was completed. In addition to the conveyance, CPS entered into a lease agreement with S&M on the same day to rent its prior office space at 96 South Water Market Street for a monthly rate of $656.
From the time of the conveyance on December 6, 1982, until July 1983 when CPS ceased operations, S&M sold it about $120,000 in goods/produce. At the time CPS notified all its creditors that it was discontinuing its operations and stretching out its payments, it owed S&M about $56,000. The plaintiff, Mandolini Company, filed an action against CPS to recover its outstanding indebtedness of $12,352.63 on September 27, 1983. The complaint alleged that the outstanding balanced owed by CPS was "exhibited" by an invoice attached to the complaint. That invoice reflects purchases made between May 12, 1983, and August 24, 1983, and a balance brought forward of $6,966.39. (The property in issue was conveyed from CPS to S&M on December 6, 1982.) The trial court entered an ex parte default judgment against CPS in the amount of $12,352.63 plus costs on July 24, 1984, for failing to answer the plaintiff's complaint.
Pursuant to the plaintiff's citation to discover assets served on Donald Mided, it learned of the history behind the interlocking directorship between CPS and S&M before November 15, 1982, the substantial loans from S&M to CPS from 1979 to 1981 and that CPS had conveyed its only two tangible assets to S&M on December 6, 1982. The plaintiff subsequently filed a motion to set aside the improper payments and for a turnover order against S&M. It asserted that S&M, Donald Mided and the other corporate shareholders "received an advantage of preference in the payment of their claims" at the expense of the plaintiff and CPS' other creditors. At the hearing on the motion the plaintiff did not introduce any evidence as to the fair market value of the realty at the time CPS conveyed its beneficial interest to S&M. S&M maintained that the consideration exchanged for the realty was certain advances and the $227,646 written off for loans, totaling $240,928.
Relying on the testimony, the financial statements and tax returns of CPS from 1979-82 and S&M from 1979-83, the Judge found that CPS was insolvent during the years 1979 through 1982 and would have been unable to carry on its business but for the fact that S&M had not called for the repayment of its loans. He held that the directors of S&M, Donald Mided and Sam Mided, could not receive the preference over CPS' other creditors resulting from CPS' conveyance of its beneficial interest to S&M, because they were aware through their prior fiduciary relationship with CPS that it was insolvent at the time of the transaction. Relying on the case of Blocker v. Drain Line Sewer & Water Co. (1972), 5 Ill. App. 3d 289, 282 N.E.2d 207, he held that the directors of CPS had a fiduciary obligation to creditors of the corporation to notify them of the insolvency. S&M has attacked the theory upon which the court based its holding; and the plaintiff does not attempt to support it. In oral argument before us, the plaintiff's attorney made it clear that he did not agree with the trial court's reasoning, but that the trial court came to the right Conclusion although for the wrong reason.
S&M raises a number of arguments in support of its contention that the order must be reversed. We believe that we need address only one of them: that the plaintiff failed to prove that it was a creditor of CPS at the time of the conveyance of the property from CPS to S&M.
The general law in Illinois is that only those creditors who had existing claims at the time of the transfer may complain that the transfer of property was made in derogation of their rights; and the burden is on the creditor to establish the existence of a preexisting debt. In Chicago Daily News Co. v. ...