and Century "set into motion a course of conduct to transfer to Century and Pubco nearly all of the assets of [the Store.]" (Cmplt. para. 8). This transfer of assets was made without any consideration being paid to the Store.
At the same time the stock transfer agreement was consummated, the Store and the Hornsbys executed a lease agreement; this is the same agreement which is the basis for the cross motions for summary judgment, discussed supra. The Store breached this agreement in July, 1989. However, the Store does not have sufficient assets to pay damages for this breach.
The Hornsbys seek to hold Pubco and Century liable for the Store's breach. Although it is not easily ascertainable from the text of the complaint, they appear to rely on two theories.
First, they suggest that the transfer of the Store's assets to Pubco and Century is voidable as a fraudulent conveyance. Second, they allude that the three corporations should be liable for each other's debts under an "alter ego" theory. However, we find that the Hornsbys have failed to state a claim under either theory.
Illinois courts have recognized two types of transfers that are voidable as a fraudulent conveyance; those that constitute "fraud in fact" and those that constitute "fraud in law." A transfer is fraudulent in fact if it was made with the intent to defraud creditors. Indiana Nat. Bank v. Gamble, 612 F. Supp. 1272, 1276 (N.D. Ill. 1984) (citation omitted); Kardynalski v. Fisher, 135 Ill.App.3d 643, 482 N.E.2d 117, 119, 90 Ill. Dec. 410 (2d Dist. 1985). There are three elements to the fraud in law theory. First, there must be a voluntary gift of property. Second, there must be an existing or contemplated indebtedness. Third, the debtor must fail to retain sufficient assets to pay the indebtedness. Indiana Nat. Bank, 612 F. Supp. at 1276 (citations omitted); Tcherepnin v. Franz, 475 F. Supp. 92, 96 (N.D.Ill. 1979); Kardynalski, 135 Ill. App. 3d 643, 482 N.E.2d 117, 120, 90 Ill. Dec. 410.
The complaint does not contain allegations sufficient to establish fraud in fact. The Hornsbys clearly allege that the Store's assets were transferred to Century and Pubco. However, even when viewing the allegations in the light most favorable to the Hornsbys, there are no allegations suggesting that this transfer was made with the intent to defraud the Hornsbys. Indeed, the Hornsbys admit that the Store performed its obligations under the lease for five years after the agreement was executed, and five years after the transfer of assets was completed. (Cmplt. para. 17). Accordingly, we are unable to find fraud in fact.
The Hornsbys also fail to adequately plead a cause of action for fraud in law. They have failed to plead that the Store owed an actual or contemplated debt to the Hornsbys at the time the transfer was completed. The Store transferred its assets to Pubco and Century in 1984. However, it was not until five years later that the Store incurred the debt at issue here. Moreover, the fact that the Store performed its obligations under the agreement for five years belies the notion that the transfer left it with insufficient assets. Accordingly, we dismiss the claim that the transfer of the Store's assets to Pubco and Century constituted a fraudulent conveyance.
Similarly, we find that Count II of the complaint cannot be sustained under an "alter ego" theory. Under Illinois law the general rule is that separate corporations have separate corporate identities. See e.g., Chicago Florsheim Shoe S. v. Cluett, Peabody & Co., 826 F.2d 725, 728 (7th Cir. 1987) (citations omitted). Although there are some exceptions to this rule, they are not favored and are stringently applied. Id.
In order to pierce the corporate veil on the ground that one corporation is the "alter-ego" of another, the plaintiff bears the burden of establishing two facts. First, she must show that "the corporation was so controlled and manipulated that it had become a mere instrumentality of another." Chicago Florsheim Shoe S., 826 F.2d at 728; Baker v. Caravan Moving Corp., 561 F. Supp. 337, 340 (N.D.Ill. 1983); McCracken v. Olson Companies, Inc., 149 Ill. App. 3d 104, 500 N.E.2d 487, 491, 102 Ill. Dec. 594 (1st Dist. 1986). In addition, the plaintiff must demonstrate that recognition of separate corporate identity would sanction a fraud or promote an injustice. Id.
The Hornsbys' allegations are insufficient to meet either of these requirements. The fact that the three corporations share directors, office space and office staff do not suggest that the Store was a mere instrumentality of the other corporations, nor does it indicate some fraud or injustice. "The separate corporate entities of two corporations may not be disregarded merely because one owns the stock of another or because the two share common directors or occupy the same office space." Sumner Realty Co. v. Willcott, 148 Ill. App. 3d 497, 499 N.E.2d 554, 557, 101 Ill. Dec. 966 (5th Dist. 1986) (citations omitted). The only other pertinent allegation is that the Store was undercapitalized. However, this fact alone does not justify a finding that the Store was the "alter ego" of Pubco and Century. More importantly, this allegation is contradicted by the Hornsbys' admission that the Store had sufficient capital to meet its obligations for five years after its capital was allegedly drained. (Cmplt. para. 17).
On balance, we find that the Hornsbys have not alleged facts sufficient to state a cause of action. They have failed to allege any facts that suggest the Store was under the control of Pubco or Century. Moreover, there is no indication that recognizing separate corporate existence would promote injustice or sanction a fraud. Therefore, we grant the motion to dismiss Count II.
We award partial summary judgment in favor of the Hornsbys in the amount of $ 77,481.27. We grant Century's and Pubco's motions to dismiss Count II of the First Amended Complaint. We observe that the remaining claims are few and relatively undisputed. There seems to be no reason why the remainder of this case could not be quickly resolved without further expense to the litigants. The parties should report to the Court regarding the status of their settlement discussions at the next status conference now scheduled for March 16, 1990, at 10:00 a.m. It is so ordered.
Date March 13, 1990
14. Defaults by Tenant and Remedies :
A: Defaults by Tenant : Without further notice, LANDLORD may terminate this lease if any default by TENANT continues after notice of default; in case of nonpayment of rent or the nonpayment of any other charges or payments provided to be made hereunder for more than fifteen (15) days or in any other case if TENANT does not cure the default within a reasonable time, but not later than thirty (30) days after notice of default; or if TENANT makes any assignment for the benefit of creditors, commits any act of bankruptcy or files a petition under any bankruptcy or insolvency law, or if such a petition filed against TENANT is not dismissed within ninety (90) days; or if a receiver or similar officer becomes entitled to the leasehold; or if TENANT's interest in this lease is taken on execution or other process of law in any; [sic] action against TENANT; or if the lease premises are levied upon by any revenue officer or similar office; or if TENANT does, or permits to be done, any act which creates a mechanic's lien or claim therefor against land or building or which the lease premises are a part and TENANT does not comply with the provisions of this agreement. Upon termination of the lease, LANDLORD may re-enter the leased premises with or without process of law, using such force as may be necessary and remove all persons, fixtures and chattels therefrom, and LANDLORD shall not be liable for any damages resulting therefrom. Upon such repossession of the leased premises, LANDLORD shall be entitled to recover as liquidated damages and not as a penalty a sum of money equal to the value of the minimum guaranteed rent plus the percentage rent based on the preceding year, and other sums provided herein to be paid by TENANT to LANDLORD for the remainder of the lease term, less the fair rental value of the lease premises for said period. Upon the happening of any one or more of the above-mentioned events, LANDLORD may repossess the leased premises by forcible entry or detainer suit, or otherwise, without demand or notice of any kind to TENANT (except as hereinabove expressly provided for) and without terminating this lease, in which event LANDLORD shall attempt to relet all or any part of the leased premises for such rent and upon such terms as shall be reasonably satisfactory to LANDLORD (including the right to relet the leased premises for a term greater or lesser than that remaining under the lease term, and the right to relet the leased premises as a part of a larger area, and the right to change the character or use made of the leased premises). For the purpose of such reletting, LANDLORD may decorate and make any repairs, changes, alterations or additions in or to the leased premises that may be necessary or convenient. If LANDLORD does not relet the leased premises, TENANT shall pay to LANDLORD on demand as liquidated damages and not as a penalty a sum equal to the amount of the guaranteed minimum rent plus the percentage rent based on the preceding year, and other sums provided herein to be paid by TENANT for the remainder of the lease term. If the leased premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the expenses of such decorations, repairs, changes, alterations, additions, the expenses of such reletting and the collection of the rent accruing therefrom, to satisfy the rent herein provided to be paid for the remainder of the lease term, TENANT shall pay to LANDLORD on demand any deficiency and TENANT agrees that LANDLORD may file suit from time to time to recover any sums falling due under the terms of this paragraph. Any recovery under this paragraph shall be without relief from valuation and appraisement laws.