The opinion of the court was delivered by: Hon. Harry D. Leinenweber
MEMORANDUM OPINION AND ORDER
Mamacita, Inc. ("Mamacita"), a judgment creditor of Colborne Corp. ("Colborne"), filed the instant lawsuit against its alleged successor company, Colborne Acquisition Co. ("CAC") and various members of the Hoskins family as well as Hoskins Property, LLC (collectively, the "Hoskins Defendants"). CAC and the Hoskins Defendants filed separate Motions to Dismiss. For the reasons stated herein, CAC's Motion to Dismiss is denied. The Hoskins Defendants' Motion to Dismiss is granted in part and denied in part.
The following allegations are taken from Mamacita's Complaint and presumed to be true for the purposes of a motion to dismiss. Mamacita is a New Jersey corporation that produces and sells frozen food. Colborne was an Illinois corporation that manufactured food equipment. It was owned by Richard Hoskins III ("Hoskins III") and his two children, Richard Hoskins IV ("Hoskins IV") and Lysa Hoskins ("Lysa"). Hoskins III was the majority shareholder, with a 90 percent stake in the business, while his children were each 5 percent shareholders. Linda Hoskins ("Linda") is the spouse of Hoskins III and the mother of Lysa and Hoskins IV. She is the sole member of the remaining Defendant, Hoskins Property. Hoskins Property is a Delaware limited liability company that owned the commercial real estate in Lake Forest where Colborne was operated ("the Ballard Road property").
In 2005, Mamacita and Colborne entered into an agreement whereby Colborne was to manufacture a stainless steel machine that produced "dough discos" to make empanadas. Colborne was to sell the machine to a finance company, and Mamacita agreed to lease and purchase the machine from that company. However, Mamacita was dissatisfied with the machine and filed suit against Colborne alleging breach of contract, breach of warranties, and consumer fraud in the Superior Court of Camden County, New Jersey. On September 2, 2008, Mamacita obtained a judgment of $538,167.08 plus costs. On December 10, 2008, Mamacita registered the New Jersey judgment in the Nineteenth Judicial Circuit in Lake County, Ill. Colborne's failure to satisfy that judgment led to the instant lawsuit.
According to the Complaint, the Hoskins family recruited their business associates to form a new entity, CAC, which they planned would obtain all of Colborne's assets in a collusive UCC sale meant to avoid Mamacita's judgment. After the UCC sale, the Hoskins family planned to retain control and possession of Colborne's assets and continue the same business operation in the name of CAC.
The Complaint alleges that in April 2009, Lake Forest Bank, a lender to both Colborne and the Hoskins family, sent Colborne a notice of default, with the alleged default used to justify the UCC sale. The default was a non-monetary default related to Mamacita's judgment against Colborne. Lake Forest Bank and Colborne gave Mamacita notice of the sale, but did not serve notice on Colborne's other secured creditors.
In the weeks prior to the UCC sale, the Complaint alleges, Colborne, the Hoskins family, CAC, and Lake Forest Bank negotiated a deal whereby Lake Forest Bank agreed to finance CAC's purchase of Colborne's assets. CAC and the bank entered into a loan agreement in which Lake Forest Bank loaned CAC $1.3 million for the purchase of Colborne's assets. CAC did not contribute new capital. In effect, the Complaint alleges, CAC purchased Colborne's assets directly from Colborne and assumed its obligations to Lake Forest Bank.
On May 19, 2009, Lake Forest Bank conducted the UCC sale of Colborne's assets. Representatives of Colborne, CAC, Lake Forest Bank, and Mamacita were the only parties present at the sale. CAC was the only bidder, and its bid of $1.3 million was immediately accepted by Lake Forest Bank and consented to by Hoskins III on behalf of Colborne. At that point, according to the Complaint, the appraised value of Colborne's assets was approximately $7.5 million.
Two days after the UCC sale, on May 21, 2009, Lake Forest Bank recorded a financing statement against CAC, asserting a security interest in all of CAC's assets acquired from Colborne at the UCC sale. The Complaint alleges that the UCC sale generated no proceeds to pay creditors, and that at the sale, Lake Forest Bank received the same financial obligations from the same borrowers and guarantors secured by the same collateral as prior to the sale. The sale stripped Colborne of its assets and placed them out of reach of Mamacita.
Mamacita brought the instant five-count Complaint. In Count I, Mamacita asks this Court to find CAC liable in successor liability for the New Jersey judgment against Colborne. Count II seeks to "pierce the corporate veil" and hold the individual Hoskins family members who were shareholders in Colborne jointly and severally liable for the New Jersey judgment. Counts III and IV seek to hold CAC liable under Illinois' Uniform Fraudulent Transfer Act (the "IUFTA") for fraud in fact and fraud in law, respectively. In Count V, Mamacita seeks to hold the Hoskins Defendants liable for fraud in fact and fraud in law under the IUFTA. The Defendants have separately moved to dismiss each of these counts on various grounds, so each motion will be discussed in turn. Additional facts related to the relevant counts will be discussed as necessary.
A. CAC's Motion to Dismiss
CAC moves to dismiss the counts in which it is named for failure to state a claim (Count I), failure to comply with the elevated pleading requirements of FED. R.CIV. P. 9(b) (CountsIIIand IV), and failure to name a necessary party (all counts).
1. Count I: Successor Liability
First, CAC argues that Mamacita's "kitchen-sink" style pleading fails to state a claim for successor liability, so Count I should be dismissed pursuant to FeD. R. CIV. P. 12(b). A motion to dismiss for failure to state a claim should be granted if the complaint fails to satisfy FED. R. CIV. P. 8's pleading requirementof "a short and plain statement of the claim showing that the pleader is entitled to relief." "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Court must construe the complaint in the light most favorable to the plaintiff and draw all inferences in its favor. Justice v. Town of Cicero, 577 F.3d 768, 771 (7th Cir. 2009).
This Court has jurisdiction over the instant suit on the basis of diversity, and the parties agree that Illinois law applies to Mamacita's claims. Under Illinois law, the general rule is that a business that purchases the assets of a corporation is not liable for the debts of that corporation. Vernon v. Schuster, 688 N.E.2d 1172, 1175 (Ill. 1997). This rule is meant to protect bona fide purchasers from unassumed liability and to ensure the fluidity of corporate assets. Id. However, there are four exceptions to this general rule of successor non-liability: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller's obligations. Id. at 1175--76. As a preliminary matter, the parties agree that FED. R. CIV. P.9(b)'s heightened pleading requirements do not apply to claims for successor liability. Kruse v. Aamed, Inc., No. 96 C 5344, 1997 WL 102528, at *4 (N.D.Ill. March 4, 1997). Mamacita argues that it adequately pled the applicability of all four of these exceptions. In order to streamline the issues in the case, the Court will evaluate each of them.
a. Express or Implied Agreement
In support of its argument that CAC expressly or impliedly agreed to assume the debts of Colborne, Mamacita alleges that CAC expressly assumed Colborne's secured debts to both Lake Forest Bank and Tennessee Commercial Bank. It has attached to its Complaint the UCC financing statements supporting this allegation. Mamacita contends that by expressly assuming these secured debts and participating in a "sham" UCC sale to acquire Colborne's assets for the purpose of defrauding Mamacita, CAC impliedly assumed Colborne's debt to Mamacita.
CAC contends that these financing statements, at best, show an agreement between CAC and the banks involved, not an agreement between CAC and Colborne Corp. The Court agrees that Mamacita has not adequately alleged an implied or explicit assumption of the debt. Although there is little Illinois case law interpreting this exception, Mamacita's theory - that by expressly assuming some debts, CAC has impliedly assumed them all - stretches the exception too far.
In Vernon, 688 N.E.2d at 1174, the buyer of a heating system brought suit against the seller's son, who had taken over the sole proprietorship after the death of his father. The plaintiff alleged that the son failed to honor the warranty on the boiler. Id. In dissent, Justice Bilandic argued that an allegation that defendant "succeed[ed] to the assets, rights, and obligations" of his father's business should have been enough to allege successor liability under the explicit or implied agreement exception. Id. at 1179. Justice Bilandic noted that the defendant appeared to have assumed at least one obligation of his father's business, the lease on the location where it was operated, so it was arguable that the defendant had assumed other obligations as well. Id. However, the majority rejected that interpretation, finding plaintiff's complaint was insufficient to allege successor liability under any of the four exceptions. Id. at 1078.
Plaintiff's theory would stretch this exception beyond the narrow bounds set by the Vernon court. Further, Mamacita's theory of implied assumption based on the alleged "sham" UCC sale goes to the fourth exception to successor non-liability, not the first. As such, Plaintiff has not adequately pled the first exception to successor non-liability.
b. "De Facto Merger" and "Mere Continuation" Exceptions
A de facto merger occurs when: (1) there is a continuity of business enterprise between the seller and buyer, including continuity of management, employees, location, general business operations and assets; (2) there is a continuity of shareholders, in that shareholders of the seller become shareholders of the buyer; (3) the seller ceases operations and dissolves soon after the transaction; and (4) the buyer assumes those liabilities and obligations necessary for the uninterrupted continuation of the seller's business. Steel Co. v. Morgan Marshall Indust., Inc., 662 N.E.2d 595, 599--600 (Ill. App. Ct. 1996). The mere continuation exception applies when "the purchasing corporation is merely a continuation or reincarnation of the selling corporation." Vernon, ...