Appeal from the Circuit Court of Cook County No. 06 L 003551 Honorable Elmer J. Tolmaire,III, Judge Presiding. Appeal from the Circuit Court of Cook County No. 10 L 008380 Honorable Ronald F. Bartkowicz, Judge Presiding.
The opinion of the court was delivered by: Justice Connors
JUSTICE CONNORS delivered the judgment of the court, with opinion. Presiding Justice Quinn and Justice Harris concur in the judgment and opinion.
¶ 1 This consolidated appeal arises out of the efforts by plaintiff and judgment creditor, Workforce Solutions, to collect on a judgment entered in its favor following a breach of contract action filed against defendant and judgment debtor, Urban Services of America. In a supplementary proceeding, the circuit court denied Workforce's motion for turnover of assets asserted against third-party citation respondents. It determined that one count of the motion was barred by the statute of limitations and the second count was denied because Workforce failed to prove that the entity held assets that could be applied toward Workforce's judgment.
¶ 2 In a separate action, Workforce filed a complaint directly against Urban and the third parties named in the supplementary proceeding. It asserted claims for fraudulent transfer, breach of fiduciary duty, successor liability, breach of the duty of disclosure and candor, fraudulent concealment, piercing the corporate veil, and alter ego. The circuit court dismissed all but the last two counts of the complaint with prejudice. Workforce now appeals from the denial of its motion for turnover and the dismissal of five counts of its complaint. For the following reasons, we reverse the circuit court's denial of the motion for turnover and remand for further proceedings. We also reverse dismissal of counts I, II, and V of the direct action against Urban and related entities and affirm dismissal of counts VI and VII.
¶ 4 In 2003, Workforce and Urban entered into a contract whereby Workforce provided contract employees to Urban to operate municipal recycling facilities. Urban fell behind on its payments to Workforce. After failed attempts to collect past-due payments, Workforce filed a breach of contract action against Urban in 2006. In June and July of 2008, Workforce obtained default judgments against Urban totaling $1,026,720.10. With statutory interest, the judgment owed to Workforce totaled nearly $1.4 million.
¶ 5 In October of 2008, Workforce instituted supplementary proceedings pursuant to section 2-1402 of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-1402 (West 2008)). Under that statute, Workforce had citations to discover assets issued to Urban, as judgment debtor, and to numerous third-party citation respondents, which were corporate entities related to Urban. In January of 2010, after two years of discovery, Workforce filed a motion for turnover of certain assets under the control of USA Franchising (USAF) and The Services Group (TSG) that it believed should satisfy the judgment on Urban's behalf. The turnover claims were brought under the Illinois Uniform Fraudulent Transfer Act (Act) (740 ILCS 160/1 et seq. (West 2008)).
¶ 6 The circuit court denied the turnover motion. The court found that the claim against USAF was untimely or "extinguished" under section 10 of the Act. 740 ILCS 160/10 (West 2008). Additionally, the court found that Workforce failed to produce evidence that TSG held any assets that could be applied to satisfy the judgment.
¶ 7 At about the same time Workforce filed its turnover motion, it also commenced a new action against Urban, USAF, TSG and related entities, and the officers and directors of those entities. Workforce asserted seven counts against the defendants for fraudulent transfer, breach of fiduciary duty, successor liability, breach of the duty of disclosure and candor, "fraudulent concealment," piercing the corporate veil, and alter ego. The circuit court dismissed the piercing and alter ego claims without prejudice. It dismissed the remaining counts with prejudice for a variety of reasons, some of which were based on the court's findings in the turnover proceeding. The details of the claims' disposition will be discussed further below.
¶ 8 Workforce filed timely notices of appeal in each case. Pursuant to motion, this court consolidated the appeals. We will analyze each case in turn.
¶ 9 A. Appeal No. 1-11-1410 (Supplementary Proceedings)
¶ 11 After obtaining a judgment against Urban in an underlying breach of contract action, Workforce initiated supplementary proceedings against Urban in an effort to discover assets that could be used to satisfy the judgment. Workforce also filed discovery citations against other entities that potentially held Urban's assets that could be applied toward the judgment, including TSG and USAF.
¶ 12 Workforce, Urban, and the third-party citation respondents engaged in extensive discovery over a two-year period. Workforce discovered that Urban, TSG, and USAF, among other entities, were owned or controlled by some combination of the same four individuals: Gordon McTavish, Steven Fenzl, Doug Ritter, and Ron Swane (the promoters).
¶ 13 The resulting matrix of entities and their ownership is complex. In the simplest terms, McTavish and Swane are the majority owners of Urban, vis-a-vis their operation of a wholly owned subsidiary of Drader, which is itself owned and controlled by McTavish and Swane. Fenzl and Ritter own the remainder of Urban. All four of the promoters are the sole members of the board of directors of Urban.
¶ 14 The promoters indirectly own 70% of USAF. Ritter and Fenzl own 35% of USAF vis-avis their sole ownership of a holding company. McTavish and Swane own another 35% of USAF in a similar arrangement.
¶ 15 The promoters also indirectly own 100% of TSG. Ritter and Fenzl's holding company owns half of TSG. McTavish and Swane own the other half as owners and controllers of another wholly owned subsidiary of Drader.
¶ 16 McTavish and Swane are also part owners of 703795 Alberta, Ltd. (Alberta). McTavish is president of Alberta and Swane is secretary-treasurer. Both men are also directors of the company.
¶ 17 According to Workforce, the discovery documents and depositions of McTavish and Swane revealed that Urban engaged in certain financial transactions with Drader, TSG, USAF, and Alberta in an effort to avoid paying its judgment. Workforce then filed a motion for turnover of assets. It asserted two claims under the Act, one challenging a May 2008 transaction between Urban and TSG, and one challenging a May 2005 transaction between Urban and USAF.
¶ 18 a. Count I: The Urban-TSG Transaction
¶ 19 First, Workforce challenged a May 2008 transaction in which Urban transferred all of its assets to TSG. Workforce alleged that Urban owed Drader $787,000 after Drader refinanced a high-interest line of credit Urban took out (Urban loan). To finance this transaction, Drader borrowed $1 million from HSBC Bank (Drader loan). In return, Urban entered into security agreements with Drader and HSBC. In essence, they obtained blanket liens over all of Urban's assets. Urban asserted that Drader and HSBC filed financing statements pursuant to the provisions of the Uniform Commercial Code (UCC) (810 ILCS 5/1-101 et seq. (West 2008)) evidencing that they were secured creditors. HSBC subsequently transferred its security interest to Drader.
¶ 20 Alberta then purchased the Urban loan debt from Drader for about $187,000. Although Drader "wrote off" the remaining $600,000 for beneficial tax purposes, indicating that the Urban debt was uncollectable, Urban still remained obligated to repay the full amount of the debt to Alberta. The written agreement between Alberta and Drader with respect to this transaction was signed by McTavish on behalf of both parties.
¶ 21 Urban and TSG then entered into an asset purchase sale. TSG purchased all of Urban's assets but assumed none of its liabilities (specifically, Workforce's judgment), other than the $787,000 debt to Alberta and a $125,000 debt owed to Fenzl. As the purchase was structured, TSG borrowed $935,000 from Alberta to finance the purchase. According to Workforce, the promoters "took all of Urban's assets and placed them into another entity they all directly or indirectly controlled, and obligated this new entity to make payments only to themselves individually or to other entities that they directly or indirectly controlled."
Furthermore, Workforce alleged:
"There was no consideration for the purchase of [Urban's] assets other than a shuffling of debts among Urban insiders[, i.e., the promoters] designed only to benefit said insiders and leave Urban's legitimate creditors, [Workforce] chief amongst them, out in the cold."
¶ 22 Additionally, Workforce asserted that the timing of this transaction was suspect. It alleged that "[t]he transfer of all of Urban's assets to TSG closed on May 2, 2008. Once done, Urban withdrew its defense of the case brought by [Workforce] on May 12, 2008 which ultimately resulted in the [default] judgment."
¶ 23 Workforce alleged that this transaction met the standards for actual fraud under section 5(a)(1) of the Act and constructive fraud under sections 5(a)(2) and 6 of the Act. 740 ILCS 160/5(a), 6 (West 2008).
¶ 24 b. Count II: The Urban-USAF Transaction
¶ 25 Workforce also challenged an August 2005 transaction in which Urban loaned USAF $400,000. The loan agreement was signed by Ritter on behalf of USAF and by Fenzl on behalf of Urban. The loan agreement also indicated that Urban loaned Ritter $150,000. However, despite Workforce's motion to compel, the entities have not produced a promissory note evidencing the Ritter loan.
¶ 26 Workforce challenged the USAF loan as being actually and constructively fraudulent under sections 5(a)(1) and (a)(2) and 6 of the Act. 740 ILCS 160/5(a), 6 (West 2008). It claimed that the USAF loan occurred months after Workforce began demanding payment from Urban on the services contract.
¶ 27 In response to both counts, TSG and USAF argued that the challenged transactions were not "transfers" of "assets" as defined by the Act. They maintained that the property that was conveyed was subject to existing ...