Court of Appeals of Illinois, First District, First Division
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Appeal from the Circuit Court of Cook County. 06 CH 10267 . Honorable Richard J. Billik (Ret.) and Rodolfo Garcia, Judges Presiding.
Affirmed in part; vacated and remanded in part.
For PLAINTIFF-APPELLANT/CROSS-APPELLEE: David T.B. Audley, Michael T. Benz, Bryan E. Jacobson, Mark A. Silverman, CHAPMAN AND CUTLER LLP, Chicago, Illinois.
For DEFENDANTS-APPELLEES/CROSS-APPELLANTS: Alisa M. Levin, LEVIN LAW, LTD., Chicago, Illinois.
JUSTICE CONNORS delivered the judgment of the court, with opinion. Presiding Justice Delort and Justice Cunningham concurred in the judgment and opinion.
[¶1] Plaintiff, Bank of America, appeals from orders of the circuit court that declined to find that spouses William Spatz (William) and Wendy Spatz (Wendy) were alter egos of Spatz Centers, Inc. (SCI), and WS Management, Inc. (WSM). Defendants, William, Wendy, SCI, WSM, and Anderson Associates, L.P. (Anderson), cross-appeal, contending: (1) the trial court should have found that certain facts and issues were precluded by collateral estoppel; (2) the trial court erred in finding that defendants violated the Uniform Fraudulent Transfer Act (Fraudulent Transfer Act) (740 ILCS 160/1 et seq. (West 2006)); and (3) the trial court improperly awarded attorney fees to plaintiff. We affirm the court's judgment on the collateral estoppel, Fraudulent Transfer Act, and alter ego claims, and vacate and remand on the issue of plaintiff's attorney fees.
[¶2] As preliminary background, this case concerns plaintiff's efforts to collect a judgment that was entered against SCI in Kansas in December 2005. At various times, William or Wendy had been a shareholder or otherwise involved in SCI, which was incorporated in 1989 in Illinois and had been the general partner or manager for a group of limited partnerships, which in turn owned various shopping centers around the country. SCI's business of managing the shopping center properties generated fees for SCI. In 1997, one of the limited partnerships for which SCI was the general partner, Wichita Associates, L.P. (WALP), which did business in Kansas, executed a note with an entity of which plaintiff is the successor. WALP eventually defaulted on its obligations under the mortgage and other loan documents, and at the end of the resulting foreclosure proceedings in Kansas, plaintiff received a judgment in December 2005 against WALP and SCI jointly and severally for $1,490,708.32, which included attorney fees, costs, and expenses. WSM was incorporated in Illinois on December 12, 2005, and soon after began managing certain properties that SCI had previously managed. Anderson allegedly began managing certain properties in 2007. Meanwhile, plaintiff registered the Kansas judgment in Illinois in January 2006. Plaintiff subsequently filed a separate action alleging various claims relating to William's and Wendy's supposed efforts to avoid paying the Kansas judgment.
[¶3] I. BACKGROUND
[¶4] A. Kansas Foreclosure Proceedings
[¶5] We first provide a summary of William and SCI's involvement in the Kansas foreclosure proceedings. WALP's note with the bank listed WALP as the maker and was signed by SCI as WALP's general partner, with Wendy signing as SCI's vice president. The note also indicated that if it became necessary to employ counsel to collect or enforce the debt or protect or foreclose the security for the debt, " Maker also shall pay on demand all costs of collection incurred by [the bank], including attorneys' fees and costs reasonably incurred for the services of counsel whether or not suit be brought." On November 30, 2004, William signed an affidavit in support of a stipulated application for an appointment of a receiver for the property. SCI was added as a defendant in the foreclosure case on February 22, 2005, when the bank filed a first amended petition for declaratory judgment and other relief. A certificate of service indicated that a copy of the first
amended petition was sent to William. On May 6, 2005, SCI filed an answer to the first amended petition. On June 28, 2005, a journal entry of judgment was entered against WALP. Subsequently, the property was sold to the bank for $1.2 million, which was applied to the judgment.
[¶6] On October 28, 2005, the bank filed a motion for partial summary judgment against SCI. In part, the bank sought payment of the unpaid principal balance on the note, which was approximately $1.4 million. The bank asserted that SCI as the general partner of WALP was jointly and severally liable for WALP's obligations. The bank also stated that WALP had failed to maintain its status as a separate, single-purpose entity, and as a result, WALP's debt obligation became fully recourse according to the language of the mortgage.
[¶7] In response, SCI and WALP acknowledged that because of a failure to file an annual report in July 1999, WALP had forfeited its good-standing status in Kansas. However, WALP and SCI asserted that WALP had applied for and expected to be granted reinstatement of its good-standing status in Kansas, and upon reinstatement, should be treated as if its good-standing status had never lapsed.
[¶8] On December 1, 2005, the Kansas court issued its ruling, stating that WALP had failed to maintain its status as a separate, single-purpose entity pursuant to the terms of the loan documents and that SCI and WALP failed to preserve WALP's existence. The court further stated that " [i]ssues concerning WALP's recent attempts to obtain reinstatement of its authorization to conduct business in Kansas *** are immaterial." The court also found that as WALP's general partner, SCI was jointly and severally liable for all of WALP's debts, obligations, and judgments. Accordingly, a judgment was entered against SCI and WALP jointly and severally for $1,490,708.32, which included $32,057.50 in attorney fees and expenses and $1,325.86 in costs. The ruling indicated that the judgment amount would also include " other expenses accrued and accruing, including reasonable attorneys' fees, insurance premiums, taxes, and assessments" pursuant to the terms of the note and that the judgment would accrue interest at the rate of $322.78 per day. The court also stated that plaintiffs had incurred and would continue to incur substantial costs in attempting to collect from WALP, including the cost of instituting the Kansas suit and " reasonable attorneys' fees related to [plaintiff's] collection efforts." A final order was entered on December 30, 2005. SCI and WALP subsequently appealed the judgment, but upon their motion, the appeal was dismissed on March 1, 2006.
[¶9] B. Motion for Turnover Against Wendy
[¶10] Plaintiff registered the Kansas judgment in Illinois in January 2006 under case number 06 M1 600238, and citation proceedings involving SCI, William, and Wendy began. On September 18, 2008, plaintiff filed a motion for a turnover order against Wendy on September 18, 2008, seeking to order Wendy to pay plaintiff approximately $1.4 million that Wendy or an entity known as Spatz Associates purportedly owed to SCI. The motion for turnover was also filed under case number 06 M1 600238.
[¶11] Referenced in the turnover proceedings was a " Spatz Centers Inc[.] Purchase/Sale Agreement" (purchase and sale agreement) that was undated and signed by William and Wendy. According to the purchase and sale agreement, Wendy owned SCI and William " is and always has been the President and a member of the Board of Directors." The purchase and sale agreement also indicated that Wendy
wanted to own SCI's 1% general partnership interest in a number of limited partnerships. Further, as of January 1, 2005, Wendy, William, and SCI agreed that: (1) Wendy agreed to transfer her interests to William " as of the date of this Agreement," SCI agreed to transfer all of its interest in the general partnership interests to Wendy, and SCI would remain the general partner of the limited partnerships; (2) Wendy agreed to forgive any debt that SCI owed her and agreed to " reasonably lend, or cause to be lent to SCI, reasonable sums of money now and in the future to insure the operations of the various properties owned by Wendy," and (3) no later than March 31, 2005, William would pay or cause to be paid $310,667.60 to Wendy for her stock in SCI.
[¶12] Following an evidentiary hearing that was held on March 20, 2009, and April 9, 2009, before Judge Alexander White in case number 06 M1 600238, the court issued an order on October 14, 2009, denying the motion for turnover. In its order, the court stated that " [t]he only relevant inquiry *** is whether Wendy is holding assets of SCI or WALP or is otherwise obligated to pay SCI or WALP for some debt." Another key question was how a certain account in SCI's general ledger, known as the " SA Distribution account," was to be interpreted. The court stated that the SA Distribution account could be an asset account that noted obligations Wendy owed to SCI, or a clearing account containing " essentially worthless entries" that served to correct otherwise erroneous entries made in the general ledger. Ultimately, the court found that the SA Distribution account was a clearing account.
[¶13] Apparently, the dispute involved various account adjustments and reclassifications that took place in 2005. One such reclassification was for $310,667.60. The court referenced the purchase and sale agreement, wherein William was required to pay Wendy $310,667.60 for her SCI stock, and stated that plaintiff's exhibits showed that SCI made a payment or deposit to the Spatz family account in that amount in March 2005, which was payment for the purchase price of the stock. The court further stated that the payment of the purchase price had been misclassified in SCI's March general ledger, and the SA Distribution account had been used as a clearing account to properly reclassify the payment.
[¶14] Among other items, the court addressed two entities known as the Bell Street property and an E-Trade account, both of which had been the subjects of adjustment entries. As to the Bell Street property, the court stated that the unrebutted testimony indicated that the property was owned exclusively by Wendy and her daughter. Although entries in SCI's general ledger had erroneously indicated that SCI had an interest in the property, the SA Distribution account was used as a clearing account to correctly show that the property was not an SCI asset. The court stated that the adjustment entries did not create an interest in the realty for SCI and did not transfer any interest in the realty to Wendy, as the property was never an SCI asset. Similarly, the court found that the E-Trade account had always been Wendy's exclusive property and again the SA Distribution account had been used as a clearing account to offset correcting entries made in SCI's general ledger so that the value of the E-Trade account was not shown on SCI's general ledger as an SCI asset. The court stated that the adjustment entries for the E-Trade account " neither transferred assets to Wendy nor created any obligation on her part to SCI."
[¶15] Overall, the court found that plaintiff did not have a factual basis for seeking a turnover order against Wendy, as there was no evidence that she received anything
from SCI in 2005 and " no evidence she [owed] SCI anything as a result of anything that was done in 2005." The court also noted that although plaintiff claimed that the account known as SA or Spatz Associates meant only Wendy, certain exhibits showed that this account could also mean William and the Spatz family. Accordingly, the court disagreed that funds directed to SA or Spatz Associates meant those funds were directed to Wendy.
[¶16] The court additionally found that various November, December, and year-end entries in the SA Distribution account did not represent actual assets and adjustment entries did not reflect " any transfers of SCI's assets to Wendy of any sort" in 2005. The court explained that plaintiff had not met its burden to show that the alleged transfers for which it sought a turnover order--including the sale of SCI stock, the sale of the Bell Street property, the proceeds of certain accounts, and other transactions--" created or preserved rights for SCI which Plaintiff, as a judgment creditor, can assume and enforce against Wendy." The court further stated that Wendy " does not own anything in which SCI has an interest" and that Wendy " does not own or control any assets of *** [SCI] and/or WALP that could be made subject to a turnover order." Additionally, the court found that plaintiff failed to show that " any assets were transferred by SCI to Wendy in 2005," that " Wendy has any assets in her possession which belong to SCI," or that " Wendy owes SCI anything as a result of anything that was done in 2005."
[¶17] C. Fraudulent Transfer, Mere Continuation, and Alter Ego Claims
[¶18] Plaintiff also filed a complaint in the chancery division under case number 06 CH 10267 on May 23, 2006. This chancery case was before Judge Richard J. Billik and involved three amended complaints, the third of which was filed on September 28, 2010, and ultimately proceeded to trial. Plaintiff's third amended complaint alleged that defendants violated the Fraudulent Transfer Act (740 ILCS 160/1 et seq. (West 2006)) and asserted causes of action for mere continuation and alter ego. Previously, around March 2008, before the turnover proceedings started, plaintiff had presented a listed of items that formed the basis of its fraudulent transfer claims " discovered to date." The listed transfers were: (1) at some point in or after 2005, SCI transferred all or nearly all of its partnership interests in each of 16 real estate limited partnerships to Wendy for no consideration; (2) WSM, rather than SCI, began managing and leasing for various limited partnerships and received all management and leasing revenue accordingly; (3) William paid $310,667.60 to Wendy for the transfer of SCI stock out of SCI's account rather than his personal funds; (4) SCI made distributions in the amount of $627,328 to shareholders during 2005, after the Kansas claim was brought against SCI; (5) Wendy used SCI's line of credit at South Central Bank for personal expenses and payments, including to pay off a mortgage on the Spatz's home in the amount of $564,926.98 and invest $1 million in a hedge fund; (6) SCI made over $275,000 in cash payments to Wendy in 2005; (7) SCI made a $100,000 loan to its shareholder, either William or Wendy, in 2005; (8) Wendy took management and leasing fees due to SCI in December 2005; (9) Wendy failed to provide credit support to SCI as required by the purchase and sale agreement; (10) Wendy hid debts owed to SCI and removed them from her general ledger at year end 2005; (11) SCI's books showed that Wendy owed over $1.4 million to SCI; (12) William transferred two E-Trade accounts that were carried on SCI's books to Wendy/Spatz Associates; (13) SCI made $55,000 worth
of deposits into Wendy's Merrill Lynch account during 2005; (14) SCI made extraordinary payments to management at the end of 2005; and (15) SCI loans to two limited partnerships were written off SCI's books and picked up by SA's books in November 2005, but SCI received no consideration for this transfer of assets to Wendy/Spatz Associates.
[¶19] As noted above, plaintiff's third amended complaint related to its claims under the Fraudulent Transfer Act and its mere continuation and alter ego claims. Plaintiff alleged in part that as a result of the Kansas judgment in December 2005, William caused SCI to stop actively producing income and cease operating as the entity that managed shopping centers owned by various limited partnerships. Plaintiff asserted that William incorporated WSM on December 12, 2005, to perform the same management and leasing functions that SCI had performed, and directed that management and leasing fees previously paid to SCI be paid to WSM. Plaintiff also alleged that around March 2007, Anderson, an entity that had been a limited partnership, started managing the limited partnerships that had been managed by WSM.
[¶20] In support of its claims under the Fraudulent Transfer Act, plaintiff listed the transfers that were allegedly made with actual intent to hinder, delay, or defraud plaintiff, including: (1) distributions paid by SCI to Wendy or William in 2005; (2) Wendy and William's conduct of purporting to delete funds owed to SCI from Spatz Associates' books; (3) Wendy and William's use of the SCI line of credit at South Central Bank to pay off a first home mortgage, transfer $1 million to Spatz Associates, " i.e., Wendy," which was later transferred to William's brother, and make miscellaneous draws for Wendy and William's benefit and offset SCI's funds for payment on the line of credit; (4) the transfer by SCI of all or the substantial part of its 1% general partnership interest in the limited partnerships; (5) the indirect transfer of management and leasing fees from SCI to the newly-formed and incorporated WSM; and (6) the indirect transfer of management and leasing fees from WSM to Anderson. As part of its requested relief, plaintiff sought punitive damages, including all attorney fees incurred after the Kansas judgment, and asserted that section 8(a)(3)(C) of the Fraudulent Transfer Act (740 ILCS 160/8(a)(3)(C) (West 2006)) had been construed to warrant punitive damages where appropriate. In the alternative, plaintiff contended that the loan documents and Kansas judgment provided for attorney fees, and that plaintiff was entitled to all fees incurred since the Kansas judgment.
[¶21] Next, in addition to asserting mere continuation claims against WSM and Anderson, plaintiff also alleged that William and Wendy were alter egos of SCI and WSM. In part, plaintiff contended that SCI failed to observe corporate formalities in that Wendy was never paid the $310,667.60 for her SCI stock and there were no SCI board minutes or resolutions authorizing SCI to enter into the purchase and sale agreement. Plaintiff also contended that Wendy and/or William commingled property titled in the name of Wendy and their daughter with SCI's assets, and stated that the Bell Street property was listed on SCI's balance sheets until November 2005. Plaintiff additionally alleged that SCI failed to maintain an arm's-length relationship with Wendy, William, WSM, other family members, and/or other Spatz-related entities in part because William directed the write-off of substantial obligations Spatz Associates owed to SCI and other entities in December 2005. Plaintiff sought judgment against William and Wendy in the full amount of the Illinois registered judgment, plus additional
postjudgment interest and attorney fees.
[¶22] On November 10, 2010, Wendy filed a motion to dismiss the complaint, contending that all matters against Wendy were barred by collateral estoppel. Wendy pointed to certain claims and allegations in the fraudulent transfer list and complaint that were previously adjudicated in her favor in the turnover proceedings. In response, plaintiff asserted in part that the complaint involved claims of fraudulent transfer and alter ego liability, while the turnover proceedings against Wendy only decided the narrow issue of whether Wendy owed money to SCI pursuant to entries in SCI's general ledger. However, plaintiff admitted that two transactions involved in the turnover proceedings were subject to collateral estoppel--the transfer of E-Trade accounts from SCI to Wendy and allegedly improper payments that SCI made to Wendy through a Merrill Lynch account. In her reply, Wendy contended in part that because a husband and wife are considered to be in privity, the finding in the turnover proceedings should also apply to William.
[¶23] On April 7, 2011, the court denied Wendy's motion to dismiss and continued the matter to " entertain further argument on the application (if any) of collateral estoppel [effect] of Judge White's *** ruling as they pertain to the complaint against Wendy Spatz."
[¶24] On May 20, 2011, the court entered an order stating that evidence about the E-Trade or Merrill Lynch accounts, as more fully described in the fraudulent transfer list and referenced in Wendy's motion, was precluded pursuant to collateral estoppel.
[¶25] Subsequently, prior to trial on plaintiff's complaint, SCI, WSM, Wendy, and William filed a motion in limine and asserted that pursuant to collateral estoppel, the ruling in the turnover proceedings precluded relitigation on certain of plaintiff's claims and factual allegations as to all defendants. Plaintiff responded in part that there was clearly no identity of parties with respect to SCI, WSM, and William and that the turnover proceeding was only filed against Wendy. Plaintiffs further contended that the turnover proceeding could not and did not address whether Wendy or any of the other defendants owed any money to plaintiff.
[¶26] In its ruling, the court distinguished between issues pertaining to Wendy and issues pertaining to other defendants. The court denied without prejudice the motion in limine as to defendants other than Wendy. The court stated that at trial, upon objection, defendants would have the burden to convince the court that collateral estoppel applied to someone other than Wendy. As to issues that involved Wendy, the court stated that, upon objection, plaintiff would have the burden to show that collateral estoppel did not apply.
[¶27] The matter proceeded to trial, which took place on a number of dates between June 28, 2011, and November 7, 2012. The bulk of the trial's relevant testimony came from William, who testified in both plaintiff's and defendants' cases. William testified that SCI, which still existed, was incorporated in 1989 with three directors, William, Wendy, and a person named Barry Herring. According to William, Herring was last affiliated with SCI in 1995, at which point there was only one director. William was the sole director and principal of SCI before January 21, 2005. William further testified that SCI's main function had been to manage properties across the country. Additionally, SCI acted as the general partner of limited partnerships that owned shopping malls and performed a variety of management functions for the limited partnerships, such as bookkeeping, filing and paying taxes,
and maintaining and leasing the properties. William stated that on formation, the limited partners mostly consisted of members of his family and friends of his immediate family.
[¶28] SCI received a certain percentage of the rental income from the tenants of the shopping malls and William acknowledged that documents shown to him by plaintiff's counsel indicated that SCI received $395,646 in management fees and $23,112 in leasing fees in 2002, about $505,698 in management fees and $37,121 in leasing fees in 2003, $568,936 in management fees and $86,332 in leasing fees in 2004, and $477,098 in management fees and $134,605 in leasing fees in 2005. According to William, however, these documents were " notoriously inaccurate." Additionally, SCI's 2005 tax return showed gross receipts or sales of $626,540. As of January 1, 2005, William and two other people were among SCI's employees.
[¶29] William testified that he first became aware of the Kansas foreclosure suit sometime in the middle to end of 2004. William stated that when SCI was named as a defendant, he was not concerned at first because the loan was nonrecourse and SCI had no liability. William became concerned later, when his attorney informed him that the bank was " trying to pierce *** the non-recourse aspect of it." William received papers relating to SCI's involvement in the case sometime in March 2005. William acknowledged that SCI's answer to the bank's amended petition, filed on May 6, 2005, reflected that he had instructed his attorney to actively defend SCI. William, however, never thought that he would lose the Kansas case. William stated that the loan required that WALP had to be registered in Kansas, and one year, William did not renew or fill out the appropriate form to renew WALP's registration. Yet, according to William, if the registration lapses and then is reinstated, it is as if the registration never lapsed. Nonetheless, the Kansas court found that because the registration had lapsed, SCI had violated the terms of the loan and the loan became recourse. After the judgment was entered, William agreed to appeal, but his attorney did not mention that William would have to put up a bond not only for the judgment, but also for substantially more than the judgment, which " sort of eliminated our desire to appeal." As a result, the attorney had the appeal dismissed. William stated that the Kansas proceedings " didn't factor into anything we did" until December 1, " when we lost."
[¶30] William acknowledged that plaintiff registered the Kansas judgment in Illinois and issued a nonwage garnishment to SCI's bank, and as a result, SCI's bank account was frozen. William also acknowledged that WSM's articles of incorporation were filed on December 12, 2005, and stated that WSM had the same address as SCI. Per a corporate resolution, William was identified as the president and secretary of WSM and Wendy was the sole member of the board of directors and received 999 of WSM's 1,000 shares, while William owned the remaining share. According to various documents, WSM was formed to do real estate management, and William testified that WSM began performing management functions for certain limited partnerships on January 1, 2006, and around February 2006, began managing a significant number of properties that SCI had previously managed. WSM received a certain percentage of the limited partnerships' rental income. William stated that no consideration or anything of value was exchanged between SCI and WSM.
[¶31] William also further discussed how WSM came to take over management functions from SCI. In October 2005, William decided to start WSM for development
occurring in Louisiana, and by December 2005, WSM was formed. However, WSM never managed any Louisiana properties " because of things that went on here." William stated that the garnishment of SCI's account made it effectively impossible to pay employees, " we needed someone to manage," and WSM " was as good an entity as any." William stated that he made the decision that it was impractical for SCI to continue as manager for various properties, with the lien on SCI's account serving as the primary factor. William also testified that the limited partnerships determined that SCI was not in a position to conduct business as needed to function on behalf of the limited partnerships. According to William, the limited partnerships " dictated who *** was going to manage and what was going to take place."
[¶32] More specifically, William differentiated between the limited partnerships that William or SCI controlled and those that were independent. According to William, each partner, entity, or person who controlled each limited partnership decided who it wanted to manage it as of January 1, 2006. For most of the limited partnerships, SCI was the general partner or managing member and had the authority " to make whatever decisions regarding management it wished to make." There, William acted as the president of the general partner as well as on behalf of the partnerships and directed the limited partnerships to pay WSM instead of SCI. William testified that he directed those limited partnerships to " behave in a certain manner, in their best interest, in which case they, you know, they did what they did." William also stated that it " [d]idn't matter to me what happened" to plaintiff, as his obligation was to act in the best interest of the limited partnerships. Of the limited partnerships that did not have SCI as a general partner and made the decision to switch to WSM independently, William stated that " those entities of which I had no control over was all done on a verbal basis." William testified that there would have been conversations and " some notification of our intent or what was going on." William further stated that " ultimately, I needed approval, but from a practical point of view, I was basically saying *** we needed to move it over" because SCI's accounts were frozen. William also stated " it was their decision whether it was allowed *** to happen." By the time these conversations took place, WSM had already been created. In total, two entities had management agreements with SCI and SCI subcontracted with WSM to manage them, eight entities had SCI as their general partner, one entity was controlled by William directly, and seven properties were neither owned nor controlled by William or Wendy and independently decided to use WSM. Additionally, one property was never managed by SCI and one entity, Anderson, managed its own property. In all, WSM managed approximately 18 properties. William testified that there were no written agreements between WSM and the limited partnerships, but there were oral agreements " in the sense that there was an understanding between the parties in terms of how they were going to function together."
[¶33] William acknowledged that a WSM working trial balance report for 2006 listed $382,575.93 in management fees and $46,081 in leasing fees. A WSM working trial balance for 2007 listed $251,075.48 in management fees. Additionally, William stated that he took over the leasing function for SCI and directed those fees to be paid to himself or various entities other than SCI, though he believed the majority of any leasing fees earned would have been deposited into WSM's account.
[¶34] William distinguished between SCI's and WSM's different functions.
William stated that SCI never stopped doing business but hired someone else to do management. According to William, SCI's obligations were to manage the partnership as a whole, such as by doing tax returns, filing annual reports, and completing corporate resolutions as required. Additionally, as long as SCI was the general partner, it had whatever liabilities were associated with the general partner and was required to perform the functions required under the limited partnership agreements. Meanwhile, WSM was a property manager that collected rents, swept the parking lots, and paid ...