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Advocate Financial Group, LLC v. 5434 North Winthrop, LLC

Court of Appeals of Illinois, Second District

November 23, 2015


          Appeal from the Circuit Court of Du Page County. No. 11-L-87. Honorable Ronald D. Sutter, Judge, Presiding.

         Anthony S. DiVincenzo, of DiVincenzo Schoenfield Swartzman, of Chicago, for appellant.

         Peter H. Jagel, of Law Offices of Peter H. Jagel, P.C., of Naperville, for appellee.

         McLaren and Birkett, Justices concurred in the judgment and opinion.


Page 1193

          HUDSON, JUSTICE.

          [¶1] I. INTRODUCTION

          [¶2] Plaintiff, Advocate Financial Group, LLC, obtained a judgment against 5434 North Winthrop, LLC (North Winthrop), a corporation that was dissolved afterward. North Winthrop's sole asset, a building in Chicago, had been sold to a purchaser, Winthrop Real Estate, LLC (Winthrop Real Estate), that later resold it to Steward Apartments, LLC (Steward). To satisfy its judgment against North Winthrop, plaintiff sought a turnover order against Steward (see 735 ILCS 5/2-1403 (West 2010)). After a bench trial, the trial court granted the order, holding that, as the " mere continuation" of North Winthrop, Steward was responsible for its debts. Steward appealed, invoking the general rule that a corporation that purchases another corporation's assets is not liable for its debts. We reversed and remanded, holding that resolving the case depended on a factual matter that the trial court did not decide: in essence, whether the transfer of assets from North Winthrop to Winthrop Real Estate and then from Winthrop Real Estate to Steward had been bona fide or a subterfuge. Advocate Financial Group, LLC v. 5434 North Winthrop, LLC,

Page 1194

2014 IL App. (2d) 130998, 383 Ill.Dec. 789, 15 N.E.3d 955.

          [¶3] On remand, based on the evidence from the original hearing, the trial court found that Winthrop Real Estate had been a " straw man" and that the two sales were in reality one prearranged transfer from North Winthrop to Steward, undertaken to avoid the judgment debt to plaintiff. The court thus held Steward responsible for the debt. Steward appeals. We affirm.

         [¶4] II. BACKGROUND

          [¶5] Because this appeal centers on the trial court's application of our opinion to the facts that the court heard originally, we set out both the facts and our opinion's reasoning in detail.

         [¶6] A. Underlying Facts

          [¶7] North Winthrop was formed to develop a residential building in Chicago and sell condominium units there. Its " Operating Agreement," dated December 21, 2006, listed its members and their respective interests as James and William Cartwright, brothers, who were also managers (7.65% each); Bernard Botheroyd (15.4%); William Severino (15.4%); Harry and Connie Powell jointly (7.7%); Michael Prokop (7.7%); Theresa McLaughlin and Synthia Stryzek jointly (15.4%); Margaret Haney (15.4%); and Ann Brensen and Barbara Palmer jointly (7.7%). In 2007, National City Bank, the predecessor to PNC Bank, National Association (PNC), lent North Winthrop $1,662,000, secured by a mortgage on the property, with most of North Winthrop's members personally guaranteeing the loan. Later, North Winthrop defaulted on the loan and PNC started foreclosure proceedings.

          [¶8] On January 15, 2010, plaintiff and North Winthrop entered into a " working agreement" under which plaintiff would assist North Winthrop in obtaining financing to pay off PNC and complete the project. On December 23, 2011, North Winthrop and PNC signed a settlement under which PNC released North Winthrop from the mortgage, released the personal guarantors from most of their obligations as such, and reduced North Winthrop's debt to $750,000. In return, North Winthrop agreed to sell the property to CSM Capital, LLC (CSM). On December 30, 2011, the sale closed for $650,000. CSM took title in the name of Winthrop Real Estate, LLC. On June 8, 2012, North Winthrop was involuntarily dissolved.

          [¶9] On March 6, 2012, Steward filed its operating agreement with the Secretary of State's office. It stated that the company had been formed " to own and operate" the Chicago property. It listed the members and their respective interests as James Cartwright (17.99%); William Cartwright (11.65%); Botheroyd (14.31%); Prokop (10.32%); Haney (30.22%, including 15.11% transferred from McLaughlin); and Brensen and Palmer jointly (15.51%). On March 19, 2012, Winthrop Real Estate and Steward closed the sale of the property for $676,008.20. Winthrop Real Estate agreed to lend Steward $400,000 to complete the project.

          [¶10] In the meantime, plaintiff had obtained an arbitration award against North Winthrop for unpaid fees under the working agreement. On September 7, 2011, plaintiff filed an amended complaint to confirm the award, naming North Winthrop and its individual members as defendants. On October 11, 2012, after North Winthrop had been dissolved, the trial court entered judgment for plaintiff and against North Winthrop, but not the individual defendants, for $50,896.23 for plaintiff's services and $36,550 in attorney fees.

          [¶11] On February 7, 2013, plaintiff moved for a turnover order against Steward, claiming that Steward was liable for

Page 1195

North Winthrop's judgment debt because it was the " mere continuation" of North Winthrop. Plaintiff observed that North Winthrop's sole asset--the eponymous Chicago real estate--was also Steward's sole asset. Further, most of North Winthrop's members were now members of Steward, and every member of Steward had been a member of North Winthrop. Citing Dearborn Maple Venture, LLC v. SCI Illinois Services, Inc., 2012 IL App. (1st) 103513, 968 N.E.2d 1222, 360 Ill.Dec. 469, and Workforce Solutions v. Urban Services of America, Inc., 2012 IL App. (1st) 111410, 977 N.E.2d 267, 364 Ill.Dec. 778, plaintiff contended that this case fit within an exception to the rule that a corporation that purchases another corporation's assets is not liable for the other corporation's debts.

          [¶12] In response, Steward argued as follows. North Winthrop sold the Chicago property in order to satisfy its settlement with PNC. The sale to Winthrop Real Estate, for $650,000, was an arm's-length transaction between unaffiliated entities: no member of North Winthrop had any interest in Winthrop Real Estate. On December 30, 2011, when the sale closed, the guarantors of the PNC note were required to contribute an additional $140,000 to pay off the note. Steward could not be North Winthrop's " mere continuation," because North Winthrop sold the building to Winthrop Real Estate, an independent corporation, and, sometime later, Winthrop Real Estate voluntarily sold the building to Steward. No case law held that one corporation can be the mere continuation of another where the assets of the first corporation were acquired and then resold in arm's-length transactions by an independent entity.

         [¶13] B. Trial

          [¶14] The trial court held a bench trial. The sole witness was James Cartwright, through whose testimony several exhibits were admitted. On examination by plaintiff's attorney, Cartwright testified as follows. In December 2006, North Winthrop was formed in order to purchase the Chicago property with the aim of rehabilitating it and selling condominium units. North Winthrop conducted no business other than owning and developing the property. After the tenants' leases expired, North Winthrop did not renew any of them. It obtained a construction loan from National City for approximately $1.5 million. PNC bought out National City and acquired the interest in the loan. ...

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