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In re Mollie Enterprises, Inc.

United States District Court, N.D. Illinois, Eastern Division

September 28, 2016

IN RE: MOLLIE ENTERPRISES, INC., Debtor.
v.
CHARLES HANSON, Defendant-Appellant. BRENDA HELMS, not individually or personally but solely in her capacity as the Trustee of Debtor's Estate, Plaintiff-Appellee,

         On appeal from the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division Bankr. Case Nos. 12-B-20426, 15-A-00034 Judge Eugene R. Wedoff

          MEMORANDUM OPINION AND ORDER

          Robert M. Dow, Jr. United States District Judge

         This case is on appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case Nos. 12-B-20426, 15-A-00034. On September 9, 2015, the Bankruptcy Court vacated its July 22, 2015 order and reinstated its original June 29, 2015 ruling in favor of Plaintiff-Appellee Brenda Helms (“the Trustee”). The Bankruptcy Court held that Defendant-Appellant Charles Hanson breached an oral loan agreement between Hanson and Mollie Enterprises, Inc. (“the Debtor”) by not repaying the loans and that the Trustee's claim to collect against Hanson was timely because of the adverse domination doctrine. Before the Court is Hanson's appeal of the Bankruptcy Court's decision to reinstate its original ruling. For the reasons set forth below, the Bankruptcy Court's decision is affirmed.

         I. Background

         Hanson was the President and sole shareholder of the Debtor, Mollie Enterprises, Inc., formerly known as Northwest Building Material & Supply Co. The other corporate officers were Hanson's three children: Katherine Henry, Scott Hanson, and Charles Hanson, Jr. Hanson ran the day-to-day affairs of the Debtor. Hanson contends that Katherine Henry was involved in financial analysis for the Debtor from the early 1990's until it ceased operations in 2010 and that she took over as the “controlling officer” of the Debtor in 2008.

         At some point prior to 2002, the Debtor entered into an oral contract with Hanson for a series of loans from the Debtor. [See 7, at 2.] As of 2010, Hanson owed the Debtor approximately three million dollars. [See 16, at 6; 9, at Exhibit 16, 1-2.] Repayment of these loans was to be made on demand from the Debtor. [7, at 2.] From at least 2002 to 2010, the Debtor's internal books and records reflected the Debtor's loans to Hanson, which accrued interest and charges on an annual basis. At the end of each fiscal year, the Debtor's accountants, Miller Cooper & Co., Ltd., prepared a “Consolidated Financial Statements and Independent Accountants' Report” reflecting the loans, which was distributed to Hanson, the other corporate officers, and the Debtor's secured lender, Suburban Bank. The Consolidated Financial Statements reflect an amount “due from stockholder [i.e., Hanson]” and state with respect to the loans:

Effective January 1, 2002, the advances bear interest at the prime rate * * * minus 0.5%. The note was non-interest bearing prior to 2002. Principal and interest are due on demand. The Companies are not expected to demand repayment within the next year; therefore, the balance has been classified as long-term on the accompanying balance sheet.

[10, Exhibits 11-16.]

         The Debtor began having financial difficulties between 2008 and 2009 and failed to pay amounts it owed to numerous creditors from at least mid-2009 through the commencement of the Bankruptcy Case in mid-2012. By the end of 2010, the Debtor ceased doing business, and its assets were sold to pay the secured debt due to Suburban Bank. On May 18, 2012, two of the Debtor's creditors filed an involuntary bankruptcy petition.[1] Plaintiff-Appellee Brenda Helms was appointed as the Debtor's Trustee on July 12, 2012.

         The Debtor did not demand repayment of the loans from Hanson while Hanson controlled the Debtor. However, the Trustee made written demand on Hanson to repay the loans and all interest thereon on December 17, 2014. [10, at 4; 16, at 7.] Hanson failed to repay the loans. On January 16, 2015, the Trustee filed the underlying adversary complaint against Hanson seeking to recover the principal and interest of the loans, and the case proceeded to trial on June 29, 2015.[2] Hanson argued that the Illinois five-year statute of limitations started to accrue when the loan agreement originated prior to the beginning of 2002, and thus any claim to collect was time-barred. The Trustee argued that the cause of action did not accrue until a demand for payment was made; since the only demand for payment was made on December 17, 2014, the Trustee asserted that the claim against Hanson for breach of the loan agreement was not time-barred. [See 5.]

         On June 29, 2015, the Bankruptcy Court ruled in favor of the Trustee, finding that there was an oral loan agreement between Hanson and the Debtor and that Hanson was in breach of the loan agreement since he did not repay the loans upon demand. [5, at 96-99.] The Bankruptcy Court concluded that the statute of limitations did not start to run until the date of demand, December 17, 2014, so the claim was not time-barred. [5, at 98.]

         On July 9, 2015, Hanson filed a motion to alter or amend judgment pursuant to Bankruptcy Rule 9023. Hanson argued that under Illinois case law, the statute of limitations began to run on the date of inception of the loan, i.e., prior to 2002. On July 22, 2015, the Bankruptcy Court granted Hanson's motion and entered judgment in Hanson's favor. [6, Exhibit 16, at 2.] The Bankruptcy Court held that a better interpretation of the limitations provision required that the statute of limitations start to run when a creditor may legally demand payment, which, for an on demand loan, is at the inception of the loan. [6, Exhibit 16, at 3-5.] The alternative approach of having the limitations period run only from the date of the demand, the Bankruptcy Court explained, would give an unlimited time for actions on oral demand agreements, since demand could be withheld indefinitely without violating the limitations period. [7, at 3-4.] The Bankruptcy Court also granted the Trustee's request for post-trial briefing. [6, Exhibit 16, at 15.]

         On September 9, 2015, the Bankruptcy Court ruled on the post-trial briefing, vacated its July 22, 2015 order in favor in Hanson, and reinstated its June 29, 2015 judgment in favor of the Trustee. [7, at 7.] The Bankruptcy Court determined that the adverse domination rule applied to the Trustee's claim for breach of the oral loan agreement and thus tolled the statute of limitations until the Trustee replaced Hanson as the person controlling the Debtor. [7, at 7.] On September 16, 2015, Hanson filed a timely notice of appeal.

         II. ...


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