The recent 1st District Appellate Court case of Andersen Law LLC v. 3 Build Construction, LLC, 2019 IL App (1st) 181575-U, examines among other topics, what constitutes a transferable asset under Illinois’s Fraudulent Transfer Act, 740 ILCS 160/1, et seq., and the pleading requirements to successfully allege the continuation exception to the general rule of no successor liability.

The plaintiffs’ IFTA claims were based on allegations that former members of the LLC debtors’ systematically raided company bank accounts and formed a new business entity to evade a money judgment.

A colorable IFTA claim — whether it sounds in actual or constructive fraud — requires a creditor-debtor relationship. It also requires the plaintiff to allege a transferor an identifiable asset.

Here, the court found the plaintiffs failed to allege either a debtor-creditor relationship between the judgment creditor and the individual LLC members or a transfer of debtor assets. The plaintiffs’ failure to allege that the debtor made transfers without receiving a reasonably equivalent value in exchange for the transfer also doomed their constructive fraud complaint count.

Next, the court jettisoned the plaintiffs’ actual fraud claims under IFTA section 5(a)(1). In an actual fraud claim, the plaintiff must show a specific intent to defraud a creditor. This section goes on to list some 11 “badges” of fraud ranging from whether the transfer was concealed, to whether the transferee was a corporate insider, to whether a transfer encompassed the bulk of a debtor’s assets. 740 ILCS 160/5(b)

The plaintiffs’ allegation that the transfers were fraudulent because they occurred within a year of the judgment or went to pay members’ personal expenses were deemed too conclusory to satisfy the pleading requirements for an IFTA actual fraud claim.

The court then rejected the plaintiffs’ IFTA section 6(a) (which governs claims arising before a transfer) claim based on the debtors forming a new corporation and diverting debtors’ business opportunities to that new entity.

An IFTA claim requires a transfer. The statute defines a “transfer” as “every mode… of disposing of or parting with an asset or an interest in an asset…” 740 ILCS 160/2(l).

“Asset” is defined as “property of a debtor” while “property,” in turn, means anything that may be the subject of ownership. 740 ILCS 160/2(b), (j).

But a transfer is not made until the debtor acquires rights in the asset transferred.

The court held the plaintiffs did not allege an asset or a transfer under the IFTA. Following Illinois case precedent, the court found that unfulfilled business opportunities were not transferrable assets under the statute.

Finally, the court rejected the plaintiffs’ successor liability claim. The plaintiffs alleged the debtors’ members formed a new business entity for the purpose of avoiding the judgment.

The general rule is that a corporation that purchases the assets of another business is not liable for the debts or liabilities of the purchased corporation. An exception to this rule applies where the purchaser is a mere continuation of the seller.

To invoke the continuation exception, the plaintiff must show the purchasing corporation maintains the same or similar management and ownership as the purchased entity.

The test is whether there is a continuation of the selling business’s entity; not merely a continuation of the seller’s business. A commonality among the seller and buyer businesses’ officers, directors, and stock are the key ingredients of a continuation.

The court found the plaintiffs’ continuation exception arguments lacking. The plaintiffs failed to allege a purchase or transfer of the corporate debtors’ assets or stock by or to the new entity. And while the plaintiffs did allege some common management between the corporate debtors and the new entity, the plaintiffs failed to allege a commonality of stock between the companies.

Case lessons

A conjectural business expectancy is not tangible enough to constitute a transferable asset under IFTA;

A creditor’s attempt to impute a corporate judgment to individual shareholders is improper in a post-judgment fraudulent transfer case. Instead, the creditor should file a separate action against the individual shareholders for breach of fiduciary duty, usurpation of corporate opportunities, piercing the corporate veil or similar theories. Finally, an identify of ownership between former and successor corporation is a key element to invoke the continuation exception to rule of no successor liability.