Jefferson-Pilot Investments, Inc. v. Capital First Realty, Inc.

Filing 288

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 5/29/12. (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

JEFFERSON-PILOT INVESTMENTS, INC.,

)
)
Plaintiff,
)
)
vs.
)
)
CAPITAL FIRST REALTY, INC., SUNSET
)
VILLAGE LIMITED PARTNERSHIP, TCF
)
NATIONAL BANK, L H BLOCK ELECTRIC )
COMPANY, INC., DOHERTY, GIANNINI,
)
REITZ CONSTRUCTION, INC., EAGLE
)
HEATING & COOLING INC., LAYNE
)
CHRISTENSEN COMPANY, and
)
LAYNE-WESTERN,
)
)
Defendants.
)
-------------------------------------------------------------- )
JEFFERSON-PILOT INVESTMENTS, INC., )
)
Third-Party Plaintiff,
)
)
vs.
)
)
CAPITAL FIRST REALTY, INC., THE
)
KLARCHEK FAMILY TRUST, JOHN
)
COSTELLO as trustee of the Klarchek
)
Family Trust, JOHN LOGIUDICE as trustee )
of the Klarchek Family Trust, WOLIN
)
KELTER & ROSEN, LTD., BAUCH &
)
MICHAELS, LLC, CAPITAL HOME
)
SERVICES CORP., GILSON LABUS &
)
SILVERMAN, LLC, JAY KLARCHEK,
)
MICHAEL PASHAWITZ, and SUNSET
)
VILLAGE LIMITED PARTNERSHIP,
)
)
Third-Party Defendants.
)

Case No. 10 C 7633

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:

Jefferson-Pilot Investments, Inc. has sued Capital First Realty for breach of its
obligations under guaranties executed in connection with certain mortgage loans.
Jefferson-Pilot has also filed a third-party complaint in which it seeks damages from
several individuals and businesses based on the allegedly wrongful distribution of its
cash collateral. The third-party defendants (“defendants”) have moved to dismiss
Jefferson-Pilot’s third-party complaint. For the reasons stated below, the Court grants
their motions in part and denies them in part.
Background
The Court takes the following facts from the third-party complaint and accepts
them as true for purposes of the motions to dismiss. Hallinan v. Fraternal Order of
Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). The Court assumes
familiarity with its prior rulings in this case. See Jefferson-Pilot Invs., Inc. v. Capital First
Realty, Inc., No. 10 C 7633, 2012 WL 137881 (N.D. Ill. Jan. 18, 2012); Jefferson-Pilot
Invs., Inc. v. Capital First Realty, Inc., No. 10 C 7633, 2011 WL 2888608 (N.D. Ill. July
18, 2011).
In 2001 and 2006, Sunset Village Limited Partnership borrowed large amounts of
money to start a residential development. Capital First guarantied Sunset Village’s
loans. In June 2010, the initial lenders assigned their rights in the notes, mortgages,
and security interests to Jefferson-Pilot. Shortly thereafter, Sunset Village missed a
payment. Jefferson-Pilot delivered a notice of default, but Sunset Village did not pay.
Jefferson-Pilot then delivered a notice of acceleration, requesting immediate payment of
all amounts due. Sunset Village again failed to cure the default, and Jefferson-Pilot filed
a mortgage foreclosure suit against Sunset Village in state court in late September
2

2010.
On October 13, 2010, Sunset Village filed a voluntary petition for Chapter 11
bankruptcy, which automatically stayed Jefferson-Pilot’s foreclosure action. This
petition was filed the day before a scheduled hearing on Jefferson-Pilot’s motion to
appoint a receiver. After initial proceedings in the bankruptcy case, Jefferson-Pilot
agreed that Sunset Village could use the rents and other proceeds generated from the
properties for property maintenance and related expenses, pursuant to periodic “cash
collateral orders” entered by the bankruptcy court. The bankruptcy court entered
several such orders, the last of which covered the period from May 1, 2011 through May
31, 2011.
Jefferson-Pilot moved the bankruptcy court to dismiss the bankruptcy case or
modify the automatic stay to allow for the continuation of the foreclosure action. The
bankruptcy court scheduled a hearing on this motion for May 18, 2011. Prior to the
hearing, however, Sunset Village’s counsel obtained leave to withdraw its appearance
in the bankruptcy case. At the May 18, 2011 hearing, the bankruptcy court ruled that
Sunset Village could not proceed without counsel and dismissed the case.
After the dismissal, on May 18 and 19, 2011, Capital First, in its role as Sunset
Village’s manager, disbursed a total of $317,625 from the funds that had been
designated as cash collateral to some or all of the third-party defendants. In addition,
more than $50,000 was disbursed from Sunset Village’s bank accounts later in May.
On May 31, 2011, this Court entered a temporary restraining order (TRO) enjoining
Sunset Village from disbursing funds contained in two of its bank accounts. At the
beginning of the May 31 TRO hearing, Jefferson-Pilot was not yet aware of the funds
3

that had been disbursed, and it argued that it needed the TRO to protect its interests
after the expiration of the cash collateral order.
Discussion
On a motion to dismiss under Rule 12(b)(6), the Court accepts the facts stated in
the complaint as true and draws reasonable inferences in favor of the plaintiff. Hallinan,
570 F.3d at 820. To survive the motion, the complaint must include enough facts to
state a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 129 S. Ct. 1937,
1950 (2009). A claim is plausible on its face “when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. at 1949.
Jefferson-Pilot has sued eleven third-party defendants, asserting a total of seven
claims against those defendants. Each defendant has filed or joined one of five motions
to dismiss, each of which incorporates the relevant arguments from the others. Several
arguments appear in multiple briefs. The Court need not reference each iteration of
each argument, but it has considered the material in each defendant’s submissions and
will specifically identify particular briefs when appropriate.
1.

Effect of the cash collateral order
As a threshold matter, the parties dispute the effect of the bankruptcy court’s May

2011 cash collateral order after that court dismissed the bankruptcy case. JeffersonPilot maintains that the order remained in effect and that Sunset Village’s violation of its
terms provides the element of fraud or bad faith that is required for many of the other
claims in the third-party complaint. Defendants argue that dismissal of the bankruptcy
case voided the order and freed Sunset Village from any other restraints the bankruptcy
4

had placed on it.
The parties agree that section 349(b) of the Bankruptcy Code establishes the
effect of dismissal:
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than
under section 742 of this title . . .
(2) vacates any order, judgment, or transfer ordered, under section
522(i)(1), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property
was vested immediately before the commencement of the case under this
title.
11 U.S.C. § 349(b). A bankruptcy court is authorized to enter cash collateral orders
under section 363.
Jefferson-Pilot cites several cases to support its contention that a bankruptcy
court order can remain in effect after the dismissal of a bankruptcy case. The most
closely analogous case is In re TNT Farms, 226 B.R. 436 (Bankr. D. Idaho 1998), in
which a bankruptcy court, in a cash collateral order, had granted a first-priority lien over
certain crop proceeds to one of the debtor’s secured creditors. After the case was
dismissed, the creditor commenced an adversary proceeding in the bankruptcy court
seeking to establish the continuing priority of its lien over the liens of other creditors.
The court determined that the plaintiff creditor had first priority in the crop proceeds “by
virtue of its adequate protection liens provided in the cash collateral orders issued by
this Court in connection with TNT’s first bankruptcy case.” Id. at 441. In reaching this
holding, the court observed that “the omission of Section 363 from the language of
Section 349 manifests the intent of Congress to leave orders entered under Section 363
unaffected unless otherwise provided by the Court.” Id. at 442. The court also noted
5

that the words “[u]nless the Court, for cause, orders otherwise” in section 349(b) “allow[]
the Court, under these appropriate circumstances, to adjust the strict results of
dismissal here.” Id.
It is not entirely clear whether the court in TNT Farms was invoking its power to
“adjust the strict results of dismissal” as a necessary prerequisite to finding that the cash
collateral order continued to establish priority. If so, the case does not support
Jefferson-Pilot’s argument that a cash collateral automatically survives dismissal. Even
if the court in TNT Farms based its holding solely on the statutory text, however, the
Court respectfully disagrees with its conclusion.
The Bankruptcy Code’s definition of cash collateral and the restrictions that the
Code imposes on its use are inextricably intertwined with the pendency of a bankruptcy
case. “Cash collateral” is defined as “cash, negotiable instruments, . . . or other cash
equivalence whenever acquired in which the estate and an entity other than the estate
have an interest.” 11 U.S.C. §363(a) (emphasis added). The statutory restrictions on
cash collateral establish that “[t]he trustee may not use, sell, or lease cash collateral . . .
unless (A) each entity that has an interest in such cash collateral consents; or (B) the
court, after notice and a hearing, authorizes such use, sale, or lease in accordance with
the provisions of this section.” 11 U.S.C. § 363(c)(2) (emphasis added). This text
indicates that such restrictions do not survive the dismissal of a bankruptcy case, when
there is no longer an estate – and thus no “cash . . . in which the estate . . . ha[s] an
interest” – or a trustee. See Matter of Statistical Tabulating Corp., 60 F.3d 1286, 1290
(7th Cir. 1995) (“Because the [automatic] stay is dependent on the existence of the
bankruptcy, the dismissal of the case disposed of any dispute about the stay.”).
6

In addition, a bankruptcy court’s authorization of a debtor’s use of cash collateral
is neither a final order disposing of a case nor an order that has the attributes of finality.
Instead, as an order designed to govern the behavior of the parties while the case is
pending, a cash collateral order is similar to a preliminary injunction, which “cannot
survive the dismissal of a complaint.” Venezia v. Robinson, 16 F.3d 209, 211 (7th Cir.
1994). This is particularly true in this case because, unlike the creditor in TNT Farms,
Jefferson-Pilot is arguing that the cash collateral order governed Sunset Village’s
actions even after the bankruptcy case in which it was entered was no longer pending,
not merely that it established a legal relationship between the parties that affects a
subsequent case. As defendants argue, if dismissal of a bankruptcy case did not
vacate orders controlling a debtor’s behavior, such an order could remain in effect
indefinitely, and the (former) bankruptcy debtor that was subject of the order would have
no way to know whether or when it was free of the order’s restrictions. Although the
cash collateral order at issue in this case only covered a defined period, Jefferson-Pilot
does not limit its argument that such orders remain in effect to orders that have an
expiration date.
The other cases that Jefferson-Pilot cites are likewise distinguishable. A court in
Texas cited TNT Farms for the proposition that a “bankruptcy court must have the
jurisdiction to enforce its own orders which parties have detrimentally relied upon, even
after a dismissal, because the opposite result would encourage forum shopping.” In re
Goldstar Emergency Med. Servs., Inc., No. 05-36446, 2007 WL 208441, at *6 (Bankr.
S.D. Tex. Jan. 23, 2007). “If the court’s authority over its own orders were always to be
terminated after dismissal, a debtor who was unhappy with the bankruptcy court’s order
7

could seek to dismiss the case and the creditor’s exclusive recourse would be in state
court.” Id. The court’s holding, however, was limited to the issue of whether it retained
jurisdiction to enforce the terms of a cash collateral order; it did not address the
question of whether post-dismissal breach of such an order can provide grounds for a
separate lawsuit. To the extent that the court in Goldstar adopted the reasoning from
TNT Farms, the Court does not find it persuasive for the reasons stated above.
Another judge in this district considered a related issue in In re N.R. Guaranteed
Retirement, Inc., 122 B.R. 72 (Bankr. N.D. Ill. 1990). In that case, a secured creditor
appealed from the bankruptcy court’s denial of its motion to prohibit the debtor’s use of
cash collateral. The bankruptcy case had been dismissed, but the debtor had obtained
a stay of dismissal and reinstatement of the automatic stay pending appeal. The district
judge concluded that the dismissal of the Chapter 11 case did not deprive it of subject
matter jurisdiction over the appeal of the denial of the motion for a cash collateral order.
Jefferson-Pilot points out the judge’s statement that “the cash collateral order has
effects that survive the dismissal – during the course of a bankruptcy case that should
never have been filed . . . substantial funds were accumulated that [the] secured
creditor . . . could have pursued,” but this was not part of any analysis of the issue
presented here. Instead, the statement was support for the judge’s conclusion that the
issue presented a “case or controversy.” Id. at 74.
The judge concluded that it is “impermissible for a debtor to bring a wholly
groundless proceeding and then to use its mere pendency – to use the fact that time
was necessarily taken to decide the issue of its groundlessness – to divert funds from
its secured creditors and make that diversion a nonreviewable decision.” Id. at 75. The
8

issue in N.R. Guaranteed Retirement was whether the district court itself had jurisdiction
over the denial of a cash collateral order – it dealt with actions taken by the parties and
the bankruptcy court during the pendency of the bankruptcy. Although the court
referred to the possible lingering effects of issues involving cash collateral, it did not
determine that a cash collateral order entered during a bankruptcy case remain in force
after the case’s dismissal.
Nor did the Seventh Circuit so rule in Wiese v. Community Bank of Central
Wisconsin, 552 F.3d 584 (7th Cir. 2009). Although the court in that case approvingly
cited TNT Farms, it did so in the context of upholding a bankruptcy court’s determination
that there was “cause” under section 349(b) for the terms of a confirmed bankruptcy
plan to remain binding on the parties after dismissal. Id. at 589-90. As Jefferson-Pilot
argues, the Seventh Circuit noted that it was “appropriate for the bankruptcy court to
consider the interests of the” creditor in making this determination. Nowhere, however,
did the Seventh Circuit suggest that the terms of either a confirmed bankruptcy plan or a
cash collateral order would remain in effect after dismissal of the underlying bankruptcy
case, absent a declaration to that effect by the bankruptcy court. Similarly, the court in
In re Derrick, 190 B.R. 346, 350-52 (Bankr. W.D. Wis. 1995), discussed the factors that
go into a bankruptcy court’s “cause” determination, not the effect an order may
otherwise have.
The parties dispute whether the bankruptcy court expressly declared the cash
collateral order to be moot. This Court’s holding, however, does not depend on the
bankruptcy court’s characterization of its order – rather, the analysis set out above
applies even if the bankruptcy court made no declaration regarding the order’s effects
9

upon dismissal.
Finally, Jefferson-Pilot contends that there is “no dispute that the May Cash
Collateral Order was also a record of the parties’ private, contractual agreement, that
remained binding on Sunset Village through May 31, 2011.” Pl.’s Resp. at 12.
Jefferson-Pilot cites Aguilera v. Freedman, Anselmo, Lindberg & Rappe, LLC, No. 10 C
5488, 2011 WL 2292302 (N.D. Ill. June 8, 2011), which concerned an agreed order
entered in state court. The court in Aguilera determined that the plaintiff could not have
altered the order’s terms without the defendant’s consent, noting that an agreed order
under Illinois law is “a record of the parties’ ‘private, contractual agreement’ that ‘is
generally binding on the parties and cannot be amended or varied without the consent
of each party.’” Id. at *7 n.5 (quoting In re Marriage of Rolseth, 389 Ill. App. 3d 969,
971, 907 N.E.2d 897, 900 (2009)). Neither Aguilera nor Rolseth examines whether the
effect of an agreed order can survive the dismissal of a case, however, and both cases
analyze Illinois common law rather than federal bankruptcy law. Jefferson-Pilot
provides no other support for this argument, and the Court concludes that it is
unavailing. The fact that the parties agreed to entry of the order in the bankruptcy case
does not make it into a contract, such as a settlement agreement, that survives the
case’s dismissal.
For these reasons, the Court concludes that the parties were not bound by the
terms of the May 2011 cash collateral order after the bankruptcy judge dismissed the
case.
2.

Judicial estoppel
A second threshold issue involves defendants’ contention that Jefferson-Pilot’s
10

claims are barred by the doctrine of judicial estoppel. This doctrine “prevents a party
from asserting a claim in a legal proceeding that is inconsistent with a claim taken by
that party in a previous proceeding.” New Hampshire v. Maine, 532 U.S. 742, 749
(2002). To establish the application of judicial estoppel, a litigant must show that its
opponent successfully made a representation to one tribunal and is attempting to
reverse itself before another. See In re Airadigm Commc’ns, Inc., 616 F.3d 642, 662
(7th Cir. 2010).
Defendants argue that Jefferson-Pilot’s claims are barred by this doctrine
because it advanced a position before the bankruptcy court and before this Court at the
May 18, 2011 TRO hearing that differs from its current position. Specifically,
defendants argue that Jefferson-Pilot formerly claimed that “the dismissal of the
bankruptcy case removed any judicial restraint on Sunset Village’s use of the cash in its
possession and, thus, that it was without an adequate remedy at law,” which differs from
its current contention that the cash collateral order remained in effect after dismissal.
Because the Court has rejected Jefferson-Pilot’s contention that the cash
collateral order remained in effect, it need not address this argument further.
Defendants argue that Jefferson-Pilot’s alleged reversal mandates dismissal of its entire
complaint, but Jefferson-Pilot has advanced multiple legal arguments for several of its
claims. Judicial estoppel “aims to prevent a party that prevails in one lawsuit on one
ground from repudiating that same ground in another lawsuit.” Jarrard v. CDI
Telecomms., Inc., 408 F.3d 905, 914 (7th Cir. 2005). The application of the doctrine
therefore does not affect Jefferson-Pilot’s additional arguments.
Even if the Court were to address the issue of judicial estoppel, however,
11

defendants’ contentions would be unavailing. First, at the hearing on May 18, 2011,
Jefferson-Pilot’s counsel asked the bankruptcy court not to dismiss the case, but the
bankruptcy court did so anyway. Jefferson-Pilot therefore cannot be said to have
“successfully made a representation” before the bankruptcy court. Second, JeffersonPilot’s arguments before this Court were premised on the theory that the cash collateral
order was set to expire on May 31, 2011, necessitating legal protection from that point
forward. This is entirely consistent with the allegations of the amended third-party
complaint, which are premised on the theory that the order remained in effect until May
31. Finally, judicial estoppel is a doctrine with “antifraud purposes” that is “intended to
protect the courts from . . . litigatory shenanigans [and] misconduct.” Id. at 915.
Defendants provide no support for their argument that a litigant that changes its position
after learning of previously unknown facts can be said to have engaged in this sort of
behavior.
For these reasons, the Court concludes that Jefferson-Pilot’s remaining claims
are not barred by the doctrine of judicial estoppel.
3.

Constructive possession
Jefferson-Pilot argues that it obtained constructive possession of the rents by

filing a foreclosure action and seeking the appointment of a receiver. It cites a case in
which a bankruptcy court found that “initiat[ing] foreclosure proceedings and obtain[ing]
the appointment of a receiver [are] the two ways that mortgagees may gain possession
of a property for purposes of collecting rent.” In re Randall Plaza Ctr. Assocs., L.P., 326
B.R. 133, 141 (Bankr. N.D. Ill. 2005). Jefferson-Pilot does not dispute, however, that it
had not obtained appointment of a receiver before the disbursements occurred.
12

Moreover, the judge in Randall Plaza also stated that “courts have allowed mortgagees
to collect rents after the mortgagees have taken affirmative action to take possession of
the property, by obtaining an injunction or by having a receiver appointed.” Id. at 140
(emphasis added). This indicates that a court order, not just initiation of a lawsuit, is
necessary for constructive possession. See Comerica Bank-Ill. v. Harris Bank Hinsdale,
284 Ill. App. 3d 1030, 1034, 673 N.E.2d 380, 382-83 (1996) (“Courts have recently
allowed mortgagees to collect rents after taking some affirmative action . . . such as
obtaining judicial intervention by way of injunctive relief [and] once a receiver has been
appointed.”); Matter of Wheaton Oaks Office Partners Ltd. P’ship, 27 F.3d 1234, 1242
(7th Cir. 1994) (“[To] allow creditors the opportunity to reach the rents sooner than the
completion of foreclosure proceedings, Illinois allows mortgagees . . . to authorize the
appointment of a receiver through whom the mortgagee can begin collecting rents.”).
The other cases that Jefferson-Pilot cites similarly concern mortgagees that had
actually obtained judicial relief. See DeKalb Bank v. Purdy, 166 Ill. App. 3d 709, 716,
520 N.E.2d 957, 961 (1988) (defendant was “ordered to pay into the court future rent
received”); State Bank & Trust Co. v. Massion, 279 Ill. App. 234, 236 (1935). JeffersonPilot argues that there is a difference between those cases, in which a mortgagee
sought to collect rent going forward, and this one, in which the mortgagee claims a right
in rent previously collected. Jefferson-Pilot also argues that those cases were about
possession of the property, whereas this case is about possession of money in Sunset
Village’s accounts. It offers no legal support for the proposition that these factors
distinguish this case, however, and the Court concludes that the arguments are
unavailing.
13

Jefferson-Pilot also argues that the cash collateral order and the TRO gave it
constructive possession of the rental amounts. The Court has already ruled, however,
that the order’s effects did not survive the dismissal of the bankruptcy case.
For these reasons, the Court concludes that Jefferson-Pilot was not in
constructive possession of the property or the rents between the dismissal of the
bankruptcy case and the entry of the TRO.
4.

Count one
In count one of its third-party complaint, Jefferson-Pilot asserts a claim against all

third-party defendants except Klarchek and Pashawitz under the Illinois Uniform
Fraudulent Transfer Act (IUFTA), 740 ILCS 160/5(a)(1). That portion of the statute
provides that “[a] transfer made . . . by a debtor is fraudulent as to a creditor . . . if the
debtor made the transfer . . . with actual intent to hinder, delay, or defraud any creditor
of the debtor.” Jefferson-Pilot seeks avoidance of the transfers under 740 ILCS 160/8.
Jefferson-Pilot alleges that Capital First made the disbursements
with full knowledge that the funds being used were (i) Cash Collateral of
Jefferson-Pilot; (ii) being disbursed in violation of Sunset Village’s agreement not
to use the Cash Collateral in any manner other than as agreed in the budget
attached to and incorporated within the May Cash Collateral Order; and (iii) with
actual intent to hinder, delay and/or defraud Jefferson-Pilot.
Am. Third-Party Compl. ¶ 40.
Defendants argue that Jefferson-Pilot has not pleaded the claim with sufficient
particularity under Federal Rule of Civil Procedure 9(b) and that it cannot show that the
transfers were made with the requisite intent because they were good-faith payments
for debts owed by Sunset Village. “A transfer or obligation is not voidable under
paragraph (1) of subsection (a) of Section 5 against a person who took in good faith and
14

for a reasonably equivalent value or against any subsequent transferee or obligee.” 740
ILCS 160/9(a).
The Court need not address these arguments for purposes of this claim, due to
its ruling that the bankruptcy court’s cash collateral order no longer governed Sunset
Village’s use of the amounts at issue after dismissal of the bankruptcy case. The
language of the complaint indicates that Jefferson-Pilot’s contention that Capital First
disbursed money with intent to defraud is based solely on its allegation that Capital First
acted in violation of the cash collateral order. Although the language of the IUFTA
arguably might a claim that Capital First made the disbursements with the required
intent even if it did not believe itself bound by the cash collateral order, the complaint
does not squarely assert such a claim. The Court therefore grants defendants’ motion
to dismiss count one.1
5.

Count two
In count two, Jefferson-Pilot asserts a claim under the IUFTA, 740 ILCS

160/5(a)(2) and 6(a), against all third-party defendants except Klarchek and Pashawitz.
The first of these provisions establishes that
[a] transfer made . . . by a debtor is fraudulent as to a creditor, whether the

1

The Court notes, in connection with the dismissal of this and other claims, that
the circumstances surrounding the defendants’ apparently near-immediate
disbursement and receipt of the funds after the bankruptcy case was dismissed may
give rise to a plausible inference of an intent to hinder or defraud. Thus Jefferson-Pilot
may be able to amend to assert a viable claim under section 5(a)(1) or other legal
theories, though it may not premise such a claim on the cash collateral order’s
continuing effect. That, however, does not mean that Jefferson-Pilot may not rely on
the sequence of events including the entry of that order, the dismissal of the bankruptcy
case, the subsequent transfers, and other relevant events to support an amended
fraudulent transfer claim.
15

creditor’s claim arose before or after the transfer was made or the obligation was
incurred, if the debtor made the transfer . . . without receiving a reasonably
equivalent value in exchange for the transfer or obligation, and the debtor:
(A) was engaged or was about to engage in a business or a transaction
for which the remaining assets of the debtor were unreasonably small in
relation to the business or transaction; or
(B) intended to incur, or believed or reasonably should have believed that
he would incur, debts beyond his ability to pay as they became due.
740 ILCS 160/5(a)(2). The second provision states:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor
whose claim arose before the transfer was made or the obligation was incurred if
the debtor made the transfer or incurred the obligation without receiving a
reasonably equivalent value in exchange for the transfer or obligation and the
debtor was insolvent at that time or the debtor became insolvent as a result of
the transfer or obligation.
740 ILCS 160/6(a).
Jefferson-Pilot alleges that Capital First, as the guarantor of Sunset Village’s
obligations, was prohibited from receiving any money until Jefferson-Pilot was paid.
“Therefore, Capital First had no valid claim against Sunset Village and Sunset Village
received no consideration in exchange for the Disbursements made to Capital First.”
Am. Third-Party Compl. ¶ 45. Jefferson-Pilot alleges that the Klarchek Trust is not a
creditor of Sunset Village and therefore provided no value to Sunset Village in exchange
for its disbursements. Finally, Jefferson-Pilot alleges that “[u]pon information and belief,
the other Third-Party Defendants did not receive reasonably equivalent value in
exchange for the Disbursements they received, which shall be further determined during
discovery.” Id. ¶ 47.
Defendants again argue that Jefferson-Pilot has not pleaded the claim with
sufficient particularity under Federal Rule of Civil Procedure 9(b). The Seventh Circuit,
16

however, has held that a cause of action for constructive fraud under IUFTA “requires
neither evidence of actual intent to defraud nor a specific misrepresentation by the
defendant.” Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1079
(7th Cir. 1997). The court found a complaint that appears to have alleged nothing more
than Jefferson-Pilot’s complaint – that the transferor “allegedly did not receive . . . any
reasonably equivalent value that would be applied to the deficiency due [plaintiff]” –
sufficient under Rule 9(b). Id. at 1080. Because Jefferson-Pilot’s allegations are
substantially similar to those at issue in General Electric Capital, the Court concludes
that the complaint comports with the requirements of Rule 9(b).
The fact that the allegations against defendants are sufficiently clear to put them
on fair notice of the claims against them is also shown by the fact that each defendant
submits evidence to show that the disbursements were payments of antecedent debts
or otherwise in return for “reasonably equivalent value.” The Court, however, cannot
properly consider this evidence on a motion to dismiss. The Seventh Circuit in General
Electric Capital rejected an argument that the transfer at issue did not constitute
constructive fraud because it was a permissible way for a debtor to repay a creditor,
finding it “inappropriate . . . to address these challenges to . . . well pleaded assertions
on review of a motion to dismiss.” Id. at 1079 n.3. Defendants do not respond to this
argument except to request the conversion of their motions to motions for summary
judgment, which the Court declines to do.
For these reasons, the Court denies defendants’ motion to dismiss count two.
6.

Count three
Jefferson-Pilot also asserts a claim against Capital First and Capital Services for
17

constructive fraudulent transfer. Jefferson-Pilot relies on section 160/6(b) of IUFTA,
which establishes that “a transfer made by a debtor is fraudulent as to a creditor . . . if
the transfer was made to an insider for an antecedent debt, the debtor was insolvent at
that time, and the insider had reasonable cause to believe that the debtor was
insolvent.” 740 ILCS 160/6(b). Jefferson-Pilot identifies Capital First and Capital
Services as “insiders of Sunset Village” and alleges that the disbursements to them
“were made on account of antecedent debts owed to them by Sunset Village at a time
when both Capital First and Capital Services knew that Sunset Village was insolvent.”
Third-Party Am. Compl. ¶ 51.
Capital First argues that these “allegations are so lacking that it is impossible to
parse exactly what the Plaintiffs are pleading.” Capital First’s Mem. at 5. The Court
disagrees with this contention as it relates to Capital First. Jefferson-Pilot alleges that
Capital First acted as the “property manager for Sunset Village,” Third-Party Am.
Compl. ¶ 8, and that the “[d]isbursements were made at the direction of Capital First,
managing agent for Sunset Village.” Id. ¶ 40. “[A] managing agent of the debtor” is
among the statutory definitions of “insider.” 740 ILCS 160/2(g)(5). Jefferson-Pilot has
clearly alleged that Capital First, as the managing agent, received disbursements at its
own direction on account of antecedent debts despite its knowledge that Sunset Village
was insolvent. Capital First has argued that the disbursements accounted for its
management fees, which accrued contemporaneously and therefore were not
“antecedent,” but this is contrary to the allegations of the complaint and the Court will
not consider it on a motion to dismiss under Rule 12(b)(6).
The complaint, however, mentions Capital Services only twice outside of the
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specific allegations in count three: one statement describes Capital Services as “an
Illinois corporation with its principal place of business located in the city of Chicago,
Illinois,” Third-Party Am. Compl. ¶ 9, and another alleges that Capital Services received
$14,000 as part of the disbursements. Id. ¶ 26. The complaint contains no statement
regarding how Capital Services is an “insider” of Sunset Village. Under the looser
standard for IUFTA claims that the Court described in the previous section, courts have
upheld claims by plaintiffs who simply “gave a general outline of the scheme sufficient to
alert the defendants as to their alleged role.” Mamacita, Inc. v. Colborne Acquisition
Co., No. 10 C 6861, at *7 (N.D. Ill. Mar. 11, 2011). Jefferson-Pilot’s allegations
regarding Capital First meet this standard, but those regarding Capital Services do not.
For these reasons, the Court grants defendants’ motion to dismiss count three as
to Capital Services but denies it as to Capital First.
7.

Count four
Jefferson-Pilot asserts a claim for unjust enrichment against all third-party

defendants except Klarchek and Pashawitz, alleging that defendants “knew that they
were not entitled to receive the Disbursements because, upon information and belief,
they knew that Jefferson-Pilot had a valid, perfected first-priority secured interest in
those funds as is evidenced by the May Cash Collateral Order.” Third-Party Am.
Compl. ¶ 54. “Pursuant to the Contract, the amounts were to be held in trust for the
benefit of Jefferson-Pilot.” Id. ¶ 55.
As with count one, Jefferson-Pilot alleges no factor that renders the enrichment
“unjust” other than Sunset Village’s alleged violation of the cash collateral order. The
Court has ruled that the order had no effect violated after the bankruptcy case was
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dismissed. The Court therefore grants defendants’ motion to dismiss count four.
8.

Count five
In count five, Jefferson-Pilot asserts that Capital First, Klarchek, and Pashawitz,

as or through officers and/or directors of Sunset Village, breached or aided and abetted
the breach of fiduciary duties owed to Jefferson-Pilot. Defendants argue that JeffersonPilot, as an individual creditor, may not sue a director of an insolvent corporation for
breach of fiduciary duty.
The Seventh Circuit has found that “a single creditor may not maintain an action
on his own behalf against a corporation's fiduciaries if that creditor shares in an injury
common to all creditors and has personally been injured only in an indirect manner.”
Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1349 (7th Cir. 1987). The
court recently reaffirmed this holding in In re Teknek, LLC, 563 F.3d 639, 646 (7th Cir.
2009). Jefferson-Pilot contends that the purpose of this aspect of the doctrine of
standing is “to avoid the creditor’s receipt of all the proceeds of a judgment when those
proceeds should be equally shared with other creditors,” an outcome that would not
occur in this case because the cash in Sunset Village’s accounts was Jefferson-Pilot’s
cash collateral. Pl.’s Resp. at 37. Because the Court has held that designation of the
money as cash collateral had no legal effect after the dismissal of the bankruptcy case,
however, this argument is unavailing. The Court therefore grants defendants’ motion to
dismiss count five.
9.

Count six
In count six, Jefferson-Pilot asserts a claim against several defendants for

tortious interference with a contractual relationship. Jefferson-Pilot alleges that there
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was a valid and enforceable contract between Jefferson-Pilot and Sunset Village
authorizing the use of cash collateral for the month of May 2011; the recipients knew of
this contract; and they unjustifiably induced Sunset Village to breach it. Because the
Court has determined that the cash collateral order had no effect after the dismissal of
the bankruptcy case, and because Jefferson-Pilot has offered no support other than
what the Court discussed above for the proposition that the order had the force of a
private agreement after the bankruptcy case, the Court concludes that there was no
existing contract with which defendants could have tortiously interfered. The Court
therefore grants defendants’ motion to dismiss count six.
10.

Count seven
Jefferson-Pilot asserts a conversion claim against six defendants, arguing that it

had “rights in the Personal Property because, pursuant to the May Cash Collateral
Order, the Cash Collateral belonged to it either actually or through constructive trust.”
Third-Party Am. Compl. ¶ 79. After dismissal of the bankruptcy case, “Sunset Village
was required to retain possession of Jefferson-Pilot’s Cash Collateral in trust, and
Jefferson-Pilot had the absolute and unconditional right to immediate possession of its
Personal Property.” Id. ¶ 80. The allegations in the complaint do not make it entirely
clear what Jefferson-Pilot believes to be the source of this right. Jefferson-Pilot clarifies
this in its brief, contending that it had a right to the money in Sunset Village’s accounts
because “it was in constructive possession of the Property and the rents” and “pursuant
to the May Cash Collateral Order . . . the Bankruptcy Court expressly found that
[Jefferson-Pilot] had a perfected security interest in Sunset Village’s cash.” Pl.’s Resp.
at 38. As the Court has previously explained, both of these arguments fail. The Court
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therefore grants defendants’ motion to dismiss count seven.
Conclusion
For the reasons stated above, the Court grants defendants’ motions to dismiss in
part [docket nos. 245, 252, 254, 255]. The motions are denied with respect to count two
against all defendants and count three against defendant Capital First. The motions are
otherwise granted. The case remains set for a status hearing on May 30, 2012 at 9:30
a.m.

s/ Matthew F. Kennelly
MATTHEW F. KENNELLY
United States District Judge
Date: May 29, 2012

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