Galesburg 67, LLC et al v. Northwest Television, Inc. et al
MEMORANDUM Opinion and Order Signed by the Honorable Mary M. Rowland on 8/22/2017. Mailed notice. (dm, )
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
GALESBURG 67, LLC ET AL,
No. 15 C 5650
NORTHWEST TELEVISION, INC.
Magistrate Judge Mary M. Rowland
MEMORANDUM OPINION AND ORDER
In 2000, Plaintiffs Galesburg 67, LLC (“G67”) and DM Partners (“DM”) each
entered into a “Settlement Agreement” with Defendant Northwest Television, Inc.
(“Northwest”) (collectively, the “Agreements”). Defendant Bruce Fox (“Fox”) was the
President of Northwest. In the Agreements, G67 and DM each agreed to withdraw
their applications for a license from the Federal Communications Commission
(FCC) for a new television station in Galesburg, Illinois, so that Northwest could be
the prevailing applicant. In return, Northwest agreed to pay G67 and DM. On
September 14, 2012, the FCC issued the broadcast license to Northwest. However,
Northwest never paid G67 or DM.
Plaintiffs brought this lawsuit alleging breach of contract against Northwest,
fraudulent transfer against Northwest and Fox, and unjust enrichment against
Northwest (in the alternative) and Fox. The Court held a one-day bench trial on
February 28, 2017. The Court enters findings of fact and conclusions of law
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pursuant to Fed. R. Civ. P. 52(a) as set forth below and enters judgment in favor of
Plaintiffs and against Defendants on Plaintiffs’ unjust enrichment claim.
I. JURISDICTION AND APPLICABLE LAW
The parties consented to the jurisdiction of the United States Magistrate
Judge, pursuant to 28 U.S.C. § 636(c). (Dkt. 89). This Court has diversity
jurisdiction over this case pursuant to 28 U.S.C. § 1332. (see Dkt. 31). Illinois law
applies. See FDIC v. Wabick, 335 F.3d 620, 625 (7th Cir. 2003) (“it is well
established that in diversity cases state law is the appropriate source for choice-oflaw rules.”). 1
II. PRIOR PROCEEDINGS
Plaintiffs filed their original complaint on June 25, 2015. On November 3,
2015, Judge Guzman granted in part and denied in part Defendant Fox’s Joint
Motion to Dismiss the complaint. On November 17, 2015, Plaintiffs filed their First
Amended Complaint (“FAC”). (Dkt. 33). Defendants’ second motion to dismiss was
denied. (Dkt. 73). On February 13, 2017, Defendants filed instanter their Answer
and Affirmative Defense to the FAC. (Dkt. 111).
III. THE TRIAL
The main issues at trial were whether: (1) the parties had an oral agreement
modifying the written Agreements pursuant to which Northwest agreed to pay
Plaintiffs in cash upon the issuance of the license; (2) the change from Channel 53
See Dkt. 32 at 4, n. 3 (J. Guzman) (noting that both contracts in this case contain an
Illinois choice of law clause and neither party had raised any choice of law concerns).
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to Channel 8 was a “material adverse change” that meant that Northwest was not
obligated to pay Plaintiffs; (3) Defendants’ transfer of funds in 2012 was a
fraudulent conveyance; and (4) Defendants were unjustly enriched at Plaintiffs’
expense. Three witnesses testified at trial: Bruce Fox, John Warren (“Warren”), the
sole member of G67, and Donald Bae (“Bae”), one of the partners of DM. After trial,
each party submitted post-trial proposed findings of fact and conclusions of law.
(Dkt. 119 (Plaintiffs) and Dkt. 120 (Defendants)). 2
IV. FINDINGS OF FACT
Northwest, DM, and G67 were all mutually exclusive applicants for a new
television station in Galesburg, Illinois. (JX 1 and JX 2). To better Northwest’s
chances of having a license granted, G67 and DM agreed to request that the FCC
dismiss their applications in exchange for payment from Northwest—$600,000.00
for G76 and $450,000 for DM. (Id.). Northwest and DM memorialized their
agreement in a contract dated June 29, 2000, amended, in writing, on July 17, 2000
(the “DM Agreement”), and Northwest and G67 memorialized their agreement in a
contract dated July 17, 2000 (the “G67 Agreement”). (Id.; Dkt. 119, ¶¶2-4; Dkt. 120,
¶¶1-3). Both Agreements required all amendments to be in writing. (JX 1, ¶12 and
JX 2, ¶12). The parties did not document in writing any oral agreement that
Plaintiffs alleged occurred in January 2001. (Dkt. 120, ¶16).
The Agreements required Plaintiffs and Northwest to prepare and file a
“Joint Request for Approval of Universal Settlement” (the “Joint Request”),
The Court directed the parties to cite to the transcript as well as pertinent case law. (Dkt.
117). Plaintiffs cited very little case law, and Defendants did not cite any case law.
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pursuant to the FCC rules. (JX 1, ¶1 and JX 2, ¶1). The Agreements provided that
within ten business days of the filing of the Joint Request, Northwest would place in
escrow irrevocable letters of credit to be disbursed as described in the Escrow
Agreements, attached as Exhibit A to the Agreements. (JX 1, ¶6, JX 2, ¶6, PX 7 and
PX 8). Northwest’s plan was to assign its interest in the television station to nonparty Second Generation of Iowa, Ltd. (“Second Generation”), and in exchange,
Second Generation would fund the payments to Plaintiffs and non-party Highland
Broadcasting (“Highland”), the withdrawing applicants under the universal
settlement. (Tr. at 10-11; PX 5). The “Loan and Option Agreement” between
Northwest and Second Generation anticipated that Second Generation would loan
Northwest $1,475,000 to fund the payments to DM, G67, and Highland. (PX 5).
Northwest, Plaintiffs, and Highland filed the Joint Request, but the process
was delayed because Quad Cities Television Acquisition Corp. (“Quad Cities”) filed
a petition to deny Northwest’s application with the FCC. (Dkt. 119, ¶9). On July 20,
2007, the FCC granted in part and denied in part Quad Cities’ petition. (PX 5,
hereafter the “FCC 2007 Ruling”). The FCC granted the Joint Request (although
without the Loan and Option Agreement) and Northwest’s application for the
station on Channel 53, and dismissed the applications of DM, G67, and Highland.
(Tr. at 48, 52; PX 5). The FCC later repurposed Channel 53, however, granting
Northwest Channel 8 instead. (Tr. at 63).
On September 14, 2012, the FCC issued the broadcast license for Channel 8
to Northwest. (PX 1). On October 15, 2012, Northwest sold the license to Trinity
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Christian Center of Santa Ana, Inc. (“Trinity”) for $1,125,000 (hereafter “TrinityNorthwest Agreement”). (Id.; see also PX 2). Trinity paid Northwest $1,125,000,
$825,000 of which was used to cancel a loan Northwest owed Trinity. (Id.; Tr. at 37).
Trinity paid Northwest the remaining $300,000 via wire transfer. (Id.; Tr. at 38).
Northwest then distributed $100,000 to Fox, the President of Northwest, and
$100,000 to the two other partners and shareholders of Northwest, Dale Arfman
and Tom Gilligan. (Tr. at 4, 38). The remaining money was used to pay past legal
bills and broker fees. (Tr. at 37-38; Dkt. 120, ¶¶20-21). After distributing the
money, Northwest had about $1,000 in the bank and no other assets. (Tr. at 42-43).
Northwest never paid DM or G67. (Dkt. 119 ¶¶31-32; Dkt. 120, ¶29).
V. CONCLUSIONS OF LAW
A. Breach of Contract against Northwest
It is undisputed that Northwest entered into the Agreements with DM and
G67, that the FCC issued the broadcast license to Northwest in September 2012,
and that Northwest never paid DM or G67. The parties dispute what happened
approximately six months after the Agreements were executed and shortly before
the letters of credit were to expire, Fox, Bae, Warren, and a representative of
Highland had a phone conversation during which Fox promised to pay cash to
Plaintiffs and Highland when the FCC issued the broadcast license to Northwest.
Defendants deny entering into any such oral agreement. Instead, Defendants claim
that “material adverse changes” occurred and the original transaction contemplated
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by the Agreements was never realized, meaning Northwest was not obligated to pay
1. Defendants’ Statute of Limitations Defense
The Court initially addresses Defendants’ statute of limitations defense to
Plaintiffs’ breach of contract claim, raised for the first time in Defendants’ post-trial
brief. (Dkt. 120 at 8). This defense is waived for two reasons: (1) failure to plead an
affirmative defense results in forfeiture of that defense if the plaintiff would be
harmed and (2) the defense was raised after trial.
Defendants’ answer and affirmative defense to the FAC (Dkt. 111) did not
include a statute of limitations defense. The Federal Rules require a party to
affirmatively state any affirmative defense, including statute of limitations. Fed. R.
Civ. P. 8(c)(1). The Seventh Circuit Court of Appeals has held that “[t]he failure to
plead an affirmative defense in the answer works a forfeiture only if the plaintiff is
harmed by the defendant’s delay in asserting it.” Carter v. United States, 333 F.3d
791, 796 (7th Cir. 2003). Here, Plaintiffs certainly would be harmed since they had
no opportunity during the litigation or at trial to address this defense. See Dexia
Crédit Local v. Rogan, 629 F.3d 612, 627 (7th Cir. 2010) (“[Defendants’] failure to
raise the specific statute of limitations defense has limited [plaintiff’s] ability to
fully develop the arguments against [its] application [and defendants] have not
presented any excuse for waiting until after the trial to raise the five-year statute of
limitations as an affirmative defense.”).
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Defendants’ statute of limitations defense is waived for a second reason: they
raised the defense after trial and did not include it in the pre-trial order (Dkt. 109).
A trial court may exclude claims, theories, or evidence not raised in a pretrial order.
Gorlikowski v. Tolbert, 52 F.3d 1439, 1444, n.3 (7th Cir. 1995). Defendants
themselves stated in both their pre-trial and post-trial briefs that they had a single
affirmative defense (that the transactions “memorialized by the two contracts were
never consummated”). (Dkt. 109 at 12).
2. Letters of Credit
The Court also addresses Plaintiffs’ argument that the letters of credit were
not “irrevocable” because they expired January 22, 2001. (Dkt. 119, ¶18). At trial,
Plaintiffs’ counsel asked a number of questions about the fact that the letters of
credit issued for the benefit of Plaintiffs stated that they were “irrevocable” and also
contained an expiration date of January 22, 2001. (see Tr. at 16, 78; see also PX 6).
Plaintiffs do not cite any authority for the proposition that a letter of credit
containing an expiration date is not irrevocable. To the contrary, in Illinois, a letter
of credit is revocable “only if it so provides.” 810 ILCS 5/5-106. See also Old Republic
Sur. Co. v. Quad City Bank & Tr. Co., 681 F. Supp. 2d 970, 971 (C.D. Ill. 2009)
(irrevocable letter of credit contained expiration date). 3
The Court finds that the testimony on this issue was relevant only to
Plaintiffs’ explanation for why the parties allegedly had a telephone conversation in
“[A] revocable credit . . . may be modified or revoked by the issuer without notice to or
consent from the customer or the beneficiary…[a]n irrevocable credit, on the other hand, is
a definite undertaking on the part of an issuing bank and constitutes the engagement of
that bank to the beneficiary…” Beathard v. Chi. Football Club, Inc., 419 F. Supp. 1133,
1136 (N.D. Ill. 1976) (internal citations and quotations omitted).
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January 2001 as the expiration date of the letters of credit approached. But as
explained below, the Court concludes that Plaintiffs did not prove that the
Agreements were orally modified.
3. Oral Modification
The Court concludes that Plaintiffs failed to prove that the Agreements were
orally modified via the telephonic conversation among the parties in January 2001.
Because Plaintiffs failed to prove the existence of a binding and enforceable
contract, Northwest is entitled to judgment on the breach of contract claim.
Under Illinois law, a modified contract “is regarded as creating a new single
contract” containing the terms of the original contract that have not been changed
and the new agreed-upon terms. Schwinder v. Austin Bank, 348 Ill. App. 3d 461,
469, 284 Ill. Dec. 58, 67 (2004). When, as here, a contract is modified or amended by
a subsequent agreement, “any lawsuit to enforce the [agreement] must be brought
on the modified agreement and not on the original agreement.” Id.; Wachovia Sec.,
LLC v. Banco Panamericano, Inc., 674 F.3d 743, 757 (7th Cir. 2012). Plaintiffs’
claim is that that Northwest breached the orally-modified Agreements. (Am. Compl.
(Dkt. 33), ¶10; Dkt. 109, p. 10; Dkt. 119, p. 5, 9-10). 4
Plaintiffs had the burden to prove that the Agreements were orally modified
by clear and convincing evidence. Do It Best Corp. v. Passport Software, Inc., No. 01
C 7674, 2005 U.S. Dist. LEXIS 7213, at *28 (N.D. Ill. Mar. 31, 2005); Czapla v.
Commerz Futures, LLC, 114 F. Supp. 2d 715, 718 (N.D. Ill. 2000). At trial, Warren
See Dkt. 73 at 6, Order Denying Second Motion to Dismiss (construing Plaintiffs’
Amended Complaint as alleging that the Agreements were orally modified to require
Northwest to pay Plaintiffs upon the issuance of the broadcast license.)
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testified about a phone conversation that modified the Agreements. (Tr. at 79). Bae
testified that his recollection of the phone conversation was consistent with
Warren’s, and adopted Warren’s testimony about the oral modification. (Tr. at 127,
142). Both Warren and Bae testified that had the parties not agreed to the
modification, they would have gone forward with their applications for the license
instead of withdrawing them, as they had previously agreed. (Tr. at 81, 127).
Warren provided very few details in his testimony about the phone call. He
could not identify a date or even an estimated date of the phone call. He also
admitted that he forgot who initiated the call and “guess[ed]” that four parties were
on the phone. He testified:
It was a phone call. I forget who initiated it, but there was a phone call
where the -- I guess the four parties were on the phone. And we
discussed the possibility of – of Second Generation not -- not
performing on these -- on these notes, that the notes would expired.
And that it was Highlands' responsibility -- and that Northwest -- it
was their responsibility to perform.
And it was discussed on the phone that Northwest would continue with
the obligation under the contract in a cash payment, so we could go
forward. Donald [Bae] even had mentioned at -- during part of the
conversation, do we need to cancel the settlement, and -- and asked
FCC to reinstate our applications.
(Tr. at 79).
Warren’s and Bae’s limited testimony explaining why they were comfortable
with only an oral agreement, without any written confirmation, was not believable.
Warren testified that he “trusted” Fox, someone he with whom he was not friends
but with whom he had an “occasional business call.” He also said he believed “we
still had the agreement in effect.” (Tr. at 81-82, 111). Bae testified that he was
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comfortable with just an oral agreement because he “felt that it was just confirming
the original agreement.” (Tr. at 133, 143). These explanations were confusing and
also contradicted Warren’s and Bae’s testimony about the importance of the oral
agreement. It is significant to the Court that both were adamant that without the
oral agreement, they would have reinstated their applications with the FCC. (Tr. at
81, 127, 133). Neither Warren nor Bae offered any testimony about whether there
was any discussion during the telephone call or at any other time about the
provision in the Agreements requiring amendments to be in writing.
Understandably, memories fade since the alleged phone conversation in 2001.
Still, the Court was not convinced by Warren’s and Bae’s testimony because of the
lack of detail provided and confusing and contradictory testimony. In addition, the
Court did not find Warren to be particular credible, especially during his discussion
about the alleged oral agreement. His tone of voice and body language did not
project confidence in his answers to questions during trial. Warren was particularly
difficult to understand during his testimony about the alleged oral agreement,
mumbling and speaking very quickly. See Tr. at 80 (Plaintiffs’ attorney told Warren
that “your prior answer  might have come out garbled.”).
On the other hand, Fox testified that he never would have made an oral
agreement for a modification as important as the one claimed by Plaintiffs. (Tr. at
151-52). 5 The Court found Fox’s demeanor credible and confident. When asked
When Fox was asked whether he recalled having a conversation with John Warren and
Donald Bae, he responded that he did “not recall those conversations.” (Tr. at 28).
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about the alleged oral modification of the Agreements, Fox stressed that there was
no oral modification:
“There were no oral modifications at any time.” (Tr. at 58-59).
“There is no way in 35 years in business that I would have ever agreed
to anything as important as this orally. I don't even recall the
conversation. But I'm going to say if we had had a conversation, there
is no way I would have done anything orally. Everything was in
writing. All amendments were in writing. Every contract I ever did
was in writing.” (Id. at 151-52).
The trial testimony showed that Fox, Warren, and Bae were all sophisticated
businessmen. All three testified about how consequential this modification would
be. The Court concludes that Fox’s version of events—that the alleged oral
modification did not happen—is far more credible. This is supported by that fact
that not long after the DM Agreement was executed, and only about 5 months
before the oral modification alleged here, Northwest and DM executed a written
amendment to their Agreement. This uncontested fact further undermines Bae’s
testimony that he and Fox and Warren entered into an oral modification.
Finally, Plaintiffs had to prove, by clear and convincing evidence, that the
parties waived the provision in the Agreements requiring amendments to be in
writing. The provision stated:
“This Agreement shall not be altered or amended except in writing
signed by the party against which enforcement is sought.” (JX 1, ¶12,
JX 2, ¶12).
Plaintiffs did not offer any evidence showing that the parties agreed to waive
this provision in the Agreements. See Czapla, 114 F. Supp. 2d at 718 (“In Illinois,
oral contract modifications are permissible even if the contract contains a provision
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banning oral modifications…This is because such a provision may be waived…A
claimant must, however, prove waiver of the provision by clear and convincing
evidence.”); Beloit Corp. v. C3 Datatec, Case No. 93-C-447, 1995 U.S. Dist. LEXIS
16685, at *31 (E.D. Wis. Aug. 23, 1995) (“To prevail, C3 must establish that the
parties by their words or conduct evidenced an intent to waive or modify this
provision [requiring changes to the contract to be in writing].”) (citing Allen &
O'Hara, Inc. v. Barrett Wrecking, Inc., 898 F.2d 512, 517 (7th Cir. 1990)).
Plaintiffs point to the FCC 2007 Ruling as “consistent with the oral
modification” and showing a “clear expectation” that Northwest would pay the
withdrawing applicants. (Dkt. 119, Pl.’s Facts ¶25; Pl.’s Concl. ¶2). The FCC 2007
Ruling may show that Northwest represented to the FCC that it was able to fund
the universal settlement even without the loan from Second Generation. But that is
not clear and convincing evidence that nearly seven years earlier, the parties had a
telephone conversation during which they orally modified the Agreements and
agreed to waive the provision requiring amendments to be in writing.
Because Plaintiffs claimed a breach of the modified Agreements but failed to
prove the existence of the modified Agreements, they are not entitled to judgment
for breach of contract against Defendant Northwest.
B. Unjust Enrichment against Northwest and Fox
Plaintiffs proved by a preponderance of the evidence that Defendants were
unjustly enriched at Plaintiffs’ expense. Unjust enrichment requires that (1)
defendants unjustly retained a benefit, (2) to the plaintiffs’ detriment, and (3)
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defendants’ retention of the benefit violates the fundamental principles of justice,
equity, and good conscience. Empress Casino Joliet Corp. v. Balmoral Racing Club,
Inc., 831 F.3d 815, 832 (7th Cir. 2016); HPI Health Care Servs., Inc. v. Mt. Vernon
Hosp., Inc., 131 Ill. 2d 145, 160, 137 Ill. Dec. 19, 26 (1989); Ramirez v. T&H Lemont,
Inc., No. 16-1753, 2016 U.S. App. LEXIS 23404, at *9 (7th Cir. Dec. 30, 2016)
(“…the presumption that the burden of proof in federal civil cases is proof by a
preponderance of the evidence...”) (internal citations and quotations omitted).
At trial, Fox admitted that Plaintiffs gave up something of monetary value
(their applications for the license with the FCC) for the benefit of Northwest, and
the parties valued that benefit in the amount of $600,000 and $450,000. (Tr. at 4546). Fox admitted that Plaintiffs conveyed that benefit to Northwest by dismissing
their applications and that Northwest enjoyed the benefit of those dismissals when
the FCC issued the license to it. (Id.). Fox also admitted that Plaintiffs were never
compensated for that benefit conveyed to Northwest. (Id.). It is undisputed
Northwest never paid DM or G67. Fox also testified that without Plaintiffs’
withdrawal of their applications, Northwest never would have enjoyed the
consideration paid by Trinity. (Tr. at 46). The amount Trinity paid was $1,125,000
for the broadcast license and other station assets. (PX 1).
Defendants’ retention of the benefit conveyed by Plaintiffs violates the
fundamental principles of justice, equity, and good conscience. At trial, Fox testified
that he received $100,000 individually. (Tr. at 38). He also said that the final
“proceeds” to Northwest was $300,000, and part of the money went to pay off a loan
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to Trinity (Id. at 37), which amount, $825,000, is documented in the TrinityNorthwest Agreement. (PX 1). Both Northwest, the company, and Fox, individually,
benefited. The fact that some of the money was used to pay Northwest’s creditor
does not make the receipt of the money any less of a benefit to Northwest.
In their post-trial proposed order, Defendants contend, without citing any
authority, that “[a]bsent an underlying breach of contract, there was also no unjust
enrichment enjoyed by Defendants, because the withdrawal of the Plaintiffs’
applications before the FCC, did not guaranty [sic] that [Northwest] would
necessarily be awarded anything.” (Dkt. 120 at p. 10). But no “underlying breach of
contract” is required for Plaintiffs to prevail on their unjust enrichment claim.
Unjust enrichment is considered to be an independent cause of action. See Raintree
Homes, Inc. v. Vill. of Long Grove, 209 Ill. 2d 248, 258, 282 Ill. Dec. 815, 821 (2004);
Am. Inter-Fid. Corp. v. M.L. Sullivan Ins. Agency, Inc., No. 15 C 4545, 2017 U.S.
Dist. LEXIS 89211, at *10 (N.D. Ill. June 9, 2017) (citing Cleary v. Philip Morris
Inc., 656 F.3d 511, 516 (7th Cir. 2011)). It “is a theory of liability under which the
law imposes an obligation upon the defendant to repay a benefit that it obtained at
the plaintiff's expense, even in situations where the defendant does not owe a
contractual duty to repay and has not committed an independent tort directed at
the plaintiff.” Am. Inter-Fid. Corp., 2017 U.S. Dist. LEXIS 89211, at *11 (N.D. Ill.
June 9, 2017) (internal quotations and citations omitted); Blue Sky Fairfield, LLC v.
Leaven, 2017 IL App (1st) 143938-U, ¶ 20 (“The theory of unjust enrichment is an
equitable remedy based upon a contract implied in law and the basis for the unjust
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enrichment doctrine is that no one ought to enrich himself unjustly at the expense
of another.”) (internal quotations and citations omitted); Nesby v. Country Mut. Ins.
Co., 346 Ill. App. 3d 564, 566, 281 Ill. Dec. 873, 875 (2004). While it may be true
that Plaintiffs’ actions did not “guarantee” that Northwest would benefit, Northwest
did benefit. Fox admitted as much at trial.
The Court agrees with Plaintiffs that both Northwest and Fox benefited and
should be held liable for unjust enrichment. Plaintiffs seek the value of the benefit
conveyed by G67, $600,000, and the value of the benefit conveyed by DM, $450,000.
(Dkt. 119 at p. 11). However, the benefit received by Northwest was $1,025,000.00
(PX 1) and the benefit received by Fox was $100,000.00. (Tr. at 38). See Cleary, 656
F.3d at 520 (unjust enrichment is “a means of recovering something that the
defendant is not entitled to but is unfairly possessing to the plaintiff’s detriment.”)
and Reinbold v. Kohansieh (In re Sandburg Mall Realty Mgmt. LLC), 563 B.R. 875,
891 (Bankr. C.D. Ill. 2017) (“Since unjust enrichment is premised on a contract
implied by law, the measure of damages focuses on the benefit received and
retained by the defendant.”). Therefore judgment on Count III against Northwest is
$1,025,000.00 and against Fox is $100,000.00.
G67 and DM also seek reasonable attorneys’ fees, costs and pre-judgment and
post-judgment interest. (Dkt. 119 at p. 11). Plaintiffs cite no authority to support
their claim for attorneys’ fees or pre-judgment interest. See In re Sheridan, 105 F.3d
1164, 1166 (7th Cir. 1997) (“under the ‘American Rule’…a prevailing litigant may
not collect a reasonable attorney’s fee from his opponent unless authorized by
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federal statute or an enforceable contract between the parties.”); Smith v. Navistar
Int'l Transp. Corp., 744 F. Supp. 832, 834 (N.D. Ill. 1990) (“Generally, Illinois law
requires pre-judgment interest only when provided by statute or by agreement of
the parties.”). Post-judgment interest is permitted, however, under 28 U.S.C. §
1961. Plaintiffs may also file a motion for reasonable costs pursuant to Federal Rule
of Civil Procedure 54(d)(1).
Defendants oppose any liability because: “The transactions memorialized by
the two Contracts . . . were never consummated, and therefore, no monies are due
by Defendants to either Plaintiff entity.” (Am. Compl. at p. 8; Dkt. 109 at p. 12).
Fox’s testimony at trial clarified, somewhat, the meaning of this affirmative
defense—that certain “material adverse changes” occurred, most importantly that
the license issued by the FCC was for Channel 8. Fox testified that “[t]he channel
position from 67 to 53 to 8 decimated us in terms of value.” (Tr. at 47). Defendants
argue that because of the “material adverse changes,” they had no obligation to pay
The Court does not find this defense persuasive in defeating an unjust
enrichment claim. Regardless of whether the transaction originally contemplated by
the parties would have been more lucrative, Defendants still received a benefit to
Fox’s testimony at trial showed the he believed the most important “material adverse
change” was the change to Channel 8, in addition to some others, but not the fact that the
Second Generation did not loan Northwest money under the Second Generation Agreement.
(Tr. at 18-19, 47-48). Defendants’ post-trial brief states that the Second Generation
Agreement was never performed. (Dkt. 120, ¶10). To the extent Defendants believe this was
another “material adverse change” and a defense to unjust enrichment, the trial testimony
did not support it, and moreover this argument is waived. See Long v. Teachers' Ret. Sys. of
Ill., 585 F.3d 344, 349 (7th Cir. 2009) (underdeveloped arguments are considered waived).
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Plaintiffs’ detriment, as Fox admitted at trial. Defendants’ receipt of the benefit
violates the fundamental principles of justice, equity, and good conscience.
C. Fraudulent Transfer against Northwest and Fox
Plaintiffs claim that Defendants are liable for fraudulent transfer under
Illinois’ Uniform Fraudulent Transfer Act (the “Act”), 740 ILCS 160/5(a), which
requires proof of actual intent to defraud: “(a) A transfer made or obligation
incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim
arose before or after the transfer was made or the obligation was incurred, if the
debtor made the transfer or incurred the obligation: (1) with actual intent to hinder,
delay, or defraud any creditor of the debtor.” Actual intent must be proven by clear
and convincing evidence. Wachovia Sec., LLC, 674 F.3d at 757; see also Firstar
Bank, N.A. v. Faul Chevrolet, Inc., 249 F. Supp. 2d 1029, 1047 (N.D. Ill. 2003) (“a
creditor must show that the debtor entered into the transaction with a specific
intent to defraud creditors.”). Without direct evidence of actual fraud, courts
evaluate the evidence in light of the “badges of fraud” listed in 740 ILCS 160/5(b).
The Court concludes that Plaintiffs did not prove by clear and convincing
evidence that the transfer in this case was done with actual intent to hinder, delay,
or defraud Plaintiffs. The Court addresses two initial matters before turning to the
“badges of fraud.”
1. The Fraudulent Transfer
The Court initially addresses the “transfer” Plaintiffs claim was fraudulent.
At trial, the evidence showed that Trinity paid Northwest $1,125,000—$825,000 of
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which canceled a loan Northwest owed to Trinity, $100,000 went to Fox, $100,000 to
the two other shareholders, and the rest to attorneys and brokers. Plaintiffs alleged
that the “distribution from Northwest to Fox constitutes a fraudulent conveyance.”
(Am. Compl., ¶18). Plaintiffs’ pre-trial order stated that Northwest “sold the license
for $1,200,000.00 and allegedly transferred the funds to third parties/shareholders
of Northwest, including Defendant Fox (the fraudulent transfer)” and that
Defendants “were well aware of the rights of Plaintiffs as creditors when they
distributed the $1,200,000.00 sale proceeds of the Broadcast License.” (Dkt. 109 at
pp. 6-7). 7 Plaintiffs’ post-trial filing states that Northwest was aware of its
obligations to DM and G67 when it “disbursed the entirety of the proceeds from the
sale of the station” and the “disbursement of the $1,125,000.00 in proceeds from the
sale of the Station to Trinity was done at the direction of its President.” (Dkt. 119,
Therefore, the Amended Complaint’s narrower focus on the distribution to
Fox only was expanded to encompass Defendants’ distribution of the entire proceeds
earned from the Trinity-Northwest Agreement ($1,125,000.00). To the extent the
broader definition of the alleged fraudulent transfer conflicts with allegations in the
Amended Complaint, the Court adopts the broader definition described in the pretrial order. See DeliverMed Holdings, LLC v. Schaltenbrand, 734 F.3d 616, 628 (7th
Cir. 2013) (“the pretrial order is treated as superseding the pleadings and
Plaintiffs’ reference to $1,200,000.00 was an error. The evidence at trial showed the
amount Trinity paid Northwest was $1,125,000.00.
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establishes the issues to be considered at trial.”) (internal citations and quotations
2. Defendants’ Argument Regarding Breach of Contract
Without citation to authority, Defendants argue that “absent an underlying
breach of contract, there can have been no fraudulent conveyance.” (Dkt. 120 at p. 8,
¶7). They argue that there was no evidence at trial that Northwest was aware or
should have been aware of a financial obligation to Plaintiffs, and no such obligation
existed at the time the alleged fraudulent transfer occurred. (Id. at ¶10).
The Act does not require an underlying breach of contract to establish a
fraudulent conveyance. To the contrary, the Illinois Supreme Court has held that
under the Act, a creditor must show that the debtor “owes or potentially owes a
‘payment’ to the creditor.” A.P. Props. v. Goshinsky, 186 Ill. 2d 524, 529, 239 Ill. Dec.
600, 603 (1999). The Act broadly defines “claim” as “a right to payment, whether or
not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
740 ILCS 160/2. See Heartland Bank & Tr. Co. v. Goers, 2013 IL App (3d) 120854U, ¶ 31 (“[Illinois] [c]ourts treat the term ‘claim’ broadly.”) and Nostalgia Network v.
Lockwood, No. 00 C 2418, 2001 U.S. Dist. LEXIS 544, at *17 (N.D. Ill. Jan. 23,
2001) (noting that a “claim” under the Act may exist before the filing of a lawsuit).
The Act also applies to a transfer “whether the creditor’s claim arose before or after
the transfer was made or the obligation was incurred.” 740 ILCS 160/5(a). Thus to
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show they had a “claim” against Defendants, Plaintiffs were only required to prove,
and they did, that Defendants potentially owed them a payment.
3. Badges of Fraud
Plaintiffs did not present any direct evidence of actual fraud at trial. The
Court therefore looks to the “badges of fraud” listed in 740 ILCS 160/5(b) “to see
whether a sufficient number gave rise to an inference or presumption of fraud.”
Wachovia Sec., LLC, 674 F.3d at 758; see also Frank IX & Sons v. Phillipp Indus.,
95 C 3195, 1997 U.S. Dist. LEXIS 12889, at *19 (N.D. Ill. Aug. 22, 1997) (noting
that the list of “badges of fraud” is “not all-inclusive, and the court may also
consider other evidence.”). Plaintiffs allege the following five of the eleven “badges
of fraud” are present in this case:
“(1) the transfer or obligation was to an insider;…(4) before the
transfer was made or obligation was incurred, the debtor had been
sued or threatened with suit; (5) the transfer was of substantially all
the debtor’s assets…(9) the debtor was insolvent or became insolvent
shortly after the transfer was made or the obligation was
incurred…(10) the transfer occurred shortly before or shortly after a
substantial debt was incurred. 740 ILCS 160/5(b).
a. Transfer to an insider (740 ILCS 160/5(b)(1))
Northwest transferred $100,000 to Fox, the President of Northwest. There is
no dispute that Fox was an “insider” as the term is used in the Act. 740 ILCS
160/2(g)(2)) (an insider includes a director, officer, or person in control of the
corporation). Therefore this “badge of fraud” was present.
Nevertheless, the Court notes that most of the $1,125,000 was used to pay a
loan owed to Trinity. Under Illinois law, “the mere preference of one or more
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creditors over others does not constitute a fraudulent transfer….A debtor may
prefer one creditor to another provided such preference is made in good faith with
the intent to pay or secure the payment of a just indebtedness against him.”
Schacht v. Katten Muchin & Zavis (in re MedCare HMO), 294 Ill. App. 3d 42, 52,
228 Ill. Dec. 502, 509 (1st Dist. 1997); see also Firstar Bank, N.A., 249 F. Supp. 2d
at 1048 (because defendants used the sale of assets to pay a debt owed to a secured
creditor, it appeared defendants’ intent was “to best pay its creditors, not to delay
payment” or defraud creditors). While the Court finds that this “badge of fraud”
existed because of Fox’s status as an “insider,” the fact that the majority of the
money was used to pay other creditors or potential creditors is evidence weighing
against a finding that Defendants acted with fraudulent intent.
b. Debtor had been sued or threatened with suit before the transfer (740
There was no evidence at trial that Defendants had been sued or even
threatened with suit before the transfer. Although the Amended Complaint alleged
the existence of a “demand letter,” Plaintiffs provided no evidence of any demand
letter at trial. Plaintiffs argue that “Northwest and Fox well knew or should have
known that this claim asserted in the instant lawsuit was imminent.” (Dkt. 119 at
13). But that is not the standard in the statute. The statute requires that the debtor
“had been sued or threatened with suit.” 740 ILCS 160/5(b).
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c. The transfer was of substantially all the debtor’s assets (740 ILCS
There was evidence at trial that the transfer was of substantially all of
Northwest’s assets. Fox testified at trial that after Northwest’s distribution of the
$1,125,000, Northwest had only about $1,000 in the bank and no other assets. (Tr.
d. The debtor became insolvent shortly after the transfer was made (740
The evidence at trial showed that Northwest became insolvent shortly after
the transfer was made. Plaintiffs’ counsel asked Fox whether Northwest was “left
insolvent” after the money from Trinity was disbursed. (Tr. at 42-43). Fox
responded: “Well, we had a thousand dollars in the bank or whatever it was, yeah.”
(Id. at p. 43).
e. The transfer occurred shortly before or shortly after a substantial debt
was incurred (740 ILCS 160/5(b)(10))
Plaintiffs did not prove that the transfer occurred shortly before or after “a
substantial debt was incurred.” Although Plaintiffs had a potential “claim” against
Defendants at the time of the transfer, they did not prove that Defendants incurred
a substantial debt around that time. Courts have found that substantial debts were
incurred where a judgment has been entered against the debtor or there was
evidence of an outstanding debt. See Bay State Milling Co. v. Martin, 99 C 6796,
2001 U.S. Dist. LEXIS 3402, at *8 (N.D. Ill. Mar. 14, 2001) (transfer occurred before
defendants incurred a substantial debt—a judgment entered by the district court);
Lincoln Nat'l Life Ins. Co. v. Nicklau, Inc., No. 98 C 2453, 2000 U.S. Dist. LEXIS
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6936, at *18 (N.D. Ill. May 17, 2000) (transfer occurred shortly before a substantial
debt resulting from a state court judgment was incurred); Berland, 215 B.R. 158,
169 (Bankr. N.D. Ill. 1997) (substantial debt incurred when debtor incurred over
$84,000 in debt to medical care providers). Here, there was no evidence of an
existing debt or any judgment entered against Defendants. Allegations that the
parties had a contract and that contract was breached around the time of the
alleged fraudulent transfer is not enough to prove this badge of fraud.
All told, Plaintiffs proved the existence of only three of the eleven badges of
fraud. Without evidence of any other circumstances to support a finding of actual
fraud, the Court finds that Plaintiffs did not meet their burden to prove by clear
and convincing evidence that Defendants acted with fraudulent intent when they
disbursed the proceeds from the sale of the license. Cf. Wachovia Sec., LLC, 674
F.3d at 758 (affirming district court’s finding of actual fraud because proof of five
badges of fraud in addition to attendant circumstances supported inference of
defendant’s fraudulent intent); A.G. Cullen Constr., Inc. v. Burnham Partners, LLC,
2015 IL App (1st) 122538, ¶ 39, 390 Ill. Dec. 647, 658, 29 N.E.3d 579, 590 (nine
badges of fraud weighed in favor of presumption of fraud); Firstar Bank, N.A., 249
F. Supp. 2d at 1048 (four badges of fraud not sufficient to prove that defendants
acted with specific intent to defraud creditors). Defendants are entitled to judgment
on the fraudulent transfer claim.
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The Court enters FINAL JUDGMENT in favor of Plaintiffs Galesburg 67,
LLC and DM Partners and against Defendants Northwest Television, Inc. and
Bruce Fox, on Plaintiffs’ claim of unjust enrichment. The Court enters final
judgment in Defendants’ favor on Plaintiffs’ breach of contract and fraudulent
Defendant Northwest is liable in the amount of $1,025,000.00 and Defendant
Fox is liable in the amount of $100,000.00. Northwest is liable to Plaintiff
Galesburg 67, LLC in the amount of $585,714.29 and to Plaintiff DM Partners in
the amount of $439,285.71. Fox is liable to Galesburg 67, LLC in the amount of
$57,142.86 and to DM Partners in the amount of $42,857.14. Within thirty (30) days
of this order, Plaintiffs may file a motion seeking reasonable costs pursuant to
Federal Rule of Civil Procedure 54(d)(1).
Dated: August 22, 2017
E N T E R:
MARY M. ROWLAND
United States Magistrate Judge
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