FIRSTMERIT BANK, N.A., as Assignee of the FDIC, receiver for Midwest Bank and Trust Company et al v. The Kloysner Group, LLC et al

Filing 40

MEMORANDUM Opinion and Order; Defendant's Motion to Dismiss all counts of FirstMerit's Amended Complaint is denied. Signed by the Honorable Sharon Johnson Coleman on 11/6/2017 Mailed notice (rth)

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
FIRSTMERIT BANK, N.A.,
Plaintiff,
v.
THE KLOYSNER GROUP, LLC, BETSY
BARBIER, ALLEN BARBIER, YMS
VENTURES INTERNATIONAL, INC.,
AND LEONID GOLDFARB,
Defendants.

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Case No. 16-cv-4930
Judge Sharon Johnson Coleman

MEMORANDUM OPINION AND ORDER
Plaintiff FirstMerit Bank, N.A. (“FirstMerit”), as assignee of the Federal Deposit
Insurance Company and receiver for Midwest Bank and Trust Company (“Midwest”), brings
this suit against The Kloysner Group, LLC, (“Kloysner”), Betsy Barbier and Allen Barbier
(“Barbier Defendants”), YMS Ventures International, Inc. (“YMS”), and Leonid Goldfarb
(“Goldfarb”) alleging that Defendants violated various sections of the Illinois Uniform
Fraudulent Transfer Act (“IUFTA”). Defendants now move this Court to dismiss the
Amended Complaint for lack of subject-matter jurisdiction and failure to state a claim,
pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). For the reasons set forth
below, this Court denies Defendants’ Motion to Dismiss [25].
Background
The following allegations from the Amended Complaint are taken as true for the
purpose of ruling on the present motion. On September 12, 2007, Potomac Property
Management, LLC (“Potomac”) borrowed $1.1 million from Midwest to purchase two
parcels of real estate. The same day, Dalila Feldman (“Feldman”) executed a commercial

guaranty backing Potomac’s debt. Goldfarb also personally guaranteed Potomac’s debt;
however, on November 30, 2010, he was declared bankrupt and his liability was discharged.
In May of 2011, Potomac failed to repay its debt and defaulted on the loan.
Feldman did not fulfill her obligation to repay Potomac’s debt. The next month,
FirstMerit—successor in interest to Midwest—filed a complaint in the Circuit Court of
Cook County Illinois seeking to foreclose on Potomac’s properties and suing Feldman for
breach of her guaranty. The proceedings terminated on July 23, 2014 with the state court
ordering a foreclosure of sale on Potomac’s properties and entering a deficiency judgment
against Feldman for $631, 235.43.
Feldman was the sole owner and employee of Reliable Medical Supply, Inc.
(“Reliable”), an Illinois corporation that delivered medical supplies to patients. Although
Reliable had stopped conducting legitimate business in early 2012, it still retained large
amounts of liquid assets and had no creditors. In an effort to discover Reliable’s assets and
recover the money owed by Feldman, FirstMerit served Reliable in State Court on February
9, 2015. Since Reliable did not respond or appear, the court issued a final judgment against
the company for the amount of Feldman’s debt, $614,657.38.
Shortly after FirstMerit sued Feldman, in April of 2012, she formed The Kloysner
Group with the Barbier Defendants. During Feldman’s examination for the state court case,
she provided no meaningful testimony about the formation or purpose of Kloysner other
than stating that money was put into the company. Kloysner’s address was a residence
where Feldman was primary owner and shared ten percent interest her daughters. It was
never registered to do business in the state of Illinois, nor did it have any employees.
Kloysner also did not observe any corporate formalities after its formation.
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Soon after creating Kloysner, Feldman transferred a total of $484,000 of Reliable’s
assets to the new company without any consideration, and thereby diminished the value of
Feldman’s interest in Reliable. All of the assets held by Kloysner originated with Feldman or
Reliable.
On July 26, 2012, while under the control of Feldman, Kloysner transferred
$150,000 to Maple Properties Development, Goldfarb’s company, to purchase the Maple
Ave Property in Northbrook, Illinois. Maple Properties Development then transferred the
Maple Avenue Property by warranty deed to Kloysner.
On August 21, 2012, Kloysner transferred another $150,000 to Maple Properties
Development for the Maple Avenue Property, and two months later, Kloysner transferred
the Maple Avenue Property, without receiving any consideration, to Feldman and the
Barbier Defendants as joint tenants by quitclaim deed. Kloysner then paid $48,961.06 to
third parties in order to develop and improve the Maple Avenue Property for the benefit of
the Barbier Defendants, who remain in sole possession and control of it. Again, Kloysner
did not receive any consideration for these money transfers and Feldman received no
economic benefit from her interest in the Maple Avenue Property.
Feldman also used Kloysner assets to pay her personal expenses. Feldman withdrew
$64,000 on August 21, 2012 and $20,000 on July 29, 2014 from Kloysner without giving any
consideration for the transfer. Additionally, she paid her close, personal friend George
Averbuch $7,500 from Reliable’s assets on August 12, 2014.
Finally, on June 5, 2015, in spite of the state court’s order permitting FirstMerit to
collect Potomac’s debt from Reliable, Feldman, through Reliable, transferred $234,500 to
YMS (the “YMS Transfer”). Goldfarb owns YMS with his wife, who is Feldman’s daughter.
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The value purportedly provided to Reliable by YMS was the transfer of uncollectable
debt obligations that had little to no value at the time they were exchanged because the
debtors were all likely insolvent (“worthless obligations”). Neither Feldman nor Reliable
made any attempt to collect on the worthless obligations.
Legal Standard
Rule 12(b)(1) permits dismissal of a claim based on a lack of subject-matter
jurisdiction. Fed. R. Civ. P. 12(b)(1). Jurisdiction is the “power to decide” and it must be
conferred upon this federal court in order to hear the instant case. In re Chicago, Rock Island &
Pacific R.R. Co., 794 F.2d 1182, 1188 (7th Cir. 1986). A plaintiff faced with a 12(b)(1) motion
to dismiss bears the burden of establishing that the jurisdictional requirements have been
met. See Western Transp. Co. v. Couzens Warehouse & Distributors, Inc., 695 F.2d 1033, 1038 (7th
Cir. 1982).
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the
legal sufficiency of the complaint, not the merits of the allegations. Gardunio v. Town of Cicero,
674 F. Supp. 2d 976, 983 (N.D. Ill. 2009) (Dow, J.). Put differently, “[t]he issue involved is
not whether the claimant is entitled to prevail, but whether the claimant is entitled to offer
evidence in support of the claims.” Id. (citation omitted).
When ruling on a motion to dismiss, the Court must accept all well-pleaded factual
allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor.
Park v. Ind. Univ. Sch. of Dentistry, 692 F.3d 828, 830 (7th Cir. 2012). The allegations must
contain sufficient factual material to raise a plausible right to relief. Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 569 n. 14, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the
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reasonable inference that the defendant is liable for the misconduct alleged. Id.; see also
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L. Ed. 2d 868 (2009).
In addition, Federal Rule of Civil Procedure 9(b) dictates that a party must “state
with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). “To satisfy
Rule 9(b)’s pleading threshold, the pleader must detail ‘the identity of the person who made
the misrepresentation, the time, place and content of the misrepresentation, and the method
by which the misrepresentation was communicated to the plaintiff.’” GE Capital Corp. v.
Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir. 1997) (internal quotation marks and
citation omitted).
Discussion
1.

Subject-Matter Jurisdiction
Defendants make mention of Federal Rule of Civil Procedure 12(b)(1) in their initial

statement of the Motion to Dismiss; however, they present no argument to this point.
Given that the parties are citizens of different states and the amount in controversy exceeds
$75,000.00, complete diversity exists. Thus, this Court has jurisdiction to hear the case. 28
U.S.C. § 1332. Since Defendants have not provided sufficient argument to support their
position, the issue of subject-matter jurisdiction is waived. United States v. Dunkel, 927 F.2d.
955, 956 (7th Cir. 1991).
2.

Failure to State a Claim.
a.

Actual Fraud - Badges of Fraud

Defendants argue that Counts I – XV 1 of FirstMerit’s complaint are deficient
because it has not pled actual fraud with the requisite particularity. “To establish ‘actual’
fraud under § 5(a)(1) [of IUFTA], a plaintiff must allege that a debtor made a transfer with
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Defendants indicate Counts I-XV, but only Counts I-XII are fraudulent transfer claims.

actual intent to hinder or defraud a creditor, regardless of whether the creditor's claim arose
before or after the transfer was made.” 740 ILCS § 160/5(a)(1); see PNC Equip. Fin., LLC v.
Zilberbrand, 2014 U.S. Dist. LEXIS 13795, *10 (N.D. Ill. Feb. 4, 2014) (Lefkow, J.); GE
Capital Corp., 128 F.3d at 1078. So, for a claim of actual fraud to succeed, a creditor must
establish intent to defraud.
Fraudulent intent can be inferred by alleging a sufficient number of the “badges of
fraud,” or indicators of fraud, outlined in IUFTA. 470 Ill. Comp. Stat. 160/5 (b) (1) – (11).
“Although the court may consider the existence of the badges of fraud in order to determine
whether fraudulent intent exists under the UFTA, there is no absolute combination or
number of badges a claimant must allege in order to state a sufficient claim.” Shapo v. Engle,
98 C 7909, 2000 U.S. Dist. LEXIS 1691, at *9 (N.D. Ill. Feb. 10, 2000) (Kocoras, J.). Courts
have found fraudulent intent with the presence of as few as five badges. See Whittom v. Kroll
(In re Whittom), 220 B.R. 365, 370 (Bankr. C.D. Ill. 1998) (finding that, in the absence of
rebuttal evidence, the five factors offered were “a classic indication of fraud.”).
In the Amended Complaint, FirstMerit alleged that transfers were made to
Feldman’s insiders; that Feldman continued to exercise control over the funds transferred to
Kloysner; that the transfers were not disclosed to FirstMerit; that the transfers were made
after Feldman was sued; that the transfers were made for less than reasonably equivalent
value; and that Feldman was insolvent following the transfers. (Pls’ Am. Complaint, ¶ ¶110,
111, 118, 126, 130, 136, 141, 145, 151, 156, 160, 166). At this juncture, FirstMerit need only
offer sufficient factual support to render the claim plausible, not to definitively prove they
will prevail. As there is no absolute number or combination of indicia required to establish
the presumption of fraudulent intent, the six badges of fraud pled by FirstMerit in Counts IXII, if taken as true, establish a sufficient factual basis for actual fraudulent transfer.
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b.

Constructive Fraud - Reasonable Equivalent Value

“A plaintiff may also establish ‘constructive’ fraud as to a creditor under § 5(a)(2) [of
IUFTA] by alleging that a defendant debtor made a transfer, either before or after the
creditor's claim arose, without receiving a reasonably equivalent value in exchange for the
transfer.” United Cent. Bank v. Sindhu, No. 10 C 2878, 2014 U.S. Dist. LEXIS 103650, at *8
(N.D. Ill. July 29, 2014) (Zagel, J.) (emphasis added). The elements of this cause of action
are as follows: (1) the creditor’s claim arose before the transfer; (2) the debtor made the
transfer without receiving a reasonably equivalent value; (3) the debtor was insolvent at the
time of the transfer or became so as a result of the transfer. 740 ILCS 160/6(a). Defendants
only contend that FirstMerit’s claims fail under constructive fraud because they have not
pled any facts that show that the conveyance or payment was not made for reasonable
equivalent value.
Whether a debtor received the reasonable equivalent value is a question of fact.
Cordes & Co., Ltd. Liab. Co. v. Mitchell Co., Ltd. Liab. Co., 605 F. Supp. 2d 1015, 1021 (N.D.
Ill. 2009) (Castillo, J.). The IUFTA provides that “[v]alue is given for a transfer or obligation
if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is
secured or satisfied.” 740 Ill. Comp. Stat. 160/4 (a). “[V]alue does not include an
unperformed promise.” Id. The determination of value is viewed from the vantage point of
the creditor since its purpose is to protect them from fraudulent conveyances. Pnc Equip.
Fin., LLC 2013 U.S. Dist. LEXIS 44307 at *13. Consequently, the inquiry here focuses on
what the debtor gave up in the transfer and received in exchange that could be used to
benefit the creditors. Id.
In Paragraphs 68-101 of the Amended Complaint, FirstMerit outlined the various
transactions that stripped Reliable’s account and how these transfers were made in exchange
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for either no consideration, personal or familial benefit, or worthless obligations. (Pls’ Am.
Complaint, ¶ ¶ 68 – 101). FirstMerit’s complaint sufficiently alleges that Reliable
relinquished real money in the transfers, but the exchanges did not satisfy any pre-existing
obligations, obtain property, or generate funds that would enable Reliable to satisfy its debt
to FirstMerit. Accordingly, it can plausibly be inferred that Reliable did not attain reasonably
equivalent value.
FirstMerit’s claims of constructive fraud for Counts I-XII under IUFTA are pled
sufficiently.
c.

Reliable Medical as Feldmanh’s Alter Ego

Defendants claim that FirstMerit did not present evidence to support treating
Kloysner as the alter ego of Feldman. “Evidence of commingling of funds, using corporate
funds for personal expenses, undercapitalization, and failing to maintain appropriate
corporate formalities are all sufficient to pierce the corporate veil and show [that a company
is] only [an] alter-ego[] of the perpetrators of the scheme.” Fid. Nat'l Title Ins. Co. v. Howard
Sav. Bank, Nos. 02 C 643, 02 C 644, 02 C 646, 02 C 647, 02 C 648, 02 C 649, 02 C 651, 02 C
667, 02 C 668, 2003 U.S. Dist. LEXIS 25933, at *8-9 (N.D. Ill. Feb. 10, 2003) (Hibbler, J.).
Here, FirstMerit has alleged that Feldman was the sole president, owner, officer, and
only employee of Reliable. (Pls’ Am. Complaint, ¶ ¶ 30-34). They also alleged that Reliable
did not observe corporate formalities; had ceased conducting legitimate business; had no
creditors to speak of; and did not make meaningful distributions to its shareholders. (Pls’
Am. Complaint, ¶ ¶ 35-38). As the entity existed and functioned solely to hold assets for
Feldman’s benefit and pay out her personal expenses, it is plausible, based on the facts, that
it was an alter ego, and when it became insolvent, she did as well.
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Given that sufficient facts were pled to demonstrate that the corporation was actually
the alter ego of Feldman, this Court finds that Counts I-III are adequately pled.
d.

The Barbier Defendants and Goldfarb are Transferees Subject to Judgement.

Defendants claim that FirstMerit failed to plead any facts that support the Barbier
Defendants being debtors. By definition, a debtor is someone “who is liable on a claim.”
740 Ill. Comp. Stat. 160/2 (f). A “creditor may recover judgement for the value of the asset
transferred . . . [against] the first transferee of the asset or the person for whose benefit the
transfer was made.” 740 Ill. Comp. Stat. 160/9 (b) (1). Transferees can defend against a
debtor’s fraudulent transfer by demonstrating that they took the value in good faith and
“gave value to the debtor in exchange for such transfer or obligation.” 11 U.S.C.§ 548(c);
Jimmy Swaggert Ministries v. Hayes (in Re Hannover Corp.), 310 F.3d 796, 799 (5th Cir. 2002).
“The burden of proof is on the defendant transferee,” however. Id.
FirstMerit presented facts that the Barbier Defendants, as members of the Kloysner
Group, were involved in a fraudulent transfer scheme where they received money transfers
and land purchases from Reliable without providing consideration. (Pls’ Am. Complaint, ¶ ¶
50-55, 74-82). These factual statements, if true, go beyond mere speculation, but actually
demonstrate a plausible enough showing of their fraudulent involvement to satisfy the
pleading requirement. Furthermore, Defendants can only escape liability by proving the
transfers were made for value and in good faith. They have not met their burden here.
The claims against Goldfarb arise out of his ownership of YMS. While he was
absolved of his previous obligation as guarantor of the original debt, he may still be subject
to judgement pursuant to 740 Ill. Comp. Stat. 160/9(b)(1) as a transferee in the fraudulent
transfers from Reliable. In Paragraphs 87-95, FirstMerit contends that Goldfarb advised
Reliable to transfer $234,500 to YMS, in exchange for uncollectable debts with little to no
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value. (Pls’ Am. Complaint, ¶ ¶ 87-95). Since the uncollectable debts could be deemed
valueless, there are sufficient facts to support that he did not embark upon this transaction in
good faith and could be liable to FirstMerit as a transferee in the fraudulent scheme.
For the foregoing reasons, this Court finds that Counts IV-VI and X-XII of
FirstMerit’s Amended Complaint are sufficient under UFTA.
Conclusion
Accordingly, Defendant’s Motion to Dismiss all counts of FirstMerit’s Amended
Complaint is denied.
IT IS SO ORDERED.
SHARON JOHNSON COLEMAN
United States District Court Judge

Dated: November 6, 2017

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