Opinion
3:17-CV-1394 -NJR-MAB
09-08-2021
PAINTERS DISTRICT COUNCIL 58 401(K) TRUST FUND, et al., Plaintiffs, v. QUALITY ASSURED INDUSTRIAL COATINGS, LLC, Defendant.
REPORT AND RECOMMENDATIONS
MARK A. BEATTY, United States Magistrate Judge
This matter is before the Court on a motion to avoid fraudulent transfers filed by the Plaintiffs in this case. The Court entered judgment in favor of Plaintiffs and against Defendant Quality Assured Industrial Coatings, LLC (Quality Assured) on March 31, 2020 (Doc. 54). Following the entry of judgment, the case was referred to the undersigned to manage the post-judgment proceedings, such as citations to discover assets (See Doc. 55, 56).
The Plaintiffs are a host of different employee benefit funds and labor organizations established pursuant to a collective bargaining agreement between certain labor organizations and employer associations (See generally Doc. 1).
Plaintiffs' motion asks this Court to avoid certain transfers that it contends were fraudulent and order Beth Johnes (the majority owner of Quality Assured) to turn over $64,065.75, which is the amount of the judgment Plaintiffs have against Quality Assured (See Docs. 54, 68, 75). Plaintiffs also ask the Court to enter judgment against Beth Johnes, personally, and in favor of Plaintiffs for $64,065.75 (Id.). Given the nature of the relief Plaintiffs seek, the undersigned opts to issue a Report and Recommendation to the District Judge because the undersigned does not have full consent of the matter. See 28 U.S.C. § 636(b)(1)(B); F.R.C.P. 72(b). Accordingly, for the reasons set forth below, it is RECOMMENDED that the motion be granted in part and deferred in part and that the Court adopt the following findings of fact and conclusions of law.
Specifically, the undersigned recommends that the Court declare the two transfers at issue void (up to the amount of Plaintiffs' judgment) and order the debtor to turn over $64,065.75 to the Plaintiffs. The Court should defer the entry of judgment against Beth Johnes, personally, until after she has been given time to comply with the Court's turn over order. If she fails to comply with the order, the Court should enter judgment against her, personally, as a sanction.
FINDINGS OF FACT
Plaintiffs filed their Complaint in this matter on December 28, 2017 (Doc. 1). Quality Assured obtained counsel and filed an Answer on June 18, 2018. (Doc. 12). The Court entered an initial scheduling order on September 21, 2018 (Doc. 19), and then modified the discovery deadline on several occasions (Docs. 29, 33, 38). On December 6, 2019, counsel for Quality Assured filed a motion to withdraw, citing irreconcilable differences between Quality Assured (its controlling member, Beth Johnes) and its retained counsel (See Doc. 41). The motion to withdraw provided a detailed accounting of the efforts counsel had made to work with his client, but to no avail (Id.). Counsel also noted that Quality Assured had failed to fulfill its financial obligations to counsel and had failed to pay at least three recent invoices for legal services (Id.).
On December 11, 2019, the Court granted the motion to withdraw (Doc. 42). In granting the motion to withdraw, the Court stated:
Counsel for Defendant Quality Assured Industrial Coatings, LLC seeks to withdraw as attorney because he has been unable to communicate with his client. The motion is GRANTED and Brian O'Neal is WITHDRAWN as counsel of record for Defendant. Mr. O'Neal is ORDERED to serve a copy of this Order on Defendant within seven (7) days of the entry of this Order at the address identified in his motion to withdraw and at the email address(es) he has on file for Defendant. Defendant is ADVISED that as a limited liability company, it cannot litigate pro se or be represented by a nonlawyer; it must be represented in litigation by a lawyer. 1756 W. Lake St. LLC v. Am. Chartered Bank, 787 F.3d 383, 385 (7th Cir. 2015). Defendant is ORDERED to retain counsel and have counsel enter an appearance in this case on its behalf on or before December 23, 2019. Defendant is WARNED that if it fails to meet that deadline, it may be subject to default. In light of defense counsel's withdrawal from this case, the dispositive motion deadline is EXTENDED by 60 days to February 14, 2020.(Doc. 42).
Quality Assured did not retain counsel by the December 23, 2019 deadline and on January 17, 2020, Plaintiffs filed a motion for entry of default (Doc. 48). Chief Judge Rosenstengel held an in-person status conference on January 21, 2020 at which time counsel for Plaintiffs appeared (Doc. 49). No. one appeared on behalf of Quality Assured (Id.). The Court granted Plaintiffs' motion for entry of default and directed Plaintiffs to move for default judgment on or before March 2, 2020 (Id.). Plaintiffs did as the Court directed and on March 31, the Court granted the motion for default judgment (Doc. 53). The Court entered judgment against Quality Assured and on behalf of all Plaintiffs for a total amount of $64,065.75 (Doc. 54).
The judgment allocates specific amounts to various different plaintiffs (e.g. Painters District Council #58 Fringe Benefit Funds shall recover from Quality Assured $19,069.57 for delinquent contributions and late fees along with $13,202.76 in attorney fees, costs, and expenses). However, the aggregate total in favor of Plaintiffs and against Quality Assured is $64,065.75.
Plaintiffs then began pursuing efforts to collect on their judgment by way of a citation to discover assets directed at Beth Johnes (Doc. 56). Plaintiffs, through their discovery efforts, learned that Quality Assured had transferred significant money out of the company on February 28, 2020 (See Doc. 68). Specifically, Plaintiffs identified the following two transfers:
Beth Johnes is the majority owner of Quality Assured (See Doc. 74). Specifically, Ms. Johnes testified that she owned 51 % of it and her husband Tim Johnes owned 49% of it (Id. at p. 10).
• Check # 13989 from Quality Assured Industrial Coatings, LLC to Beth Johnes in the amount of $78,350.00 on February 28, 2020
• Check # 13990 from Quality Assured Industrial Coatings, LLC to Beth Johnes in the amount of $50,000 on February 28, 2020(See Doc. 68, Doc. 68-1). It is these two transfers that prompted Plaintiff's motion to avoid fraudulent conveyances.
At an evidentiary hearing on Plaintiff's motion, Ms. Johnes appeared and provided testimony (Doc. 74). She testified that she owned 51 % of Quality Assured and that her husband Tim owned 49% of the company (Id.). When questioned about the two checks at issue in Plaintiffs' motion, Ms. Johnes testified that she wrote the check from Quality Assured to herself and ultimately transferred the money into a retirement fund (Id. at pp. 10-11). Specifically, the money was transferred from Quality Assured to Ms. Johnes and then from Ms. Johnes into Mr. Johnes's IRA (Id.). The reason for the transfer, according to Ms. Johnes, is that the IRA had previously loaned Quality Assured money to help it make payroll (Id. at p. 11). However, there is no formal documentation memorializing when each of these loans occurred or the exact amount of each loan from Mr. Johnes's IRA to the company (Id.). Ms. Johnes stated that the retirement account loaned the money to her husband and her, personally, and then she put the money into the company to help with its cash flow and operating expenses (Id.).
At the conclusion of the evidentiary hearing, the Court noted that Plaintiffs and Ms. Johnes may submit supplemental briefing on Plaintiff's motion. However, the Court subsequently corrected this mistake, noting that Ms. Johnes is not an attorney, so she cannot represent Quality Assured. And it is well settled that Quality Assured, as an LLC, cannot participate in litigation pro se. See 1756 W. Lake St. LLC v. Am. Chartered Bank, 787 F.3d 383, 385 (7th Cir. 2015). Nor is Ms. Johnes, personally, a party to this case. Accordingly, the Court issued an Order, clarifying that Ms. Johnes can participate in the post-judgment collection process and the discovery associated with post-judgment collection, such as her testimony at the evidentiary hearing on Plaintiffs' motion (See Doc. 76). However, Ms. Johnes was instructed that she cannot submit legal briefing to the Court on behalf of Quality Assured (Id.). The Court made clear that Quality Assured must retain legal counsel if it wished to contest Plaintiffs' pleadings in any form (Id.).
CONCLUSIONS OF LAW
Under Fed.R.Civ.P. 69, a “judgment creditor or a successor in interest whose interest appears of record may obtain discovery from any person - including the judgment debtor - as provided in these rules or by the procedure of the state where the court is located.” The scope of discovery contemplated by Rule 69 is broad, with the intent of allowing the judgment creditor to obtain any information it can that will assist it in collecting on its judgment. O.H.M Resource Recovery Corp. v. Industrial Fuels & Resources, Inc., 1991 WL 146234, *2 (N.D.Ind. July 24, 2001) (“[t]he scope of discovery under Rule 69(a) is broad, permitting a judgment creditor to obtain discovery not only of the debtor's current assets, but also information relating to past financial transactions which could reasonably lead to the discovery of concealed or fraudulently transferred assets.”). As a result of information gathered in Plaintiffs' post-judgment discovery efforts, Plaintiff has filed the instant motion to avoid fraudulent transfers.
As a general matter, Illinois Courts have allowed fraudulent conveyance actions to be pursued in conjunction with supplementary proceedings. See Cent. Laborers' Pension Fund v. All. Com. Concrete, Inc., No. 08-3065, 2014 WL 3376890, at *3 (C.D. Ill. July 10, 2014) (citing Alan Drey Co., Inc. v. Generation, Inc., 317 N.E.2d 673 (Ill.App.Ct. 1974)). See also Cent. Laborers Pension Fund v. AEH Constr., Inc., No. 14-3052, 2015 WL 5462139 (C.D. Ill. Sept. 17, 2015) (considering a motion to avoid fraudulent conveyances in a supplementary proceeding following the entry of default judgment); accord Meggison v. Stevens, 316 N.E.2d 673 (Ill.App.Ct. 1974).
A. Are the two transfers at issue fraudulent under Illinois law?
Plaintiffs' motion is predicated on the Illinois Uniform Fraudulent Transfer Act (“UFTA”). 740 Ill. Comp. Stat. § 160/1 et seq. This makes sense because collection proceedings, even in federal court, are governed by the procedural laws of the state court. Star Ins. Co. v. Risk Mktg. Grp. Inc., 561 F.3d 656, 661 (7th Cir. 2009) (noting that Fed.R.Civ.P. 69 governs collection proceedings in the federal courts and adopts whatever procedures are followed by the state courts in which the collection is sought, unless there is a federal statute on point). The purpose of the UFTA is to prevent fraudulent transfers of property by a debtor who has attempted to defraud a creditor by transferring those assets beyond the reach of the creditor. Zurich Am. Ins. Co. v. Pers. Staffing Grp., LLC, 105 N.E.3d 979, 983 (Ill.App.Ct. 2018). The relevant provision of the UFTA in this instance provides, in pertinent part: “[a] transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made 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 Ill. Comp. Stat. § 160/6(b).
The first question is whether the claim arose before the transfers at issue were made. A “claim” is a defined term under the UFTA and means a “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 Ill. Comp. Stat. § 160/2(c). Plaintiffs filed their complaint against Quality Assured on December 28, 2017 (Doc. 1). Plaintiffs' complaint carefully spells out that Quality Assured is in breach of a collective bargaining agreement and a trust agreement (Id.). And Plaintiffs' complaint detailed the amount it contends that Quality Assured owed as a result of its breach (Id. at pp. 4-5). The two transfers at issue occurred on February 28, 2020. Even if Quality Assured disputed Plaintiffs' claim initially, Plaintiffs had asserted a right to payment predicated on a breach of an agreement before the transfers occurred. Accordingly, Plaintiffs' claim arose before the two transfers at issue here. Indeed, the Court had found Quality Assured in default on January 21, 2020 before the transfers at issue occurred and it was only a matter of time before default judgment entered (See Docs. 48, 49).
The next issue is whether the transfer was made to an insider for an antecedent debt. An insider is a defined term under the Illinois UFTA. If the debtor is a corporation, an insider is a director, officer, or person in control of the corporation. 740 Ill. Comp. Stat. § 160/2. Here, Quality Assured was a limited liability corporation. Ms. Johnes served as the manager and was the majority owner of Quality Assured and she transferred the money from the corporation to herself (Docs. 68, 68-1, 74, pp. 9-11). The money was then deposited into an IRA for the benefit of Tim Johnes (Ms. Johnes's husband), who would also be considered an “insider” under the UFTA (Id.); see also 740 Ill. Comp. Stat. § 160/2(g)(2)(F) (defining an insider as a “relative of a general partner, director, officer, or person in control of the debtor;”). The reason for the transfer of money from Quality Assured to Ms. Johnes was to repay a debt owed to Mr. Johnes's IRA, which had loaned money to Quality Assured, beginning in 2008 and continuing until 2019 (Doc. 74, p. 11). Its unclear to the Court why Quality Assured wrote the two checks to Ms. Johnes, personally, who in turn deposited them into the IRA. But even if the check had been issued to Mr. Johnes, as noted above, he was also an insider because he is the spouse of the controlling member and manager and was a 49% owner of Quality Assured.
The final issue in considering whether the two transfers were fraudulent under the UFTA is whether Quality Assured was insolvent at that time and Ms. Johnes (the insider) had reasonable cause to believe that it was insolvent. See 740 Ill. Comp. Stat. § 160/6(b).The two transfers at issue occurred in February of 2020, and according to Ms. Johnes, Quality Assured dissolved in 2019 and was no longer operating at the time of the transfers. Moreover, a review of the records provided in support of Plaintiffs' motion reveals that these two transfers (along with a few other miscellaneous transfers) in late February and early March drained Quality Assured of all of its assets (Doc. 68-1, pp. 11-14). In fact, by the end of March 2020, the Quality Assured's business checking account had an “ending balance” of $ 300.91 (Doc. 68-1, p. 14). Indeed, Ms. Johnes was uniquely aware that these two transfers would deplete Quality Assured of any meaningful assets, given her role as the majority owner and the manager of the company. Based upon her testimony and the exhibits attached to Plaintiffs' motion, it seems fair to infer that Ms. Johnes was controlling all of the financial decisions in winding up the affairs of Quality Assured. See Cent. Laborers' Pension Fund v. AEH Constr., Inc., No. 14-3052, 2015 WL 5462139, at *5 (C.D. Ill. Sept. 17, 2015) (noting that an individual, as the sole shareholder and director of a corporation, as well as the president, secretary, and treasurer, would have reasonable cause to believe the corporation was insolvent).
a debtor who is generally not paying his debts as they become due is presumed to be insolvent. 740 Ill. Comp. Stat. § 160/3; see also Cent. Laborers' Pension Fund, 2015 WL 5462139, at *5.
B. What is the appropriate remedy for Plaintiffs regarding the fraudulent transfers?
Having concluded that the two transfers at issue here are fraudulent under the UFTA, the question becomes: what is the remedy? Again here, the Court looks to the UFTA because collection proceedings are governed by the procedural laws of the state court. Star Ins. Co., 561 F.3d at 661 (7th Cir. 2009). The UFTA provides, in relevant part, that a creditor may pursue an “action for relief against a transfer” and may obtain an “avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's clam.” 740 Ill. Comp. Stat. § 160/8(a)(1). The UFTA also provides that “[i]f a creditor has obtained a judgment on a claim against the debtor, the creditor, if the court so orders, may levy execution on the asset transferred or its proceeds.” 740 Ill. Comp. Stat. § 160/8(b).
a levy of execution is basically the legally sanctioned seizure and sale of property and the money obtained from such a sale, which is then used to satisfy a judgment. See Black's Law Dictionary (11th ed. 2019) (defining levy as “[t]he legally sanctioned seizure and sale of property; the money obtained from such a sale. - also termed . . . levy of execution.” And defining execution as “[j]udicial enforcement of a money judgment, usu. by seizing and selling the judgment debtor's property <even if the plaintiff receives a judgment against the foreign debtor, execution is unlikely>.”).
Plaintiffs rely primarily on two decisions from one case out of the U.S. District Court, Central District of Illinois: (1) Cent. Laborers' Pension Fund v. AEH Constr., Inc., No. 14-3052, 2015 WL 5462139 (C.D. Ill. Sept. 17, 2015); (2) Cent. Laborers' Pension Fund v. AEH Constr., Inc., No. 14-3052, 2015 WL 7293207 (C.D. Ill. Nov. 18, 2015). In Cent. Laborers' Pension Fund, the debtor, which was a corporation, transferred money out of the corporation and to an individual who also served as the president, director, and sole shareholder of the corporation. The plaintiffs claimed the transfer at issue was fraudulent. In the court's September Order, the court outlined the specifics of the Plaintiffs' motion to avoid the fraudulent conveyance, and then ultimately set the matter for a hearing to allow the individual (or transferee) to appear and offer testimony. 2015 WL 5462139, at *4.
At the hearing, the individual appeared and testified that the transfer at issue was made to satisfy a loan payment he had made, personally, to the corporation. 2015 WL 7293207, at *1. The Court's November Order analyzes the transfer from the debtor corporation to the individual and concludes that it was fraudulent under the UFTA and ordered briefing on the appropriate remedy. 2015 WL 7293207, at *4. Ultimately, the court directed the individual (Thomas Hensley) to turn over the entire amount that was transferred from the corporation to him and allowed the plaintiffs to levy execution on the assets transferred or their proceeds. Id.
Here, the Court has already held an evidentiary hearing at which time Ms. Johnes appeared and testified as a witness about the two transfers at issue in Plaintiffs' motion (See Docs. 73, 74).
The Seventh Circuit has specifically approved of turn over orders when assets have been fraudulently transferred. “The Illinois Code of Civil Procedure (735 ICLS 5/2-1402) also allows the holder of a judgment to command the debtor to turn over to the judgment creditor as many of the seizable assets as may be necessary to satisfy the judgment.” Star Ins. Co., 561 F.3d at 662. Indeed, in Star Ins. Co., the Seventh Circuit affirmed the district court's order directing the recipient (or transferee) of the fraudulent transfer to turn over assets in 21 days, and when the recipient failed to do so, the court entered judgment against the recipient, personally, for the entire amount. Id. at 662-63.
Here, in addition to a turn over order, Plaintiffs also ask the Court to enter judgment against Beth Johnes personally and in favor of the Plaintiffs (See Doc. 75). At first blush, this request would appear to be procedurally unsound, given that Beth Johnes is not a party to this action. The only defendant is Quality Assured. However, in Star Ins. Co., the Seventh Circuit affirmed the district court's decision to enter judgment against a non-party transferee for the amount of the underlying judgment as a sanction for failing to comply with its turn over order. 561 F.3d at 661-63. The Court noted that Illinois Supreme Court Rule 277(h) allows the trial court to sanction an individual for failing to comply with a turn over order. Id. at 662-63. The Court rejected the argument that imposing the judgment against the transferee amounted to piercing a corporate veil, noting instead that it was an appropriate use of the trial court's discretion after the transferee failed to comply with its turn over order. Id. at 663 (“Contrary to the defendants' argument, the district court did not pierce any veil and therefore, did not need to hear evidence on compliance with corporate formalities; rather, the district court simply did not tolerate the failure to comply with its August 31, 2007 order and entered a sanction against the transferees in the amount of the underlying judgment. Such an action was not an abuse of discretion.”). This process of sanctioning a non-party for failure to comply with the Court's order is also consistent with the Seventh Circuit's guidance that “[p]roceedings to enforce judgments are meant to be swift, cheap, [and] informal” and that the drafters of Federal Rule 69 did not intend “to put the judge into a procedural straightjacket, whether of state or federal origin.” Resol. Tr. Corp. v. Ruggiero, 994 F.2d 1221, 1226 (7th Cir. 1993).
Illinois Supreme Court Rule 277(h) provides: “Any person who fails to obey a citation, subpoena, or order or other direction of the court issued pursuant to any provision of this rule may be punished for contempt. Any person who refuses to obey any order to deliver up or convey or assign any personal property or in an appropriate case its proceeds or value or title to lands, or choses in action, or evidences of debt may be committed until he has complied with the order or is discharged by due course of law. The court may also enforce its order against the real and personal property of that person.”
Kennedy v. Four Boys Lab. Serv., Inc., 664 N.E.2d 1088, 1094 (Ill. Ct. App. 1996), is also helpful in navigating this procedural puzzle. In Kennedy, the Illinois appellate court noted that Supreme Court Rule 277(h) allows the court to sanction a person who fails to comply with a turn over order. Id. at 371. A finding of contempt is not a necessary predicate before sanctioning a party for failure to comply with a turn over order. Id. Ultimately, the trial court has discretion to fashion the appropriate sanction, and in Kennedy, the court held that it was not an abuse of discretion to enter a money judgment against the transferee for the entire amount of the plaintiffs' judgment. Id.
In light of the foregoing, the first step in the process is to declare the two fraudulent transfers at issue (up to $64,065.75) void and order Ms. Beth Johnes to turn over $64,065.75 to Plaintiffs by a date certain. If Ms. Johnes fails to comply with the Court's order, then the Court should enter judgment against Beth Johnes personally and in favor of Plaintiffs in the amount of $64,065.75 as a sanction pursuant to Illinois Supreme Court Rule 277(h). If these steps prove ineffective in collecting on Plaintiffs' judgment, the Court may consider allowing the Plaintiffs to levy execution on any tangible assets held by Quality Assured (likely none) or Ms. Johnes to then sell to try and satisfy the judgment. 740 Ill. Comp. Stat. § 160/8(b).
RECOMMENDATIONS
For the foregoing reasons, it is RECOMMENDED that Plaintiffs' motion to avoid fraudulent conveyances (Docs. 68, 75) be GRANTED IN PART. The Court should declare the fraudulent transfers up to the amount owed on the judgment ($64,065.75) VOID and ORDER Ms. Beth Johnes to TURN OVER $64,065.75 to Plaintiffs by a date certain (to be determined by the Court if it adopts the undersigned's recommendation).
The Court should DEFER the entry of judgment against Ms. Johnes, personally, until the Court determines whether Ms. Johnes will comply with the Court's Turn Over Order. If Ms. Johnes fails to comply with the Turn Over Order, the Court should enter judgment against her personally, and in favor of Plaintiffs as a sanction.
Notice Regarding Objections
Pursuant to 28 U.S.C. § 636(b)(1) and SDIL-LR 73.1(b), the parties shall have fourteen (14) days after service of this Report and Recommendation to file written objection thereto. The failure to file a timely objection may result in the waiver of the right to challenge this Report and Recommendation before either the District Court or the Court of Appeals. Snyder v. Nolen, 380 F.3d 279, 284 (7th Cir. 2004); United States v. Hernandez-Rivas, 348 F.3d 595, 598 (7th Cir. 2003).