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holding that there is no absolute combination or number of badges required to state a claim
Summary of this case from Mamacita, Inc. v. Colborne Acquisition Co.Opinion
No. 98 C 7909
February 10, 2000
MEMORANDUM OPINION
This matter comes before the Court on Plaintiff's motion for leave to file an amended Count XII and on the motion to intervene of a third party, the Springs-Illinois, Inc. (the "Springs"). For the reasons set forth below, the Court grants Plaintiff's motion for leave to file an amended Count XII and grants the Springs' motion to intervene.
BACKGROUND
This Court has set forth the factual background of this case at length in previous decisions in this matter. See Shapo v. Engle, No. 98 C 7909, 1999 WL 446853 (N.D. Ill. June 11, 1999) (Kocoras, J.) (denying certain Defendants' motion for advancement of expenses and costs); Shapo v. Engle, No. 98 C 7909, 1999 WL 528528 (N.D. Ill. July 13, 1999) (Kocoras, J.) (dismissing Plaintiff's Second Amended Complaint); Shapo v. Engle, No. 98 C 7909 (N.D. Ill. Nov. 10, 1999). For purposes of this motion, the Court assumes familiarity with those facts and will only provide a brief summary of the relevant facts.
This Court previously dismissed part of Count XII in Plaintiff Liquidator Nathaniel Shapo's ("Shapo" or the "Liquidator") third amended complaint. See Shapo, 1999 WL 1045086, at *21. Count XII alleged violations of the Uniform Fraudulent Transfer Act ("UFTA"), 740 ILCS 160/1 et seq. Specifically, the Liquidator claimed that certain transactions violated § 5(a)(1) of the UFTA, which provides that a transfer 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. See id. at § 5(a)(1). After considering what would constitute a "transfer" under the UFTA, the Court dismissed that part of Count XII which was based on the issuance of additional common stock by certain subsidiaries, finding that such an action did not allege a "transfer." See Shapo, 1999 WL 1045086, at *21.
In addition, the Court dismissed the claim regarding the "Spring Lots" transactions from the third amended complaint's RICO claims because it failed to meet the requirements of Federal Rules of Civil Procedure 8(a) and 9(b). The Springs was and continues to be a wholly-owned subsidiary of the Insurance Companies. The Springs' principal asset was a resort golf course development in Spring Green, Wisconsin, which consisted of a 27-hole golf course, pro-shop, hotel, restaurant, and various other adjoining lots. In June 1999, the Springs sold substantially all of its assets for cash. Representatives of the Liquidator control the proceeds from this sale along with other cash assets.
Presently, Shapo moves for leave to amend Count XII to include allegations that transactions involving the Spring Lots and Springs receivables (the "Springs lots/receivables"), the stripping of assets of Coronet Financial, and the transfer of control of certain subsidiaries constituted transfers that violated the UFTA. In addition, the Springs moves to intervene in this action under Rule 24(b).
LEGAL STANDARD
In general, leave to amend a complaint under Rule 15 of the Federal Rules of Civil Procedure should be "freely given when justice so requires." Fed.R.Civ.P. 15(a); see also McGee v. Kerr-Hickman Chrysler Plymouth, Inc., 93 F.3d 380, 385 (7th Cir. 1996). However, leave to amend is inappropriate where there is undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, or futility of the amendment. See General Electric Capital Corp. v Lease Resolution Corp., 128 F.3d 1074, 1085 (7th Cir. 1997), citing Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); see also Orix Credit Alliance. Inc. v. Taylor Machine Works. Inc., 125 F.3d 468, 480 (7th Cir. 1997), citing Ferguson v. Roberts, 11 F.3d 696, 706 (7th Cir. 1993). Leave to amend is also properly denied when the proposed amendment seeks to assert claims against new defendants which are barred by the applicable statute of limitations and which are not found to "relate back" to the filing of the original complaint. See Worthington v. Wilson, 8 F.3d 1253, 1256 (7th Cir. 1993). The decision whether to allow an amendment to the pleadings rests within the sound discretion of the trial court. See Jones v. Hamelman, 869 F.2d 1023, 1026 (7th Cir. 1989).
Federal Rule of Civil Procedure 24(b) provides for permissive intervention. A court may allow permissive intervention "when an applicant's claim or defense and the main action have a question of law or fact in common." Fed.R.Civ.Pro. 24(b)(2). It is wholly within the court's discretion whether to grant a timely filed motion to intervene.
DISCUSSION
I. Motion to Amend
Defendants argue that Shapo's amendment would both be futile and barred by the applicable statute of limitations. In general, this case essentially alleges the existence of a complicated RICO scheme involving several individuals and entities in a wide variety of transactions to allegedly defraud and siphon off the assets of three Insurance Companies of which Shapo is now the Liquidator. This litigation is still in the pleading stage. It is not presently clear that Shapo's proposed amendment is either futile or untimely. In order for the Court to give Shapo's claims proper consideration, a full exposition of facts is necessary. At this stage, given the complex nature of this case, it would be prudent for the Court to consider the whole of Shapo's viable allegations rather than mete out small portions, which may ultimately prove to be part of the whole.
An amendment is futile "when it fails to state a valid theory of liability or could not withstand a motion to dismiss." Bower v. Jones, 978 F.2d 1004, 1008 (7th Cir. 1992). Defendants contend that Shapo's allegations regarding the transfer of certain Springs receivables by Coronet Financial do not allege violations of the UFTA. Further, Defendants argue that Shapo's amended allegation that the Insurance Companies were defrauded by the transfer of new stock by certain subsidiaries fails to be any different from the allegation this Court previously dismissed, which claimed that these subsidiaries defrauded the Insurance Companies by issuing new stock.
Specifically, Defendants argue that Shapo fails to adequately allege that the transfer of Spring receivables was committed with the "intent to hinder, delay, or defraud any creditor of the debtor" as required by § 5(a)(1) of the UFTA. See 740 ILCS 160/5(a)(1). A creditor must allege an actual intent to defraud under § 5(a) of the UFTA, but may demonstrate the requisite intent by pointing to certain "badges of fraud" enumerated in § 5(b) of the UFTA. See Mussa v. Mussa, 215 B.R. 158, 167-68 (N.D. Ill. 1997). Defendants maintain that Shapo has not alleged a sufficient number of the eleven enumerated badges of fraud. The badges of fraud look to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(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;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(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; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 740 ILCS 160/5(b).
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. See Steel Co. v. Morgan Marshall Industries. Inc., 278 Ill. App.3d 241, 251, 662 N.E.2d 595, 602, 214 Ill. Dec. 1029, 1036 (1st Dist. 1996); Spatz v. Spatz, 222 B.R. 157, 168 (N.D. Ill. 1998). Further, there is no one determining factor to a finding of fraud and the court may also consider other evidence.See Spatz, 222 B.R. at 168 (citations omitted).
Presently, Shapo's allegations seem to assert enough of the badges of fraud such that it is plausible that an inference of fraud could arise. See Steel Co., 278 Ill. App.3d at 251, 662 N.E.2d at 602. Shapo has alleged that Coronet Financial transferred the Springs receivables to Sunstates Equities, Sunstates Financial, Sew Simple, and Acton/Sunstates, which as "affiliates" of the Insurance Companies could qualify as "insiders." See 740 ILCS 160/2. Further, given the alleged nature of the scheme, it is possible that the debtor retained possession or control of the property transferred. Plaintiff alleges that these affiliates transferred some of the Springs receivables for Springs lots. Moreover, a threat of suit loomed over at least some of the Defendants. It is also possible that the value of the consideration received by the debtor was not reasonably equivalent to the value of the Springs receivables transferred, and it seems that Coronet Financial was insolvent or became insolvent shortly after the transfer of the Springs receivables. Although Defendants take issue with whether Shapo has adequately established the existence of several of the badges of fraud, the Court will not now engage in an analysis of each of the badges because it would require a premature analysis of the facts. Thus, the Court will allow Shapo's amendment regarding the Springs lots/receivables.
Defendants contend that Shapo's amended allegation, which claims that the transfers of new stock by certain subsidiaries violated the UFTA, is identical to the claim this Court previously dismissed. Shapo's previous Count XII asserted that certain subsidiaries' issuance of additional common stock violated § 5(a)(1) of the UFTA. In dismissing this claim, the Court held that the issuance of additional stock could not be viewed as a transfer under the UFTA. See Shapo, 1999 WL 1045086, at *21. In the current motion, the Court recognizes that Shapo's amended claim virtually alleges the same violation, but this time claims that the "transfer" of new stock, rather than the issuance of additional stock, constitutes a violation of § 5(a)(1). After reconsidering the Court's prior decision and the purpose of the UFTA, the Court finds that it is necessary to view the issuance or transfer of new stock in the context of the overall circumstances and facts in order to determine whether a transfer in violation of the UFTA occurred. Under the UFTA, a "transfer" includes "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." 740 ILCS 160/2(1). While the Court continues to recognize that the subsidiaries' issuance of additional stock did not cause the Insurance Companies to part with or lose an interest in the shares they then owned, the facts of the overall scheme may reveal that the resulting reduction of the Insurance Companies' ownership interest in the subsidiaries was itself a transfer under the UFTA. Rather than focus only on the issuance of new stock, it may be necessary to evaluate the overall context and effect of the transaction. The Court needs to consider the facts and circumstances and all appropriate inferences drawn therefrom in order to determine how the reduction in the Insurance Companies' overall ownership interest in the subsidiaries affected the Insurance Companies' rights or interests in an asset they held. As such, the Court will allow Shapo's amendment to include the claim regarding certain subsidiaries issuance or transfer of new stock.
Defendants also maintain that Shapo's amended claims made under § 6(b) are time barred. A court should deny leave to amend if the proposed amendment seeks to raise untimely claims which do not "relate back" to the filing of the original complaint. See Worthington, 8 F.3d at 1256. If the amended pleading alleges a claim that "arose out of the conduct, transaction, or occurrence" state in the original complaint, it relates back to the date of the original pleading. See Federal Deposit Ins. Corp. v. Knostman, 966 F.2d 1133, 1138 (7th Cir. 1992), quoting Fed.R.Civ.P. 15(c). For a claim to "relate back" to the time of the original complaint, it must meet four requirements:
(1) the basic claim must have arisen out of the conduct set forth in the original pleading; (2) the party to be brought in must have received such notice that it will not be prejudiced in maintaining its defense; (3) that party must or should have known that, but for a mistake concerning identity the action would have been brought against it; and (4) the second and third requirements must have been fulfilled within the proscribed limitations period. See Schiavone v. Fortune, 477 U.S. 21, 29, 106 S.Ct. 2379, 2384, 91 L.Ed.2d 18 (1986).
Under these considerations, Shapo's § 6(b) UFTA claim would relate back to the date of the filing of the original complaint. Shapo's § 6(b) claims involve the same transactions alleged in its original complaint against the same Defendants. Further, Shapo's original complaint alleged claims under the UFTA, not all of which were dismissed, and thus, Defendants should not be prejudiced in having to defend a similar claim thereunder. Thus, Shapo's § 6(b) claim would relate back to the original complaint.
Consequently, the Court grants Shapo's motion for leave to file an amended Count XII.
II. Motion to Intervene
Defendants oppose the Springs' motion to intervene, arguing that the Springs' claim and the main action do not share a common question of law or fact; that the Springs' claim is untimely; and that venue for the Springs' claim is not proper in the Northern District of Illinois. Nevertheless, because the Court finds that the Springs meets the requirements for permissive intervention, the Court grants the Springs motion to intervene.
Federal Rule of Civil Procedure 24(b) provides that upon timely application a court may allow anyone to intervene in an action "when an applicant's claim or defense and the main action have a question of law or fact in common. . . . In exercising its discretion the court shall consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties." Fed.R.Civ.P. 24(b). In order to justify intervention, the intervenor must show that (1) there is a common question of law or fact, and (2) there exists an independent basis of jurisdiction over the intervenor's claim or defense. See Security Ins. Co. of Hartford v. Schipporeit, 69 F.3d 1377, 1381 (7th Cir. 1995).
In arguing that there exists no common question of law or fact between the main action and the Springs' claim, Defendants advocate a narrow view of the facts, which would evaluate each part of the alleged overall scheme in isolation. Defendants split hairs over the facts involved and seek to separate out a narrow set over which Defendants argue the facts of the Springs' claim do not directly overlap. Given the nature of the main action, this approach would be unnatural. The transactions and relationships in the alleged scheme are inextricably intertwined and would require a strained interpretation in order to see them as discrete actions. The Springs' claim involves the use of its Springs receivables to transfer a disproportionate amount of its Springs lots. The facts in the Springs' claim involve facts that are part of the alleged overall scheme in the main action to defraud the Insurance Companies. As such, the Springs' claim meets the first requirement of permissive intervention.
Further, the court has independent diversity jurisdiction over the Springs' claim. Defendants do not contend that the Springs' claim does not fulfill the requirements of diversity jurisdiction. Rather, Defendants argue that venue for the Springs' claim is not proper in the Northern District of Illinois. This argument fails. A court determines venue at the time a plaintiff initiates a lawsuit, not at some later date. See Andersen v. Sportmart. Inc., 57 F. Supp.2d 651, 664, n.h (N.D. Ind. 1999), citing Bredberg v. Long, 778 F.2d 1285, 1288 (8th Cir. 1985). Thus, where venue is proper for the original claims by a plaintiff against a defendant and other claims are later brought in through devices such as counterclaims, cross-claims, impleader, interpleader, and intervention, and asserted against parties to the original suit, no venue objection is available.See 15 CHARLES ALAN WRIGHT ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 3808 (2d ed. 1986). Because the main action has already satisfied the venue statutes, the subsequent claims need not. See id. In the present case, Plaintiff Shapo has already satisfied the venue statute in the main action. Thus, the Springs, in seeking to intervene and allege a claim against parties already part of the original complaint, need not independently satisfy the venue statute. See id. Consequently, Defendants' venue objection is without force.
Finally, Defendants argue that the Springs' claim is untimely. Whether an application to intervene is timely is left to the discretion of the court based on the totality of the circumstances. See In re Waste Management. Inc. Securities Litigation, No. 97 C 7709, 1999 WL 967012, at *2 (N.D. Ill. Oct. 18, 1999). The clock does not necessarily start ticking for potential intervenors the moment the suit is filed or the moment they learn of the suit's existence. Instead, a court determines timeliness from the time the potential intervenors learn that their interest might be impaired. See Reich v. ABC/York-Estes Corp., 64 F.3d 316, 321 (7th Cir. 1995), citing United States v. City of Chicago, 870 F.3d 1256, 1263 (7th Cir. 1989). This did not occur until the Court dismissed the Springs lots transactions in November 1999. At this point, the Springs should have realized that its interests might no longer be adequately represented. The Springs then moved to intervene on December 8, 1999. This one month delay was not unreasonable.
Moreover, the original parties to this litigation would suffer little prejudice if the Springs intervened since the original parties already need to address facts and issues directly connected to claims which the Springs seeks to raise. Moreover, it would be more efficient to address the Spring claims in this litigation since the Court is already addressing a myriad of other similar transactions that are part of the alleged scheme to defraud the Insurance Companies, than to have the Springs bring this one part of the scheme separately in a different lawsuit.
CONCLUSION
For the reasons set forth above, the Court grants Plaintiff's motion for leave to file an amended Count XII and grants the Springs' motion to intervene.