People ex rel. Department of Human Rights v. Oakridge Healthcare Center, LLC , 2020 IL 124753 ( 2020 )

2020 IL 124753
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 124753)
THE PEOPLE OF THE STATE OF ILLINOIS ex rel. THE DEPARTMENT
OF HUMAN RIGHTS, Appellee, v. OAKRIDGE HEALTHCARE
CENTER, LLC, Appellant.
Opinion filed September 24, 2020.
JUSTICE KILBRIDE delivered the judgment of the court, with opinion.
Chief Justice Anne M. Burke and Justices Garman, Karmeier, Theis, and
Michael J. Burke concurred in the judgment and opinion.
Justice Neville took no part in the decision.
OPINION
¶1 In April 2014, a judgment was entered against Oakridge Nursing &
Rehabilitation Center, LLC (Oakridge Rehab), for its discriminatory conduct
against a former employee, in violation of the Illinois Human Rights Act (Act) (775
ILCS 5/1-101 et seq. (West 2010)). Oakridge Rehab had already gone out of
business, however, having transferred the assets and operation of its nursing home
facility to Oakridge Healthcare Center, LLC (Oakridge Healthcare), on January 1,
2012. Unable to enforce the judgment against Oakridge Rehab, the State instituted
proceedings to enforce the Oakridge Rehab judgment against Oakridge Healthcare.
Oakridge Healthcare successfully moved for summary judgment, alleging it could
not be held liable for the judgment under Illinois’s common-law rule. On appeal, a
majority of the appellate court reversed and agreed to adopt the federal successor
liability doctrine. We reverse that judgment and decline to adopt the federal
successor liability doctrine in cases arising under the Act.
¶2 I. BACKGROUND
¶3 In February 2011, Jane Holloway filed a charge pursuant to the Act with the
Illinois Department of Human Rights (Department), alleging age and disability
discrimination that violated the Act at the long-term care facility where she was
previously employed by Oakridge Rehab; Oakridge Rehab received notice of the
charge that spring. On January 1, 2012, Oakridge Rehab; its landlord, Oakridge
Nursing and Rehab Properties, LLC (Oakridge Properties); and a newly formed
entity, Oakridge Healthcare, entered into a termination agreement ending the lease
between Oakridge Rehab and Oakridge Properties and making Oakridge
Healthcare the new lessee. On the same date, Oakridge Rehab transferred
substantially all its corporate assets to Oakridge Healthcare pursuant to an
“Operations Transfer Agreement” that also declared Oakridge Healthcare was not
a successor or successor-in-interest to the transferor and that Oakridge Healthcare
was neither liable for the transferor’s obligations nor subject to any judgment for
its liabilities. Oakridge Rehab then immediately ceased operations, and Oakridge
Healthcare took over the nursing home under a new name. After concluding its
investigation into Holloway’s allegations, the Department filed a civil rights
complaint on her behalf with the Illinois Human Rights Commission (Commission)
in September 2012. The complaint sought relief against only Oakridge Rehab and
included no claim asserting personal liability.
¶4 On September 17, 2013, an administrative law judge issued a recommendation
that Holloway be awarded $30,880 in back pay, plus prejudgment interest. The
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Commission adopted the recommended order in April 2014 and granted a motion
seeking to enforce the order against Oakridge Rehab, the sole respondent, a few
months later. Oakridge Rehab, however, was involuntarily dissolved in November
2014. When Oakridge Rehab failed to satisfy Holloway’s judgment, the State of
Illinois filed a complaint in the circuit court of Cook County against both Oakridge
Rehab and Oakridge Healthcare, its purported successor, to enforce compliance,
but again no personal liability claim was made.
¶5 Oakridge Healthcare filed a motion for summary judgment, arguing that it could
not be held liable for Oakridge Rehab’s liabilities as a matter of law under the
common-law doctrine of corporate successor nonliability when no exception to that
general rule applied. After the State asserted its inability to respond in the absence
of any discovery, discovery commenced.
¶6 The State deposed Helen Lacek, who was a member of Oakridge Rehab as well
as its manager prior to the transfer of its operations to Oakridge Healthcare. Helen
testified that Oakridge Rehab began experiencing dire financial trouble when the
State of Illinois stopped making payments on invoices. Oakridge Rehab’s financial
problems quickly escalated until it was no longer able to pay its rent. In June 2011,
Oakridge Rehab provided the required six-month notice to its landlord, Oakridge
Properties, stating its intent to terminate the lease due to its financial difficulties.
While several people visited Oakridge Rehab prior to its transfer to Oakridge
Healthcare, none of them expressed any interest in taking over the facility
operations.
¶7 The State also deposed Oakridge Properties manager Elisha Atkin (Eli), who
founded Oakridge Healthcare in November or December 2011. Eli is a 50%
member of Oakridge Healthcare, with the other 50% member being his sister-in-
law. Eli is also involved as a member or manager in a number of other long-term
care facilities or properties, along with several of his immediate and extended
family members. One of those facilities is McAllister Properties, LLC, whose
members are Eli’s wife, his brother, Helen Lacek, and Ability Insurance; Eli
manages that business. Helen and Eli were also two of the members of McAllister
Nursing and Rehab Center, LLC (McAllister Rehab), another long-term care
facility. Helen serves as the administrator of McAllister Rehab and has also been a
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nursing consultant at some of the other facilities connected to Eli, but she has not
provided those services at Oakridge Healthcare.
¶8 Eli stated that negotiations about Oakridge Healthcare becoming the new lessee
of the nursing home facility began in November 2011. Its new lease started on
January 1, 2012, when the lease between Oakridge Properties and Oakridge Rehab
ended. Oakridge Rehab did not notify Oakridge Healthcare of any pending claims
filed by past or present employees prior to the transfer of the nursing home
operation. In addition, Oakridge Healthcare did not look at any of Oakridge
Rehab’s liabilities prior to the transfer because it was not assuming any of them
under the terms of the transfer agreement.
¶9 In its response to Oakridge Healthcare’s motion for summary judgment, the
State contended that the court should apply the federal doctrine of successor
liability instead of the Illinois general nonliability rule in this case. The State argued
that the federal doctrine should be applicable because this case involved
employment discrimination and “Illinois courts look to standards applied to federal
claims brought under federal employment discrimination laws in analyzing” cases
alleging violations of the Act. 2019 IL App (1st) 170806, ¶ 20. Before it entered
summary judgment in favor of Oakridge Healthcare, the trial court made several
findings, concluding that (1) Oakridge Healthcare was not a successor in liability
to Oakridge Rehab, (2) the State did not show that Oakridge Healthcare was a mere
continuation of Oakridge Rehab, and (3) Illinois’s long reliance on the common-
law successor nonliability rule precluded adoption of the federal successor liability
doctrine.
¶ 10 The State appealed, and the appellate court reversed, remanding the cause for
further proceedings. A majority of the court found that “the State presented
sufficient evidence for a reasonable trier of fact to find that the asset transfer was
for the fraudulent purpose of escaping Holloway’s judgment.” 2019 IL App (1st)
170806, ¶ 42. The majority cited evidence that Holloway’s discrimination charge
was filed before the transfer and Oakridge Rehab transferred nearly all the
corporation’s assets to Oakridge Healthcare without an appraisal or payment,
leaving it unable to pay Holloway’s subsequent judgment. 2019 IL App (1st)
170806, ¶¶ 35-38. The appellate majority also held it could apply the federal
successor liability doctrine to cases involving violations of the Act because this
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court “has not specifically addressed a successor corporation’s liability for
employment discrimination.” 2019 IL App (1st) 170806, ¶ 51. Applying the version
of the federal successor liability test from Equal Employment Opportunity Comm’n
v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974), later
articulated in Musikiwamba v. ESSI, Inc., 760 F.2d 740, 750-53 (7th Cir. 1985), the
appellate majority found a number of relevant factors were met here. First,
Oakridge Rehab and Helen Lacek knew about Holloway’s claim before the assets
transfer. Second, Oakridge was “unable to provide Holloway relief” due to its
serious financial troubles. Third, Oakridge Healthcare continued to operate the
facility as a nursing home after the asset transfer by “using the same workforce and
at the same location,” showing a continuity of business. For those reasons, the
appellate court concluded that “Holloway’s judgment may be imposed on Oakridge
Healthcare as Oakridge [Rehab’s] successor” under the federal doctrine. 2019 IL
App (1st) 170806, ¶ 58.
¶ 11 Dissenting from the majority’s reasoning, Justice Mason asserted that its
reliance on the fraudulent transfer exception was improper because the record
showed the State abandoned that claim when it made the “strategic decision” to
“unequivocal[ly] disavow[ ]” any trial argument on it. 2019 IL App (1st) 170806,
¶ 74 (Mason, J., dissenting). Even if the merits of the argument were considered,
the majority’s conclusion was unsupported because the State offered “no evidence”
that Oakridge Rehab’s pretransfer financial problems were “contrived.” In the
dissent’s view, Oakridge Rehab’s “only viable choice was to conduct a ‘fire sale’
of its assets, which it did” due to serious financial distress. The dissent found “no
‘badge of fraud’ in this scenario.” 2019 IL App (1st) 170806, ¶ 85.
¶ 12 In addition, the dissent explained that the majority’s application of the federal
successor liability doctrine in cases addressing Act violations conflicts with long-
standing Illinois precedent, including this court’s decision in Vernon v. Schuster,
179 Ill. 2d 338, 344-45 (1997). There, the dissent noted, we recognized only four
exceptions to the common-law rule of successor nonliability, contrary to the federal
doctrine. 2019 IL App (1st) 170806, ¶¶ 68, 80. As evidence of the majority’s
overreach, the dissent cited a heading in the majority opinion that read “ ‘Illinois
Courts Shall Recognize Successor Liability for Violation of the Illinois Rights
Act.’ ” 2019 IL App (1st) 170806, ¶ 80 (quoting 2019 IL App (1st) 170806, ¶ 49
(majority opinion)). According to the dissent, “the majority modifie[d] Vernon by
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creating a new exception to be applied in employment discrimination cases,” an act
that “is beyond [the appellate court’s] power as an intermediate court of review.”
2019 IL App (1st) 170806, ¶ 80.
¶ 13 Oakridge Healthcare filed a petition for leave to appeal in this court. We
allowed its petition pursuant to Illinois Supreme Court Rule 315 (eff. July 1, 2018).
¶ 14 II. ANALYSIS
¶ 15 We are asked to decide two issues in this appeal: (1) whether we should adopt
the federal corporate successor liability doctrine in cases involving discriminatory
conduct that violates the Act (775 ILCS 5/1-101 et seq. (West 2010)) and
(2) whether the trial court properly granted Oakridge Healthcare’s motion for
summary judgment. We review both issues de novo. Blount v. Stroud, 232 Ill. 2d
302, 308 (2009) (stating that questions of law are reviewed de novo); Seymour v.
Collins, 2015 IL 118432, ¶ 42 (stating that rulings on motions for summary
judgment are reviewed de novo).
¶ 16 A. Applicability of the Common-Law Nonliability Rule
¶ 17 Because the resolution of whether we should adopt the federal corporate
successor liability doctrine in cases where the underlying conduct violates the Act
directs the rest of our analysis, we address it first. In John Wiley & Sons, Inc. v.
Livingston, 376 U.S. 543 (1964), the United States Supreme Court invoked federal
Labor Management Relations Act (Labor Act) (29 U.S.C. § 185 (1958)) principles
to support its application of the corporate successor liability doctrine. The Court
held that the successor company in a corporate merger could be bound by the
arbitration provisions in its predecessor’s collective bargaining agreement because
it was enforceable under the Labor Act. John Wiley, 376 U.S. at 550.
¶ 18 Use of the successor liability doctrine in federal labor law cases was further
developed in Golden State Bottling Co. v. National Labor Relations Board, 414
U.S. 168 (1973). There, the Court agreed with the National Labor Relations Board
that a corporate successor that bought and continued another business, without
substantial change and with notice of its predecessor’s National Labor Relations
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Act violations, was required to follow the terms of labor board orders entered to
remedy those violations. Golden State, 414 U.S. at 171-72. The Court explained
that the additional liability risk taken on by the successor corporation could be fairly
accommodated during negotiations on the business’s purchase price or by the
insertion of an indemnity clause into the sales agreement that protected the buyer.
Golden State, 414 U.S. at 185.
¶ 19 Federal appellate courts subsequently expanded the federal successor liability
doctrine to employment discrimination cases filed under Title VII. In MacMillan
Bloedel Containers, Inc., 503 F.2d at 1090, the Sixth Circuit held the Supreme
Court’s rationale applied equally to cases involving unfair employment practices
and that successor liability should be determined on a case-by-case basis. To aid in
the inquiry, the Sixth Circuit identified nine factors: (1) whether the successor
company had notice of the alleged violation; (2) the predecessor’s ability to provide
relief; (3) whether the two businesses had a “substantial continuity” of operations;
(4) whether the new company uses the same facility; (5) whether it “uses the same
or substantially the same work force”; (6) whether it “uses the same or substantially
the same supervisory personnel”; (7) whether the jobs are the same and continue
“under substantially the same working conditions”; (8) whether it uses the same
equipment, machinery, and production methods; and (9) whether it produces the
same product. MacMillan Bloedel Containers, Inc., 503 F.2d at 1094. The Seventh
Circuit, in turn, narrowed the analysis down to just five factors: whether (1) the
transferee had notice of the legal challenge; (2) the transferor could have given the
requested relief before the sale or dissolution; (3) the transferor could have given
the requested relief after the sale or dissolution; (4) the transferee can give the
requested relief; and (5) a continuity of operations and work force existed between
the transferor and the transferee. Equal Employment Opportunity Comm’n v.
Northern Star Hospitality, Inc., 777 F.3d 898, 902 (7th Cir. 2015) (citing Teed v.
Thomas & Betts Power Solutions, L.L.C., 711 F.3d 763, 765-66 (7th Cir. 2013)).
¶ 20 Eschewing the federal doctrine, however, Illinois, along with the majority of
American jurisdictions, has long applied the common-law rule that a corporate
successor is not subject to any debts or obligations incurred by the entity that
previously operated the business. That principle is known as the “rule of successor
corporate nonliability.” Vernon, 179 Ill. 2d at 344-45. It was “ ‘developed as a
response to the need to protect bonafide purchasers from unassumed liability’
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(Tucker v. Paxson Machine Co., 645 F.2d 620, 623 (8th Cir. 1981)) and was
‘designed to maximize the fluidity of corporate assets’ (Upholsterers’ International
Union Pension Fund v. Artistic Furniture, 920 F.2d 1323, 1325 (7th Cir. 1990)).”
Vernon, 179 Ill. 2d at 345. Recognizing that the rule’s application may preclude a
plaintiff from receiving court-ordered relief if the original business is dissolved or
lacks sufficient assets, this court adopted four exceptions: (1) the parties had an
express or implied agreement that the transferee would assume the transferor’s
liabilities, (2) the transaction amounts to a merger or consolidation or a de facto
merger of the transferor and the transferee, (3) the transferee is a mere continuation
or reincarnation of the transferor, or (4) the transaction was entered into for the
fraudulent purpose of avoiding liability for the transferor’s obligations. Most
American courts have also recognized the same four exceptions. Vernon, 179 Ill.
2d at 345.
¶ 21 Nonetheless, the State asserts that those exceptions are inadequate to serve the
important interests underlying the Act’s antidiscrimination provisions. It suggests,
instead, that we adopt the federal successor liability doctrine in cases arising out of
the Act because it permits the relevant interests to be balanced on a case-by-case
basis. Individualized balancing, however, necessarily undercuts the concern
underlying the creation of our current common-law nonliability rule: imposing
successor liability harms bona fide corporate buyers by creating undue uncertainty.
In the more than two decades since we decided Vernon, bona fide corporate buyers
in Illinois have undoubtedly come to rely on that rule. Any shift away from our
long-standing rule must be supported by special justification sufficient to excuse
the harm that will necessarily flow to the many successor businesses that have relied
on it. See Coleman v. East Joliet Fire Protection District, 2016 IL 117952, ¶ 53
(quoting our explanation in People v. Sharpe, 216 Ill. 2d 481, 520 (2005), that “ ‘we
have consistently held that any departure from stare decisis must be specially
justified’ ” (quoting Vitro v. Mihelcic, 209 Ill. 2d 76, 82 (2004))). We may not
depart from stare decisis simply because we could possibly reach a different
conclusion now if we were to decide the matter anew. To be consistent with the
principle of stare decisis, overturning the common-law rule we adopted in Vernon
requires a clear showing of good cause or some other compelling rationale. See
Coleman, 2016 IL 117952, ¶ 53 (citing Sharpe, 216 Ill. 2d at 520).
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¶ 22 While not disputing those standards, the State contends that Oakridge
Healthcare provides no persuasive reason not to adopt the federal successor liability
doctrine. That contention, however, ignores the undeniable fact that this court
expressly adopted the common-law nonliability rule, not the federal rule, in Vernon.
In response, the State relies on its claim that Vernon does not control the instant
case because it did not involve workplace discrimination. The State maintains that
the federal doctrine is better suited for use in cases involving Act violations because
it arose out of labor law, a context that is more similar to the employment
discrimination claim underlying this litigation.
¶ 23 Although it is true that the Court’s decision in John Wiley, 376 U.S. 543, held
the corporate successor liability doctrine could bind the successor company in the
corporate merger to the arbitration provisions, that decision had two critical
considerations missing from the instant appeal. First, the Court in John Wiley
explicitly recognized that the predecessor and successor companies had entered into
a corporate merger. Here, the State does not attempt to claim that Oakridge
Healthcare and Oakridge Rehab merged operations such that both continued to exist
as a single, newly established legal entity. In fact, the State’s argument relies
extensively on Oakridge Rehab’s continuing existence as a separate entity after
Oakridge Healthcare took over the nursing home business. Indeed, it was Oakridge
Rehab’s independent inability to pay the judgment entered against it due to its
financial failure and ultimate dissolution that led to the State filing the instant action
against its successor, Oakridge Healthcare. Here, the predecessor and successor
corporations have absolutely no continuing relationship, while in John Wiley the
two corporations merged to become a single entity. The vastly more attenuated
relationship between Oakridge Rehab and Oakridge Healthcare does not, by itself,
justify the application of the federal rule used in John Wiley. Indeed, if Oakridge
Rehab and Oakridge Healthcare had entered into a corporate merger, the successor
entity would, in fact, have been subject to liability under the second exception to
our common-law rule of general successor nonliability stated in Vernon. The
second Vernon exception allows for the imposition of liability “where the
transaction amounts to a consolidation or merger of the purchaser or seller
corporation.” Vernon, 179 Ill. 2d at 345. The availability of that exception provides
a sufficient basis to reject the State’s suggestion that this court apply the rule from
John Wiley since that exception is inapplicable under the facts of this case.
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¶ 24 We note, however, that another rationale also exists for rejecting the State’s
assertion that the federal rule is better suited to cases involving Act violations than
the Vernon rule. In John Wiley, the Supreme Court relied heavily on the distinctive
considerations underlying the federal Labor Act’s handling of collective bargaining
agreements—considerations that are wholly inapplicable here. As John Wiley
explained, the Court’s decision was based on the “impressive [national labor]
policy considerations favoring arbitration” (John Wiley, 376 U.S. at 550), a subject
that is irrelevant here. Even more critically, the Court expressly recognized the
unique policies at stake in collective bargaining agreements that significantly
differentiate them from ordinary contracts.
“The objectives of national labor policy, reflected in established principles of
federal law, require that the rightful prerogative of owners independently to
rearrange their businesses and even eliminate themselves as employers be
balanced by some protection to the employees from a sudden change in the
employment relationship. ***
*** While the principles of law governing ordinary contracts would not
bind to a contract an unconsenting successor to a contracting party, a collective
bargaining agreement is not an ordinary contract. ‘. . . [I]t is a generalized code
to govern a myriad of cases which the draftsmen cannot wholly anticipate. . . .
The collective agreement covers the whole employment relationship. It calls
into being a new common law—the common law of a particular industry or of
a particular plant.’ Warrior & Gulf, [363 U.S.] at 578-579 ***.” (Emphases
added.) John Wiley, 376 U.S. at 549-50.
¶ 25 None of those same distinctive considerations are at issue here, however, further
undermining the State’s claim that the federal doctrine is better suited to resolve the
instant case than is Vernon. We are not persuaded that the State’s argument
provides a sufficiently clear showing of good cause or other compelling rationale
to merit overturning our adoption of the successor corporate nonliability doctrine
as it was adopted in Vernon.
¶ 26 To bolster its argument that this court should reject our common-law doctrine
and adopt the federal one, the State contends that, if Illinois fails to adopt the federal
successor liability doctrine, the outcome in factually similar cases could depend on
whether the case was filed in state or federal court. For example, a case involving
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an Act violation filed in Illinois could result in the corporate defendant being
absolved of any liability while a factually similar case alleging a federal violation
that was filed in federal court could produce a substantial judgment for the
complainant. The State asserts that the difference in outcomes based on whether the
court applied the Illinois common-law rule or the federal doctrine is not consistent
with state and federal courts possessing overlapping jurisdiction over employment
discrimination claims.
¶ 27 The potential for differences in outcomes between similar federal and state
employment discrimination cases falls far short of providing a compelling reason
to abandon the Vernon standard for the federal doctrine. The two systems have
many distinctive features that can affect the outcome of a case aside from the use
of differing standards for imposing liability on a corporate successor. As we have
discussed, the federal doctrine is deeply rooted in the unique underpinnings of
federal labor law and collective bargaining policies, while our common-law
doctrine has far broader base considerations. We, along with the vast majority of
other states, have weighed the relevant factors and determined that the four
exceptions to the successor nonliability rule are sufficient to provide a safety valve
for unjust uses of the rule in appropriate cases. Vernon, 179 Ill. 2d at 345. The mere
possibility that a particular employment discrimination case could have a different
outcome if brought in federal court is not sufficiently compelling to overturn our
decades-old common-law rule.
¶ 28 The State next asserts that several states with antidiscrimination statutes similar
to the Illinois Act have also adopted the federal formulation. See In re MTA
Trading, Inc., 922 N.Y.S.2d 488, 491-92 (App. Div. 2011); Stevens v. McLouth
Steel Products Corp., 446 N.W.2d 95, 100 (Mich. 1989); First Judicial District
Department of Correctional Services v. Iowa Civil Rights Comm’n, 315 N.W.2d
83, 89-92 (Iowa 1982); Superior Care Facilities v. Workers’ Compensation
Appeals Board, 32 Cal. Rptr. 2d 918, 924-25 & n.1 (Ct. App. 1994). While
acknowledging that Illinois courts are not bound by decisions of other courts, the
State argues that the reasoning in foreign decisions can be persuasive. It contends
that, at most, adoption of the federal successor liability doctrine in cases arising out
of the Act requires potential buyers to conduct due diligence before purchasing
another company’s assets, a task already ordinarily undertaken by prudent
businesspersons.
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¶ 29 By choosing to apply the federal standard, the few states that have adopted the
federal doctrine have weighed the policy considerations underlying the competing
interests of purchasing corporations and victims of employment discrimination and
decided on a balance that is at odds with the majority of American jurisdictions
continuing to adhere to the common-law rule. See Vernon, 179 Ill. 2d at 345
(explaining the extensive case law basis for the common-law rule and its
application in American courts). In Vernon, 179 Ill. 2d at 345, this court expressly
adopted the majority approach, acknowledging the value of the need to make
marginal and failing companies marketable and prevent them from closing their
doors forever. While conducting due diligence before purchasing corporate assets
is certainly a commonplace and well-advised procedure, it cannot always provide
a solid basis to assess the value of the predecessor corporation’s future liability
accurately when the underlying Act litigation is in its early stages, years before the
entry of a final judgment award, as in this case. In those instances and many others,
application of the federal rule would severely undercut Vernon’s concerns about
promoting the salability of marginal businesses to avoid the loss of jobs, community
resources, and revenues that result when a business is shuttered.
¶ 30 Nonetheless, recognizing the possible inequities that may result from the
common-law rule’s application in certain cases, most jurisdictions, including this
one, have adopted four limited exceptions to the general rule of nonliability for
corporate successors. In its decision, however, the appellate majority created a fifth
exception that applies solely to cases involving employment discrimination claims
brought under the Act. The addition of that exception constitutes a significant
modification of this court’s decision in Vernon, 179 Ill. 2d at 345, where we
expressly limited, and listed, four exceptions. As this court has repeatedly
admonished, our appellate court may not overrule or change our holdings.
“ ‘ “Where the Supreme Court has declared the law on any point, it alone can
overrule and modify its previous opinion, and the lower judicial tribunals are bound
by such decision and it is the duty of such lower tribunals to follow such decision
in similar cases.” ’ ” (Emphasis in original.) Blumenthal v. Brewer, 2016 IL
118781, ¶ 28 (quoting Price v. Philip Morris, Inc., 2015 IL 117687, ¶ 38, quoting
Agricultural Transportation Ass’n v. Carpentier, 2 Ill. 2d 19, 27 (1953)).
¶ 31 Acknowledging that fundamental point, as it must, the State is left to argue that
the appellate court’s addition of a fifth exception did not actually modify our
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opinion in Vernon because Vernon did not rise out of an Act violation and the
federal doctrine better suits that context. Essentially, the State asserts that the
application of the common-law rule remained an open question after Vernon was
decided because it did not specifically address the rule to be applied in cases
addressing violations of the Act. Our discussion in Vernon, however, was quite
broad. It was not limited to the narrow context of warranty and contract liability
incurred by successive sole proprietorships, the relevant facts in that decision. As
we have already noted, important underlying considerations distinguish the
application of the federal liability doctrine, deeply rooted in federal labor law, and
our common-law nonliability rule, stemming from broader policy considerations.
¶ 32 Indeed, a review of Illinois case law shows that the common-law nonliability
rule has been applied in the context of a wide variety of legal claims, not just those
involving labor law issues. In Vernon, 179 Ill. 2d at 343, the underlying action
involved allegations of breach of warranty and contract, and our appellate court has
applied the common-law rule broadly in many other types of underlying actions.
See, e.g., A.L. Dougherty Real Estate Management Co. v. Su Chin Tsai, 2017 IL
App (1st) 161949 (involving the breach of a commercial lease); Groves of Palatine
Condominium Ass’n v. Walsh Construction Co., 2017 IL App (1st) 161036
(involving defects in the construction of condominium buildings); Advocate
Financial Group, LLC v. 5434 North Winthrop, LLC, 2015 IL App (2d) 150144
(involving payment for financial services); Villaverde v. IP Acquisition VIII, LLC,
2015 IL App (1st) 143187 (involving nonpayment of wages); Diguilio v. Goss
International Corp., 389 Ill. App. 3d 1052 (2009) (involving a product liability
claim). Although the State contends that the appellate court did not modify the rule
in Vernon because the scope of its application remained an open question, the
breadth of the rule’s prior application seriously undermines that contention. We
hold that the appellate majority erred by altering this court’s enunciation of that rule
by adding a fifth exception.
¶ 33 Finally, we note that it is within the legislature’s power to abrogate the
common-law rule we adopted in Vernon or otherwise alter its standards through
appropriately targeted legislation if it determined those changes to the rule and its
exceptions necessary in a specific context, such as employment discrimination
cases. To date, our legislature has not chosen to do so. We stand by Vernon’s
adoption of the common-law rule of successor corporate nonliability and its four
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exceptions because the State has failed to show good cause or other compelling
reason to reject its application in cases involving Act violations.
¶ 34 B. Application of the “Fraudulent Purpose” Exception
¶ 35 Having decided not to adopt the federal successor corporate liability rule in Act
cases, we next examine whether the “fraudulent purpose” exception to our
common-law rule of nonliability applies under the facts of this case. Oakridge
Healthcare argues that the appellate majority erred by concluding that the
“fraudulent purpose” exception applied to its acquisition of Oakridge Rehab’s long-
term care facility. The fraudulent purpose exception exists “where the transaction
is for the fraudulent purpose of escaping liability for the seller’s obligations.”
Vernon, 179 Ill. 2d at 345. Initially, Oakridge Healthcare claims that the State
forfeited this argument by failing to raise it in the trial court, to oppose Oakridge
Healthcare’s summary judgment motion for summary judgment, or as a theory of
recovery in its complaint.
¶ 36 Before the appellate court, the State claimed that court could affirm or reverse
on any ground appearing in the record. That claim reflects a misunderstanding of
the applicable standard. A reviewing court may only affirm on any basis in the
record; it may not reverse on any grounds found in the record. See Tri-G, Inc. v.
Burke, Bosselman & Weaver, 222 Ill. 2d 218, 258 (2006). Nonetheless, in this
instance we will overlook any forfeiture of the fraudulent purpose exception and
address the merits of the State’s claim because the appellate majority relied on it to
reverse the summary judgment finding entered in favor of Oakridge Healthcare.
Forfeiture is an admonition to the parties, not a limitation on a reviewing court’s
jurisdiction. We may ignore forfeiture “in the interests of achieving a just result and
maintaining a sound and uniform body of precedent.” Jackson v. Board of Election
Commissioners of the City of Chicago, 2012 IL 111928, ¶ 33.
¶ 37 In Illinois, sections 5 and 6 of the Uniform Fraudulent Transfer Act (Fraud Act)
(740 ILCS 160/5, 6 (West 2018)) recognize two types of fraud: fraud in fact and
fraud in law (Bank of America v. WS Management, Inc., 2015 IL App (1st) 132551,
¶ 87). As both parties acknowledge, fraud in fact requires proof that the “debtor”
(here, Oakridge Rehab) had an “actual intent to hinder, delay, or defraud any
creditor of the debtor” (here, Holloway/the State). 740 ILCS 160/5(a)(1) (West
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2018). Without proof of the debtor’s “actual intent to hinder, delay, or defraud any”
of its creditors, fraud in fact cannot be established. 740 ILCS 160/5(a)(1) (West
2018). To create an inference of the requisite intent, the State must seek to prove
the factors listed in section 5(b) of the Fraud Act (740 ILCS 160/5(b) (West 2018)).
Premier Property Management, Inc. v. Chavez, 191 Ill. 2d 101, 110 (2000) (noting
that section 5(b) “lists 11 factors that may be considered in determining the debtor’s
actual intent in making the transfer”). Those factors have sometimes been deemed
“badges of fraud.” Bank of America, 2015 IL App (1st) 132551, ¶ 88. Courts are
not constrained by that list, however, and need not consider every factor. In
addition, they may consider other factors not enumerated in section 5(b). The
presence of one or more factors, however, is not conclusive evidence of fraud. Bank
of America, 2015 IL App (1st) 132551, ¶¶ 88-89. The factors expressly set out in
section 5(b) are 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
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(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) (West
2018).
See Bank of America, 2015 IL App (1st) 132551, ¶ 88.
¶ 38 Before this court, the State asserts that “a reasonable fact finder would
determine that the transfer met several ‘badges’ of fraud.” Consistent with the
appellate majority’s analysis, the State argues that the evidence sufficiently
established the fourth, fifth, eighth, and ninth factors to preclude the entry of
summary judgment for Oakridge Healthcare. Because the State does not present
any argument addressing the other statutory indicia of fraud, we will address only
those four factors.
¶ 39 The fourth factor considers whether, “before the transfer was made or
obligation was incurred, the debtor had been sued or threatened with suit.” 740
ILCS 160/5(b)(4) (West 2018). Holloway filed her discrimination charge against
Oakridge Rehab in February 2011, and Oakridge Rehab was notified of that charge
in the spring of that year. On January 1, 2012, Oakridge Rehab transferred virtually
all business assets to Oakridge Healthcare. Undoubtedly, Oakridge Rehab was
aware of Holloway’s charge at the time of the transfer. That does not mean,
however, that the fourth factor was even arguably established. The filing of a charge
with the Department does not inexorably lead to the filing of a lawsuit. Indeed, no
complaint was filed in this case until September 2012, at least eight months after
the transfer, when the Department concluded its investigation. It cannot
legitimately be said that Oakridge Rehab was “threatened with suit” at the time that
the transfer occurred. The Department’s investigation was underway, and at that
point neither party could reasonably foresee the outcome of that investigation. We
conclude the evidence does not support the presence of the fourth factor.
¶ 40 Moving to the fifth factor, we examine whether “the transfer was of
substantially all the debtor’s assets.” 740 ILCS 160/5(b)(5) (West 2018). Oakridge
Healthcare acknowledges that the record contains sufficient evidence to show it
received “substantially all” assets owned by Oakridge Rehab, with the latter
keeping only its accounts receivable, consisting largely of moneys still owed to it
by the State. While a single factor may, on occasion and under the appropriate
circumstances, be sufficient to create an inference of fraud in fact, those
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circumstances are not present here. See Brandon v. Anesthesia & Pain Management
Associates, Ltd., 419 F.3d 594, 600 (7th Cir. 2005). It is, in fact, difficult to imagine
when the mere transfer of substantially all corporate assets, standing alone, would
be sufficient to justify an inference of fraud in fact. Many, if not most, corporate
transfers presumably include the transfer of substantially all corporate assets since
they typically constitute a significant portion of the business’s value and are critical
to its operations. Here, Oakridge transferred assets, other than real property, that
were needed to care for the facility’s residents. Transferring those assets allowed
for the continuous care of the residents and is not, by itself, a sufficient justification
to infer fraud in fact.
¶ 41 In considering evidence of the eighth factor, we examine whether “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.” 740 ILCS
160/5(b)(8) (West 2018). Of all the factors it cites, the State focuses most heavily
on this one. In a related argument, it contends that the parties’ failure to obtain an
appraisal of the asserts prior to the transfer adds support to its position.
¶ 42 The State points to evidence that, after Holloway filed her charge, Oakridge
Rehab transferred nearly all business assets to Oakridge Healthcare without any
negotiations or consideration in a transaction that was not made at arm’s length. As
additional support for the inference of fraud, the State notes that Helen Lacek and
Eli Atkin, along with his other family members, were close business associates for
decades, that Oakridge Healthcare was founded specifically to acquire Oakridge
Rehab’s assets, and that the assets’ value was unknown because they had not been
appraised. In addition, Helen and Eli continued to have a close business relationship
after the transfer, with Helen serving as a consultant for three companies affiliated
with Eli and both Helen and Eli sharing connections to two other companies. The
State maintains that, based on these facts, a reasonable fact finder could find that
Helen used the transfer to avoid any potential liability to Holloway.
¶ 43 Although Helen and Eli were admittedly well acquainted with each other after
years of working in the same industry, that does not create a reasonable inference
that the asset transfer was not an arm’s-length transaction. In industries with fewer
players in a particular region, such as the residential care industry, it is not
surprising that Helen and Eli would both have connections to some of the same
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business entities. Taken alone, those business connections do not create any
nefarious inferences.
¶ 44 Under the unique facts of this case, the lack of any monetary exchange when
the assets were transferred also does not imply the transaction was structured to
avoid liability. Oakridge Rehab was in serious financial distress due to the State’s
ongoing failure to make its Medicaid payments. Oakridge Rehab chose to continue
operations as long as possible, likely in the hope that those payments would be
made before it had to close its doors. To continue caring for its residents, Oakridge
chose to use its limited funds to pay staff instead of rent, but it recognized that
situation could not continue indefinitely. Despite evidence that a few other
businesses inquired about the possibility of buying Oakridge Rehab, those inquiries
did not lead to purchase offers. Oakridge Healthcare was the only entity that
expressed any serious interest in the facility. While no monetary consideration was
exchanged in the transfer, Oakridge Rehab obtained a distinct benefit: it was no
longer liable for the operation’s escalating expenses and retained its accounts
receivable, including the Medicaid sums due from the State. Those future payments
could then be used to pay back rent and early lease termination penalties totaling
more than $454,000, along with any other unpaid bills. In other words, the transfer
allowed Oakridge Rehab to stop the bleeding that was rapidly draining the
company’s financial lifeblood.
¶ 45 And, while an asset appraisal may have been warranted under normal business
circumstances, we cannot say that the lack of an appraisal creates a reasonable
inference of an intent to defraud creditors in light of the serious financial stress and
limited sale opportunities for Oakridge Rehab. The assets that were transferred to
Oakridge Healthcare consisted of the license needed to operate the facility, beds,
three days’ worth of perishable food, a week’s worth of frozen food, stock
medicines, medical supplies, and some paper. Because Oakridge Rehab did not own
the physical building used for its operations, the building was not an asset that could
have been transferred, with possession of it reverting to Oakridge Properties when
the lease was terminated. We conclude that, under these circumstances, the absence
of an asset appraisal and outright monetary payment was insufficient to establish
the eighth indicator of fraudulent intent.
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¶ 46 Finally, the ninth factor requires this court to review whether “the debtor was
insolvent or became insolvent shortly after the transfer was made or the obligation
was incurred.” 740 ILCS 160/5(b)(9) (West 2018). The transfer occurred on
January 1, 2012. Although the appellate court and the State focused on Oakridge
Rehab’s financial problems prior to the transfer, their supporting evidence is
minimal. The appellate majority relied solely on Helen Lacek’s deposition
statement that Oakridge Rehab began having financial troubles in June 2011 and
that those troubles escalated until it could not pay its rent, requiring the early
termination of its lease. The State’s brief offers even less support, perfunctorily
asserting only that Oakridge Rehab “was insolvent before the asset transfer was
made (badge 9).”
¶ 47 We are not persuaded that the evidence sufficiently establishes Oakridge
Rehab’s insolvency at or shortly after the time of the transfer. Certainly, it was
undergoing serious financial distress that would likely not have been resolved until
the State resumed making the payments it rightfully owed. At the time of the
transfer, however, Oakridge Rehab was still paying its staff and otherwise
maintaining its operations, albeit at the expense of paying its rent. Nonetheless, the
business’s financial condition would undoubtedly have brightened considerably if
the State had resumed the timely payment of its obligations, a condition that did not
occur prior to the transfer.
¶ 48 Assuming arguendo that Oakridge Rehab was insolvent at the time of the
transfer, we cannot say that the presence of only two indicators of potential fraud,
numbers five (a transfer of substantially all assets) and nine (insolvency at the time
of the transfer), is sufficient to preclude the entry of summary judgment under the
facts of this case. See 740 ILCS 160/5(b)(5), (9) (West 2018) (listing the factors
relevant here). Even if all 11 factors are present, they may be insufficient to create
an inference or presumption of fraud in fact. A.G. Cullen Construction, Inc. v.
Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 29. One of the touchstones
of the Fraud Act is whether the transfer was made with “actual intent to hinder,
delay, or defraud” a creditor, a requirement expressly stated in section 5(a)(1). 740
ILCS 160/5(a)(1) (West 2006). If the circumstances surrounding a transfer do not
establish it was made with the actual intent to avoid a creditor, the evidence is
insufficient to prove the fraud. Bank of America, 2015 IL App (1st) 132551, ¶ 79.
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¶ 49 Here, the State has shown only that Oakridge transferred substantially all
corporate assets at a time when it was at least arguably insolvent. That, without
more, is legally insufficient to show it had an actual intent to avoid its creditors at
the time the transfer occurred. As Oakridge Healthcare notes, Oakridge Rehab had
serious financial problems stemming from the State’s failure to make its requisite
payments for the care of the facility’s residents. Without enough money coming in
to pay all its ongoing bills, Oakridge Rehab opted to pay its staff and forgo its rental
payments. As the State grew further and further behind in its payments, Oakridge
Rehab’s financial position became more dire until it was forced to terminate its
lease. If it had not transferred virtually all remaining assets to Oakridge Healthcare
at that point, it would have had to close, forcing the elderly and disabled residents
in its care to find other accommodations or risk becoming homeless. Those
circumstances do not support the conclusion that Oakridge Rehab was motivated to
transfer its assets by an intent to evade its financial obligations to Holloway.
¶ 50 That conclusion is further bolstered by the fact that, at the time of the transfer
on January 1, 2012, the Department had not even completed its investigation of
Holloway’s allegations. Its investigation was not finished until shortly before it
filed its complaint against Oakridge Rehab in September 2012, almost eight months
after the transfer took place. Even after that filing, the outcome of the proceeding
was not assured. At the time of the asset transfer, it was pure speculation that the
Department would decide to pursue Holloway’s claim before the Illinois Human
Rights Commission. Thus, it would have required even greater prescience to
conclude at the time of the transfer in January 2012 that the administrative law
judge hearing the claim would recommend an award of $30,880 in back pay, plus
prejudgment interest, and that the Commission would formally adopt the award in
April 2014, more than two years after Oakridge Rehab transferred the assets. In
light of those circumstances, the State has not created a question of material fact
about whether Oakridge Rehab had the actual intent to evade or otherwise defraud
either Holloway or the State at the time of the transfer, the necessary prerequisites
for fraud in fact.
¶ 51 The State next argues that the transfer constituted fraud in law. The test for
fraud in law is closely related to the requirements needed to establish the eighth
factor in the State’s fraud-in-fact claim. The eighth factor looks at whether “the
value of the consideration received by the debtor was reasonably equivalent to the
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value of the asset transferred or the amount of the obligation incurred.” 740 ILCS
160/5(b)(8) (West 2018). Similarly, under the fraud-in-law standard, if the
“ ‘transfer is made for no or inadequate consideration, *** the fraud is presumed.’ ”
Bank of America, 2015 IL App (1st) 132551, ¶ 87 (quoting Northwestern Memorial
Hospital v. Sharif, 2014 IL App (1st) 133008, ¶ 18). The latter test is drawn from
section 5(a)(2) of the Fraud Act (740 ILCS 160/5(a)(2) (West 2018)). Both tests
evaluate the sufficiency of the consideration underlying the transfer. Because we
previously determined that the requirements of the eighth factor of the fraud-in-fact
analysis were not sufficiently met here to create a question of material fact, we need
not examine the State’s fraud-in-law claim further. We conclude that the trial court
properly entered summary judgment for Oakridge Healthcare, and the appellate
court erred by reversing that judgment.
¶ 52 III. CONCLUSION
¶ 53 For the reasons stated, we decline to adopt the federal successor liability
doctrine in cases when a judgment has been entered for a violation of the Illinois
Human Rights Act and, instead, adhere to this state’s long-standing common-law
rule of corporate successor nonliability, subject to only the four exceptions we
recognized in Vernon, 179 Ill. 2d at 344-45. The Illinois Human Rights
Commission’s judgment in favor of Jane Holloway was entered solely against
Oakridge Rehab, and the pleadings did not request relief from any other individual
or entity. After analyzing the facts of this case under our common-law corporate
successor nonliability rule, we conclude that Oakridge Healthcare did not incur any
liability for fulfilling the judgment entered against Oakridge Rehab. Therefore, we
reverse the appellate court judgment and affirm the trial court’s entry of summary
judgment for Oakridge Healthcare.
¶ 54 Appellate court judgment reversed.
¶ 55 Circuit court judgment affirmed.
¶ 56 JUSTICE NEVILLE took no part in the consideration or decision of this case.
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