A.G. Cullen Construction, Inc. v. Burnham Partners, LLC , 29 N.E.3d 579 ( 2015 )

2015 IL App (1st) 122538
No. 1-12-2538
Opinion filed March 11, 2015
Third Division
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
______________________________________________________________________________
A.G. CULLEN CONSTRUCTION, INC., ) Appeal from the Circuit Court
) of Cook County.
Plaintiff-Appellant, )
)
v. ) No. 08 L 13121
)
BURNHAM PARTNERS, LLC, LORI HALPIN, )
ROBERT HALPIN, and WESTGATE ) The Honorable
VENTURES, LLC, ) Vanessa A. Hopkins,
) Judge, presiding.
Defendants-Appellees. )
)
______________________________________________________________________________
JUSTICE HYMAN delivered the judgment of the court, with opinion.
Justices Lavin and Mason concurred in the judgment and opinion.
OPINION
¶1 Defendant Westgate Ventures, LLC, hired plaintiff A.G. Cullen Construction, Inc., to
build a warehouse and distribution facility in Big Beaver, Pennsylvania. (Westgate was primarily
owned by defendant Burnham Partners, LLC, which, in turn, was owned by defendant Robert
Halpin.) When the project neared completion, Westgate and Cullen had a disagreement and
Westgate stopped paying Cullen. This led to Cullen seeking relief through arbitration and
obtaining an award of $457,416.37, which it reduced to judgment in Pennsylvania. Before the
1-12-2538
arbitration award was entered, Burnham, through Robert Halpin, began to wind down Westgate,
liquidating all of the company's assets. After paying off a $2.5 million secured construction loan,
the majority of Westgate's remaining cash was disbursed to Burnham in the form of a $400,000
development fee and to the Halpins, to repay a loan they made to Westgate, leaving Westgate
with no funds to pay the arbitration award. Cullen filed a lawsuit against defendants in the circuit
court of Cook County to recover the amount awarded, alleging, among other things, fraudulent
conveyance and breach of fiduciary duty.
¶2 After a bench trial, the circuit court entered judgment in defendants' favor on all counts
and dismissed the complaint. Cullen contends: (i) the trial court abused its discretion by refusing
its request for an adverse inference when defendants failed to produce numerous corporate
records they claimed had been lost; (ii) defendants violated section 5 of the Uniform Fraudulent
Transfer Act (UFTA) (740 ILCS 160/5 (West 2012)) by liquidating all of Westgate's assets
before the arbitration hearing; (iii) defendants violated section 18-804 of the Delaware Limited
Liability Company Act (Del. Code Ann. tit. 6, § 18-804 (West 2008)) by fraudulently preferring
one unsecured creditor over the other; (iv) the trial court erred in refusing to pierce the corporate
veil to hold Halpin personally liable for the money Westgate owes to Cullen; and (v) defendants
owed Cullen a fiduciary duty once Westgate became insolvent.
¶3 We reverse. Defendants violated the UFTA when, in winding down Westgate, they
disbursed all of the company’s assets to themselves and other unsecured creditors when they
knew about their potential liability to Cullen on its arbitration claim. We disagree with the trial
court’s finding that Burnham was entitled to the $400,000 development fee or that the other
transfers were made in good faith in the absence of documentary evidence to support that
finding. Under section 8 of the UFTA a creditor in a case of fraudulent transfer may obtain
2
1-12-2538
“avoidance of the transfer or obligation to the extent necessary to satisfy” its claim. 740 ILCS
160/8 (West 2012). Thus, we remand to the trial court to permit Cullen to satisfy its
Pennsylvania judgment. Further, because defendants were using Westgate as a shield to avoid
personal liability, the corporate veil has been pierced and defendants are personally liable for the
judgment amount, plus interest. Lastly, we need not address Cullen’s claim under the Delaware
Limited Liability Company Act having determined that defendants violated the UFTA by
dissipating all of Westgate’s assets.
¶4 BACKGROUND
¶5 In 1998, Robert Halpin formed Burnham Partners, LLC, an Illinois limited liability real
estate development company. Halpin is the sole member of Burnham. In June 2005, Burnham
created Westgate Ventures, LLC, a Delaware limited liability company, to develop a warehouse
and distribution facility in Big Beaver, Pennsylvania. The sole members of Westgate were
Burnham, which owned a 90% interest, and Felix Fukui, who owned the remaining 10% interest.
(Fukui, an architect, was also hired to design the warehouse property; he is not a party.)
Westgate was governed by the Westgate Ventures I, LLC, limited liability agreement (LLC
agreement). Article IX of the LLC agreement named Burnham as the initial manager of Westgate
and listed numerous duties of the manager, including acquisition, ownership, improvement, sale,
and lease of company property. Article XI of the LLC agreement required each member to make
a capital contribution to Westgate. Burnham never made a capital contribution. Instead, Robert
Halpin and his wife, Lori Halpin, borrowed money from Northern Trust Bank and then loaned
$175,000 to Westgate. Westgate executed a note in favor of the Halpins, which was payable on
the sale of the property.
3
1-12-2538
¶6 On July 1, 2005, Westgate and Burnham entered into a development and asset
management agreement (development agreement) in which Burnham agreed to provide
development services to Westgate, including purchasing land, hiring an architect, engineers, and
contractors, overseeing construction of the building, finding a tenant, and ultimately, selling the
building. Robert Halpin drafted the development agreement, represented both Westgate and
Burnham in negotiating its terms, and signed the development agreement on behalf of both
parties. The development agreement provided that the duties of the project manager, Burnham,
would be performed and supervised by Robert Halpin and that Westgate would pay Burnham a
development management fee of $400,000.
¶7 Westgate hired A.G Cullen, Inc., a Pennsylvania construction company, as its building
contractor. On November 17, 2005, Westgate entered into a standard construction contract with
Cullen. Halpin signed the contract on behalf of Westgate, as its managing partner. The
construction contract required Cullen to submit to the architect, Fukui, monthly applications for
payment. Once Fukui approved payment, Westgate's lender, S&T Bank, would remit a check to
Cullen. In April 2006, a dispute arose when Westgate, through Fukui, refused to approve
Cullen's request for payment of about $360,000. In June of that year, Cullen filed a demand for
arbitration. A hearing took place in July 2007, and on September 7, 2007, the arbitrator entered
an award in favor of Cullen and against Westgate. The award included $360,790.38 in unpaid
contract work, $9,284.71 for extra work, $37,021.15 in attorney fees, $3,000 in arbitration costs,
and $89,990.13 for interest and penalties under the Pennsylvania Contractor and Subcontractor
Payment Act (73 Pa. Cons. Stat. Ann. § 501 et seq. (West 2008)). The arbitrator deducted
$45,000 for liquidated damages and $3,680 for unperformed work under the contract, for a total
4
1-12-2538
award of $448,406.87. On November 27, 2007, the court of common pleas of Allegheny County,
Pennsylvania, reduced the award to a judgment.
¶8 On April 5, 2007, three months before the July 2007 arbitration hearing, Westgate sold
the warehouse facility for $3.2 million. After the sale, Westgate engaged in no further business
and Halpin began to windup Westgate and liquidate its assets. From the proceeds of the sale
Halpin paid $2,513,984.01 to S&T Bank, a secured creditor. With the remaining $686,015.99,
Halpin disbursed to Northern Trust $120,000, the remaining balance on the $175,000 loan the
Halpins made to Westgate; paid Burnham’s development fee of $400,000, which was later
transferred to Halpin; and gave an additional $70,000 to himself and his wife. Westgate was left
with a remaining balance of $27,530.44, which Halpin transferred to himself on July 15, 2007,
leaving Westgate with a zero balance in its operating account. Thus, when the Pennsylvania
court entered the $457,416.37 judgment in favor of Cullen, Westgate had no remaining assets
with which to pay the judgment.
¶9 On November 24, 2008, Cullen filed a complaint against defendants in the circuit court of
Cook County to recover the amount owed by Westgate on the Pennsylvania judgment. Cullen's
third amended, six-count complaint filed on December 5, 2011, alleged breach of fiduciary duty
(count I), breach of section 18-804 of the Delaware Limited Liability Act (Del. Code Ann. tit. 6,
§ 18-804 (West 2008)) (count II), and violation of the Pennsylvania Contractor and
Subcontractor Payment Act (73 Pa. Cons. Stat. Ann. § 501 et seq. (West 2008)) (count III),
fraudulent conveyance against Westgate, Burnham, and the Halpins (count V), and against
Westgate and the Halpins (count VI). Cullen also sought to pierce Westgate's corporate veil to
hold Burnham and the Halpins jointly and severally liable.
5
1-12-2538
¶ 10 During discovery, Cullen requested numerous documents, including Westgate's books,
minutes, and records regarding corporate formalities, business activities, and debt. The Halpins
failed to turn over many requested documents, claiming not to know what happened to them but
suggesting that documents kept in their home were lost when they moved in 2007 and 2009.
¶ 11 While the case was pending, Westgate filed for bankruptcy in the United States District
Court for the Western District of Pennsylvania. All claims against Westgate were stayed and,
thus, only the claims against the other three defendants were litigated at trial.
¶ 12 A five-day bench trial took place in the circuit court of Cook County. Paul Cullen,
plaintiff's secretary and vice-president, testified that he believed Robert Halpin, Burnham and
Westgate "were one and the same" and that Halpin was the ultimate decision-maker on the
project because "everything had to go through [him]." Cullen said he negotiated the construction
contract with Halpin but afterward only spoke to him occasionally, mainly about money, and did
not see him on site during the construction project. Cullen said Fukui had responsibility for
approving payments but during the project he continuously failed to approve payment
applications in a timely manner. Cullen also denied ever telling Halpin that he underbid the
project and claimed that his company completed construction. On cross-examination, Cullen
acknowledged that the construction contract was only with Westgate and that he did not ask
Robert Halpin for a personal guarantee.
¶ 13 On adverse examination, Robert Halpin testified that Westgate and Burnham were
separate entities and that Westgate held separate operating and capital accounts at Northern Trust
Bank. He said Westgate retained Burnham as an independent contractor to develop and manage
the project under the development agreement. Halpin acknowledged that under the development
agreement with Westgate, Burnham was not entitled to any compensation for serving as manager
6
1-12-2538
of Westgate but was to be paid $400,000 under the development agreement as an independent
contractor for performing essentially the same duties.
¶ 14 Halpin further testified that he and his wife kept the records for Westgate but
acknowledged that neither of them is an accountant and did not know generally accepted
accounting procedures. Halpin was aware of an obligation to preserve corporate documents
during litigation but was unable to produce some documents in response to Cullen's discovery
requests because they were lost when he and his wife moved in 2007 and 2009. Halpin
acknowledged he never invoiced Westgate for the work he did under the development agreement
but said he provided monthly status reports to Westgate and kept records of funding requests,
which were lost in the move. Halpin also acknowledged he was not regularly present on the
jobsite, but said he participated in weekly site meetings telephonically and visited the site
monthly.
¶ 15 As Burnham's agent Halpin was in charge of winding up the affairs of Westgate. Halpin
testified that he did not advise Cullen before the arbitration hearing that Westgate had no funds
because he did not think Westgate owed any money to Cullen. He stated that the money from the
sale of warehouse facility first went to S&T Bank to repay the construction loan, then to
Northern Trust to repay the Halpins' loan and Burnham's development fee. At Robert Halpin's
request, Lori Halpin signed and distributed additional checks to pay in full all of Westgate's
interest payments, legal fees, arbitration fees, and additional costs incurred during construction.
Halpin said Westgate closed its operating and capital accounts at Northern Trust Bank in June
2007 and distributed any remaining money to Burnham even though he knew about the pending
arbitration hearing and that there would be insufficient funds to pay an award in Cullen's favor.
He said he did not consider keeping some money in reserve to pay a possible judgment in favor
7
1-12-2538
of Cullen. After December 31, 2007, Westgate conducted no further business and filed for
bankruptcy in Pennsylvania.
¶ 16 On cross-examination, Halpin said that to keep costs down, Burnham agreed to defer its
development fee for about two years. The Halpins also personally advanced additional expenses
to Westgate and received corresponding reimbursement. Halpin testified that Cullen informed
him a week or so after executing the contract that he had underbid the project and had
insurmountable pay applications. Moreover, Halpin testified that Cullen walked off the project,
forcing him to hire someone else to complete construction, and thus, he did not think Cullen
would obtain a substantial arbitration award or that Westgate owed any fees to Cullen under the
construction contract.
¶ 17 On adverse examination, Lori Halpin testified that she did bookkeeping for both
Burnham and Westgate. She said she was not an employee of either company, although she
acknowledged that her LinkedIn profile lists her as the operations manager for Burnham
Partners. She was authorized to sign checks for both Westgate and Burnham. She also was
primarily responsible for filing, organizing, and managing paperwork on the project but could
not recall if Westgate or Burnham had a document retention policy. She said documents and
records for the project were lost when she and her husband moved, but she did not know how
and did not realize they were missing until her husband asked her to find documents in
anticipation of this litigation.
¶ 18 At the close of evidence, Cullen requested an adverse inference against defendants, for
failing to turn over requested documents regarding the Westgate project that were under their
control and should have been produced through the exercise of reasonable diligence.
Specifically, Cullen asserted it was entitled to the adverse inference that (i) Robert Halpin failed
8
1-12-2538
to honor the corporate structure of Westgate; (ii) Robert Halpin did not treat Westgate and
Burnham as separate entities; (iii) Robert Halpin did not keep Burnham and Westgate separate
from himself; (iv) the records would have shown Lori Halpin's true involvement as the person
who ran Robert Halpin's business for him and that Westgate was a mere instrumentality or alter
ego of Robert Halpin, Lori Halpin, and Burnham; (v) because Robert Halpin made a loan to
Westgate rather than a capital contribution as required by the LLC agreement, Westgate did not
receive reasonably equivalent value in exchange for its payment to the Halpins; and (vi)
Westgate did not receive reasonably equivalent value in exchange for its payment for the
$400,000 it paid to Burnham and Halpin.
¶ 19 The trial court rejected Cullen's request for an adverse inference and on July 31, 2012,
dismissed Cullen's amended complaint and entered a final judgment in favor of defendants. In its
order, the trial court first found defendants did not owe a fiduciary duty to Cullen, reasoning,
"the mere fact that a business transaction occurred is insufficient to support such a finding." The
court also found that Cullen had no claim against defendants under the Delaware Limited
Liability Company Act (Del. Code Ann. tit. 6, § 18-804 (West 2008)). That Act provides that
when winding up a limited liability company, assets "shall be distributed to creditors, including
members and managers who are creditors." Id. Because Burnham was a member and a creditor,
the court found that distributions to Burnham and the Halpins were not impermissible. The court
also found defendants did not violate the Pennsylvania Contractor and Subcontractor Payment
Act (73 Pa. Cons. Stat. Ann. § 501 et seq. (West 2008)), as Cullen's contract was with Westgate
and no privity of contract existed between Cullen, Burnham, and the Halpins.
¶ 20 Next, the trial court concluded that Cullen failed to present "undisputed evidence" that
Burnham through Halpin perpetrated fraud by transferring all of Westgate's assets to themselves
9
1-12-2538
and all other creditors except Cullen. The court found that the evidence suggested Burnham and
Westgate were bona fide independent entities that kept proper corporate books and records, and
were properly funded. The court stated that Burnham properly earned its $400,000 development
fee, which had been deferred for two years and that the Halpins were entitled to be repaid for
their $175,000 loan to Westgate, that those disbursements were not made with the intent to
hinder or defraud Cullen, and that the mere preference of one creditor over another does not
constitute fraud. In addition, the court determined no evidence warranted piercing of the
corporate veil or Cullen’s alter ego theory. Lastly, the court stated that Cullen could have
contracted to protect itself by, for instance, asking Robert Halpin for a personal guarantee or
requiring a performance bond, but failed to do so.
¶ 21 Cullen filed an initial brief with this court, to which defendants responded, but did not
file a reply brief. Under Supreme Rule 341(j), a reply brief is not required, and we proceed
without benefit of a reply argument from Cullen. Ill. S. Ct. R. 341(j) (eff. Feb. 6, 2013).
¶ 22 During oral arguments, plaintiff's attorney cited a case, Northwestern Memorial Hospital
v. Sharif, 2014 IL App (1st) 133008, which he asserted supports his adverse inference and
fraudulent conveyance arguments. Because the appellate court's opinion in that case was filed
after both parties filed their briefs, we permitted defendants' attorney to file a supplemental brief
addressing the Northwestern case and plaintiff's attorney to file a reply brief.
¶ 23 ANALYSIS
¶ 24 Fraudulent Conveyance
¶ 25 Cullen contends the trial court erred in dismissing its fraudulent conveyance claim
because Burnham and Halpin acted fraudulently under section 5(a) of the UFTA (740 ILCS
10
1-12-2538
160/5(a) (West 2012)) in disbursing $470,129.58 of Westgate's assets to Burnham and ultimately
Halpin and his wife and $120,000 to the Northern Trust to repay the Halpins' loan to Westgate.
¶ 26 The UFTA was enacted to enable a creditor to defeat a debtor's transfer of assets to which
the creditor was entitled. 740 ILCS 160/5 (West 2012). Illinois courts have divided fraudulent
conveyance cases into two categories—fraud in fact and fraud in law. A cause of action under
section 5(a)(1) of the UFTA is for actual fraud, often referred to as “fraud in fact.” Proof of fraud
in fact requires a showing of an actual intent to hinder, delay, or defraud the creditors. Anderson
v. Ferris, 128 Ill. App. 3d 149, 153 (1984). A trial court's determination involving an intent to
defraud is reviewed under the manifest weight of the evidence standard. See Workforce Solutions
v. Urban Services of America, Inc., 2012 IL App (1st) 111410, ¶ 53; Gambino v. Boulevard
Mortgage Corp., 398 Ill. App. 3d 21, 54 (2009). A factual finding is against the manifest weight
of the evidence only when the opposite conclusion is plainly evident or the finding is arbitrary,
unreasonable, or not based in evidence. Staes & Scallan, P.C. v. Orlich, 2012 IL App (1st)
112974, ¶ 35.
¶ 27 Constructive fraud or “fraud in law” does not require proof of actual intent to defraud. In
re Hennings Feed & Crop Care, Inc., 365 B.R. 868, 874 (Bankr. C.D. Ill. 2007) (citing General
Electric Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1079 (7th Cir. 1997)). “Rather,
transfers made for less than reasonably equivalent value, leaving a debtor unable to meet its
obligations, are deemed or presumed to be fraudulent.” Id. (citing In re Zeigler, 320 B.R. 362,
374 (Bankr. N.D. Ill. 2005)). The test for determining the validity of a transfer under the UFTA
is “ ‘whether or not it directly tended to or did impair the rights of creditors ***. *** [I]f the
transfer hinders, delays, or defrauds his creditors, it may be set aside as fraudulent.’ ” In re
Martin, 145 B.R. 933, 947 (Bankr. N.D. Ill. 1992) (quoting Birney v. Solomon, 348 Ill. 410, 414-
11
1-12-2538
15 (1932)); Apollo Real Estate Investment Fund, IV, L.P. v. Gelber, 403 Ill. App. 3d 179, 193-94
(2010).
¶ 28 Cullen contends that Robert Halpin and Burnham engaged in fraud in fact and violated
section 5 the UFTA by making two transfers of Westgate's assets to Burnham, which Burnham
later transferred to Robert Halpin—$400,000 on April 16, 2007, and $70,129.58 on July 11,
2007. Cullen also asserts Robert and Lori Halpin violated the UFTA by causing Westgate to
transfer $120,000 of Westgate's assets to Northern Trust Bank to repay the loan Robert and Lori
made to Westgate.
¶ 29 The UFTA sets forth 11 factors in making a determination as to actual intent: (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) (West 2012). See also Kennedy v. Four Boys Labor Service, Inc., 279 Ill. App. 3d 361,
369 (1996). Proof of some or even all of the factors included in section 5(b) does not create a
presumption that the debtor had the actual intent to defraud. But the presence of these “badges of
fraud” may, in sufficient number, give rise to an inference or presumption of fraud. Steel Co. v.
12
1-12-2538
Morgan Marshall Industries, Inc., 278 Ill. App. 3d 241, 251 (1996) (citing Kaibab Industries,
Inc. v. Family Ready Homes, Inc., 80 Ill. App. 3d 782, 786 (1978) (finding four "badges of
fraud" sufficient to give rise to an inference of fraud)).
¶ 30 In dismissing Cullen's claim that defendants violated the Act, the trial court stated that
Cullen "failed to adduce undisputed evidence showing that fraud has been [perpetrated] by the
individual Defendants." The court's order did not address the section 5(b) factors in making that
determination but instead found that Burnham and Westgate were separate entities, with separate
accountants and bank accounts, that Westgate was properly funded, that Burnham earned its
$400,000 development fee, which it had deferred for two years and that the Halpins were entitled
to be repaid for their $175,000 loan to Westgate. The court also accepted Robert Halpin's
testimony that Cullen said he had underbid on the project, that Cullen told him that it had change
orders over $400,000, and that Cullen walked off the job, forcing Halpin to hire someone else to
finish the project. Cullen denied these allegations.
¶ 31 We acknowledge that appellate courts give great deference to a trial court's credibility
determinations, and do not substitute our judgment for that of the trial court. Certain
Underwriters at Lloyd's, London v. Abbott Laboratories, 2014 IL App (1st) 132020, ¶ 47. But,
even if the trial court's findings of fact are true, they are not dispositive on the issue of whether
defendants fraudulently conveyed Westgate's assets. An examination of the factors listed in
section 5(b) establishes the presence of a sufficient and significant number of "badges" of fraud
giving rise to a presumption of fraud when Westgate, at the direction of Robert Halpin,
transferred $400,000 to Burnham on April 16, 2007, $70,129.58 to Burnham on July 11, 2007,
$120,000 to Northern Trust on April 5, 2007.
13
1-12-2538
¶ 32 First, under the Act, where the debtor is a corporation, like Westgate, an "insider"
includes a director of the corporation, an officer of the corporation, anyone in control of the
corporation, and a relative of a person in control of the corporation. 740 ILCS 160/2(g)(2) (West
2012). An insider also includes an affiliate, or an insider of an affiliate as if the affiliate were
Westgate, and the managing agent of Westgate. 740 ILCS 160/2(g)(4), (5) (West 2012).
Burnham, as the managing agent of Westgate, constituted an insider. Robert Halpin was also an
insider, as the sole member of Burnham, which held a 90% interest in Westgate and was in
control. Lori Halpin was also an insider under the Act, as the "relative of a person in control."
¶ 33 Examining the other factors listed in section 5(b) of the Act, we observe that in June
2006, before any of the transfers occurred, Cullen filed a demand for arbitration, putting
defendants on notice of a threatened lawsuit and the real possibility of a judgment against them.
Robert Halpin testified that he believed Cullen's construction contract was substantially paid and
did not believe Cullen would obtain a significant arbitration award. The trial court accepted this
testimony, finding that Halpin had no reason to believe Cullen would obtain the award it did. The
trial court also found that Halpin acted in "good faith" and "substantially complied" with the
terms of the contract. These findings are contrary to the evidence. The record shows Westgate
paid Cullen $1,728,000 of the $2,086,821 contract price, leaving a dispute over the remaining
$358,821. Although Halpin asserted he did not think Cullen would be awarded damages because
Cullen had walked off the job, the arbitrator, in entering the $457,416.37 award in Cullen's favor,
determined that the amount of work not performed by Cullen amounted to $3,680 or 1% of the
contract price. Thus, at the time Halpin was winding up Westgate, he knew of the threat of a
lawsuit and judgment and had the obligation not to dissipate the company's assets.
14
1-12-2538
¶ 34 Although Halpin knew about the dispute over the amount owed under the contract and
the upcoming arbitration hearing, he transferred all of Westgate's assets out of the company to
Burnham and then to himself and his wife without disclosing the transfers to Cullen. The
transfers of $120,000 on April 4, 2007 to Northern Trust and $400,000 to Burnham on April 16,
2007 were for substantially all of Westgate's assets. When he later transferred $70,129.58 on July
11, 2007, Westgate had no remaining funds with which to pay Cullen for the money owed on the
judgment.
¶ 35 Further, Westgate did not receive "reasonably equivalent value" in exchange for either
the $400,000 development fee to Burnham under the terms of the development agreement or the
$120,000 transfer to the Northern Trust to repay the remainder of the Halpins' loan. First, the
agreement to pay Burnham $400,000 as a "development fee" lacked consideration because
Burnham and Halpin were obligated to perform those functions as the majority owner of
Westgate. Further, Halpin failed to present any invoices or other evidence showing that Burnham
performed any services above and beyond what it was already obligated to perform that
warranted $400,000 development fee. In finding that Burnham was entitled to that fee, the trial
court relied on Robert Halpin's testimony about services Burnham performed as project manager,
including obtaining permits, selecting an architect, hiring engineers, and generally overseeing the
construction project. The trial court stated that, "[Halpin] kept monthly reports giving Westgate a
written status of the project,” but disregarded Halpin's failure to produce a single monthly report
or other documentation showing precisely what services Burnham performed. The trial court
accepted the Halpins' explanation that they, along with other records requested by Cullen, “were
probably lost in one of the moves" (emphasis added) and found that the fee was justified based
on Halpin's testimony alone. We disagree and find that in the absence of evidence showing that
15
1-12-2538
Burnham performed services justifying the fee, Westgate did not receive reasonably equivalent
value for the transfer of $400,000.
¶ 36 Northwestern Memorial Hospital v. Sharif, 2014 IL App (1st) 133008, is instructive.
Sharif was the founder, president, chief executive officer, chief operating officer, and managing
member of Randolph Equities, LLC, which rented commercial space in an office building. Id. ¶
3. Randolph defaulted under its lease and Northwestern, the landlord, obtained a judgment
against Randolph for $270,000. Id. ¶ 4. During the process of collection, Northwestern learned
that Randolph had been engaged in litigation as a plaintiff against an unrelated third-party
defendant and had settled that suit for $3.3 million. Id. ¶ 5. Instead of paying Northwestern,
Sharif transferred most of the settlement money to himself and his ex-wife. Id. Northwestern
filed a fraudulent transfer action against Sharif and the ex-wife. In pretrial discovery,
Northwestern sought settlement information, related accounting records, and documents relating
to funds Sharif provided to Randolph. Id. ¶ 8. Sharif provided some documents but claimed not
to have any documentation regarding funds he provided Randolph, claiming they were in his
accountant's possession. Id. After a bench trial, the trial court ruled in favor of the landlord,
holding that the transaction displayed many of the “badges of fraud” under the UFTA. Id. ¶ 13.
In affirming the trial court, the appellate court noted Sharif “failed to present objective, unbiased
testimonial or documentary evidence, e.g., cancelled checks, bank transfers, loan agreements, to
support that these transfers to himself were credible loan repayments to a bona fide creditor.” Id.
¶ 33.
¶ 37 Similarly, here, the Halpins presented no unbiased testimony or documentary evidence to
support a finding that the transfer of $400,000 from Westgate to Burnham and ultimately to
themselves was in exchange for reasonably equivalent value.
16
1-12-2538
¶ 38 The $120,000 transferred to the Northern Trust to repay the Halpins' loan was also not in
exchange for "reasonably equivalent value." Under the LLC agreement, Burnham was required
to make a capital contribution to Westgate. In lieu of making the required capital contribution,
the Halpins took out a loan from the Northern Trust and in turn loaned Westgate $175,000. In
transferring to the Northern Trust $120,000, the balance of the Halpins' loan, Westgate was
repaying a capital contribution Burnham was required to pay. Thus, Westgate did not receive
reasonably equivalent value for that payment.
¶ 39 Moreover, Westgate, through its transfers to Burnham, concealed its assets from Cullen
and became insolvent after the transfers, all of which occurred just 2months before the
arbitration award was entered and 10 months after Cullen's demand for arbitration. Thus, 9 of the
11 "badges of fraud" weigh in favor of a presumption of fraud. A debtor may prefer one creditor
over another, as long as he acts without fraudulent intent. As noted, the test is whether a transfer
"directly tended to or did impair the rights of creditors." (Internal quotation marks omitted.)
Apollo Real Estate Investment Fund, IV, L.P., 403 Ill. App. 3d at 193-94. Westgate's transfers of
all of its assets to Burnham and then to the Halpins shortly before a judgment was entered
against Westgate did impair the rights of Cullen and were fraudulent in violation of section 5 of
the UFTA.
¶ 40 Piercing the Corporate Veil
¶ 41 Cullen next contends the circuit court erred in denying his claim seeking to pierce
Westgate’s corporate veil to hold Burnham and the Halpins jointly and severally liable for the
Pennsylvania judgment. In addressing this claim, the trial court stated that Cullen “failed to
adduce undisputed evidence showing that fraud has been [perpetrated] by the individual
Defendants.” The court also stated that there was “insufficient evidence to find that Westgate and
17
1-12-2538
Burnham are not bona fide independent entities.” Cullen asserts the trial court was wrong on
both counts and that the court should have pierced the corporate veil based on defendants'
fraudulent actions and because Westgate was merely the alter ego of Burnham and the Halpins.
¶ 42 Illinois law provides that efforts to pierce the corporate veil are governed by the law of
the state of incorporation. Westmeyer v. Flynn, 382 Ill. App. 3d 952, 957 (2008). Westgate is a
Delaware limited liability company so Delaware law applies to determine whether to pierce the
corporate veil. “Delaware law respects corporate formalities, absent a basis for veil-piercing,
recognizing that the wealth-generating potential of corporate and other limited liability entities
would be stymied if it did otherwise.” Alliance Data Systems Corp. v. Blackstone Capital
Partners V L.P., 963 A.2d 746, 769 (Del. Ch. 2009). Thus, Delaware courts do not lightly
disregard the corporate form. Absent sufficient cause the separate legal existence of a
corporation will not be disturbed. Generally, the corporate veil may be pierced where there is
fraud or where a subsidiary is in fact the mere alter ego of the parent. Geyer v. Ingersoll
Publications Co., 621 A.2d 784, 793 (Del. Ch. 1992). See also Mabon, Nugent & Co. v. Texas
American Energy Corp., No. Civ. A. 8578, 1988 WL 5492, at *4 (Del. Ch. Jan. 27, 1988) (" 'It
may be done only in the interest of justice, when such matters as fraud, contravention of law or
contract, public wrong, or where equitable consideration among members of the corporation
require it, are involved.' " (quoting Pauley Petroleum Inc. v. Continental Oil Co., 239 A.2d 629,
633 (Del. 1968))).
¶ 43 “ '[A]n alter ego analysis must start with an examination of factors which reveal how the
corporation operates and the particular defendant's relationship to that operation. These factors
include whether the corporation was adequately capitalized for the corporate undertaking;
whether the corporation was solvent; whether dividends were paid, corporate records kept,
18
1-12-2538
officers and directors functioned properly, and other corporate formalities were observed;
whether the dominant shareholder siphoned corporate funds; and whether, in general, the
corporation simply functioned as a facade for the dominant shareholder.' ” Harco National
Insurance Co. v. Green Farms, Inc., No. Civ. A. 1131, 1989 WL 110537, at *4 (Del. Ch. Sept.
19, 1989) (quoting United States v. Golden Acres, Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988)).
¶ 44 Defendants contend there is no basis for piercing the corporate veil because Westgate
kept separate records, was properly funded, and did not have funds that were commingled with
the funds of Halpin or Burnham. But, as the trial court recognized, if "a fraudulent conveyance
had occurred, then there would be a strong presumption for piercing the corporate veil." In
addressing this issue, the trial court found that Cullen "failed to adduce undisputed evidence
showing that fraud has been [perpetrated] by the individual [d]efendants." We disagree. As
already discussed, Halpin fraudulently conveyed Westgate's funds to insiders, namely Burnham,
himself, and his wife. Accordingly, the trial court erred in entering judgment in favor of
defendants on Cullen’s claim to pierce the corporate veil.
¶ 45 Fiduciary Duty
¶ 46 Lastly, Cullen argues the trial court erred in finding that Robert Halpin did not owe it a
fiduciary duty. We agree with Cullen—the corporate veil should have been pierced and Burnham
and Westgate are the same entity. Once Westgate became insolvent, Halpin, as the manger of
Burnham, owed a fiduciary duty to Cullen as a creditor of Westgate to manage its assets properly
and in the best interest of creditors. See Paul H. Schwendener, Inc. v. Jupiter Electric Co., 358
Ill. App. 3d 65, 75 (2005) ("[O]nce a corporation becomes insolvent, the fiduciary duty of an
officer is extended to the creditors of the corporation. [Citations.] The fiduciary duty arises
because, from the moment a corporation becomes insolvent, its assets are deemed to be held in
19
1-12-2538
trust for the benefit of its creditors. [Citation.]"). Halpin breached that duty by making
fraudulent, insider disbursements to Burnham, himself, and his wife, that left Westgate with no
assets to pay the amount owed o Cullen on the contract.
¶ 47 Remedy Under the UFTA
¶ 48 Under section 8 of the UFTA, a creditor may obtain avoidance of a fraudulent transfer to
the extent necessary to satisfy the creditor's claim or any other relief the circumstances may
require. 740 ILCS 160/8(a)(1) (West 2012). Thus, because we find that defendants violated
section 5 of the UFTA by disbursing all of Westgate’s assets to themselves and other unsecured
creditors when they knew about their potential liability to Cullen on its arbitration claim, we
remand to the trial court with directions to enter judgment in favor of Cullen and against
Burnham, Robert Halpin, and Lori Halpin. Cullen may thus pursue efforts to obtain satisfaction
of its judgment from defendants.
¶ 49 CONCLUSION
¶ 50 We reverse the circuit court's judgment in defendants' favor and remand for further
proceedings consistent with this opinion.
¶ 51 Reversed and remanded with directions.
20