Zurich American Insurance Co. v. Personnel Staffing Group, LLC ( 2018 )

2018 IL App (1st) 172281No. 1-17-2281
May 15, 2018
SECOND DIVISION
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
ZURICH AMERICAN INSURANCE COMPANY and ) Appeal from the
AMERICAN ZURICH INSURANCE COMPANY, ) Court Circuit of
) Cook County.
Plaintiffs-Appellees, )
) 17 L 003729
v. )
)
PERSONNEL STAFFING GROUP, LLC; DANIEL ) Honorable
S. BARNETT; and DASH MANAGEMENT, ) Thomas R. Mulroy, Jr.,
) Judge Presiding.
Defendants-Appellants. )
______________________________________________________________________________
PRESIDING JUSTICE NEVILLE delivered the judgment of the court, with opinion.
Justices Hyman and Mason concurred in the judgment and opinion.
OPINON
¶1 After Zurich American Insurance Company (Zurich) filed a demand for arbitration of its
dispute with its insured, Personnel Staffing Group, LLC (PSG), Zurich filed a complaint
against PSG and two other defendants, alleging that PSG fraudulently transferred funds to the
other defendants to avoid paying an anticipated arbitration award. PSG filed in court a
counterclaim that matched claims it raised in the arbitration. The Cook County circuit court
denied the defendants’ motion to compel arbitration of the fraudulent transfer claim, and it
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denied the defendants’ motion to stay proceedings on the fraudulent transfer claims pending
resolution of the arbitration. The court also dismissed the counterclaims to compel arbitration
of those claims. The defendants now appeal.
¶2 We find that Zurich’s complaint concerns collection of the arbitration award and the
circuit court correctly held that the parties did not agree to arbitrate issues regarding
collection of arbitration awards. Staying proceedings on the fraudulent transfer claims
pending arbitration would conflict with the purposes of the Uniform Fraudulent Transfer Act
(Act). 740 ILCS 160/1 et seq. (West 2016). The defendants concede that the parties agreed to
arbitrate the issues raised in their counterclaims. Accordingly, we affirm the circuit court’s
order.
¶3 BACKGROUND
¶4 In 2011, PSG bought workers’ compensation insurance from Zurich subject to a “Loss
Retrospective Agreement” (Agreement), which provided that PSG would pay Zurich an
amount that depended on the workers’ compensation claims eventually filed against PSG for
the covered period. The Agreement established that Zurich would handle the claims and then
bill PSG for the paid losses. Because Zurich would initially pay the claims, it effectively
loaned the payments to PSG. The Agreement referred to this aspect of the Agreement as a
“risk financing arrangement,” for which Zurich required collateral in the form of a letter of
credit in “an amount sufficient to secure [PSG’s] financial obligations under this
Agreement.” The Agreement also provided that “[a]ny dispute arising out of the
interpretation, performance or alleged breach of this Agreement, shall be settled by binding
arbitration.”
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¶5 For several years, PSG regularly paid Zurich the amounts Zurich billed, but
disagreements arose, and PSG stopped reimbursing the full amounts demanded. In June
2016, the final policy term ended, and PSG bought insurance from another source. On
December 1, 2016, Zurich filed a demand for arbitration to resolve its disputes with PSG.
Zurich sought to recover more than $4.6 million for the retrospective premiums already due,
and it sought a letter of credit in the amount of $39 million as security for future claims. PSG
replied that Zurich had breached the Agreement by “engag[ing] in a pattern and practice of
settling claims without regard for whether the settlements were reasonable,” by “fail[ing] to
properly investigate and manage claims,” and by “failing to consult with PSG about
settlements and reserve charges that exceed $10,000.”
¶6 Before the arbitration hearing began, Zurich filed the complaint that initiated the lawsuit
now before this court. Zurich named as defendants PSG, Dash Management, Inc. (Dash), and
Daniel S. Barnett. Barnett, the “majority member” of PSG, owned Dash, and PSG paid Dash
management fees. Zurich alleged that the defendants violated the Act in 2015, when PSG
distributed $4.5 million to Barnett and paid Dash $5.8 million in management fees.
¶7 The defendants filed a “Motion To Dismiss or Stay or in the Alternative for Judgment on
the Pleadings.” They argued that either the circuit court should dismiss the lawsuit and
compel arbitration of the fraudulent transfer claims or the court should stay proceedings on
the fraudulent transfer claims until the arbitrators issue a final award. In the alternative, the
defendants sought judgment on the pleadings, arguing that PSG’s debt to Zurich did not arise
until 2017 and, therefore, Zurich could not challenge the transfers PSG made in 2015. The
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defendants also filed a counterclaim that raised the same issues PSG raised in arbitration.
Zurich filed a motion to compel arbitration of the counterclaim.
¶8 The circuit court set a date for hearing the “Motion To Dismiss or Stay or in the
Alternative for Judgment on the Pleadings.” Following the hearing, the court entered an order
in which it (1) denied the motion to dismiss the lawsuit to compel arbitration of the
fraudulent transfer claims, (2) denied the motion to stay proceedings on Zurich’s complaint,
(3) denied the motion for judgment on the pleadings, and (4) granted Zurich’s motion to
compel arbitration of the counterclaims. The defendants filed a notice of appeal.
¶9 ANALYSIS
¶ 10 Illinois Supreme Court Rule 307(a)(1) (eff. Nov. 1, 2017) gives this court jurisdiction to
decide this appeal. MHR Estate Plan, LLC v. K&G Partnership, 2016 IL App (3d) 150744,
¶ 15; Robert A. Besner & Co. v. Lit America, Inc., 214 Ill. App. 3d 619, 623 (1991) (an order
compelling arbitration is considered to be an appealable interlocutory order because it is
injunctive). The circuit court considered only the pleadings and attached documents, deciding
the issues as a matter of law. Therefore, we review the court’s decision de novo. Board of
Managers of Chestnut Hills Condominium Ass’n v. Pasquinelli, Inc., 354 Ill. App. 3d 749,
753-54 (2004).
¶ 11 Motion to Compel Arbitration
¶ 12 PSG argues first that the circuit court should have granted its motion to compel Zurich to
arbitrate its fraudulent transfer claims against PSG because the claims “aris[e] out of the
interpretation, performance or alleged breach of th[e] Agreement.” We disagree. In its
complaint, Zurich alleged that PSG transferred funds to Barnett and Dash to avoid paying a
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possible arbitration award. Zurich’s complaint parallels the complaints filed in Northern
Tankers (Cyprus) Ltd. v. Backstrom, 967 F. Supp. 1391 (D. Conn. 1997); Ryan Racing, LLC
v. Gentilozzi, 231 F. Supp. 3d 269 (W.D. Mich. 2017); and Apparel Art International, Inc. v.
Jacobson, Civ. No. 90-1756 (JAF), 1991 WL 641949 (D.P.R. Aug. 21, 1991), aff’d, 967 F.2d
720 (1st Cir. 1992). In Apparel Art, the plaintiff claimed that after it initiated arbitration of its
claims against Amertex, “the principals of Amertex themselves, through family members and
shell corporations, transferred virtually all assets from Amertex while the arbitration was
proceeding as a way to frustrate plaintiff’s attempt to collect on any award it might receive.”
Apparel Art, 1991 WL 641949, at *3. The Apparel Art court observed, “the fraudulent
transfer claim is merely one aspect of plaintiff’s attempt at collection of the judgment”
entered on the arbitration award. Apparel Art, 1991 WL 641949, at *3. Ryan Racing and
Northern Tankers also involved fraudulent transfer claims addressed in court as part of the
plaintiffs’ efforts to collect arbitration awards. Ryan Racing, 231 F. Supp. 3d at 275-76;
Northern Tankers, 967 F. Supp. at 1394-95.
¶ 13 In Geneva Corporate Finance v. G.B.E. Liquidation Corp., 598 N.W.2d 331 (Iowa Ct.
App. 1999), the plaintiff won an arbitration award against the defendant and obtained a
judgment on the award. The plaintiff then filed a fraudulent transfer complaint against the
defendant in court. The defendant asked the court to dismiss the complaint as res judicata,
arguing that the plaintiff could have pursued the fraudulent transfer claim in arbitration. The
Geneva court held that the judgment on the arbitration award did not bar the fraudulent
transfer claim because “the arbitration award established defendant corporation’s liability
under the listing contract and this action deals with collecting the judgment.” Geneva, 598
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N.W.2d at 334. We find that Zurich, like the plaintiffs in Geneva, Apparel Art, Ryan Racing,
and Northern Tankers, brought the fraudulent transfer claim as part of an effort to collect an
arbitration award.
¶ 14 Under the Uniform Arbitration Act (710 ILCS 5/1 et seq. (West 2016)), after a party
obtains an arbitration award, the party must file a complaint in court for confirmation of the
award. 710 ILCS 5/14 (West 2016); see Windham v. Doctor’s Associates, Inc., 127 A.3d
1082, 1086-87 (Conn. App. Ct. 2015). The court then decides issues related to enforcement
and collection of the judgment entered on the award. 710 ILCS 5/14 (West 2016); see Adam
Martin Construction Co. v. Brandon Partnership, 135 Ill. App. 3d 324, 326 (1985).
¶ 15 The defendants cite Miller v. Flume, 139 F.3d 1130 (7th Cir. 1998), as authority holding
that the arbitrator should decide fraudulent transfer issues. In Miller, the defendant won an
arbitration award against the plaintiffs, and a court entered a judgment confirming the award.
The defendant then filed a second arbitration demand, alleging that the plaintiffs had
fraudulently transferred assets to avoid paying the arbitration award. Miller, 139 F.3d at
1131. The plaintiffs filed a complaint to enjoin the second arbitration, which concerned only
enforcement and collection of the original arbitration award. The Miller court found the
fraudulent transfer claim arbitrable. The court emphasized that “the language of this
particular agreement to arbitrate is quite broad, sweeping in not only claims that literally
‘arise out of’ the business of the firm (i.e., its buying and selling activities), but also claims
that have a ‘connection’ with the firm’s business.” Miller, 139 F.3d at 1136.
¶ 16 The arbitration clause here, unlike the clause at issue in Miller, limits its scope to issues
that arise out of the interpretation, performance, or alleged breach of the Agreement. The
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Agreement manifests an intention to adopt the usual arrangement: the arbitrator decides how
much each party owes the other under the contract, and the court decides issues related to
enforcement and collection of the arbitrator’s award. We find that the issues surrounding the
allegedly fraudulent transfers concern collection of the arbitrator’s award and, therefore, they
do not arise out of the interpretation or performance of the Agreement. The circuit court
correctly denied the defendants’ motion to compel Zurich to arbitrate its fraudulent transfer
claims.
¶ 17 Motion to Stay
¶ 18 Next, the defendants argue that the circuit court should have stayed court proceedings
pending issuance of the arbitral award. “The purpose of the Uniform Fraudulent Transfer Act
is to prevent fraudulent transfers of property by a debtor who intends to defraud creditors by
placing assets beyond their reach.” Yokogawa Corp. of America v. Skye International
Holdings, Inc., 159 S.W.3d 266, 269 (Tex. App. 2005). In accord with the purposes of the
Act, “[a] ‘claim’ under the Act may be maintained even though ‘contingent’ and not yet
reduced to judgment.” Cook v. Pompano Shopper, Inc., 582 So. 2d 37, 40 (Fla. Dist. Ct. App.
1991) (per curiam); see Salisbury v. Majesky, 352 Ill. App. 3d 1188, 1190-91 (2004). “[I]f
automatically staying discovery and progression of [fraudulent transfer] claims was standard
and a failure to do so an abuse of discretion, the goal of protecting creditors from wrongful
asset transfers would likely be nearly entirely frustrated.” Friedman v. Heart Institute of Port
St. Lucie, Inc., 863 So. 2d 189, 193 (Fla. 2003). We find that, in accord with the purposes of
the Act, the circuit court correctly denied the motion to stay proceedings under the Act.
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¶ 19 Motion to Dismiss
¶ 20 The defendants argue that the circuit court improperly ruled on their motion to dismiss
under section 2-615 of the Code of Civil Procedure. 735 ILCS 5/2-615 (West 2016). The
defendants asked the circuit court to dismiss the complaint on grounds that Zurich had no
claim against PSG in 2015, when PSG made the transfers Zurich seeks to challenge. In this
appeal, the defendants argue that the circuit court erred when it denied the motion for
judgment on the pleadings because “[d]efendants did not have any opportunity to file a brief
or make any argument” in support of their motion. However, defendants do not argue that the
denial of the motion to dismiss the complaint qualifies as an order granting or denying an
injunction. See Ill. S. Ct. R. 307(a) (eff. Nov. 1, 2017). In this limited appeal under Rule 307,
we lack jurisdiction to address the denial of a motion to dismiss the complaint. See Mund v.
Brown, 393 Ill. App. 3d 994, 996 (2009); Murges v. Bowman, 254 Ill. App. 3d 1071, 1080
(1993).
¶ 21 Counterclaims
¶ 22 Finally, the defendants contend that the circuit court erred when it granted Zurich’s
motion to compel arbitration of the counterclaims. The defendants admit that all of their
counterclaims arose out of the Agreement and concern the amount due under the Agreement.
None of the counterclaims involve collection of a possible arbitral award. Because the
defendants admit that their counterclaims arose out of the Agreement, the circuit court
correctly granted Zurich’s motion to compel arbitration of the counterclaims.
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¶ 23 CONCLUSION
¶ 24 Zurich and PSG agreed to arbitrate all claims arising out of the interpretation or
performance of the Agreement, but they did not agree to arbitrate issues concerning
collection and enforcement of an arbitrator’s award. Because Zurich’s fraudulent transfer
claims concern collection of a possible award, the claims do not arise out of the interpretation
or performance of the Agreement. The circuit court correctly denied the motion to compel
arbitration of Zurich’s fraudulent transfer claims. The court also correctly denied the motion
to stay proceedings on the complaint pending arbitration. As the defendants conceded that the
arbitrators have jurisdiction to decide their counterclaims, the circuit court correctly granted
Zurich’s motion to compel arbitration of the counterclaims. Accordingly, we affirm the
circuit court’s judgment.
¶ 25 Affirmed.
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