Courts frequently face issues arising out of parties’ transfers of property prior to, during or after claims are made against them in litigation. Creditors often claim debtors transfer their properties to others to avoid seizure of their properties after entry of a judgment. The Illinois Fraudulent Transfer Act (“Act”) prohibits debtors from transferring their properties to others if such transfers are made with actual intent to hinder, delay or defraud any creditor. Application of the Act was illustrated in the recent Seventh Circuit Court of Appeals decision in Brandon v. Anesthesia & Pain Management Associates, Ltd.
Michael Brandon (“Brandon”), a physician, won a $2.53 million judgment for retaliatory discharge by his former employer, Anesthesia & Pain Management Associates, Ltd. (“APM”). He learned that after he had filed suit, APM had transferred $878,000 from accounts receivable, as well as $300,000 in cash bonuses, to APM’s three physician-shareholders, and two physicians employed by APM. All five physicians were named as defendants, along with APM and St. Clair Anesthesia Ltd., a corporation formed by APM’s shareholders the day after Brandon obtained his judgment.
Brandon claimed payments made to the defendants after he sued APM, and out of the proceeds from the collection of APM’s receivables, left APM with just $39,000 in assets and amounted to fraudulent conveyances. According to the Court of Appeals, the District Court erred in concluding that the defendants did not owe Brandon anything. The Court of Appeals held that the physicians did not own the receivables collected by APM, and the “bonuses” were not compensation for services rendered to APM, but represented shares in APM’s profits.
According to the Court of Appeals, APM’s pre-judgment practice of treating accounts receivable as property of the physician-defendants was merely a device for corporate profit sharing. APM’s patients made their payments to APM, not to the physicians. APM applied receipts to the payment of its debts and to otherwise conduct its business before paying any of the receipts to the physicians. Thus, the physicians themselves treated receivables as corporate property. Similarly, bonuses were neither wages contractually due the recipients nor even “earned bonuses” under the Illinois Wage Payment and Collection Act; they were paid after operating expenses and represented corporate profits. The cash used to pay them was a corporate asset, just like the proceeds from the receivables.
The Court of Appeals concluded that the distributions made to physician-defendants were fraudulent conveyances under the Act. There was no consideration (the bonuses were not accrued wages and the defendants had not paid or given other value for the accounts receivable) and, after the payments, there were insufficient remaining assets to satisfy creditors. In addition, the distributions were intended to prevent a creditor from collecting on a claim.
Application of the Act requires careful analysis of all circumstances and events. If you believe you have been prejudiced by a fraudulent conveyance, or if you want to take an action and avoid a fraudulent transfer claim, please contact us.