FirstMerit Bank, N.A. v. Kloysner Grp., LLC, No. 16‑cv‑4930, 2017 U.S. Dist. LEXIS 183695 (N.D. Ill. Nov. 6, 2017)
In an action for violations of various sections of the Illinois Uniform Fraudulent Transfer Act, the District Court for the Northern District of Illinois (the “Court”) denied the Defendants’ Motion to Dismiss for lack of subject‑matter jurisdiction and failure to state a claim.
In September 2007, Potomac Property Management, LLC (“Potomac”) borrowed $1.1 million from Midwest Bank and Trust Company (“Midwest”) to purchase two parcels of real estate. On the day of the purchase, Dalila Feldman (“Feldman”) and Leonid Goldfarb (“Goldfarb”) executed a commercial guaranty backing Potomac’s debt. However, in November 2010, Goldfarb was declared bankrupt and his liability was discharged. In May 2011, Potomac failed to repay its debt and defaulted on the loan, and Feldman did not fulfill her obligation to repay Potomac’s debt. Then FirstMerit Bank, N.A. (“FirstMerit”), successor-in-interest to Midwest, filed a complaint in the Circuit Court of Cook County Illinois seeking to foreclose on Potomac’s properties and suing Feldman for breach of her guaranty. The action terminated with the foreclosure of Potomac’s properties and a deficiency judgment against Feldman for $631,235.43.
Feldman was the sole owner and employee of Reliable Medical Supply, Inc. (“Reliable”). Although Reliable stopped conducting business in 2012, it still retained large amounts of liquid assets and had no creditors. FirstMerit served Reliable in state court in February 2015 and Reliable did not respond or appear; thus, the State Court issued a final judgment against the company for the amount of Feldman’s debt, $614,657.28. Shortly after FirstMerit sued Feldman, she created The Kloysner Group (“Kloysner”) with Betsy Barbier and Allen Barbier (“Barbier Defendants”). Feldman provided no meaningful testimony about the formation or purpose of Kloysner in state court, only saying that money was put into the company. Kloysner’s address was a residence primarily owned by Feldman, never registered to do business in Illinois, and did not have any employees.
After the creation of Kloysner, Feldman transferred a total of $484,000 from Reliable to Kloysner without any consideration, which diminished the value of Feldman’s interest in Reliable. All the assets held by Kloysner originated with Feldman or Reliable. In July 2012, Kloysner transferred $150,000 to Maple Properties Development (“Maple”) for the Maple Avenue Property in Northbrook, Illinois. Maple then transferred the Maple Avenue Property by warranty deed to Kloysner. In August 2012, Kloysner transferred another $150,000 to Maple for the Maple Avenue property, and two months later, Kloysner transferred the Maple Avenue Property, without receiving any consideration, to Feldman and the Barbier Defendants as joint tenants by quitclaim deed. Kloysner then paid $48,961.05 to third parties to develop and improve the Maple Avenue Property. Feldman withdrew $64,000 in August 2012, and $20,000 in July 2014 from Kloysner without giving any consideration for the transfer. In June 2015, despite the state court’s order permitting FirstMerit to collect Potomac’s debt from Reliable, Feldman transferred $234,500 to YMS Ventures International, Inc. (“YMS”). The value purportedly provided to Reliable by YMS was the transfer of uncollectable debt obligations.
Following all these actions, FirstMerit filed a complaint alleging fraud against Feldman and certain of the other parties (the “Defendants”). In response to the complaint, the Defendants argued that FirstMerit’s complaint was deficient because it did not plead actual fraud with the requisite particularity. In assessing the that argument, the Court noted that FirstMerit need only offer sufficient factual support to show the claim is plausible; they are not required to definitively prove they will prevail. The Court noted that: “A plaintiff may also establish ‘constructive’ fraud as to a creditor under § 5(a)(2) [of IUFTA] by alleging that a defendant debtor made a transfer, either before or after the creditor’s claim arose, without receiving a reasonably equivalent value in exchange for the transfer.” The Court further noted that the Defendants argued FirstMerit’s claims fail under constructive fraud because they have not pled any facts that show that the conveyance or payment was not made for reasonably equivalent value. However, FirstMerit’s complaint sufficiently alleged that Reliable relinquished real money in the transfers, but the exchanges did not satisfy any pre‑existing obligations, obtain property, or generate funds that could satisfy Reliable’s debt to FirstMerit. Accordingly, the Court held that First Merit’s claims of constructive fraud for Counts I‑XII under IUFTA were pled sufficiently.
In addition, the Court noted that FirstMerit alleged that (i) Feldman was the sole president, owner, officer, and only employee of Reliable and (ii) that Reliable did not observe corporate formalities; had stopped conducting legitimate business; had no creditors; and did not make meaningful distributions to shareholders. Thus, the Court noted that the complaint included sufficient particularity to provide that Reliable only existed to hold assets for Feldman’s benefit and was an alter ego of Feldman. Evaluating the facts at hand, the Court noted that while absolved of the obligation as a guarantor of the original debt, Feldman may still be subject to judgment pursuant to 740 Ill. Comp. Stat. 160/9(b)(1) as a transferee in the fraudulent transfers from Reliable. Since the uncollectible debts could be deemed valueless, there are sufficient facts to support that Feldman did not embark upon this transaction in good faith and could be liable to FirstMerit as a transferee in the fraudulent scheme. For the forgoing reasons, the Court found that all constructive fraud claims were sufficiently pled.