for every month until May 2000, the General Ledgers reflect that Frawley owed the corporation
significantly more than what was owed by the corporation to him in subordinated debt and

accrued interest on the subordinated debt.

Analysis

Summary judgment is appropriate if, after drawing all reasonable inferences in favor of
the nonmoving party, there is no genuine issue of material fact and the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(c); Juarez v. Ameritech Mobile Communications,
Inc., 957 F.2d 317, 320 (7th Cir. 1992). Put another way, “where the undisputed facts
demonstrate that one party is entitled to judgment as a matter of law, summary judgment in favor
of that party is entirely appropriate.” Collins v. American Optometric Ass’n, 693 F.2d 636, 639
{7th Cir. 1982). The question is thus “whether the evidence presents a sufficient disagreement to
require submission to a jury or whether it is so one-sided that one party must prevail as a matter
of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). To pierce the corporate
veil under Illinois law, Nova must demonstrate that there is “such unity of interest and ownership
that the separate personalities of the corporation and the individual . . . no longer exist” and that
“adherence to the fiction of separate corporate existence would sanction a fraud or promote
injustice.” Hystro Productions, Inc. v. MNP Corp., 18 F.3d 1384, 1388-89 (7th Cir. 1994). In
this case, there are three issues that address whether piercing FTC’s corporate veil is appropriate:
(1) whether Frawley preferred himself as a creditor to the detriment of Nova or whether he was a
perfected secured creditor with priority over judgment lien holders such as Nova; (2) whether

Frawley used FTC funds as his own; and (3) whether, as an alternative to piercing FTC’s



Indus., Inc. v. Pollak Indus., Inc., 382 N.E.2d 393, 398 (Ill. App. Ct. 1978) (“The record indicates
that any loans Pollak made to the corporations were paid back. . . . [t]here is no evidence that
Pollak borrowed an excessive amount of money from [one of the corporations] or that he never
intended to pay back what he did borrow. Thus the record supports the inference that an
intermingling of funds did not occur.”). However, there are unresolved factual issues as to
whether FTC accurately maintained a running accounting of monies that either Frawley owed to
FTC or FTC owed to Frawley and to what extent, if it did at all, the amount Frawley owed to
FTC exceeded the amount FTC owed to Frawley. In the presence of issues of material fact as to

the accuracy of FTC accounting, summary judgment is inappropriate.

Illinois Uniform Fraudulent Transfer Act

Finally, Nova seeks an entry of judgment against Frawley and Cullen on the alternative
basis that the transfers at issue constitute fraudulent conveyances under two separate provisions
of the Illinois Uniform Fraudulent Transfer Act (UFTA). First, a transfer is fraudulent as to a
creditor if the debtor makes the transfer with actual intent to hinder, delay, or defraud any
creditor. 740 ILCS 160/5(a)(1). Second, when a person transfers money or other property to
another person without receiving anything in return, and the transferor is insolvent (or made
insolvent by the transfer), the transfer is voidable even if there was no intent to hinder creditors.
740 ILCS 160/6(a).

In response, Frawley and Cullen note that a “transfer,” for the purposes of avoidance
under the UFTA, must dispose of or part with an ‘asset’ or an ‘interest in an asset’ [but that the]

UTFA excludes from its definition of an ‘asset’ any property of the debtor ‘to the extent it is


1981), superseded by statute on other grounds, Levy v. Markal Sales Corp., 724 N.E.2d 1008
{Il. App. Ct. 2000).

On the other hand, a perfected secured creditor defeats a lien creditor. See Blatstein v.
Blatstein, 226 B.R. 140, 150 (E.D. Pa. 1998), aff'd in part, rev'd in part on other grounds, 192
F.3d 88 (3rd. Cir. 1999). A lien creditor has priority over a secured creditor only if the lien
attaches before the security interest is perfected. Blatstein, 226 B.R. at 150 (quoting Trinity
Holdings, Inc. v. The Firestone Bank, Civ. No. 92-203, 1994 WL 449258, *8 (W.D. Pa. May 4,
1994)). Nova attempts to argue that there are special rules regarding perfected secured creditors
when a corporation is insolvent, but “the law is that the directors or officers of a solvent
corporation, acting in good faith, may deal with it, and loan it money, and take security therefor,
and that the subsequent insolvency of the corporation will not affect their rights of action to
recover such loans, or enforce their securities.” [linois Steel Co. v. O’Donnell, 41 N.E. 185, 185
(Ill. 1895); 13 Ill. Law & Prac. Corporations § 204 (2002). There is no reason for subordinating
a secured Joan made to a corporation by a shareholder, officer, or director to the claims of its
general creditors in the absence of bad faith, fraud, or overreaching.’ In re Gaynes, 21 B.R. 504

(Bankr. D. Ariz. 1982); Abraham v. Lake Forest, Inc., 377 So.2d 465 (La. Ct. App. 1979);

5 Nova points out that although there are circumstances where directors or dominant
shareholders can prefer themselves or relatives over the claims of other creditors, those
transactions generally have been allowed because they survived the close scrutiny of the court
and were found to be fair and in good faith. See Illinois Steel Co., 41 N.E. at 186 (preference
given to relative of director or officer not invalidated “if it is otherwise fair and free from
fraud.”); Hanson v. Bradley, 10 N.E.2d 259, 263 (Mass. 1937) (secured creditor entitled to rights
“except so far as in exceptional cases courts find it necessary to restrict their rights in order to
prevent fraud or injustice through the use of corporate forms.”); Beaver Park Co, v. Hobson, 283
P. 772, 775 (Co. 1929) (officer of corporation has right to become creditor “in the absence of bad
faith or fraud.”). In the face of all the factual disputes in this case, however, such close scrutiny
of the transactions at issue is not yet possible.



corporate veil, the transfers at issue constitute fraudulent conveyances under the Illinois Uniform

Fraudulent Transfer Act (UFTA).

Did Frawley Prefer Himself as Creditor to the Detriment of Nova?

Nova’s first basis for piercing the corporate veil is that Frawley preferred himself as a
creditor to the detriment of other creditors, including Nova. As a general rule, corporate officers
have a duty not to make transactions for themselves which are damaging to the corporation and
profitable to them. O'Connell v. Pharmaco, Inc., 493 N.E.2d 1175, 1181 (Il. App. Ct. 1986). If
such transactions do occur, the officers have the burden of establishing the faimess of any
transaction in which they acquired corporate assets. Libco Corp. v. Roland, 426 N.E.2d 309, 312
(ill. App. Ct. 1981). Officers cannot serve themselves first by manipulating the affairs of the
corporation to the detriment of creditors. Mid-American Elevator Co., Inc. v. Norcon, Inc., 679
N.E.2d 387, 392 (Ill. App. Ct. 1996). It is also improper for corporate officers to manipulate
corporate property so as to pay their own claims against the company to the loss of creditors.
Rosebloom v, Whittaker, 33 Ill.App. 442, 443 (Ill. App. Ct. 1989). Accordingly, a “sole
stockholder cannot wrongfully cause the transfer of all of the property of the corporation to be
made to himself so as to deprive a creditor of the corporation the payment of his debt; and, if he
does so, the creditor may hold him responsible for that payment.” State Bank of Cerro Gordo v.
Benton, 317 N.E.2d 578, 580 (Ill. App. Ct. 1974), In other words, a creditor can bring an action
to pierce the corporate veil and hold officers personally liable for wrongfully converting or

misappropriating funds. Circle Sec. Agency Inc. v. Ross, 425 N.E.2d 1283, 1286 (Il. App. Ct.


the only method of perfection is obtaining control over the deposit account. 810 ILCS 5/9-
312(b)(1). A secured party has control ift

(1) __ the secured party is the bank with which the deposit account is maintained;

(2) the debtor, secured party, and bank have agreed in an authenticated record that the
bank will comply with instructions originated by the secured party directing
disposition of the funds in the deposit account without further consent by the
debtor; or,

(3) the secured party becomes the bank’s customer with respect to the deposit
account.

810 ILCS 5/9-104. Here, FTC argues that Frawley has failed to identify an authenticated record
with the bank holding FTC’s deposit accounts granting Frawley control over the deposit account,
as required under the statute. However, it is not Frawley’s burden in opposing summary
judgment to produce such evidence. Rather, FTC, as the movant, must establish that uncontested
facts establish that Frawley did not have control over the deposit account and that he therefore

had not perfected his security interest at the time of the transfers. FTC has not established this,

and therefore summary judgment is inappropriate on this basis as well.

Did Fraw: 1 as Hi ?

Nova’s second basis for piercing the corporate veil is that Frawley and Cullen used FTC
funds to pay for personal expenses and thus commingled funds. See Macaluso v. Jenkins, 420
N.E.2d 251, 256 (Ill. App. Ct. 1981). In response, Frawley claims that payment by FTC of any of
Frawley’s personal, non-business related expenses was offset against the outstanding perfected
secured debt of the Corporation owed to Frawley or revolving secured lines of credit. If FTC and
Frawley did accurately account for such personal use of corporate funds, then piercing the

corporate veil on the ground of intermingling of funds may not be appropriate. See Amsted



,

anate Order Form (06/97) : 4

United States District Court, Northern District of Hlinois

Name of Assigned Judy Sitting Judge if Oth
or Magistrate Judge James B. Zagel than Assigned Judge
CASE NUMBER OBC 3661 DATE 10/16/2003
CASE NOVA CHEMICAL, INC. vs. FRAWLEY, ET AL
TITLE
Un the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
(1) oO Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion due
@) i) Answer brief to motion due . Reply to answer brief due. .
(4) a Ruling/Hearing on set for at
(5) a Status hearing[held/continued to] [set for/re-set for] on set for at
(6) Oo Pretrial conference[held/continued to] [set for/re-set for] on set for at .
(7) oO Trial[set for/re-set for] on at
(8) o [Bench/Jury trial] [Hearing] held/continued to at
(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) O Local Rule 41.1 OOFRCP41(a(1) © FRCP41(a\(2).
ao [Other docket entry] Motion (12-1) for summary judgment is denied. Enter memorandum
opinion and order.
(1) @ [For further detail see order attached to the original minute order.]
No notices required, advised in open court. Document
a : Number
No notices required. ;
Notices mailed by judge's staff, OCT
Notified counsel by telephone. ‘due 20 2003
av | Docketing to mait notices.
Mail AO 450 form, Aynod LolY1sic ‘sn iil
Copy to judge/magistrate judge. yay
os neh Hd LE LOOEO | semis
mn ints Spend oeeeLLLd
hime recejved i
central Geom nailing deny ices



encumbered by a valid lien.” Blatstein, 226 B.R. at 150 (citing 12 Pa. Cons.Stat. § 5101(b)); see
also 740 ILCS 160/2(b) (defining “asset” as “property of a debtor” but not “property to the extent
it is encumbered by a valid lien.”); 740 ILCS 160/2(m) ( “A ‘valid lien’ means a lien that is
effective against the holder of a judicial lien subsequently obtained by legal or equitable process
or proceedings, a common-law lien, or a statutory lien.”). Therefore, if the property at issue is
not an asset, then the UFTA does not apply. Rich v. Rich, 405 S.E.2d 858, 861 (W. Va. 1991).

Here, there are genuine issues of material fact as to whether and to what extent Frawley
held valid security interests in the assets of FTC. “T]he determination of the validity and
priority of [Frawley’s] security interests in the assets of [FTC] proves crucial to this dispute”
because a perfected security interest would be a valid lien excluded under the UFTA. Blatstein,
226 B.R. at 150. In addition, although Nova may be correct that Frawley is liable under the
UFTA for the amount transferred above and beyond the value of his security interest, there are
unresolved factual issues regarding how much money Frawley loaned to FTC, how much of this
debt was paid off by FTC’s payment of Frawley’s personal expenses and cash taken from the
corporation by Frawley, and how much of the debt was due and owing in December 2000, the
time at which FTC transferred the $600,000 to Frawley personally. Accordingly, summary
judgment on the basis of the UFTA is inappropriate at this point.

For the reasons above, Nova’s Motion for Summary Judgment is DENIED.

ENTER:

No oC
(cs Zagel g
Unitgd States Distfict Judge
DATE: _[ ok 20)

10



Troglia v. Bartoletti, 451 P.2d 106 (Mont. 1969); Dean v. Kellogg, 68 N.E.2d 898 (Ill. 1946);
Dunham v. Natural Bridge Ranch Co., 147 P.2d 902 (Mont. 1944); Hanson v. Bradley, 10
N.E.2d 259 (Mass. 1937); Beaver Park Co. v. Hobson, 283 P. 772 (Colo. 1929).

Therefore, if Frawley was a perfected secured creditor, then the funds Nova seeks were
properly encumbered by a prior perfected security interest. It is beyond dispute that Frawley
entered some type of security agreement with FTC, attempted to execute a revolving note with
FTC in the amount of $3,000,000, and filed a financing statement in 1997. However, there are
genuine issues of material fact as to whether these actions perfected as to Frawley any security
interest as to FTC’s deposit account and/or permitted Frawley to make the transfers at issue to
himself. Furthermore, even if they did, there are further questions regarding: (1) how much
money Frawley loaned to FTC; (2) how much of this debt was paid off by FTC’s payment of
Frawley’s personal expenses and cash taken from the corporation by Frawley; (3) how much of
the debt was due and owing in December 2000, the time at which FTC transferred the $600,000
to Frawley personally; and (4) whether Frawley’s conduct, even though permissible per se
because of his status as a perfected secured creditor, was nonetheless improper because of bad
faith, fraud, or overreaching. All of these unresolved issues address the fundamental unresolved
issue of whether and to what extent Frawley was entitled to transfer money to himself in
December 2000 in priority above judgment lien holders such as Nova. Accordingly, summary
judgment on the basis that Frawley preferred himself to the detriment of Nova is inappropriate.

Nova attempts to argue that Frawley did not perfect his security interest in FTC’s deposit

account. Pursuant to the Illinois U.C.C., when a deposit account is taken as original collateral,



Frawley contends that, pursuant to the terms and conditions of the security agreement and
the $3,000,000 revolving note, he made two separate loans to FTC. First, he claims that in 1999
he personally loaned FTC $275,000, and the General Ledgers for FTC for 1999 and 2000 reflect
subordinated debt to Frawley in this amount.’ Frawley further alleges that he subsequently
loaned FTC another $400,000, which he claims is evidenced by a wire transfer order
confirmation dated October 20, 2000 and FTC’s October 2000 general monthly ledger noting
receipt of a $400,000 “Cash” transfer, identifying the debt as subordinated, and cross-referencing
the $400,000 transfer as “Subordinated Debt - Dan Frawley” (a ledger alleged use to keep track
of the debt FTC owed Frawley which was subjected to a perfected security interest). This
$400,000 transfer allegedly increased the subordinated debt owed by Frawley to FTC from
$275,000 to $675,000.

As to the charge regarding his use of FTC funds to pay for personal expenses, Frawley
alleges that FTC maintained a running accounting of monies that either he owed to FTC or FTC
owed to him in a “Due to/from Dan Frawley” ledger. Frawley alleges that bills paid by FTC on
behalf of him were charged to this ledger at all times. In other words, when FTC would pay, in
part or in total, a personal bill or expense of Frawley, the amount of the payment would be offset
against the outstanding perfected secured debt of FTC owed to Frawley or revolving secured
lines of credit. Nova disputes this by pointing to a few examples where personal bills paid by

FTC do not appear to be reflected in a corresponding charge in the ledger. Nova also notes that

4 As an aside, the Letke & Associates review of FTC’s balance sheets concluded that the
subordinated debt owed to the stockholders was accounted for in the same way as any other debt
would be to any other creditor and that no material modifications to the financial statements were
needed for them to be in conformity with generally accepted accounting principles.

3



personal checking account, and $150,000 was transferred to Cullen’s personal checking account.
These transfers allegedly depleted FTC’s remaining assets, causing it to go out of business
shortly thereafter and thus leaving nothing for Nova to collect in satisfaction of its judgment. In
addition, Nova claims that Frawley and Cullen used FTC funds to pay for personal expenses,
including several credit card purchases, a veterinary bill for Frawley’s dog, and water bills and a
homeowner’s insurance policy for personal properties owned by Frawley.

In response to these charges, Frawley argues that he became a perfected secured creditor,
three years before Nova became a lien creditor, and that the $600,000 transferred to him was
encumbered by secured lines of credit.2 On November 1, 1997, Frawley entered a security
agreement with FTC and executed a revolving note by FTC Corporation as “Maker” and himself
as “Lender” in the amount of $3,000,000. Shortly thereafter, Frawley filed a U.C.C. Financing
Statement. In the ensuing years, Frawley executed two revolving note extensions extending the
maturity date of the revolving note. In 2000, the accounting firm of Letke & Associates reviewed
FTC’s balance sheets as of December 31, 1999, the related statements of income, changes in
stockholders’ equity, and cash flows for the years then ended.’ This review found that FTC did
indeed have two revolving lines of credit with its stockholders in the amount of $3,000,000 and

$1,000,000 and collaterized by substantially all of the business assets of FTC.

? Cullen maintains that a portion of the $150,000 transferred to her was for year end
compensation as an employee of FTC, but per bankruptcy filing and a prior order of Judge
Leinenweber, the action against Cullen is stayed.

3 The review was done in accordance with the Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public Accountants.
Satisfying its main purpose, the review found that no material modifications should be made to
the financial statements in order for them to be in conformity with generally accepted accounting
principles.



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
NOVA CHEMICALS, INC., DGZ XETED
a
Plaintiff, OCT 20 2003
v. No. 02 C 3661

Judge James B. Zagel
DANIEL FRAWLEY and KATHLEEN
CULLEN,

Defendants.
MO) UM. IN, ORD
This is an action to pierce the corporate veil of Frawley Trading Corporation (“FTC”) and
hold the owners and sole shareholders, Daniel Frawley and Kathleen Cullen, personally liable for
a $750,000 judgment entered against FTC and in favor of Nova Chemicals (“Nova”) in
November 2000.' Nova now moves for summary judgment pursuant to Federal Rule of Civil

Procedure 56.

Factual Background

Nova claims that Frawley and Cullen, as FTC’s dominant (and indeed only) shareholders,
preferred themselves as creditors to the detriment of Nova by transferring $750,000 from FTC to
their personal checking accounts for their own personal use and benefit, less than one month after

the jury verdict award in Nova’s favor. Specifically, $600,000 was transferred to Frawley’s

' A separate judgment in the amount of $63,497.46 representing an award of Nova’s
costs as the prevailing party in the underlying litigation was also entered against FTC. FTC and,
Nova contends, the individual owners, are responsible for that unsatisfied judgment as well as the
interest that has accrued on both judgments from the dates those judgments were final.