Opinion ID: 2425819
Heading Depth: 2
Heading Rank: 2

Heading: Fraudulent Transfers

Text: In finding Banco's 2002 blanket lien over Loop's assets a fraudulent transfer, the district court found sufficient evidence of both actual and constructive fraud under Illinois's Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/5(a). Wachovia, 586 F.Supp.2d at 1015-16. Yet because Wachovia disclaimed making a case on anything other than actual fraud we will only examine the actual fraud findings. Banco argues that it held two blanket liens in Loop's assets, one established by the 2000 transaction and another by the 2002 agreement. Yet reading the 2002 transaction as anything other than an extension of the 2000 agreement with the same blanket lien would be a fundamental misconception of the arrangement. The 2002 agreement consolidated, amended and restated the 2000 guaranty and security agreement as described in the 2002 security agreement's caption. The 2002 agreement continued the lien created by the 2000 transaction and extended it to cover the new funds Banco loaned Loop under the same line of credit. In targeting the 2002 transaction as fraudulent, Wachovia claimed that Loop made the transfer with the actual intent to defraud Wachovia and hinder or delay its collection of Loop's margin debt. The 2002 transfer by its terms subsumed the obligations from the 2000 transaction. Cf. Schwinder v. Austin Bank of Chi., 348 Ill.App.3d 461, 284 Ill.Dec. 58, 809 N.E.2d 180, 189 (2004) (when a contract is modified or amended by a later agreement, a suit to enforce the agreement must be brought on the modified agreement and not on the original); In re Cole, No. 07-80542, 2007 WL 3302112, at  (Bankr. C.D.Ill. Nov. 6, 2007) (refinancing or an additional loan involved a renewal of the prior note and a continuation of the security interest in the collateral); In re Tardy, 18 B.R. 36, 37 (Bankr.C.D.Ill.1982); (if a note is renewed on a debt, the security interest thereon is not changed unless there is some showing of intent to the contrary or the parties formed a new agreement); Cmty. Bank of E. Peoria v. Meister Bros., Inc., 12 Ill.App.3d 1004, 299 N.E.2d 589, 592 (1973) (five notes were intended as a single, related transaction and the general rule is that where a note is given merely in renewal of another note and not in payment, the renewal does not extinguish the original debt nor change the debt except to postpone repayment (internal quotation marks omitted)). Banco's 2002 transaction with Loop merely extended, under, as we shall see, quite suspicious circumstances, the same blanket lien over Loop's assets asserted in 2000. A debtor makes a transfer or incurs an obligation that is fraudulent as to a creditor when done with actual intent to hinder, delay, or defraud any creditor of the debtor. 740 ILCS 160/5(a)(1). Wachovia had to prove Loop's actual intent by clear and convincing evidence. See Hofmann v. Hofmann, 94 Ill.2d 205, 68 Ill. Dec. 593, 446 N.E.2d 499, 506 (1983). To determine actual intent, the district court considered the factors listed in 160/5(b), known as badges of fraud, Lindholm v. Holtz, 221 Ill.App.3d 330, 163 Ill.Dec. 706, 581 N.E.2d 860, 863 (1991), to see whether a sufficient number gave rise to an inference or presumption of fraud, Steel Co. v. Morgan Marshall Indus., Inc., 278 Ill.App.3d 241, 214 Ill.Dec. 1029, 662 N.E.2d 595, 602 (1996). Appellants argue that the badges of fraud used by the district court to give rise to an inference of actual fraud were inapplicable or insufficient to raise the fraud presumption. See 740 ILCS 160/5(b). The district court found that Wachovia proved five: (1) Loop incurred the obligation to Banco shortly before or after Loop incurred its substantial debt to Wachovia; (2) the loan was between insiders; (3) Loop retained possession or control of the property; (4) the transfer was of most of Loop's assets; and (5) Loop was insolvent or became insolvent shortly after the transfer. Wachovia, 586 F.Supp.2d at 1015-16. Appellants argue that badge (3) does not apply because Loop did not retain possession or control of the property transferred in the 2002 transaction. Yet appellants also argue that Loop always remained the title owner of all of its assets before and after the granting of either lien. Banco Br. 31. Either way, appellants say nothing of the district court's finding that Greenblatt's status as a 50% owner of Loop and sole owner of Banco gave him effective control over Loop's assets before and after the 2002 transfer. Wachovia, 586 F.Supp.2d at 1016. Banco argues that badge (4) does not apply because Loop's assets were not transferred; as just noted, appellants argue that Loop remained the owner of the assets before and after the transaction. But a transfer under the UFTA includes the creation of a lien or other encumbrance. 740 ILCS 160/2( l ). By increasing and extending Loop's line of credit with Banco, the 2002 transaction allowed Banco to maintain and extend its lien on substantially all of Loop's assets. Given these badges of fraud, along with the attendant circumstances, the district court had more than an adequate basis to find an inference of Loop's fraudulent intent. See Alan Drey Co. v. Generation, Inc., 22 Ill.App.3d 611, 317 N.E.2d 673, 679 (1974); see also Brandon v. Anesthesia & Pain Mgmt. Assocs., 419 F.3d 594, 600 (7th Cir.2005) (badges of fraud, like symptoms of a disease, are not additive). Banco argues that the district court's ruling threatens to keep small business owners from lending to entities in which they own an interest. Yet the district court's findings show that this case rests on a rather extraordinary attempt to prevent creditors from collecting on a debt, a circumvention of the principle that when a business fails, shareholders are paid last. E.g., Lasday v. Weiner, 273 Ill.App.3d 461, 210 Ill.Dec. 222, 652 N.E.2d 1198, 1201 (1995) (share-holders are last in line in a distribution from a dissolved corporation). Regarding the other transactions found fraudulent, the district judge stated near the end of trial that she would not rule on any fraudulent transfer that was not charged in Wachovia's complaint. Thus, the court's finding that Loop's $518,338 payment to EZ Links was fraudulent was error as confirmed by Wachovia's counsel at argument. Wachovia also did not allege that Loop's payments to Jahelka and Nichols were fraudulent. Yet because appellants did not raise this issue in their opening briefs, they waived any argument on this ruling. See Clarett v. Roberts, 657 F.3d 664, 674 (7th Cir.2011) (argument addressed in two sentences in opening brief deemed waived); Citizens Against Ruining the Env't v. EPA, 535 F.3d 670, 675 (7th Cir.2008) (raising argument in reply does not give an adversary adequate opportunity to respond).