Court Opinion

ID: 2713842
Source: CourtListenerOpinion
Date Created: 2014-08-05 22:02:05.396955+00
Date Added: 2024-06-11T13:17:09.885657
License: Public Domain

2014 IL App (2d) 130998
                                  No. 2-13-0998
                           Opinion filed August 5, 2014
______________________________________________________________________________

                                           IN THE

                            APPELLATE COURT OF ILLINOIS

                              SECOND DISTRICT
______________________________________________________________________________

ADVOCATE FINANCIAL GROUP, LLC,            ) Appeal from the Circuit Court
                                          ) of Du Page County.
       Plaintiff-Appellee,                )
                                          )
v.                                        ) No. 11-L-87
                                          )
5434 NORTH WINTHROP, LLC;                 )
JAMES CARTWRIGHT; WILLIAM                 )
CARTWRIGHT; BERNARD BOTHEROYD; )
SEVERINO; HARRY POWELL;                   )
CONNIE POWELL; MICHAEL PROKOP;            )
THERESA McLAUGHLIN; SYNTHIA               )
STRYZEK; MARGARET HANEY; ANN              )
BRENSEN; and BARBARA PALMER,              )
                                          )
       Defendants                         )
                                          ) Honorable
(Steward Apartments, Citation Respondent- ) Ronald D. Sutter,
Appellant).                               ) Judge, Presiding.
______________________________________________________________________________

       JUSTICE HUDSON delivered the judgment of the court, with opinion.
       Justice Hutchinson concurred in the judgment and opinion.
       Justice Jorgensen dissented, with opinion.

                                         OPINION

¶1     Plaintiff, Advocate Financial Group, LLC, obtained a judgment against 5434 North

Winthrop, LLC (North Winthrop), a corporation that had been dissolved. North Winthrop’s sole

asset, a residential building in Chicago (Chicago property), had been sold to a purchaser that

later resold it to Steward Apartments, LLC (Steward). To satisfy its judgment against North
2014 IL App (2d) 130998

Winthrop, plaintiff sought a turnover order against Steward (see 735 ILCS 5/2-1403 (West

2010)). After a trial, the trial court granted the order, holding that, as the “mere continuation” of

North Winthrop, Steward was responsible for its debts. Steward appeals, contending that the

court misapplied the “mere continuation” exception to the general rule that a corporation that

purchases the assets of another corporation is not liable for the other corporation’s debts. We

vacate and remand.

¶2     North Winthrop was formed to develop the Chicago property and sell condominium units

there. Its “Operating Agreement,” dated December 21, 2006, listed its members and their

respective interests as James and William Cartwright, brothers, who were also managers (7.65%

each); Bernard Botheroyd (15.4%); William Severino (15.4%); Harry and Connie Powell jointly

(7.7%); Michael Prokop (7.7%); Theresa McLaughlin and Synthia Stryzek jointly (15.4%);

Margaret Haney (15.4%); and Ann Brensen and Barbara Palmer jointly (7.7%).                 In 2007,

National City Bank, the predecessor to PNC Bank, National Association (PNC), lent North

Winthrop $1,662,000, secured by a mortgage on the property, with most of North Winthrop’s

members personally guaranteeing the loan. Later, North Winthrop defaulted on the loan, and

PNC started foreclosure proceedings.

¶3     On January 15, 2010, plaintiff and North Winthrop entered into a “working agreement”

under which plaintiff would assist North Winthrop in obtaining financing to pay off PNC and

complete the project. On December 23, 2011, North Winthrop and PNC signed a settlement

under which PNC released North Winthrop from the mortgage, released the personal guarantors

from most of their obligations as such, and reduced North Winthrop’s debt to $750,000. In

return, North Winthrop agreed to sell the property to CSM Capital, LLC (CSM). On December

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30, 2011, the sale closed for $650,000. CSM took title in the name of Winthrop Real Estate,

LLC (Winthrop Real Estate). On June 8, 2012, North Winthrop was involuntarily dissolved.

¶4     On March 6, 2012, Steward filed its operating agreement with the Secretary of State’s

office. It stated that the company had been formed “to own and operate” the Chicago property.

It listed the members and their respective interests as James Cartwright (17.99%); William

Cartwright (11.65%); Botheroyd (14.31%); Prokop (10.32%); Haney (30.22%, including 15.11%

transferred from McLaughlin); and Brensen and Palmer jointly (15.51%). On March 19, 2012,

Winthrop Real Estate and Steward closed the sale of the property for $676,008.20. Winthrop

Real Estate agreed to lend Steward $400,000 to complete the project.

¶5     In the meantime, plaintiff had obtained an arbitration award against North Winthrop for

unpaid fees under the working agreement. On September 7, 2011, plaintiff filed an amended

complaint to confirm the award, naming North Winthrop and its individual members as

defendants. On October 11, 2012, after North Winthrop had been dissolved, the trial court

entered judgment for plaintiff and against North Winthrop, but not the individual defendants, for

$50,896.23 for plaintiff’s services and $36,550 in attorney fees.

¶6     On February 7, 2013, plaintiff moved for a turnover order against Steward, claiming that

Steward was liable for North Winthrop’s judgment debt because Steward was the “mere

continuation” of North Winthrop. Plaintiff observed that North Winthrop’s sole asset—the

eponymous Chicago property—was also Steward’s sole asset.              Further, most of North

Winthrop’s members were now members of Steward, and every member of Steward had been a

member of North Winthrop. Citing Dearborn Maple Venture, LLC v. SCI Illinois Services, Inc.,

2012 IL App (1st) 103513, and Workforce Solutions v. Urban Services of America, Inc., 2012 IL

App (1st) 111410, plaintiff contended that this case fit within an exception to the rule that a

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corporation that purchases another corporation’s assets is not liable for the other corporation’s

debts.

¶7       In response, Steward argued as follows. North Winthrop sold the Chicago property in

order to satisfy its settlement with PNC. The sale to CSM/Winthrop Real Estate, for $650,000,

was an arm’s-length transaction between unaffiliated entities: no member of North Winthrop had

any interest in Winthrop Real Estate.      On December 30, 2011, when the sale closed, the

guarantors of the PNC note were required to contribute an additional $140,000 to pay off the

note. Steward could not be North Winthrop’s “mere continuation,” because North Winthrop sold

the building to CSM/Winthrop Real Estate, an independent corporation, and, sometime later,

CSM/Winthrop Real Estate voluntarily sold the building to Steward. The “mere continuation”

doctrine applies only to direct transfers of assets; no case law holds that one corporation can be

the mere continuation of another where the assets of the first corporation were acquired and then

resold in arm’s-length transactions by an independent entity.

¶8       The parties agreed that an evidentiary hearing was needed to resolve the dispute. At the

hearing, the sole witness was James Cartwright, through whose testimony several exhibits were

admitted into evidence. On examination by plaintiff’s attorney, Cartwright testified as follows.

In December 2006, North Winthrop was formed in order to purchase the Chicago property, with

the aim of rehabilitating it and selling condominium units. North Winthrop conducted no

business other than owning and developing the property. After the tenants’ leases expired, North

Winthrop did not renew any of them. It obtained a construction loan from National City for

approximately $1.5 million. PNC bought out National City and acquired the interest in the loan.

In 2008, when the real-estate and financial markets declined, PNC required an additional

$300,000 in order to continue to finance the loan. The Cartwrights took out a separate loan.

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¶9     Cartwright testified that, late in 2008, PNC stopped funding the project altogether. North

Winthrop found out that CSM might be able to provide capital to get the project restarted. North

Winthrop’s members were concerned about completing the project, and the Cartwrights, Harry

Powell, McLaughlin, Stryzek, and Haney were also concerned about “get[ting] off the

guarantees” they had made to PNC. Shown the December 23, 2011, settlement with PNC,

Cartwright agreed that his dealings with CSM would have begun before that date. CSM bought

the building, and, as part of the settlement, several of North Winthrop’s members paid PNC

$140,000 to “get off the guarantees.” Shown the contract between North Winthrop and CSM,

Cartwright acknowledged that it stated that the parties had entered into it in May 2011, although

the closing took place on December 30, 2011. After the closing, North Winthrop “stopped

functioning. There was [sic] no assets.” North Winthrop and its members “were completely

finished with [CSM].”

¶ 10   Cartwright testified that he and William were the managing members of Steward. He

explained the origins of Steward. Early in 2012, Winthrop Real Estate (formerly CSM) was

having difficulty obtaining permits and a water meter. Joe Capicious, Cartwright’s long-time

acquaintance, asked him whether “we” were interested in continuing to develop the Chicago

property, because “we had the permits in place. We had the wherewithal with the City to get

things like the water meter.” Cartwright agreed with plaintiff’s attorney that “the City basically

let Steward jump into the place of *** North Winthrop.”

¶ 11   Cartwright also agreed with plaintiff’s attorney that Steward was formed with one

purpose: to regain ownership of the property. He also agreed that part of his motivation was to

“salvage the money [he] had already put into the project.” On March 19, 2012, Steward signed

the contract buying the property from Winthrop Real Estate for $676,008.20. Shown a provision

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2014 IL App (2d) 130998

in the contract referencing a title commitment from a title insurer, effective January 9, 2012,

Cartwright testified that he did not know anything about the commitment; he had signed the

contract but had not read it first. Although the contract stated that the purchaser would pay a

$210-per-day penalty if the closing occurred after March 2, 2012, he did not recall Steward

paying any such penalty.

¶ 12   Cartwright testified that the deed of sale was dated March 8, 2012. He did not attend the

closing and did not personally remember when it occurred. The closing statement recited that

“CSM Capital” would lend Steward $400,000 to complete the construction and that the purchase

was contingent on Steward obtaining financing before the closing. Steward obtained financing,

repaid the loan, and, in February 2013, refinanced the project through Signature Bank.

¶ 13   On examination by Steward’s counsel, Cartwright testified as follows. After PNC settled

with North Winthrop in the foreclosure case, North Winthrop sold the property to

CSM/Winthrop Real Estate for $650,000. North Winthrop also raised $140,000 to “get off the

guarantees” for the debt to PNC. North Winthrop had no ownership interest in CSM/Winthrop

Real Estate; to Cartwright’s knowledge, neither did any of North Winthrop’s individual

members. By settling the foreclosure case and selling the property, North Winthrop and the

guarantors saved approximately $1.1 million. No sale proceeds were distributed to any members

of North Winthrop. After the sale, North Winthrop had no assets and conducted no further

business.

¶ 14   Cartwright testified that, on March 5, 2012, he signed the contract of sale from Winthrop

Real Estate to Steward. On March 6, 2012, he signed the operating agreement for Steward.

Before March 2012, Capicious had approached Cartwright about a possible sale, and several

former members of North Winthrop had agreed to participate. When the original sale by North

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Winthrop to CSM/Winthrop Real Estate closed, there was no “agreement in place” to resell the

property to any entity connected with Cartwright.

¶ 15   On reexamination by plaintiff, Cartwright stated that, when he first met with Capicious,

the project was “in distress.”     Capicious told Cartwright that he was a member of CSM.

Capicious became Cartwright’s contact, and eventually CSM approved the sale from North

Winthrop to CSM. Cartwright did not know whether CSM had obtained an appraisal for the

property before the closing; he “would imagine [it] did.” Within 45 days of buying the property,

CSM/Winthrop Real Estate contacted Cartwright about a possible resale; Cartwright “jumped on

that as soon as they agreed to it,” in part to salvage the money he had already put into the project.

Steward was formed with the Cartwrights as managers; some, but not all, of North Winthrop’s

former members were members of Steward. Steward’s purpose in buying the property was the

same as North Winthrop’s had been: to rehabilitate it and convert it to condominiums, sell it, or

continue to own it as an investment.

¶ 16   The parties rested. The trial court admitted the exhibits about which Cartwright had

testified. In its closing argument, plaintiff contended in part that Steward was liable for North

Winthrop’s debts because Steward was a mere continuation of the defunct corporation. Plaintiff

noted that the members of the two corporations were almost identical; the only difference was

that a few members of North Winthrop were not members of Steward. Further, plaintiff noted

that the corporations owned the same asset, the Chicago property, and no other property, and that

they had the same purpose for owning that asset.          Plaintiff also contended that there was

evidence that the two transactions were not arm’s length and were instead a single scheme to

enable North Winthrop to avoid its debts; plaintiff noted how soon one sale was followed by the

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2014 IL App (2d) 130998

other and that the title commitment for the second sale had been obtained only days after the first

sale.

¶ 17    In response, Steward contended that plaintiff’s fraud argument was a new theory that it

had not raised in the motion for a turnover order. Not only was fraud unproven, Steward

maintained, but, as a matter of law, the facts did not fit the mere-continuation doctrine. In all

opinions applying the doctrine, there had been a direct transfer of assets from corporation A to

corporation B, which had the same, or nearly the same, ownership (or a series of such transfers

between essentially identical entities). Here, by contrast, there was an intervening arm’s-length

transfer from corporation A to corporation C, which was free to hold onto the asset or transfer it

in any way that it wished, followed by an arm’s-length transfer from C to B. There was no sale

from A to B, and the intervening two sales were not a sham or a scheme to defraud creditors.

North Winthrop had sold the property to CSM/Winthrop Real Estate in order to settle its

foreclosure suit with PNC on terms beneficial to both; in turn, CSM/Winthrop Real Estate had

sold the property to Steward because it discovered that it could not develop the property on its

own.

¶ 18    In reply, plaintiff argued that even before the first sale, from North Winthrop to

CSM/Winthrop Real Estate, there had been negotiations that eventually culminated in the sale of

the property from CSM/Winthrop Real Estate to Steward, a corporation that was essentially

identical to North Winthrop. Further, even if there was no prearranged double-sale, Steward was

liable to plaintiff because it was the mere continuation of North Winthrop.

¶ 19    The trial court ruled in plaintiff’s favor. The court explained as follows. Plaintiff had

obtained a judgment against North Winthrop for a debt. The issue was whether Steward could

be held liable for the judgment. The sale from North Winthrop to CSM/Winthrop Real Estate

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2014 IL App (2d) 130998

closed in late December. Within “a matter of days,” a title commitment had been obtained for a

sale of the property to Steward. Cartwright had testified that one of the main purposes of the

first sale was to remove his and other members’ personal liability as guarantors of the PNC loan

to North Winthrop.        Capicious then approached Cartwright with the proposal that

CSM/Winthrop Real Estate sell the property to several former members of North Winthrop. The

court continued:

              “So the argument really today is that this falls under an exception to [the] general

       rule of successor corporate nonliability. The exception brought up here is the mere

       continuation exception.

              The mere continuation exception applies when the purchasing corporation is

       merely a continuation or reincarnation of the selling corporation. ***

              In other words, the purchasing corporation maintains the same or similar

       management and ownership but merely wears different clothes.               The test used to

       determine whether one corporate entity is a continuation of another is whether there is a

       continuation of the corporate entity of the seller, not whether there is a continuation of the

       seller’s business operation. A common identity of officers, directors, ownership and

       stocks *** is a key element of what constitutes a continuation. However, the continuity

       of shareholders necessary to a finding of mere continuation does not require complete

       identity between the shareholders of the former and successor corporations.

              Well, I think in this case, the evidence shows that we have all those requirements.

       And then the only issue in my mind *** is whether this sale to what I would call kind of

       the middle man of CSM, whether that somehow changes the exception to the rule and

       makes it nonapplicable [sic] under these facts. I don’t think it does.”

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¶ 20   Steward moved to reconsider the judgment, arguing that the mere-continuation doctrine

did not apply, because North Winthrop had sold its sole asset not to Steward but to an

independent third party that was under no obligation to sell the property to Steward or anybody

else. After hearing arguments, the court declined to reconsider its ruling. It explained:

       “[W]hile [this case] does not involve a direct transfer, there was that threat [sic] of

       continuity, and we had [North Winthrop] *** and then we have exactly the same group

       minus two or three or some members for [Steward] ***. We have the continuity of the

       property itself. *** And the cases that were cited did involve more of a direct transfer,

       but I don’t see frankly a different outcome because there was in effect a middle man ***.

       *** [E]specially in light of the facts involving the title commitment and that was right

       there, right *** within a matter of days ***.”

¶ 21   Steward timely appealed.       On appeal, Steward contends that the mere-continuation

exception to the rule of corporate successor nonliability does not apply when the two

corporations do not engage in a direct transaction but, instead, the first corporation transfers its

assets to a separate entity, which, in turn, voluntarily transfers the assets to the second

corporation. Therefore, according to Steward, the trial court erred as a matter of law in holding it

responsible for plaintiff’s judgment against North Winthrop.

¶ 22   As we will explain below, our reading of the record leads us to conclude that the trial

court did not make a finding on the bona fides of CSM’s involvement. Contrary to the dissent’s

position, we do not believe that there is a factual issue to review; rather, we seek to articulate and

clarify the law to be applied on remand. Accordingly, we will apply the de novo standard of

review and not the manifest-weight-of-the-evidence standard suggested by the dissent. See City

of Champaign v. Torres, 214 Ill. 2d 234, 241 (2005).

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¶ 23   We begin with the applicable law. As a general rule, a corporation that purchases the

assets of another corporation is not liable for the debts or liabilities of the transferor corporation.

Vernon v. Schuster, 179 Ill. 2d 338, 344-45 (1997). The rule is based in part on “ ‘the need to

protect bonafide purchasers from unassumed liability’ ” (id. at 345 (quoting Tucker v. Paxson

Machine Co., 645 F.2d 620, 623 (8th Cir. 1981))) and “ ‘to maximize the fluidity of corporate

assets’ ” (id. (quoting Upholsterers’ International Union Pension Fund v. Artistic Furniture of

Pontiac, 920 F.2d 1323, 1325 (7th Cir. 1990))). There are four recognized exceptions to the

rule: “(1) where there is an express or implied agreement of assumption; (2) where the

transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where

the purchaser is merely the continuation of the seller; or (4) where the transaction is for the

fraudulent purpose of escaping liability for the seller’s obligations.” Id.

¶ 24   Here, the trial court held that the third exception, where one corporation is the “mere

continuation” of another, applied. The trial court did not rely on the fourth exception, where a

sale is to defraud creditors. Although plaintiff argued for the application of the fraud exception,

the trial court did not find that either of the two sales, or the two sales considered as one scheme

or transaction, had a fraudulent purpose. The court did note facts that might have supported that

finding, but it based its decision on the mere-continuation doctrine. We thus turn to the case law.

¶ 25   Although successor corporate nonliability is “the ‘general rule in the majority of

American jurisdictions’ ” (id. (quoting Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir.

1977))) and the four exceptions are “equally recognized in most American jurisdictions” (id.),

the parties’ briefs have confined their citations of authority to Illinois law. The problem is that

the facts of this case do not resemble those in the Illinois opinions. Thus, Steward points out that

no Illinois opinion has applied the mere-continuation doctrine to facts comparable to those here.

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Plaintiff responds that no Illinois opinion has held that the doctrine does not apply to facts

comparable to those here. Both parties are correct. Because we may consider foreign authority

for its persuasive value when Illinois authority is inconclusive (Rhone v. First American Title

Insurance Co., 401 Ill. App. 3d 802, 812 (2010)), we first turn to Illinois authority, then examine

foreign authority for assistance.

¶ 26     The mere-continuation exception to the rule of successor nonliability applies when the

purchasing corporation “maintains the same or similar management and ownership, but merely

wears different clothes. [Citations.]” (Internal quotation marks omitted.) Vernon, 179 Ill. 2d at

346. The test is not whether the seller’s business operation continues in the purchaser, but

whether the seller’s corporate entity continues in the purchaser. Id. The key consideration is

whether there is identity of ownership, based on identity of officers, directors, and stockholders.

Id. at 346-47; Workforce Solutions, 2012 IL App (1st) 111410, ¶ 87. However, the distribution

of the ownership of shares in the new corporation need not be identical to that in the old

corporation. Workforce Solutions, 2012 IL App (1st) 111410, ¶ 88.

¶ 27     We can say that, had there been a direct transfer of assets from North Winthrop to

Steward, the latter would have been responsible for the former’s debt to plaintiff. Steward’s

shareholders are substantially similar to North Winthrop’s; although several former shareholders

dropped out, no new ones came aboard, and Steward’s shareholders had held a majority interest

in North Winthrop. Moreover, both corporations were managed by the Cartwright brothers.

Therefore, the requisite continuity existed between North Winthrop and Steward.           See id.;

Dearborn Maple Venture, 2012 IL App (1st) 103513, ¶ 39.

¶ 28     The problem, of course, is that Steward did not simply purchase North Winthrop’s sole

asset.    The only transfers in this case were (1) North Winthrop’s sale of its asset to

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CSM/Winthrop Real Estate; and (2) CSM/Winthrop Real Estate’s sale of the same asset to

Steward. Plaintiff does not claim that CSM/Winthrop Real Estate was the “mere continuation”

of North Winthrop or that Steward was the “mere continuation” of CSM/Winthrop Real Estate.

That claim would fail, because there was no identity of ownership either way; CSM/Winthrop

Real Estate was independent of both North Winthrop and Steward. Had the trial court held that

CSM/Winthrop Real Estate was a “straw man” that North Winthrop used to evade its creditors, it

could have applied the fraud exception to the rule of successor nonliability to enable plaintiff to

recover against Steward. However, although there are hints of such reasoning in the court’s

comments, it specifically relied solely on the mere-continuation exception and did not find a

fraudulent purpose behind the transactions.

¶ 29   Therefore, Illinois law leaves open the real issue in this case: does the mere-continuation

doctrine apply when two corporations are essentially identical, the first corporation transfers its

assets to an intermediate purchaser, and the intermediate purchaser then transfers the assets to the

second corporation? Steward is correct that courts’ phrasing of both the rule of successor

nonliability and the mere-continuation exception appears to assume a direct transfer from the

original corporation to the alleged continuation. However, although the cases speak of “a

corporation that purchases the assets of another corporation” (Vernon, 179 Ill. 2d at 344-45) and

an exception to the rule when “the purchaser is merely a continuation of the seller” (id. at 345;

see also Nilsson v. Continental Machine Manufacturing Co., 251 Ill. App. 3d 415 (1993)), they

do not speak of a corporation that “directly purchases the assets of another corporation.” In any

event, as we will explain below, not only is the presence of an intermediate purchaser relevant to

our inquiry, the nature of the intermediate purchaser’s involvement must also be considered.

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¶ 30   As important, in the cases that the parties cite and the other Illinois cases that we have

found, the issue was always the effect of a direct transfer from one corporation to its alleged

continuation. No Illinois opinion addresses how to apply the successor-nonliability rule, or how

(and whether) the mere-continuation exception applies, to the fact pattern here. We therefore

turn to foreign authority to see what light can be shed on a case in which the original corporation

transfers its assets not to its alleged “mere continuation” but instead to a third party, which then

transfers the assets to the alleged corporate clone.

¶ 31   There is authority that the use of an intermediary to transfer assets from the predecessor

to its corporate clone will not automatically bar the application of the mere-continuation

doctrine. See, e.g., Patin v. Thoroughbred Power Boats Inc., 294 F.3d 640, 651 (5th Cir. 2002).

In Patin, however, not only were the two corporations owned and controlled by the same people,

but the intermediaries were as well. Id. at 651 n.14. The court did state, “[T]he fact that a

transfer of assets involves an intermediary rather than a direct transfer from predecessor to

successor does not necessarily preclude application of the mere continuation exception,

particularly when the intermediary is under the control of or otherwise tied to the principals in

both the predecessor and successor corporations.” Id. at 651. However, this cautious statement

must be taken in the context of a case in which the intermediary was indeed so controlled. In

Patin, the intermediaries did not break any continuity of ownership or control in the transfer

process.   There was simply more than one mere continuation, and declining to apply the

exception would have exalted form over substance in a most obvious way, thereby practically

sanctioning a fraud.

¶ 32   Patin’s quoted passage cites Ed Peters Jewelry Co. v. C&J Jewelry Co., 124 F.3d 252

(1st Cir. 1997). In Ed Peters, the plaintiff sought to recover an unsecured debt incurred by the

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original corporation, Anson. Anson became insolvent and worked out an arrangement with

Fleet, its secured creditor. Under the arrangement, Fleet instituted foreclosure proceedings,

Anson was dissolved, and, at the private foreclosure sale, Anson’s assets were purchased by a

new company, C&J, that was owned and controlled by Anson’s former owners and continued

Anson’s business operations. Fleet financed part of the purchase price. The district court ruled

that, as a matter of law, the plaintiff could not recover from the new corporation. Id. at 257-58.

¶ 33   The First Circuit reversed, holding in part that the plaintiff had raised a factual basis for

holding C&J liable for Anson’s debts. The court noted existing case law (some of which we

discuss later) “overwhelmingly confirm[ing] that an intervening foreclosure sale affords an

acquiring corporation no automatic exemption from successor liability.” Id. at 267. The plaintiff

had raised a factual issue of whether C&J simply was “Anson in disguise.” Id. Thus, “the fact

that C&J acquired the Anson assets indirectly through Fleet, rather than in a direct sale from

Anson, [did] not trump the successor liability doctrine as a matter of law, since equity is loath to

elevate the form of the transfer over its substance.” Id. at 268.

¶ 34   Ed Peters is dissimilar to the present case in that there the plaintiff had raised the factual

possibility that the two transfers, from Anson to Fleet and then from Fleet to C&J, were in reality

parts of one integrated transaction arranged in advance by both the owners of the two

corporations and the ostensibly independent third party. In that scenario, it would indeed be

placing form ahead of substance to regard the independent third party as anything more than a

facilitator of the ultimate transaction—from the original corporation to its clone.              By

prearrangement, the simple transfer was undertaken in stages.

¶ 35   Ed Peters cited, in part, Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265 (D.N.J.

1994). Ed Peters, 124 F.3d at 267. However, as in Ed Peters, in Glynwed, even before the

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successor corporation came into existence, the foreclosing creditors took an active role in

arranging the transfer of assets from the original corporation to the successor corporation. See

Glynwed, 869 F. Supp. at 267-68. Thus, the two transactions were part of one prearranged and

foreordained transfer of assets, with the intermediary committed in advance to the transfer. The

intermediary was not independent of the two corporations—it was in essence a broker.

¶ 36    In G.P. Publications, Inc. v. Quebecor Printing-St. Paul, Inc., 481 S.E.2d 674 (N.C. Ct.

App. 1997) (cited in Ed Peters, 124 F.3d at 267), the original corporation’s secured creditor held

a foreclosure sale at which it was the sole bidder. It acquired the original corporation’s assets

and then transferred those assets to a new corporation that it had launched. G.P. Publications,

481 S.E.2d at 676-77. The appellate court held that the new corporation could be liable to the

old corporation’s unsecured creditor in a declaratory judgment action over a debt, given the

continuity of ownership between the old corporation and the new one. Id. at 680-81.

¶ 37    Although the G.P. Publications court was concerned primarily with the definition of a

successor or a mere continuation (id.), it nonetheless recognized that the mere-continuation

doctrine could apply even with an intermediary routing the assets from the old corporation to the

new one. Again, however, the third party was anything but independent of the two corporations;

while it had no overlap of ownership or control with the original corporation (although it was its

creditor), it created the new corporation with the assets that it had obtained through the

foreclosure sale (id. at 677). 1

        1
            Also, in Continental Insurance Co. v. Schneider, Inc., 873 A.2d 1286 (Pa. 2005), the

court recognized that cases from other jurisdictions, including Glynwed and G.P. Publications,

had held that a successor liability claim is not barred merely because the alleged successor

purchased the alleged predecessor’s assets “in a commercially reasonable disposition of

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2014 IL App (2d) 130998

¶ 38   Unfortunately, here, the trial court did not consider whether the intervening sale, unlike

the foreclosure sales in the preceding cases, was a mere mechanism for arranging a transfer from

the original corporation to the corporate clone with the intermediary’s conscious participation

from the start.   If not, then the foregoing authority is not on point.      Conversely, if the

intermediate transfer was not a bona fide transaction, authority suggests that the mere-

continuation exception would apply (indeed, such facts might be a basis to invoke the fraud

exception as well).

¶ 39   In Comstock v. Great Lakes Distributing Co., 496 P.2d 1308 (Kan. 1972), the plaintiff

recovered a judgment against Vulcan, the manufacturer of an allegedly defective automobile

jack, for personal injuries. The issue on appeal was whether he could recover against Great

Lakes, on a theory that it was the mere continuation of Vulcan. After manufacturing the

defective jack, Vulcan became insolvent and, at a foreclosure proceeding, its assets were

acquired by various nonaffiliated entities. One of these was a corporation, Polytex, which

acquired a building with a second mortgage; the second mortgagee, also unaffiliated with

Vulcan, then redeemed the building. Another secured creditor redeemed the machinery and the

equipment. Eventually, Great Lakes acquired some of Vulcan’s equipment. Id. at 1309-11.

¶ 40   The Supreme Court of Kansas affirmed a judgment holding that Great Lakes was not

liable to the plaintiff, as it was not the mere continuation of Vulcan (and there had been no de

collateral under the [Uniform Commercial Code]” (id. at 1293), including a foreclosure sale. Id.

However, the court did not decide whether the facts before it supported such a claim or what

facts would have to be shown to establish successor liability under the mere-continuation

doctrine or any other theory. See id. at 1293-94.

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facto merger). In part this was because there was no continuity of ownership. Id. at 1312.

Further, however, there were no direct transfers of assets or other direct dealings between Vulcan

and Great Lakes (id. at 1312-13). Great Lakes had acquired “some Vulcan property,” but it had

done so “as a bona fide purchaser.” Id. at 1312. Although the court noted that there was no

continuity of ownership between the old and new corporations, it also cited a learned treatise for

the proposition that, “ ‘where an individual purchases the assets of a corporation at a foreclosure

sale and then resells to a new company composed largely of the members of the company whose

assets were sold, and there is no fraud, the new company is not liable for the debts of the

old….’ ” Id. (quoting 15 William Meade Fletcher et al., Private Corporations § 7333, at 642-44

(perm. ed.).

¶ 41    Our case is not as clear-cut as either the authority applying the mere-continuation

doctrine to sales involving intermediaries or the authority refusing to apply the exception. We

acknowledge that there is limited persuasive authority to guide us. However, as noted above, the

trial court did not specifically rule on the fraud exception to corporate successor nonliability. 2

Nevertheless, the trial court did make some findings suggesting that the transaction from North

Winthrop to CSM/Winthrop Real Estate and then from CSM/Winthrop Real Estate to Steward

was, in reality, one integrated transaction arranged in advance between the owners of those

        2
            The core of our disagreement with the dissent concerns whether the trial court made a

finding regarding fraud and whether the transfers to and from CSM/Winthrop Real Estate were

bona fide. While the record might support the inferences suggested by the dissent, we do not

believe that the trial court’s ruling clearly indicates that it actually drew such inferences.

Therefore, we believe that the more prudent course is to remand this case to allow the trial court

to consider these issues in the first instance.

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companies. This suggestion is evidenced by the court’s characterization of CSM/Winthrop Real

Estate as the “middleman.” Although the trial court did not make a specific finding on the issue

of fraud, we find that this issue is so intertwined with the question of whether the transactions in

this case were bona fide that the fraud question is an essential issue in this case and must be

addressed.

¶ 42   As such, we vacate the trial court’s judgment and remand the cause for the trial court to

reconsider its decision, specifically address the fraud question, and enter an appropriate

judgment. We note that in this case there is considerable overlap between the mere-continuation

exception and the fraud exception.      That is, if fraud tainted the transactions to and from

CSM/Winthrop Real Estate, then in actuality there was simply a transaction from North

Winthrop to Steward. The use of a straw man would not render the mere-continuation exception

inapplicable. See, e.g., Patin, 294 F.3d at 651. Indeed, regardless of whether the conduct of the

parties in this case fell within the legal definition of fraud, if the transfers involving

CSM/Winthrop Real Estate were not bona fide, the mere-continuation exception would apply.

On remand, the trial court may, in its discretion, conduct whatever proceedings, if any, it deems

advisable.

¶ 43   Vacated and remanded.

¶ 44   JUSTICE JORGENSEN, dissenting.

¶ 45   I agree with the principle, set forth by the majority, that, if the transfers involving CSM

were not bona fide arm’s-length transactions, but were instead part of one prearranged plan, then

there was, in reality, a transfer from North Winthrop to Steward.

¶ 46   However, I must respectfully dissent because, unlike the majority, I believe that the trial

court did make the factual determination that North Winthrop, CSM, and Steward shared a

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2014 IL App (2d) 130998

common plan to move the assets from North Winthrop to Steward. This factual determination is

entitled to deference, and there is sufficient evidence to support it.

¶ 47   I think that a deferential, manifest-weight standard of review applies (as opposed to de

novo review, supra ¶ 22). This case does not involve an undisputed set of facts. Rather, as in

any case that invokes a deferential standard of review, the trial court was put in the position to

weigh the evidence, draw inferences, and make credibility determinations. For example, the

court did not have to believe Cartwright’s self-serving statements that there was no prearranged

transaction and that CSM wanted to sell the property simply because it did not realize how

difficult the permitting process would be. There was compelling circumstantial evidence that

supported the opposite conclusion. Cartwright began negotiating the second transaction before

the first was completed (supra ¶ 18). CSM secured the title commitment from Steward within

five business days of holding the property. CSM’s excuse, that it sought a title commitment to

sell the property because it did not realize how difficult the permitting process would be, barely

passes the smell test, especially considering that it could not have tried that hard in the merely

five business days surrounding the 2012 New Year’s holiday.               Instead, the court could

reasonably have found, based on the circumstances surrounding the sale, that CSM’s true motive

was a quick and large profit based on a prearranged sale. It also could reasonably have found

that, once CSM began the initial transaction, it was effectively bound to North Winthrop and

Steward, lest it lose the opportunity for a quick and large profit and be stuck with an asset that it

was not prepared to develop.

¶ 48   Next, I disagree that remand is necessary for the trial court to expand upon its findings.

The trial court already made its overall finding of mere continuation. Although it can be helpful

to do so, a trial court is not required to explain each component of its overall finding. See, e.g.,

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2014 IL App (2d) 130998

In re Marriage of Ackerley, 333 Ill. App. 3d 382, 392 (2002) (we review the result to which the

trial court arrived and not its reasoning); cf. Muck v. Van Bibber, 223 Ill. App. 3d 830, 836

(1992) (when inadequate trial court findings inhibit our ability to appropriately review a case,

remand is appropriate). I believe that, although less than perfect, the trial court’s findings are

adequate for us to review. The trial court said, in so many words, that the two-part transaction

was, in reality, one prearranged transaction. Again, the court repeatedly referred to CSM as a

“middleman.” A middleman, by definition, from the moment it takes on an asset, never intends

to keep it. The court also stressed that the two-part transaction took place “within days,”

implying a prearranged transaction.

¶ 49   Finally, I believe that the evidence is sufficient to support the trial court’s mere-

continuation finding. The majority appears to agree (supra ¶¶ 41-42) that the evidence was

sufficient to find that a prearranged transfer took place (it just disagrees that the trial court

actually found that). I will not further describe that evidence, as it is set forth by the majority

and in this dissent (supra ¶ 47).

¶ 50   For these reasons, I would have affirmed the trial court’s judgment.

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