Court Opinion

ID: 4307358
Source: CourtListenerOpinion
Date Created: 2018-08-24 22:06:02.851986+00
Date Added: 2024-06-11T14:41:27.737602
License: Public Domain

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                                   Appellate Court                            Date: 2018.07.17
                                                                              08:31:14 -05'00'

             Zurich American Insurance Co. v. Personnel Staffing Group, LLC,
                               2018 IL App (1st) 172281

Appellate Court        ZURICH AMERICAN INSURANCE COMPANY and AMERICAN
Caption                ZURICH INSURANCE COMPANY, Plaintiffs-Appellees, v.
                       PERSONNEL STAFFING GROUP, LLC; DANIEL S. BARNETT;
                       and DASH MANAGEMENT, Defendants-Appellants.

District & No.         First District, Second Division
                       Docket No. 1-17-2281

Filed                  May 15, 2018

Decision Under         Appeal from the Circuit Court of Cook County, No. 17-L-003729; the
Review                 Hon. Thomas R. Mulroy Jr., Judge, presiding.

Judgment               Affirmed.

Counsel on             Sperling & Slater, P.C., of Chicago (Greg Shinall, Thomas D. Brooks,
Appeal                 and Nathan A. Shev, of counsel), for appellants.

                       Locke Lord LLP, of Chicago (Steven T. Whitmer, Julie L. Young, and
                       Heidi L. Brady, of counsel), for appellees.

Panel                  PRESIDING JUSTICE NEVILLE delivered the judgment of the
                       court, with opinion.
                       Justices Hyman and Mason concurred in the judgment and opinion.
                                             OPINION

¶1       After Zurich American Insurance Company (Zurich) filed a demand for arbitration of its
     dispute with its insured, Personnel Staffing Group, LLC (PSG), Zurich filed a complaint
     against PSG and two other defendants, alleging that PSG fraudulently transferred funds to the
     other defendants to avoid paying an anticipated arbitration award. PSG filed in court a
     counterclaim that matched claims it raised in the arbitration. The Cook County circuit court
     denied the defendants’ motion to compel arbitration of the fraudulent transfer claim, and it
     denied the defendants’ motion to stay proceedings on the fraudulent transfer claims pending
     resolution of the arbitration. The court also dismissed the counterclaims to compel arbitration
     of those claims. The defendants now appeal.
¶2       We find that Zurich’s complaint concerns collection of the arbitration award and the circuit
     court correctly held that the parties did not agree to arbitrate issues regarding collection of
     arbitration awards. Staying proceedings on the fraudulent transfer claims pending arbitration
     would conflict with the purposes of the Uniform Fraudulent Transfer Act (Act). 740 ILCS
     160/1 et seq. (West 2016). The defendants concede that the parties agreed to arbitrate the
     issues raised in their counterclaims. Accordingly, we affirm the circuit court’s order.

¶3                                         BACKGROUND
¶4       In 2011, PSG bought workers’ compensation insurance from Zurich subject to a “Loss
     Retrospective Agreement” (Agreement), which provided that PSG would pay Zurich an
     amount that depended on the workers’ compensation claims eventually filed against PSG for
     the covered period. The Agreement established that Zurich would handle the claims and then
     bill PSG for the paid losses. Because Zurich would initially pay the claims, it effectively
     loaned the payments to PSG. The Agreement referred to this aspect of the Agreement as a “risk
     financing arrangement,” for which Zurich required collateral in the form of a letter of credit in
     “an amount sufficient to secure [PSG’s] financial obligations under this Agreement.” The
     Agreement also provided that “[a]ny dispute arising out of the interpretation, performance or
     alleged breach of this Agreement, shall be settled by binding arbitration.”
¶5       For several years, PSG regularly paid Zurich the amounts Zurich billed, but disagreements
     arose, and PSG stopped reimbursing the full amounts demanded. In June 2016, the final policy
     term ended, and PSG bought insurance from another source. On December 1, 2016, Zurich
     filed a demand for arbitration to resolve its disputes with PSG. Zurich sought to recover more
     than $4.6 million for the retrospective premiums already due, and it sought a letter of credit in
     the amount of $39 million as security for future claims. PSG replied that Zurich had breached
     the Agreement by “engag[ing] in a pattern and practice of settling claims without regard for
     whether the settlements were reasonable,” by “fail[ing] to properly investigate and manage
     claims,” and by “failing to consult with PSG about settlements and reserve charges that exceed
     $10,000.”
¶6       Before the arbitration hearing began, Zurich filed the complaint that initiated the lawsuit
     now before this court. Zurich named as defendants PSG, Dash Management, Inc. (Dash), and
     Daniel S. Barnett. Barnett, the “majority member” of PSG, owned Dash, and PSG paid Dash
     management fees. Zurich alleged that the defendants violated the Act in 2015, when PSG
     distributed $4.5 million to Barnett and paid Dash $5.8 million in management fees.

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¶7         The defendants filed a “Motion To Dismiss or Stay or in the Alternative for Judgment on
       the Pleadings.” They argued that either the circuit court should dismiss the lawsuit and compel
       arbitration of the fraudulent transfer claims or the court should stay proceedings on the
       fraudulent transfer claims until the arbitrators issue a final award. In the alternative, the
       defendants sought judgment on the pleadings, arguing that PSG’s debt to Zurich did not arise
       until 2017 and, therefore, Zurich could not challenge the transfers PSG made in 2015. The
       defendants also filed a counterclaim that raised the same issues PSG raised in arbitration.
       Zurich filed a motion to compel arbitration of the counterclaim.
¶8         The circuit court set a date for hearing the “Motion To Dismiss or Stay or in the Alternative
       for Judgment on the Pleadings.” Following the hearing, the court entered an order in which it
       (1) denied the motion to dismiss the lawsuit to compel arbitration of the fraudulent transfer
       claims, (2) denied the motion to stay proceedings on Zurich’s complaint, (3) denied the motion
       for judgment on the pleadings, and (4) granted Zurich’s motion to compel arbitration of the
       counterclaims. The defendants filed a notice of appeal.

¶9                                             ANALYSIS
¶ 10       Illinois Supreme Court Rule 307(a)(1) (eff. Nov. 1, 2017) gives this court jurisdiction to
       decide this appeal. MHR Estate Plan, LLC v. K&G Partnership, 2016 IL App (3d) 150744,
       ¶ 15; Robert A. Besner & Co. v. Lit America, Inc., 214 Ill. App. 3d 619, 623 (1991) (an order
       compelling arbitration is considered to be an appealable interlocutory order because it is
       injunctive). The circuit court considered only the pleadings and attached documents, deciding
       the issues as a matter of law. Therefore, we review the court’s decision de novo. Board of
       Managers of Chestnut Hills Condominium Ass’n v. Pasquinelli, Inc., 354 Ill. App. 3d 749,
       753-54 (2004).

¶ 11                                  Motion to Compel Arbitration
¶ 12       PSG argues first that the circuit court should have granted its motion to compel Zurich to
       arbitrate its fraudulent transfer claims against PSG because the claims “aris[e] out of the
       interpretation, performance or alleged breach of th[e] Agreement.” We disagree. In its
       complaint, Zurich alleged that PSG transferred funds to Barnett and Dash to avoid paying a
       possible arbitration award. Zurich’s complaint parallels the complaints filed in Northern
       Tankers (Cyprus) Ltd. v. Backstrom, 967 F. Supp. 1391 (D. Conn. 1997); Ryan Racing, LLC v.
       Gentilozzi, 231 F. Supp. 3d 269 (W.D. Mich. 2017); and Apparel Art International, Inc. v.
       Jacobson, Civ. No. 90-1756 (JAF), 1991 WL 641949 (D.P.R. Aug. 21, 1991), aff’d, 967 F.2d
720 (1st Cir. 1992). In Apparel Art, the plaintiff claimed that after it initiated arbitration of its
       claims against Amertex, “the principals of Amertex themselves, through family members and
       shell corporations, transferred virtually all assets from Amertex while the arbitration was
       proceeding as a way to frustrate plaintiff’s attempt to collect on any award it might receive.”
       Apparel Art, 1991 WL 641949, at *3. The Apparel Art court observed, “the fraudulent transfer
       claim is merely one aspect of plaintiff’s attempt at collection of the judgment” entered on the
       arbitration award. Apparel Art, 1991 WL 641949, at *3. Ryan Racing and Northern Tankers
       also involved fraudulent transfer claims addressed in court as part of the plaintiffs’ efforts to
       collect arbitration awards. Ryan Racing, 231 F. Supp. 3d at 275-76; Northern Tankers, 967 F.
       Supp. at 1394-95.

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¶ 13        In Geneva Corporate Finance v. G.B.E. Liquidation Corp., 598 N.W.2d 331 (Iowa Ct.
       App. 1999), the plaintiff won an arbitration award against the defendant and obtained a
       judgment on the award. The plaintiff then filed a fraudulent transfer complaint against the
       defendant in court. The defendant asked the court to dismiss the complaint as res judicata,
       arguing that the plaintiff could have pursued the fraudulent transfer claim in arbitration. The
       Geneva court held that the judgment on the arbitration award did not bar the fraudulent transfer
       claim because “the arbitration award established defendant corporation’s liability under the
       listing contract and this action deals with collecting the judgment.” Geneva, 598 N.W.2d at
       334. We find that Zurich, like the plaintiffs in Geneva, Apparel Art, Ryan Racing, and
       Northern Tankers, brought the fraudulent transfer claim as part of an effort to collect an
       arbitration award.
¶ 14        Under the Uniform Arbitration Act (710 ILCS 5/1 et seq. (West 2016)), after a party
       obtains an arbitration award, the party must file a complaint in court for confirmation of the
       award. 710 ILCS 5/14 (West 2016); see Windham v. Doctor’s Associates, Inc., 127 A.3d 1082,
       1086-87 (Conn. App. Ct. 2015). The court then decides issues related to enforcement and
       collection of the judgment entered on the award. 710 ILCS 5/14 (West 2016); see Adam Martin
       Construction Co. v. Brandon Partnership, 135 Ill. App. 3d 324, 326 (1985).
¶ 15        The defendants cite Miller v. Flume, 139 F.3d 1130 (7th Cir. 1998), as authority holding
       that the arbitrator should decide fraudulent transfer issues. In Miller, the defendant won an
       arbitration award against the plaintiffs, and a court entered a judgment confirming the award.
       The defendant then filed a second arbitration demand, alleging that the plaintiffs had
       fraudulently transferred assets to avoid paying the arbitration award. Miller, 139 F.3d at 1131.
       The plaintiffs filed a complaint to enjoin the second arbitration, which concerned only
       enforcement and collection of the original arbitration award. The Miller court found the
       fraudulent transfer claim arbitrable. The court emphasized that “the language of this particular
       agreement to arbitrate is quite broad, sweeping in not only claims that literally ‘arise out of’ the
       business of the firm (i.e., its buying and selling activities), but also claims that have a
       ‘connection’ with the firm’s business.” Miller, 139 F.3d at 1136.
¶ 16        The arbitration clause here, unlike the clause at issue in Miller, limits its scope to issues
       that arise out of the interpretation, performance, or alleged breach of the Agreement. The
       Agreement manifests an intention to adopt the usual arrangement: the arbitrator decides how
       much each party owes the other under the contract, and the court decides issues related to
       enforcement and collection of the arbitrator’s award. We find that the issues surrounding the
       allegedly fraudulent transfers concern collection of the arbitrator’s award and, therefore, they
       do not arise out of the interpretation or performance of the Agreement. The circuit court
       correctly denied the defendants’ motion to compel Zurich to arbitrate its fraudulent transfer
       claims.

¶ 17                                          Motion to Stay
¶ 18        Next, the defendants argue that the circuit court should have stayed court proceedings
       pending issuance of the arbitral award. “The purpose of the Uniform Fraudulent Transfer Act
       is to prevent fraudulent transfers of property by a debtor who intends to defraud creditors by
       placing assets beyond their reach.” Yokogawa Corp. of America v. Skye International
       Holdings, Inc., 159 S.W.3d 266, 269 (Tex. App. 2005). In accord with the purposes of the Act,
       “[a] ‘claim’ under the Act may be maintained even though ‘contingent’ and not yet reduced to

                                                    -4-
       judgment.” Cook v. Pompano Shopper, Inc., 582 So. 2d 37, 40 (Fla. Dist. Ct. App. 1991)
       (per curiam); see Salisbury v. Majesky, 352 Ill. App. 3d 1188, 1190-91 (2004). “[I]f
       automatically staying discovery and progression of [fraudulent transfer] claims was standard
       and a failure to do so an abuse of discretion, the goal of protecting creditors from wrongful
       asset transfers would likely be nearly entirely frustrated.” Friedman v. Heart Institute of Port
       St. Lucie, Inc., 863 So. 2d 189, 193 (Fla. 2003). We find that, in accord with the purposes of the
       Act, the circuit court correctly denied the motion to stay proceedings under the Act.

¶ 19                                         Motion to Dismiss
¶ 20       The defendants argue that the circuit court improperly ruled on their motion to dismiss
       under section 2-615 of the Code of Civil Procedure. 735 ILCS 5/2-615 (West 2016). The
       defendants asked the circuit court to dismiss the complaint on grounds that Zurich had no claim
       against PSG in 2015, when PSG made the transfers Zurich seeks to challenge. In this appeal,
       the defendants argue that the circuit court erred when it denied the motion for judgment on the
       pleadings because “[d]efendants did not have any opportunity to file a brief or make any
       argument” in support of their motion. However, defendants do not argue that the denial of the
       motion to dismiss the complaint qualifies as an order granting or denying an injunction. See Ill.
       S. Ct. R. 307(a) (eff. Nov. 1, 2017). In this limited appeal under Rule 307, we lack jurisdiction
       to address the denial of a motion to dismiss the complaint. See Mund v. Brown, 393 Ill. App. 3d
994, 996 (2009); Murges v. Bowman, 254 Ill. App. 3d 1071, 1080 (1993).

¶ 21                                           Counterclaims
¶ 22       Finally, the defendants contend that the circuit court erred when it granted Zurich’s motion
       to compel arbitration of the counterclaims. The defendants admit that all of their counterclaims
       arose out of the Agreement and concern the amount due under the Agreement. None of the
       counterclaims involve collection of a possible arbitral award. Because the defendants admit
       that their counterclaims arose out of the Agreement, the circuit court correctly granted Zurich’s
       motion to compel arbitration of the counterclaims.

¶ 23                                         CONCLUSION
¶ 24       Zurich and PSG agreed to arbitrate all claims arising out of the interpretation or
       performance of the Agreement, but they did not agree to arbitrate issues concerning collection
       and enforcement of an arbitrator’s award. Because Zurich’s fraudulent transfer claims concern
       collection of a possible award, the claims do not arise out of the interpretation or performance
       of the Agreement. The circuit court correctly denied the motion to compel arbitration of
       Zurich’s fraudulent transfer claims. The court also correctly denied the motion to stay
       proceedings on the complaint pending arbitration. As the defendants conceded that the
       arbitrators have jurisdiction to decide their counterclaims, the circuit court correctly granted
       Zurich’s motion to compel arbitration of the counterclaims. Accordingly, we affirm the circuit
       court’s judgment.

¶ 25      Affirmed.

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