Court Opinion

ID: 3002840
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:34:44.081908+00
Date Added: 2024-06-11T11:45:50.916858
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 07-4034

F OR Y OUR E ASE O NLY, INC.,
                                                  Plaintiff-Appellant,
                                  v.

C ALGON C ARBON C ORPORATION,
P RODUCT C ONCEPTS C OMPANY, and
M ARK S CHNEIDER,
                                               Defendants-Appellees,

                                 and

HSN, LP,
                                                Intervening Appellee.

             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
             No. 02 C 7345—Wayne R. Andersen, Judge.

   A RGUED S EPTEMBER 24, 2008—D ECIDED M ARCH 31, 2009

  Before P OSNER, W OOD and T INDER, Circuit Judges.
 W OOD , Circuit Judge. This case immerses us in the
world of off-shore finance, shadowy relations among
2                                               No. 07-4034

companies, and allegedly fraudulent transfers, all for the
sake of anti-tarnish jewelry boxes sold on the Home
Shopping Network. For Your Ease Only, Inc. (“FYEO”)
sells these jewelry boxes, and it pursued litigation
against some of its competitors for patent misuse and
tortious interference with business relations. Although
FYEO obtained a $2.19 million default judgment against
the defendants in that suit, it has not managed yet to
collect on its judgment. One defendant, Mark Schneider,
moved to Costa Rica before the final judgment was en-
tered, and Schneider’s wholly owned company trans-
ferred its main asset—the right to payments from
HSN, LP (commonly called the Home Shopping Net-
work)—to an entity called Sevenquest, LLC, which (not
so coincidentally) Schneider also owns exclusively.
Sevenquest subsequently transferred the right to HSN’s
payments to Anewco Corp., a company wholly owned
by Schneider’s brother-in-law, Doug Fournier. FYEO
believes that these two transfers are voidable under the
Illinois Uniform Fraudulent Transfer Act (“UFTA”), 740
ILCS 160/1 et seq., but the district court rejected its posi-
tion. Although HSN appeared only as an observer
before the district court, it filed a motion in this court on
April 23, 2008, for permission to intervene on appeal;
that motion was granted on April 30, 2008, and HSN
has fully participated since then. The other defendants-
appellees have chosen to take a pass. We conclude that
additional findings are necessary before it is possible to
decide whether UFTA gives FYEO a right to have the
transfers set aside. We therefore vacate the judgment and
remand for further proceedings.
No. 07-4034                                               3

                             I
  Six years ago, FYEO sued Mark Schneider, his wholly
owned company Product Concepts Company (“PCC”), and
Calgon Carbon Corporation, for patent misuse and
tortious interference. At some point, Schneider and PCC
stopped responding to the district court’s discovery
orders; their insouciance prompted the district court on
June 27, 2006, to enter a default against them for
$2,120,150.70. Judgment was entered on the default on
February 22, 2007, by which time accruing interest had
increased the total amount to $2,190,550.93.
  By the time FYEO’s judgment was entered, PCC’s main
asset was the right to payments from HSN for the latter’s
service in selling PCC’s anti-tarnish jewelry boxes. Schnei-
der, in his capacity as owner of PCC, had executed an
exclusive product merchandising agreement with HSN in
2004. Not long afterward Schneider moved to Costa
Rica. In 2005, Schneider transferred the right to the
HSN business and payments from PCC to Sevenquest.
  Judgment in hand, FYEO began to search for assets
belonging to Schneider or PCC. In December 2006, it
subpoenaed Fournier, Schneider’s brother-in-law. The
subpoena informed Fournier of the judgment against
Schneider and PCC and noticed Fournier’s deposition; it
also required him to bring along any records relating
to Schneider, PCC, HSN, or Sevenquest. After receiving
the subpoena, Fournier flew to Costa Rica to see Schnei-
der. On January 11, 2007, Schneider gave Fournier
a letter addressed to HSN; that letter purported to
transfer Sevenquest’s rights under the HSN agreement
4                                            No. 07-4034

to Fournier’s company, Anewco. At that time, however,
Anewco did not exist. Fournier established it shortly
after his return to the United States.
  As it began to learn about these transactions, FYEO
took the position that the right to the HSN business is
an asset of Schneider and PCC and that it is entitled to
reach the HSN payments to satisfy its judgment. Any
attempted transfer to Anewco, it adds, was voidable
under UFTA. On April 20, 2007, FYEO served HSN with
a third-party citation order to discover assets of
Schneider and PCC. The citation prohibited HSN from
transferring any property or paying any money over to
the judgment debtors. An accompanying citation
notice, which had been filed with the district court, in-
formed HSN that the judgment debtors were Schneider
and PCC. The notice also listed one of Schneider’s last
known addresses as Sevenquest. Finally, in conjunction
with the order and notice, FYEO petitioned the district
court for an order restraining HSN from transferring
property to the judgment debtors or their successor
entities, including Sevenquest and Anewco. The petition
asked the district court to require HSN to deposit any
payments owed to Schneider, PCC, Sevenquest, or Anewco
with the district court.
  FYEO’s initial efforts were unavailing. On May 5, 2007,
HSN paid Anewco $84,856. In response, on June 1, 2007,
FYEO amended its petition to include a request for a
turnover order for payments made by HSN to Schneider,
PCC, Sevenquest, or Anewco in violation of the citation.
On June 29, 2007, HSN paid Anewco another $297,360.
No. 07-4034                                              5

  The district court held a hearing in October 2007 on
FYEO’s petition for a turnover order and restraining
order. The court noted that only if the payments to
Anewco were property of Schneider and PCC could it
find that HSN violated the citation. Moreover, the only
way that the payments could still be the property of
Schneider and PCC was if the transfers to Sevenquest and
Anewco were voidable under UFTA. The district court
decided that the first transfer from PCC to Sevenquest
was voidable because it was fraudulent. See 740 ILCS
160/5(a). In support of that conclusion, the court found
that the transaction possessed sufficient “badges of
fraud” to justify a presumption of fraudulent intent: the
transfer was to an insider because Schneider was the
sole owner of both companies; Schneider retained
control of the property; the transfer was concealed by
Schneider’s efforts to avoid discovery; Schneider had
been sued before the transfer; the transfer was of sub-
stantially all of Schneider’s assets; Schneider absconded
by moving to Costa Rica; and Schneider was or became
insolvent shortly after the transfer. Neither HSN nor
the Schneider parties dispute this finding.
  The district court then addressed the transfer from
Sevenquest to Anewco. Under UFTA, a transfer made
after a fraudulent transfer is voidable unless it is made
to “a person who took in good faith and for a reas-
onably equivalent value.” 740 ILCS 160/9(a). (This
standard is similar to the one for holders in due course
of negotiable instruments, who must take for value, in
good faith, and without notice of such problems as
forgery, default, dishonor, or inauthenticity. See 810 ILCS
6                                             No. 07-4034

5/3-302(a).) According to Fournier, he and Schneider
had an oral agreement under which Fournier would
develop the business with HSN, and, in exchange, Schnei-
der would transfer the HSN business to Fournier after
three years. During that three-year period, Fournier
would earn a small commission while Schneider would
receive the profits. They made this oral agreement in 2003
or 2004, apparently because Schneider expected his
move to Costa Rica to hamper his efforts to fulfill the
exclusive contract he had recently signed with HSN. The
district court accepted Fournier’s description of the
transaction and found that Fournier acted in good faith
and paid reasonably equivalent value for the HSN
rights. This is only partly true, at least as far as the
finding of good faith is concerned; Fournier had more
to say than this implies.
  Fournier testified that he knew of the judgment
against Schneider and PCC in December 2006, after he
received the subpoena from FYEO and before he
accepted the transfer in January 2007. During his deposi-
tion he admitted that he traveled to Costa Rica to effect
the transfer of the business: “The main reason I went
there was to conclude that I’ve done my three years, this
is what we agreed to, I’m sick of your problem, I want
to go on my own, and you promised me this.” Avoiding
the judgment also motivated Fournier to form a new
company, Anewco, to hold the asset:
    Q: But it was your purpose in forming Anewco to
       attempt to try to isolate yourself from Mr. Schnei-
       der’s legal issues, right?
    A: Yes, sir. Part of the reason anyway.
No. 07-4034                                              7

  The district court decided that Fournier acted in
good faith because, at the time of the transfer, he did
not have a legal or financial relationship with Schneider.
As the court noted, Fournier did not funnel money to
Schneider and did not maintain a business relationship
with Schneider after the transfer. Schneider, the court
concluded, “was not financially involved and did not
have control over it [the HSN payments].” Last, the
court found that Fournier’s efforts over three years to
develop the HSN business constituted reasonably equiva-
lent value for transfer from Sevenquest. On this basis,
the court held that the transfer to Anewco was not
voidable under UFTA. The right to the HSN payments
was held by Anewco, not the judgment debtors, and
HSN therefore did not violate the citation by making
the payments to Anewco.

                            II
  Before we address the merits, a word about appellate
jurisdiction is in order. FYEO is appealing from an order
in a supplemental proceeding to its lawsuit against Schnei-
der, PCC, and Calgon Carbon Corporation. In the under-
lying case, FYEO obtained a default judgment against
Schneider and PCC, but its claim against Calgon Carbon
Corporation is still pending. We need not concern our-
selves with that fact, however, because this appeal is
from a final order in a proceeding to collect on a judg-
ment. That is all that 28 U.S.C. § 1291 requires. See King
v. Ionization Intern., Inc., 825 F.2d 1180, 1184 (7th Cir.
1987). (We note for the record that the district court
8                                                 No. 07-4034

expressly made a finding pursuant to F ED. R. C IV. P. 54(b)
that there was no just reason to delay enforcement of
the judgment against Schneider and PCC, and it entered
a final judgment against Schneider and PCC for
$2.19 million on February 22, 2007.)
  Because the parties do not dispute the district court’s
finding that the transfer from PCC to Sevenquest was
fraudulent and voidable under 740 ILCS 160/8, the
only question on this appeal is whether the district
court correctly found that the second transfer, from
Sevenquest to Fournier, was made in good faith and
for reasonably equivalent value.

                              A
  A central issue here is whether the transfer to Fournier
was made in good faith, but a precise definition of that
term is hard to come by. UFTA does not supply a defini-
tion, and the Illinois courts have not filled this gap by
offering one of their own. In this respect UFTA is similar
to other statutes that require a finding of good faith.
For example, the Bankruptcy Code uses the term
without defining it, and courts have similarly resisted
articulating a precise definition. See, e.g., Moglia v. Univer-
sal Auto., Inc., No. 98 C 5915, 2000 U.S. Dist. LEXIS
10420, at *11-12 (N.D. Ill. July 12, 2000) (listing cases ad-
dressing good faith in 11 U.S.C. § 548(c)).
  It is somewhat easier to identify situations in which
good faith is lacking. Thus, for example, good faith will
probably be lacking if the transferee knows that the
No. 07-4034                                                  9

transfer may be voidable because he knows of an out-
standing judgment against the transferor. The Illinois
Court of Appeals has found a lack of good faith where
the transferee knew of a pending lawsuit against the
transferor and accepted the transfer without informing
the plaintiff. Kennedy v. Four Boys Labor Servs., 664 N.E.2d
1088, 1093 (Ill. App. Ct. 1996). Similarly, in a case
decided before the enactment of UFTA, the Illinois
Court of Appeals found a lack of good faith where the
transferee knew of an outstanding judgment and sought
protection should any claim to the transferred property
arise from that judgment. Alan Drey Co. v. Generation, Inc.,
317 N.E.2d 673, 680 (Ill. App. Ct. 1974). In the closely
related area of bankruptcy, this court defined good faith
for purposes of § 550(b) of the bankruptcy code as a
state of mind in which the person is “without knowledge
of voidability.” Bonded Fin. Servs., Inc. v. European Am. Bank,
838 F.2d 890, 897 (7th Cir. 1988). We commented that
knowledge does not require a “complete understanding
of the facts . . . some lesser knowledge will do.” Id. at 898.
  FYEO argues that the district court applied the wrong
legal standard for good faith and improperly focused on
the financial and legal relationship between Schneider
and Fournier after the transfer. It is unclear what standard
of good faith the district court applied. If what the
court meant to say, however, was that good faith exists
as a matter of law as long as there is no continuing legal
or financial relationship between Schneider and Fournier
after the transfer, then we must disagree with it. Whether
the transferor receives benefits from the asset after the
transfer or retains control over the asset after the transfer
10                                              No. 07-4034

is relevant to whether the transfer is fraudulent under
740 ILCS 160/5(b), but it is not the only pertinent fact.
Even though the existence of a continuing legal or finan-
cial relationship after the transfer may indicate bad faith,
the lack of such a relationship does not establish good
faith.
  Most importantly, the Illinois cases we cited earlier
show that a transferee who knows about a judgment
against the transferor does not take the asset in good
faith. Here, the facts show that Fournier knew of the
judgment against Schneider and PCC before he accepted
the transfer of the HSN business. Like the transferee in
Kennedy, he knew about not only the pending lawsuit,
but also the actual judgment against Schneider and PCC.
He knew from the subpoena that FYEO was seeking
information about the HSN business. In fact, Fournier
flew to Costa Rica immediately after learning of the
judgment in order to protect “his” HSN business from
the judgment.
  The district court erred by focusing on the continuing
relationship between Fournier and Schneider after the
transfer, rather than Fournier’s knowledge of the judg-
ment against Schneider at the time he flew to Costa Rica
to start the process of transferring the business from
Sevenquest to Anewco (a transfer that was not completed
until after his trip). Since Fournier knew that the judg-
ment had been entered and that FYEO was pursuing the
HSN payments, Fournier did not accept the transfer in
good faith. The transfer is therefore voidable under 740
ILCS 160/9.
No. 07-4034                                             11

                            B
  FYEO argues in the alternative that the transfer is
voidable because Fournier did not pay a reasonably
equivalent value for the HSN business. FYEO points to
Fournier’s testimony that he did not give Schneider
money and challenges the enforceability of the oral agree-
ment. Both arguments lack merit. UFTA does not limit
reasonably equivalent value to money nor to value trans-
ferred pursuant to a valid contract. The district court
found that Fournier’s three years of labor to create the
business with HSN was reasonably equivalent to the
value of the business that labor created. We see nothing
clearly erroneous about that finding.

                            C
  The only remaining issue is whether HSN violated the
citation when it accepted the transfer of the jewelry box
agreement from the Schneider entities to Anewco and
thereafter began making its payments to the latter com-
pany. Service of a citation puts a lien on “all personal
property belonging to the judgment debtor in the posses-
sion or control of the third party or which thereafter
may be acquired or come due the judgment debtor and
comes into the possession or control of the third party to
the time of the disposition of the citation.” 735 ILCS 5/2-
1402(m). If a recipient violates the restraining provision
of a citation and transfers the asset, a court “may enter
judgment against him or her in the amount of the unpaid
portion of the judgment and costs allowable under this
Section, or in the amount of the value of the property
transferred, whichever is lesser.” 735 ILCS 5/2-1402(f)(1).
12                                              No. 07-4034

   HSN paid Anewco for the products it was selling after
it received the citation and FYEO’s petition for a restrain-
ing order. HSN argues that expecting it not to pay
Anewco is commercially unreasonable, against public
policy, and unfair, because it would require HSN to
choose between defaulting on its contract with Anewco
and violating the citation. Its argument, however, over-
looks the third choice that the law provides: taking a
page from interpleader procedure, HSN could have
arranged to place the payments either in a private escrow
account or in the registry of the court. Indeed, FYEO’s
petition for a restraining order asked the court to order
the latter relief, and so it is obvious that HSN was aware
of this option.
  FYEO urges this court to find that nothing remains to
be decided before a turnover order can be entered requir-
ing HSN to pay it $382,216.00, in addition to any addi-
tional payments made to Anewco after April 2007. Not
so fast, says HSN. HSN points out that the district court
never determined whether HSN violated the citation
and that unresolved issues of fact should be left to the
district court judge. It points out, for example, that the
citation does not name Anewco, and so there is some
question whether HSN knew that Anewco was, in law,
PCC’s and Sevenquest’s successor in interest. FYEO’s
petition for the restraining order so names Anewco, but
HSN was not required to take FYEO’s word for it. The
record does contain evidence indicating that HSN may
have known that Anewco received the business from
Schneider, because the January 11, 2007 letter was from
Schneider. Further support for that inference can be
No. 07-4034                                              13

found in the fact that HSN used the same vendor identifi-
cation number and product identification number for
Anewco as it had used for PCC and Sevenquest. That
said, upon a full hearing HSN may have additional evi-
dence that is pertinent. It is the district court’s role in
the first instance to apply the law to the facts. Door Sys.,
Inc. v. Pro-Line Door Sys., Inc., 126 F.3d 1028, 1032 (7th
Cir. 1997); Robinson v. Sappington, 351 F.3d 317, 338 (7th
Cir. 2003). We therefore remand this case to the district
court to decide whether HSN violated the citation by
transferring the assets of PCC and Schneider to Anewco.
  We V ACATE the judgment of the district court and
R EMAND for further proceedings consistent with this
opinion.

                           3-31-09