The U.S. Court of Appeals for the Seventh Circuit recently determined that a judgment-debtor's transfer of property to a transferee with knowledge of the judgment was voidable under the Uniform Fraudulent Transfer Act. See For Your Ease Only, Inc. v. Calgon Carbon Corp., 560 F.3d 717 (7th Cir. 2009).
Though the transferee had given reasonably equivalent value to the judgment-debtor in exchange for the transfer, the court found that the transferee did not take the judgment debtor's assets in good faith because its principal knew that judgment had been entered.
The appeal arose from a suit brought in the Northern District of Illinois by For Your Ease Only, Inc. ("FYEO") for patent misuse and tortuous interference with business relations against several competitors relating to certain jewelry boxes sold on the Home Shopping Network. FYEO obtained a default judgment in excess of $2 million against the defendants.
One of the defendants, Mark Schneider, moved to Costa Rica during the litigation. Another defendant, which was an entity owned by Schneider, transferred its principal asset—the right to receive payments from Home Shopping Network—to another company that Schneider owned, Sevenquest, LLC. Following entry of the judgment in 2006, FYEO attempted to enforce the judgment by serving a subpoena on Schneider's brother-in-law, Doug Fournier. The December 2006 subpoena informed Fournier of the entry of the judgment against the defendants.
A month after receiving the subpoena, Fournier flew to Costa Rica to meet with Schneider. Schneider gave Fournier a letter addressed to Home Shopping Network that purported to transfer Sevenquest's right to the Home Shopping Network payments to another entity called Anewco Corp., which was to be formed by Fournier. Although Anewco did not yet exist at the time that Schneider gave him the letter, Fournier formed it shortly after returning to the United States. FYEO learned that Home Shopping Network had been making its payments to Sevenquest and then to Anewco. It challenged the transfer of the payment rights to Sevenquest and Sevenquest's transfer of those rights to Anewco on fraudulent conveyance grounds. FYEO also challenged the payments that Home Shopping Network thereafter made to Anewco.
The district court found that the initial transfer of the right to receive the payments to Sevenquest possessed sufficient "badges of fraud" to be presumptively fraudulent under the Illinois Uniform Fraudulent Transfer Act: the transfer was effected from one Schneider-owned company to another; Schneider continued to control the property after the transfer; the transfer had been concealed by Schneider's efforts to avoid discovery; Schneider made the transfer after being sued; the transfer was of substantially all of his assets; and he became insolvent shortly after the transfer. The district court took a different view, however, of the subsequent transfer from Sevenquest to Anewco. It found that Anewco had taken the payment rights for reasonably equivalent value and in good faith. The value was Fournier's prior agreement to provide services to develop the Home Shopping Network for a three-year period for a small commission. In exchange, at the conclusion of this period, Schneider would transfer the business to him. The district court based its good faith finding on the fact that Fournier did not have a legal or financial relationship with Schneider at the time of the transfer. Schneider did not have involvement with Anewco, and after the transfer he had no control over the Home Shopping Network payments. Therefore, the court determined that the transfer to Anewco was not voidable under UFTA.
Seventh Circuit Review
On appeal, the Seventh Circuit accepted the district court's finding that reasonably equivalent value had been exchanged in the transfer, but focused on Fournier's knowledge of the judgment against Schneider when he traveled to Costa Rica. The court examined Illinois case law, and cited decisions in which courts have found lack of good faith, where the transferee knew of a judgment against the transferor or even a pending lawsuit against the transferor.
Even if Schneider or his companies had no continuing legal or financial relationship with Anewco following the transfer, it was clear that Fournier had knowledge of the outstanding judgment against Schneider. He knew about FYEO's judgment from the subpoena it had sent to him, and he flew to Costa Rica immediately after learning of it to protect "his" business with Home Shopping Network from the judgment.
The Seventh Circuit ruled that Fournier's knowledge of the judgment precluded his company from receiving the payment rights in good faith, even if he and his company had given reasonably equivalent value. Therefore, the transfer of the right to receive the payments was voidable under the UFTA.