icon on Jane Holloway, was employed at a facility called Oakridge Convalescent Home. She filed a charge of discrimination under the Illinois Human Rights Act against Oakridge Nursing & Rehab Center, LLC, -- her employer and the managing company of Convalescent. Oakridge later transferred nearly all of its assets for no consideration to Oakridge Healthcare Center, LLC. Oakridge Healthcare became the new manager of Convalescent.
Holloway obtained an administrative judgment of $30,880. When Oakridge Center failed to satisfy the judgment, the State of Illinois filed a complaint against Oakridge Healthcare, as the successor of Oakridge Center, to enforce compliance with the judgment. Oakridge Healthcare filed a motion for summary judgment, which the circuit court granted. The State appealed and argued that it had presented sufficient evidence to create a material issue of fact that Oakridge Center transferred its assets for the fraudulent purpose of escaping Holloway’s judgment. Further, the State urged the appeals court to look to federal common law, where successor liability has long been recognized in employment discrimination cases.
In turn, Oakridge Healthcare argued that the State never raised the fraudulent transfer argument at any stage of the proceedings in the trial court, and therefore forfeited the argument. Oakridge Healthcare also argued that the asset transfer was not done with intent to defraud Holloway because at the time of the transfer (1) no one had given any thought whatsoever to Holloway’s pro se administrative charge, (2) there was no existing indebtedness to Holloway, and (3) when the asset transfer was made in 2012 no one could anticipate that Holloway would receive an award in 2014.
The appeals court majority disagreed. Here, the State alleged in count II of its complaint that (i) when Oakridge Healthcare began operating Convalescent it was aware of complainant’s charge of discrimination and (ii) based on certain facts, Oakridge Healthcare was a successor of Oakridge Center, and was therefore responsible for its liabilities. These facts were sufficient to set forth a cause of action for fraudulent transfer and Oakridge Healthcare specifically addressed the fraudulent transfer exception in the trial court. Thus, this argument was not raised for the first time on appeal and the State did not forfeit the argument.
In Vernon v. Schuster, 179 Ill. 2d 338 (1997), the Illinois Supreme Court held that a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the transferor corporation. The rule of successor corporate non-liability is intended to protect bona fide purchasers from unassumed liability, and was created to improve the fluidity of corporate assets. Nevertheless, there are four exceptions to the rule of successor corporate non-liability: (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 a continuation of the seller, or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations.
Here, there was evidence the transfer may have been made for the purpose of escaping Oakridge Center’s obligation to Holloway.
Illinois recognizes two categories of fraudulent transfers: “fraud in law” and “fraud in fact.” Under the theory of fraud in fact, a party must prove that the transfer was made with actual intent to hinder, delay, or defraud the creditors. A creditor can prove fraud in fact based on the existence of certain “badges of fraud” set forth in the Uniform Fraudulent Transfer Act (UFTA). The factors are:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.” 740 ILCS 160/5(b).
A court need not consider all 11 factors. However, when the factors are present in sufficient numbers, they may give rise to an inference of fraud.
Here, Holloway filed her charge of discrimination on February 7, 2011, and an employee named Helen became aware of the charge “in spring 2011.” Holloway’s filing of her charge of discrimination put Oakridge Center on notice of a threatened lawsuit and the real possibility of judgment against Oakridge Center. Thus, Oakridge Center had the obligation not to dissipate its assets.
Despite this obligation on January 1, 2012, , Oakridge Center transferred to Oakridge Healthcare all of its (i) property, (ii) contracts, (iii) licenses, (iv) patient records, (v) patient trust funds, and (vi) supplies. Helen stated in her deposition that Oakridge Center transferred beds, the license, three days' worth of perishable foods, seven days of frozen food, stock meds, medical supplies, and a couple reams of paper. The fifth “badge of fraud” was met because the transfer was of substantially all of Oakridge Center’s assets.
In addition, because Oakridge Center never had the transferred assets appraised and never received any payment from Oakridge Healthcare, Oakridge Center did not receive reasonably equivalent consideration for the value of the transferred assets. Therefore the eighth badge of fraud was met.
Finally, with respect to the ninth badge of fraud, the court found that Helen stated in her deposition that in June 2011, Oakridge Center began to experience financial trouble and was no longer able to pay its rent to Oakridge Properties, which resulted in the company’s termination of its lease with Oakridge Properties. Thus there was evidence that Oakridge Center was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
Based on these findings, there was adequate evidence to support an inference of fraud.
A “fraud in law” transfer is also found in sections of the UFTA. Fraud in law occurs where the transfer is made for no or inadequate consideration, and the fraud is presumed. Because the appeals court found that Oakridge Center did not receive reasonably equivalent value in exchange for the transferred assets, it held that the transfer was made for no (or inadequate) consideration. Therefore, the transfer was made for the fraudulent purpose of avoiding Holloway’s judgment.
Because Oakridge Center became aware of Holloway’s charge, and transferred to Oakridge Healthcare substantially all of its assets for no consideration, (thereby possibly leaving Oakridge Center insolvent), the court held that the State presented sufficient evidence for a reasonable trier of fact to find that the asset transfer was for the fraudulent purpose of escaping Holloway’s judgment.
The exceptions to the rule of corporate successor non-liability focus on transactions involving corporations and the transfer of their assets. The exceptions do not consider employees such as Holloway, who have no control over these transactions and are left without a remedy when corporations transfer their assets. Therefore, the appeals court found that its holding did not depart from Illinois law, but was one of first impression.
Federal cases have set forth a standard for determining successor liability in cases involving employment discrimination. For example, the Sixth Circuit imposed liability on successor employers in Equal Employment Opportunity Comm’n v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974).
Liability of successor employers is not automatic and must be determined on a case-by-case basis with the primary goal of providing the discriminate with full relief. The MacMillan court identified nine factors a court may consider in imposing liability on a successor corporation: (1) whether the successor company had notice of the charge, (2) whether the predecessor was able to provide relief, (3) whether there has been a substantial continuity of business operations, (4) whether the new employer uses the same plant or facility, (5) whether it uses the same or substantially the same work force, (6) whether it uses the same or substantially the same supervisory personnel, (7) whether the same jobs exist under substantially the same working conditions, (8) whether it uses the same machinery, equipment and methods of production, and (9) whether it produces the same product.
Here, Oakridge Center’s transfer of assets to Oakridge Healthcare tracking the MacMillan factors. First, as noted, Oakridge Center had notice of Holloway’s discrimination charge because Holloway filed it on February 7, 2011, and Helen became aware of the charge in spring 2011, prior to the transfer on January 1, 2012. As for the second factor, Oakridge Center did not have the ability to provide Holloway relief because it admittedly began to experience financial trouble in June 2011 and was unable to pay its rent. This established that it was insolvent or became insolvent shortly after the transfer was made, thus was unable to provide Holloway relief. Finally, the third factor, which subsumes the remaining factors into the continuity of operations factor, was also met because Oakridge Healthcare continued to operate Convalescent as a nursing home, using the same workforce and at the same location. All of Convalescent’s operations remained the same. Therefore, the transfer met the MacMillan factors, and Holloway’s judgment could be imposed on Oakridge Healthcare as Oakridge Center’s successor.
The appeals court held that Illinois courts, (including the circuit court in this case), should rely on the federal doctrine of successor corporate liability where the underlying claim stems from a charge of employment discrimination in violation of the Illinois Human Rights Act. The case was reversed and remanded.
People Ex Rel. Department of Human Rights v. Oakridge Nursing & Rehab Center, 2019 IL App (1st) 170806.