Hong Kong Electro-Chemical Works, Ltd. v. Less

• Decision Date: 27 August 2008
• Docket Number: No. 07-1995.,07-1995.
• Citation: 539 F.3d 795
• Parties: HONG KONG ELECTRO-CHEMICAL WORKS, LTD., Plaintiff-Appellant, v. Garry LESS, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

539 F.3d 795

HONG KONG ELECTRO-CHEMICAL WORKS, LTD., Plaintiff-Appellant, v. Garry LESS, et al., Defendants-Appellees.

No. 07-1995.

United States Court of Appeals, Seventh Circuit.

Argued January 16, 2008.

Decided August 27, 2008.

Thomas W. Flannigan (argued), Chicago, IL, for Plaintiff-Appellant.

Gary Less, Michelle Less, John H. Ward (argued), Much, Shelist, Freed, Denenberg, Ament & Rubenstein, Chicago, IL, for Defendants-Appellees.

Charlene Werner, Woodstock, IL, for Appellee.

Before MANION, WOOD, and SYKES, Circuit Judges.

WOOD, Circuit Judge.

This appeal is part of a long effort by Hong Kong Electro-Chemical Works, Ltd. ("HKEW") to get paid for goods that it sold to defendant Garry Less and a business he and his wife Michelle ran under the name Todd Industries. (We refer to them all as Less, unless the context requires otherwise.) The district court found that Less owes HKEW $166,252.88 plus interest. Less did not pay, leading HKEW to search for assets that would satisfy its judgment. The dispute here centers on a house that Less and his family occupied and arguably owned. The district court rejected HKEW's claim that a 2002 conveyance of that house to Michelle Less's mother, Charlene Werner, and a later 2006 conveyance of the same house to Roth Holdings, LLC, were fraudulent transfers and were voidable under the Illinois Uniform Fraudulent Transfer Act (IUFTA), 740 ILCS 160/1 et seq. We reverse.

I

Garry Less earned a significant sum of money in 1988 as a commodities trader. He failed, however, to set aside enough money to pay his taxes, and as 1989 opened, his luck ran out. Less wound up with tax debts he could not pay, liens imposed by the IRS, and a young family to support. During this period, Less refrained from purchasing a house in his own name. Instead, Less and his wife Michelle entered into an agreement with Werner, under which Werner would purchase a house for the Lesses to live in and the Lesses would cover the mortgage payments. This led to the 2002 conveyance at issue here. In that year, Werner purchased from Scott Warren (an unrelated third party) a house in Riverwoods, Illinois, that Garry picked out. The Lesses moved in and made the mortgage payments for the next few years.

In the meantime, Less went into business as an importer of frying pan handles. He conducted this business through Todd Industries, a corporation wholly owned by Michelle. In July 2000 the corporation was dissolved by the Illinois Secretary of State for failure to file an annual report and pay statutory fees. After dissolution, Less nonetheless entered into a contract supposedly on behalf of Todd Industries to purchase frying pan handles from HKEW; in that agreement, he misrepresented the legal status of Todd Industries. After receiving the wares, neither Less nor Todd Industries paid for them. In June 2005 HKEW (relying on diversity jurisdiction) filed a breach of contract claim against Less, Michelle, and Todd Industries to recover $166,252.88.

While that suit was pending, Less made arrangements for the Riverwoods house to be sold to his lawyer, Mitchell Roth. Roth purchased the house through his wholly-owned corporation, Roth Holdings, LLC. (When appropriate, we refer to them collectively as "Roth.") Mitchell Roth is, according to Less, a very old and close friend of Less, as well as the registered agent for Todd Industries. Roth's law firm was handling the litigation with HKEW for Less. A central condition of the sale of the house was that the Less family be permitted to remain on the premises. (In looking for a buyer who was amenable to this arrangement, Less also approached the accounting firm that handled his taxes and another party whose relationship to Less is uncertain; both declined.) In 2006, Less signed the sale contract as "attorney-in-fact" for Werner. (This is the transaction referred to in these proceedings as the 2006 conveyance.) Less also signed the lease from Roth to the Lesses, which required the Lesses to pay all mortgage, tax, and other expenses of the property and gave them an option to buy the property within a year. Notably, in the meantime the IRS liens had been extinguished by operation of law; this meant that Less could once again own property without worrying that the IRS would seize it in satisfaction of his debt for the 1988 taxes. As of the time the district court awarded summary judgment to HKEW for the full amount of $166,252.88, making HKEW a judgment-creditor of the Lesses, the Riverwoods house had been conveyed to Roth.

HKEW filed a motion in the district court to void the 2006 conveyance to Roth as a fraudulent effort on Less's part to avoid creditors. It also asked the court to set aside the 2002 conveyance in which Werner purchased the Riverwoods house, although a closer look at the motion shows that it was really a request to reform the 2002 title and to establish a constructive trust that recognizes Less as the true purchaser and that allows HKEW to reach the property to satisfy its judgment. The district court denied the motion, and HKEW now appeals.

II

We review the district court's legal conclusions de novo, and its findings of fact for clear error. Here, the primary legal issues concern what rule to apply for evaluating resulting trusts, constructive trusts, and fraudulent conveyances. The facts are largely uncontested. Illinois law governs in this diversity suit.

The first issue for us is whether the district court erred in finding that the Lesses did not have any ownership interest in the Riverwoods house at any point. HKEW recognizes that Less avoided taking legal title to the house, but it argues that he had an equitable interest in it that it is entitled to reach. The district court had this to say:

HKEW has not pointed to any evidence that indicates that the Less Defendants ever had any legal or equitable interest in the House, either in whole or in part. The parties agree that Werner purchased the House from Warren. However, HKEW has not pointed to any connection between the Less Defendants and Warren. Nor has HKEW shown that the Less Defendants gave any money to Werner for the purchase of the House. Thus, the undisputed facts show that the 2002 Conveyance did not involve a transfer of any interest to or from the Less Defendants.

(Emphasis added.)

The district court seems to have been assuming that, under Illinois law, an equitable interest (such as a beneficiary's interest via a resulting trust) cannot arise unless the party who enjoys the beneficial interest in the house and who pays the mortgage also contributed some of the up-front money toward the purchase of the house. As we explain below, this is not the case, and any decision based on that assumption cannot stand. Moreover, the italicized language in the preceding quote demonstrates that Roth is incorrect when it argues that HKEW waived the resulting-trust argument by failing to raise it below. The district court's language leaves no doubt that it considered the question whether Less had an equitable interest in the house. The resulting-trust argument has not been waived, and this court may review the district court's resolution of this claim.

"[A] resulting trust [arises] wherever the circumstances surrounding the disposition of property raise an inference, not rebutted, that the transferor does not intend that the person taking or holding the property . . . should have the beneficial interest therein." Kaibab Indus., Inc. v. Family Ready Homes, Inc., 111 Ill.App.3d 965, 67 Ill.Dec. 635, 444 N.E.2d 1119, 1126 (1983) (omission in original). A resulting trust "comes into being at the instant the title vests or not at all." Suwalski v. Suwalski, 40 Ill.2d 492, 240 N.E.2d 677, 679 (1968). Nevertheless, "[u]nder Wright, Suwalski, and West, the supreme court has examined the conduct of the parties subsequent to the questioned conveyance to determine the intent of the parties at the time of the conveyance." Key v. Key, 111 Ill.App.3d 151, 66 Ill.Dec. 886, 443 N.E.2d 812, 816 (1982) (emphasis added). "[T]he burden of proof rests upon the party seeking to establish a resulting trust, and the evidence to be effective for this purpose must be clear, convincing, unequivocal, and unmistakable." Kaibab, 67 Ill.Dec. 635, 444 N.E.2d at 1126. The "crucial element in creating a resulting trust is `intent'" and "such intent can be proved by surrounding circumstances, but such proof must be clear and convincing." Id. at 1126. Applying those principles to this case, the district court should have conducted an analysis of the circumstances before, during, and after the 2002 conveyance to ascertain the intent of the parties, rather than relying on the single indicium of up-front payment of purchase price.

Illinois courts have found resulting trusts in a variety of circumstances. See Key, 66 Ill.Dec. 886, 443 N.E.2d at 816 (finding resulting trust in favor of a father where the conveyance was in the names of his two sons but the father paid part of the down payment and made all payments toward principal and interest on the mortgage indebtedness, as well as payments for repairs, insurance, and taxes, and received the crops from the land). See also Suwalski, 240 N.E.2d at 679 (reversing appellate court and holding that a resulting trust, rather than a co-tenancy, was created in favor of the parents where the son fronted $1,500 toward purchase price of property and co-signed for the loan but paid none of the mortgage payments, taxes, insurance premiums, or costs of repairs and improvements all of which were paid by the father and mother).

In Wright v. Wright, 2 Ill.2d 246, 118 N.E.2d 280, 281-82 (1954),

plaintiff requested defendant to apply for a "G.I. loan" to assist her in raising the purchase price. . . . Plaintiff said that she would pay the mortgage debt. . . . Plaintiff testified that at the time of the transaction defendant said: "I don't want the property because it is in my name only and you...