Barnett v. Stern
| Decision Date | 30 November 1988 |
| Docket Number | No. 85 C 144.,85 C 144. |
| Citation | 93 BR 962 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | Ralph BARNETT, Philip Liss, and Louis Levit, Trustee of the Bankrupt Estate of Burton L. Stern, Plaintiffs, v. Burton L. STERN, Individually and as Trustee of the Burton L. Stern Trust dated August 1, 1978, Todd Stern, Individually and as Trustee of the Nationwide Trust dated March, 1985, Defendants. |
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Robert Frankenstein, Joel L. Widman, Kozlicki, Widman & Goldberg, Ltd., Chicago, Ill., for plaintiffs.
Allan E. Levin, Donald L. Johnson, Johnson & Schwartz, Chicago, Ill., for defendants.
Plaintiffs Ralph Barnett ("Barnett"), Philip Liss ("Liss") and Louis Levit ("Levit"), have brought this action against defendants Burton L. Stern ("Burton") and Todd Stern ("Todd") under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. The case came before this court as a bench trial in September, 1987. The court has reviewed the evidence and arguments presented by the parties, and now makes the following findings of fact and conclusions of law.
In 1965, Barnett filed a lawsuit in Illinois state court against Burton seeking $44,800. The next year, Liss did likewise for $15,000. In 1968, while those two cases were pending, Burton filed for bankruptcy in federal court, 68 B 4803 (N.D.Ill.). The bankruptcy judge subsequently sustained objections to discharge filed by Barnett and Liss. In 1977, after Burton had exhausted his appeal, the denials of discharge were affirmed.
In August, 1978 Burton created the Burton L. Stern Trust ("the B.S. Trust"1). The trust named Burton as trustee and Burton's children as beneficiaries. Burton transferred nearly all of his assets into the trust in order to avoid the claims of his wife, who was divorcing him, and those of his other creditors. The trust had assets exceeding $1,000,000, including businesses located in Indiana and Wisconsin.
For many years, Burton successfully kept the trust's funds out of the reach of his creditors. He did not, however, operate the trust for the benefit of his children. Instead, he treated the money as his own, using it to pay not only for ordinary living expenses, but for recreation and personal loan obligations as well. Burton used the United States mails for many of these payments.
On January 28, 1983 Barnett and Liss prevailed in their state litigation — consolidated as 78 L 17700 — against Burton and became judgment creditors in the amounts of $84,186.66 and $28,187.50, respectively. When they attempted to collect on these judgments, however, Burton informed them that he did not have sufficient funds to pay them. During a citation to discover assets in December, 1983, Burton testified that he had no assets, that he had not created a trust or transferred any assets to a trust, and that all of his living expenses were provided by his children.
By early 1985, Burton's luck was running out. The law firm Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C., having also obtained a state court judgment against Burton, would not accept his protestations of poverty — a lawyer in the firm had helped Burton set up the B.S. Trust some seven years earlier — and moved the state court to order Burton to turnover funds from the B.S. Trust. In April, the court granted the motion, finding that the B.S. Trust was a sham created by Burton to conceal assets from his creditors, and instructing Burton to pay the firm with assets of the trust. Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C. v. Stern, 82 L 8086 (Circuit Court of Cook County, April 18, 1985).
Meanwhile, Barnett and Liss had also learned of the existence of the B.S. Trust, and they were even less amused. On January 5, 1985, they filed this lawsuit against Burton, alleging that his misrepresentations to them regarding his financial condition, and his use of the B.S. Trust to conceal his assets, violated RICO. They sought treble damages pursuant to 18 U.S.C. § 1964(c), and also moved for a preliminary injunction to prevent him from further depleting the B.S. Trust. On August 2, 1985, United States Magistrate Lefkow ruled that the B.S. Trust was a sham, that Burton was continuing to deplete the assets of the trust, and that plaintiffs had a reasonable likelihood of prevailing on their claims. On September 26, 1985, District Judge Moran adopted the magistrate's findings and granted the injunction.
Unfortunately, Burton had beaten his creditors to the punch. In March, 1985, while the state and federal court actions against him were still pending, he had closed out the B.S. Trust's bank account and had transferred the funds into the bank account of another trust, the Nationwide Trust. This trust had been created by Burton's son Todd on March 1, and named Todd as trustee and Burton's other children as beneficiaries. In the ensuing months, most of the B.S. Trust's remaining assets found their way into the Nationwide Trust.
Todd was named as the Nationwide Trust trustee, but Burton controlled it. Todd signed a few documents and checks, and authorized a signature facsimile stamp for Burton's use in trust activities; Burton did everything else, using the Nationwide Trust, as he had the B.S. Trust, to buy and sell businesses, pay personal expenses and, in general, live a very comfortable life. Burton operated the trust out of Wisconsin, but his work on behalf of trust business took him to a number of states. In addition, Burton made payments with trust funds through the United States mails.
On August 23, 1985, with most of the B.S. Trust assets hidden in the Nationwide Trust, Burton filed a bankruptcy petition in federal court. In Re Burton L. Stern, Debtor, 85 B 10870 (Schwartz, B.J.). Although he initially omitted reference to the B.S. Trust in his list of assets, he eventually added them by amendment. He did not, however, mention the Nationwide Trust, and for the next eighteen months he spent more than $102,000 of trust funds.
In May, 1986, the bankruptcy court appointed Levit as a Chapter 7 trustee of the bankrupt estate. Levitt soon instituted an adversary proceeding against the Nationwide Trust, alleging that the Nationwide Trust was the alter-ego of Burton and asking the bankruptcy court to declare all trust assets parts of the bankrupt estate. Both Burton and Todd received notice of the proceeding and had the opportunity to present evidence and make arguments to the bankruptcy court. On December 15, 1986 the court entered judgment for Levit, finding that, since the date of its creation, the Nationwide Trust had been the property of Burton, and ordering Levit to assume control over all Nationwide Trust assets. Levit v. Nationwide Trust, 86 A 981 (Bkrptcy.N.D.Ill.).
While Levit was prosecuting his case before the bankruptcy judge, Barnett and Liss were seeking relief from the automatic stay, which had gone into effect the day Burton had filed his petition. See 11 U.S.C. § 362. On June 24, the bankruptcy judge granted their request. His order authorized them to proceed with their RICO/fraud case in district court "only for the purpose of establishing the amount of their claim against Burton L. Stern," and stated that "any recovery arising out of the RICO/fraud case shall be the property of the estate to the extent said recovery is collected from assets and proceeds of assets which may be claimed as property of the estate." In Re Burton L. Stern, Debtor, 85 B 10870 (June 24, 1986). A few months later, the bankruptcy judge authorized Levit to join the RICO case as a plaintiff in order to protect the interests of the estate.
All three plaintiffs subsequently amended the complaint. Barnett and Liss added RICO and fraud claims against Burton and Todd (individually and as Nationwide Trust trustee) for their conduct with respect to the Nationwide Trust from March through August, 1985; Levit added a single RICO claim for the alleged depletion of estate assets — i.e., $102,000 of Nationwide Trust funds — after the date Burton filed his bankruptcy petition.
Plaintiffs divide the case into five counts, with Barnett and Liss joining together in Counts I through IV and Levit alone pressing Count V. The first four counts allege essentially the same injury, the inability to collect on the state court judgment, but seek recovery under a variety of factual and legal theories. The fifth focuses on a different aspect of the case.
Counts I and II name Burton alone, alleging that he violated RICO, 18 U.S.C. § 1962(c), and Illinois common law through his fraudulent scheme to conceal assets of the B.S. Trust from his creditors. Counts III and IV name both Burton and Todd, alleging the same theories of liability as the first two counts but with respect to the operation of the Nationwide Trust. Plaintiffs request treble the amount of their state court judgments pursuant to RICO, 18 U.S.C. § 1964(c), as well as $500,000 in punitive damages for the fraud.
Count V also arises under § 1962(c) of RICO and is predicated on the same fraudulent scheme alleged in Count III. This count differs from that one, however, inasmuch as it names only Todd as a defendant and describes the injury as the depletion of estate assets following the commencement of the bankruptcy case. Levit asks for treble this amount under § 1964(c).2
Before turning to the merits, the court must address a problem created by Burton's initiation of bankruptcy proceedings while this case was pending. Recent developments in bankruptcy law call into question the standing of Barnett and Liss to pursue their claims after the bankruptcy case began. Since standing is jurisdictional, the parties' failure to raise the issue does not permit the court to overlook it. See Ostano Commerzanstalt v. Telewide Systems, Inc., 790 F.2d 206 (2d Cir.1986) (...
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