Brandon v. Anesthesia & Pain Management Ltd

• Decision Date: 15 August 2005
• Docket Number: No. 04-3821, 04-4044.,04-3821, 04-4044.
• Citation: 419 F.3d 594
• Parties: Michael BRANDON, Plaintiff-Appellant, v. ANESTHESIA & PAIN MANAGEMENT ASSOCIATES, LTD., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

419 F.3d 594

Michael BRANDON, Plaintiff-Appellant, v. ANESTHESIA & PAIN MANAGEMENT ASSOCIATES, LTD., et al., Defendants-Appellees.

No. 04-3821, 04-4044.

United States Court of Appeals, Seventh Circuit.

Argued May 9, 2005.

Decided August 15, 2005.

John D. Lynn (argued), Denner & Lynn, St. Louis, MO, for Plaintiff-Appellant.

Carl W. Lee, Gundlach, Lee, Eggmann, Boyle & Roessler, Kevin J. Stine (argued), Mathis, Marifian, Richter & Grandy, Kevin T. Hoerner, Becker, Paulson, Hoerner & Thompson, Belleville, IL, for Defendants-Appellees.

Before POSNER, EASTERBROOK, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

The plaintiff, a physician, won a $2.53 million judgment in a diversity suit for retaliatory discharge that he had brought in a federal district court in Illinois against his former employer, a corporation named Anesthesia & Pain Management Associates (APM). We affirmed the judgment, 277 F.3d 936 (7th Cir.2002), but APM refused to pay any part of it. Brandon then filed a supplementary proceeding, Fed.R.Civ.P. 69(a), in the course of which he learned that after he had filed his tort suit APM had transferred $878,000 in receipts from accounts receivable that it had collected and $300,000 in cash bonuses (for a total of $1,178,000) to the three physicians who owned APM—Drs. Ravi, Slocomb, and Boivin—and to two physicians employed by the corporation, Drs. Gillen and Chintapalli. All five physicians were named as defendants in the supplementary proceeding. The $1,178,000 figure seems to be erroneous; the value of the accounts receivable transferred, so far as we can determine from the record, was not $878,000 but $931,000. That is a matter to be straightened out on remand.

Brandon contended in the supplementary proceeding that the payment to the defendants, after he filed suit against APM, of the bonuses and of the receipts from the collection of the accounts receivable—payments that left APM with only $39,000 in assets—were fraudulent conveyances of property that belonged to the corporation.

Years later he brought a separate supplementary proceeding against the three shareholders, claiming that they were alter egos of APM and therefore personally liable for the corporation's debt to him. This second proceeding named as an additional defendant a corporation, St. Clair Anesthesia Ltd., that APM's shareholders had formed the day after the verdict in Brandon's favor in the tort suit. He claimed that St. Clair was a successor to APM and therefore liable for its debt to him (though there is no "therefore," as we'll see), and alternatively that St. Clair had been formed to squirrel away assets of APM on which Brandon was entitled to levy in order to collect his judgment. After St. Clair was formed, APM ceased to do any business (though it has never been dissolved), except to collect accounts receivable. It was out of receipts from those collections that most of the challenged payments to the individual defendants were made.

Both supplementary proceedings are governed by the law of Illinois, the state that the federal district court in which the suit was filed is located in. Fed.R.Civ.P. 69(a). The district judge dismissed them after a one-day bench trial, ruling that the transfers had not been fraudulent conveyances, that the shareholders were not alter egos of APM, and that St. Clair was not APM's successor.

The district court committed a succession of errors in reaching the startling conclusion that none of the entities from which Brandon is seeking payment of his judgment (the five individual doctors plus St. Clair) owe him anything. The first error was to rule that the accounts receivable were owned by the individual physicians who owned or were employed by APM rather than by APM itself, and the second was to rule that the bonuses the physicians received were in compensation for services they had rendered APM rather than shares of the corporation's profits.

The corporation's practice, which preceded Brandon's lawsuit against it, of deeming its accounts receivable the property of its shareholders and physician employees was actually a device for corporate profit sharing. For when APM's patients paid the receivables, they paid them to APM, not to the receivables' nominal owners, the physicians; and APM used the money to pay its debts and otherwise conduct its business before it paid any of the money to the shareholders and employees. The receivables were thus treated as a corporate asset. In re Marriage of Rubinstein, 145 Ill.App.3d 31, 99 Ill.Dec. 212, 495 N.E.2d 659, 663 (1986); In re Marriage of Davis, 131 Ill.App.3d 1065, 87 Ill.Dec. 145, 476 N.E.2d 1137, 1140-41 (1985); cf. In re Milwaukee Cheese Wisconsin, Inc., 112 F.3d 845, 846-47 (7th Cir.1997); In re Bullion Reserve of North America, 836 F.2d 1214, 1217 (9th Cir.1988). As a detail, we note that the price at which the receivables were "sold" to the shareholders and employees was based on the value of existing receivables; no part of the price represented the value of future receivables. Yet it was future receivables that were transferred to the doctors, and these receivables, not having been part of the sales, were unquestionably a corporate asset.

The analysis of the bonuses is similar to that of the proceeds from the collection of the accounts receivable. The bonuses were neither wages contractually due the recipients nor even "earned bonuses" (which the Illinois Wage Payment and Collection Act equates to wages, 820 ILCS 115/2); they were shares of corporate profits. The cash used to pay them was a corporate asset, just like the receipts from collecting the accounts receivable.

The payments to the individual defendants of the bonuses and the receipts were fraudulent conveyances in both senses of the term. There was (1) no consideration (the bonuses were not accrued wages and the defendants had not paid or given other value for the accounts receivable) and there were insufficient remaining assets to satisfy creditors, and (2) the payments were intended to prevent a creditor from collecting on his claim. 740 ILCS 160/5(a)(1), (2); Gendron v. Chicago & North Western Transportation Co., 139 Ill.2d 422, 151 Ill.Dec. 545, 564 N.E.2d 1207, 1214-15, (1990); Scholes v. Lehmann, 56 F.3d 750, 756-57 (7th Cir.1995).

An alternative route that Brandon could have followed would have been to petition APM into bankruptcy; its liabilities (primarily to him) exceeded its assets. Had he followed this route, he could have reached back and undone as preferential transfers the payments to the individual defendants made within a year (now two years, as a result of a 2005 amendment) before the bankruptcy. 11 U.S.C. § 548. The physicians might have benefited from APM's bankruptcy as well (and if so could have had APM file a voluntary petition for bankruptcy) by limiting their liability and shielding their postpetition income while paying part of Brandon's claim out of prepetition income and assets. By trying to stiff Brandon, they exposed their future assets and income to levy. That is what now comes to pass: money they made, and assets they acquired, long after the verdict will be used to satisfy the judgment debt. They blew their opportunity to use bankruptcy law to enable a fresh start.

Brandon's alter ego theory, an alternative to the fraudulent-conveyance theory, is that the ownership of APM's accounts receivable by the physicians—which, remember, predated his tort suit—and the corporation's practice (also predating the suit) of distributing profits, as they accumulated, in the form of bonuses, meant that APM operated with virtually no corporate assets. It is natural for a group of doctors, faced as they are with the possibility of malpractice suits, to want to operate in a judgment-proof format. But it is a risky gambit, for, since APM was a shell, Brandon was entitled to pierce the corporate veil and levy on the owners' personal assets to the full extent of his judgment; in the jargon of corporate law, the corporation was not a separate entity from its owners but merely their "alter ego." Mark I, Inc. v. Gruber, 38 F.3d 369, 371 (7th Cir.1994); In re Kaiser, 791 F.2d 73, 75 (7th Cir.1986). The owners' liability to Brandon is, moreover, joint and several. Knickman v. Midland Risk Services-Illinois, Inc., 298 Ill.App.3d 1111, 233 Ill.Dec. 153, 700 N.E.2d 458, 462-63 (1998); Fentress v. Triple Mining, Inc., 261 Ill.App.3d 930, 200 Ill.Dec. 1, 635 N.E.2d 102, 107 (1994); Quantum Color Graphics, LLC v. Fan Association Event Photo GmbH, 185 F.Supp.2d 897, 901 (N.D.Ill.2002).

The district judge rejected the alter ego theory on several unpersuasive grounds, such as that APM had not stripped itself of assets in order to prevent Brandon from collecting his judgment, for the stripping (the purported vesting of ownership of the corporation's accounts receivable in the physicians and the treatment of corporate profits as earned bonuses) had occurred earlier. That is irrelevant and likewise the fact also stressed by the judge that personal-services corporations usually don't have sizable assets compared to other corporations. As the judge himself noted, a principal asset of personal-service corporations is their accounts receivable, and APM stripped itself of this asset.

The alter ego theory offers broader relief to Brandon in one sense, because as we have noted it enables him to collect his entire judgment out of the personal assets of the three shareholder defendants. But he does not seek relief on this theory against the other two physicians, the employees, as to whom he is therefore limited to obtaining the money fraudulently conveyed to them.

Had APM continued in business, it would have earned additional profits on which Brandon could have levied. As the defendants...