General Elec. Capital Corp. v. Lease Resolution Corp.

• Decision Date: 24 October 1997
• Docket Number: No. 96-2310,96-2310
• Citation: 128 F.3d 1074
• Parties: 47 Fed. R. Evid. Serv. 1074 GENERAL ELECTRIC CAPITAL CORPORATION, Plaintiff-Appellant, v. LEASE RESOLUTION CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1074

128 F.3d 1074

47 Fed. R. Evid. Serv. 1074

GENERAL ELECTRIC CAPITAL CORPORATION, Plaintiff-Appellant, v. LEASE RESOLUTION CORPORATION, Defendant-Appellee.

No. 96-2310.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 3, 1996.

Decided Oct. 24, 1997.

Quinton F. Seamons, Alexander Terras (argued), Todd A. Rowden, Wilson & McIlvaine, Chicago, IL, for Plaintiff-Appellant.

Jerome H. Torshen (argued), Eric J. Rietz, Zoran Draqutinovich, Torshen, Spreyer & Garmisa, Mitchell M. Iseberg, Jeffrey Schulman, Michael Ellis Pildes, Philip S. Wolin, Wolin & Rosen, Chicago, IL, for Defendant-Appellee.

Before ESCHBACH, FLAUM, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

On May 11, 1995, the district court dismissed two counts of General Electric Capital Corporation's ("GE Capital") fourth amended complaint for failure to state claims upon which relief may be granted. In making its determination, the court took judicial notice of facts from a prior unrelated proceeding and from a private document submitted in that proceeding. By taking judicial notice without determining that the facts were undisputed and that the sources relied upon have an accuracy that cannot reasonably be questioned, the district court erred. See Fed.R.Evid. 201(b). Reviewing GE Capital's assertions without these facts, we reverse the court's dismissal of the fraudulent transfer claim but affirm its dismissal of the successor liability claim.

I. HISTORY

Prior to March 4, 1993, Datronic Rental Corporation ("Rental") was the general partner of seven publicly traded limited partnerships that purchased and managed equipment lease portfolios. Datronic Aero, Inc. ("Aero") was a subsidiary of Rental, and Edmund J. Lopinski, Jr. was Rental's president and ninety-five percent shareholder.

On December 23, 1991, GE Capital financed the acquisition of an airplane by loaning $2,100,000 to Aero. Aero's sole business activity was to purchase and hold the airplane. In consideration for the loan, Aero executed a promissory note payable to GE Capital. GE Capital secured the loan with a mortgage on the airplane. In addition, GE Capital received a corporate guaranty from Rental and personal guaranties from Lopinski and Timothy C. Bullard, another executive officer of Rental.

By May 20, 1992, Aero was delinquent in its payments. GE Capital declared a default and demanded return of the airplane; this demand was refused. In response, GE Capital replevied the airplane. A court-approved sale of the airplane produced $1,965,000, leaving a deficiency of $175,000 plus costs and expenses. Under the terms of the financing documents, Aero, Rental, Lopinski, and Bullard were liable for the deficiency. On September 13, 1994, GE Capital obtained a judgment against Aero and Rental, jointly and severally, for $199,425.18.

Meanwhile, in early 1992, an investigation revealed that Lopinski had "looted" the limited partnerships that Rental managed. This revelation forced Lopinski to surrender control of Rental and place his controlling stock in a voting trust. On May 18, 1992, John Ventre, a limited partner, filed a class action lawsuit in the district court against Rental, Lopinski, Bullard, and others alleging that the defendants looted the limited partnerships and engaged in unlawful conduct that included violations of state and federal securities laws. The district court certified a class of 35,000 limited partners on August 14, 1992.

On March 4, 1993, the class settled its claims. As part of the settlement, Rental transferred ninety-five percent of its assets to Lease Resolution Corp. ("LRC") in exchange for a release from pending legal claims. LRC is a new corporation, organized to perform the same services Rental had performed and substituted as general partner in Rental's stead. It occupies the same physical location and offices from which Rental has operated its business. As provided by Fed. R. Civ. P. 23, the district court approved the settlement, finding that the settlement was fair, reasonable, and adequate.

The settlement required that 95% of any proceeds Rental received from the settlement agreement would be assigned and paid to the Datronic Limited Partnerships. See Fourth Amended Complaint para. 17. The other 5% would remain for the payment of debts and reasonable expenses. After the settlement, Rental ceased conducting business. See id. Also, Aero was without assets since GE Capital had already replevied its sole asset. GE Capital believes the transfer of assets from Rental to LRC prevented Rental from satisfying its obligations.

On May 11, 1993, GE Capital brought an action against LRC ¹ to recover its $170,500 claim against Rental from LRC. LRC moved to dismiss this complaint on June 14, 1993. In response, GE Capital sought and was granted leave to file a third amended complaint. On October 26, 1993, LRC filed a motion to dismiss three counts of this complaint.

The district court granted LRC's motion on March 16, 1994. The court specifically found that GE Capital "has failed to allege the de facto merger and fraud exceptions to the general rule of nonliability for successor corporations. Plaintiff has failed to allege any continuity of shareholders, which is required to state a claim against LRC for de facto merger." General Electric Capital Corp. v. Datronic Aero, Inc., No. 92 C 3828, 1995 WL 296957 (N.D.Ill. May 12, 1995) (order granting LRC's motion to dismiss). GE Capital also failed to set forth its allegations of fraud with particularity as required by Fed.R.Civ.P. 9(b) ("Rule 9(b)"). See id. The court, however, allowed GE Capital to file another revised complaint. GE Capital refiled on March 31, 1994.

GE Capital directed two counts of this fourth amended complaint against LRC. Count IV alleged that Rental failed to receive "reasonably equivalent value" for its transfer of assets to LRC in violation of the Illinois Uniform Fraudulent Transfer Act, 740 Ill. Comp. Stat. 160/5 (West 1993). Complaint pp 36-43 ("fraudulent transfer claim"). Count V claimed that LRC is simply a continuation of Rental and therefore is obligated for the liabilities of Rental as a successor corporation. See id. pp 44-55 ("successor liability claim"). On April 20, 1994, LRC moved to dismiss this complaint, arguing that GE Capital has failed to plead fraud sufficiently in Count IV in violation of Rule 9(b) and that GE Capital has failed to state a claim upon which relief may be granted in Counts IV and V in violation of Fed.R.Civ.P. 12(b)(6) ("Rule 12(b)(6)").

On May 11, 1995, the district court dismissed Counts IV and V of GE Capital's final complaint with prejudice. In dismissing Count V, it held that the court's prior decision that "the settlement agreement was 'fair, reasonable, and adequate' negates any claim by GE that the transfer of Rental's assets to LRC was not for 'reasonably equivalent value.' " General Electric Capital Corp. v. Datronic Aero, Inc., No. 92 C 3828, slip op. at 15, 1995 WL 296957 (N.D.Ill. May 12, 1995) (quoting Ventre v. Datronic Rental Corp., No. 92 C 3289, 1993 WL 524377 (N.D.Ill. Dec. 13, 1993) (order approving settlement)). The court made two determinations in dismissing Count V. First, the court held that GE Capital failed to state a claim because it failed to allege continuity of ownership. See id. at 14. Second, it held that "the settlement agreement demonstrates a lack of continuity of ownership between Rental and LRC, thereby precluding GE from asserting continuity of ownership between those two corporations." Id. at 15.

II. ANALYSIS

Although the district court addressed LRC's motions to dismiss under Rules 9(b) and 12(b)(6) together, we will discuss them separately for clarity's sake, applying our de novo standard of review. See City Nat'l Bank v. Checkers, Simon & Rosner, 32 F.3d 277, 281 (7th Cir.1994). We agree with the district court that GE Capital has pled its fraudulent transfer claim with sufficient particularity to satisfy Rule 9(b). We, however, are unable to accept the district court's use of judicial notice of prior proceedings in dismissing GE Capital's claims under Rule 12(b)(6). We therefore review these claims without the facts elicited from the prior proceeding.

A. Rule 9(b)

Motion to Dismiss

Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The circumstances of fraud or mistake include " 'the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.' " Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir.1994) (quoting Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 924 (7th Cir.1992)); see also DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990) (reasoning that Rule 9(b) particularity "means the who, what, when, where, and how: the first paragraph of any newspaper story").

GE Capital does not allege a common law fraud violation; instead, it claims that LRC violated the Illinois Uniform Fraudulent Transfer Act. 740 Ill. Comp. Stat. 160/5 ("IUFTA"). This statute protects against two kinds of fraudulent transfers: transfers with an actual intent to defraud and transfers which the law considers fraudulent (i.e., constructive fraud or fraud in law). GE Capital has alleged constructive fraud in its Fourth Amended Complaint. Sections 5(a)(2)(A) & (B) of IUFTA establish a presumption that constructive fraud has occurred where 1) the debtor made a voluntary transfer; 2) at the time of the transfer, the debtor had incurred obligations elsewhere; 3) the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer; and 4) after the transfer, the debtor failed to retain sufficient property to pay the indebtedness. ² See id.; see also In re Martin, 145 B.R. 933, 945 (Bankr.N.D.Ill.1992);...