In re Stacy, Bankruptcy No. 96 B 23596

• Decision Date: 03 December 1998
• Docket Number: Adversary No. 97 A 01018.,Bankruptcy No. 96 B 23596
• Citation: In re Stacy, 227 B.R. 272 (Bankr. N.D. Ill. 1998)
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re Edwin STACY, Debtor. David R. BROWN, Trustee, Plaintiff, v. Edwin STACY and Marie Stacy, Defendants.

227 B.R. 272 (1998)

In re Edwin STACY, Debtor David R. BROWN, Trustee, Plaintiff, v. Edwin STACY and Marie Stacy, Defendants.

Bankruptcy No. 96 B 23596, Adversary No. 97 A 01018.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

December 3, 1998.

Brian J. Wanca, Roberta K. Kanabay, Rolling Meadows, IL, for Plaintiff.

John V. Del Gauidio, Jr., Chicago, IL, for Defendants.

David R. Brown, Roselle, IL, Trustee.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the motion of Edwin Stacy (the "Debtor") and his spouse, Marie Stacy, to dismiss the amended complaint filed by David R. Brown, Trustee of the Debtor's Chapter 7 estate (the "Trustee") pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth herein, the Court denies the motion to dismiss. The Debtor and his spouse shall file an answer and any affirmative defenses within thirty days hereof. Concurrently entered herewith is a Preliminary Pretrial Order setting this adversary proceeding for pretrial conference on February 5, 1999 at 9:00 a.m.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and (O).

II. FACTS AND BACKGROUND

Many of the facts in this matter are undisputed. On May 2, 1993, Days Inns of America, Inc. ("Days Inn") filed a lawsuit in the Circuit Court of DuPage County, Illinois against, inter alia, the Debtor. While that action was pending, on November 21, 1994, the Debtor transferred his and his wife's marital residence in Hinsdale, Illinois (the "Hinsdale Property") then titled in an Illinois land trust, in which they owned the beneficial interest, to themselves in an Illinois tenancy by the entirety. On September 16, 1996, Days Inn received a judgment against the Debtor in the amount of $328,586.37 and was later awarded attorney's fees in the sum of $109,520.79.

The Debtor filed a Chapter 13 petition on September 9, 1996, which was subsequently converted to Chapter 7. The Debtor claimed the Hinsdale Property exempt on his Schedule C pursuant to 11 U.S.C. § 522 and the Illinois tenancy by the entirety statute 735 ILCS 5/12-112 ("§ 12-112").

Thereafter, on July 30, 1997, the Trustee commenced the instant adversary proceeding against the Debtor and his spouse. The Trustee alleged in Count I of the complaint that the transfer of the Hinsdale Property by the Debtor to himself and his spouse as tenants by the entireties was a fraudulent transfer in violation of the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 et seq. In Count II of that complaint, the Trustee alleged that the Debtor claimed his entire interest in the Hinsdale Property as exempt property in his Schedule C attached to the Chapter 7 bankruptcy petition. The Trustee alleged that to the extent that the Debtor's transfer of ownership in the Hinsdale Property into a tenancy by the entirety was avoided under Count I, then his claim of exemption must fail.

On August 12, 1997, the Debtor and his spouse filed their first motion to dismiss the original complaint. They argued that the Illinois Fraudulent Transfer Act was inapplicable to transfers of property to tenancy by the entirety and that any claim that the transfer was avoidable must be analyzed under the standards prescribed in § 12-112. On January 16, 1998, the Court denied the motion to dismiss based in part on the Court's decision in Voiland v. Gillissie (In re Gillissie), 215 B.R. 370 (Bankr.N.D.Ill.1997). The Court gave the Debtor and his spouse leave to file an answer to the complaint by a date certain. On January 23, 1998, they filed a notice of appeal and moved for an interlocutory appeal based on the Court's denial of that motion to dismiss.

After granting the motion for an interlocutory appeal, on July 30, 1998, Judge Robert W. Gettleman of the United States District Court for the Northern District of Illinois, reversed this Court's denial of the motion to dismiss the original complaint and remanded the matter for further proceedings. See Brown v. Stacy ( In re Stacy), 223 B.R. 132 (N.D.Ill.1998). Specifically, Judge Gettleman determined that the Court erred when it denied the motion to dismiss. He held that only amended § 12-112 should have applied to the matter and the Illinois Fraudulent Transfer Act was inapplicable. Id. at 136. He opined that "to avoid a transfer under § 12-112, the creditor must prove, (1) that the debtor was unable to pay existing debts as they became due, and (2) that the debtor transferred the property to a tenancy by the entirety for the sole, exclusive purpose of avoiding those debts." Id.

The Trustee filed an amended complaint on September 21, 1998. Therein, the Trustee asserts under Count I that the transfer of the Hinsdale Property from the land trustee to the Debtor and his spouse as tenants by the entireties was fraudulent in violation of the Illinois Fraudulent Transfer Act and § 12-112. Most significantly for purposes of the motion at bar, the amended complaint in paragraph 10 alleges that the Debtor, with the sole intent to avoid the payment of the debt owed to Days Inn, made the transfer into the entireties and that the debt was beyond his ability to pay it. Thus, the Trustee asks the Court to avoid and set aside the transfer of the Debtor's interest in the Hinsdale Property pursuant to 740 ILCS 160/8, 735 ILCS 5/12-112 and 11 U.S.C. § 544(b). Under Count II of the amended complaint, the Trustee alleges that the Debtor claimed his entire interest in the Hinsdale Property exempt on his Schedule C. The Trustee argues that to the extent that the transfer of ownership in the Hinsdale Property into a tenancy by the entireties is avoided under Count I, then his claim of exemption must also fail.

The Debtor and his spouse filed the instant motion to dismiss on October 26, 1998. They allege that the amended complaint should be dismissed with prejudice for two reasons: (1) it seeks relief under the Illinois Fraudulent Transfer Act, which Judge Gettleman held inapplicable; and (2) it does not allege that Days Inn held a judgment against the Debtor when he and his spouse transferred the Hinsdale Property into tenancy by the entirety, which they contend is a requirement under § 12-112 to avoid the transfer. They conclude that for purposes of applying § 12-112, the Debtor had no "existing debt" at the time of the transfer. It is undisputed that Days Inn did not have a judgment against the Debtor at the time of the transfer of the Hinsdale Property into tenancy by the entirety.

III. APPLICABLE STANDARDS

In order for the Debtor and his spouse to prevail on their motion to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6) and its bankruptcy analogue Federal Rule of Bankruptcy Procedure 7012, it must clearly appear from the pleadings that the Trustee can prove no set of facts in support of his claims which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Colfax Corp. v. Illinois State Toll Highway Auth., 79 F.3d 631, 632 (7th Cir. 1996) (citation omitted); Meriwether v. Faulkner, 821 F.2d 408, 411 (7th Cir.), cert. denied, 484 U.S. 935, 108 S.Ct. 311, 98 L.Ed.2d 269 (1987). The Seventh Circuit has emphasized that "despite their liberality on pleading matters . . . the federal rules still require that a complaint allege facts that, if proven, would provide an adequate basis for each claim." Gray v. Dane County, 854 F.2d 179, 182 (7th Cir.1988) (citations omitted). It is well established that alleging mere legal conclusions, without a factual predicate, is inadequate to state a claim for relief. Briscoe v. LaHue, 663 F.2d 713, 723 (7th Cir. 1981), aff'd, 460 U.S. 325, 103 S.Ct. 1108, 75 L.Ed.2d 96 (1983). Moreover, the Court must take as true all well pleaded material facts in the complaint, and must view these facts and all reasonable inferences which may be drawn from them in a light most favorable to the Trustee. See Northern Trust Co. v. Peters, 69 F.3d 123, 129 (7th Cir.1995); Infinity Broadcasting Corp. of Illinois v. Prudential Ins. Co. of America, 869 F.2d 1073, 1075 (7th Cir.1989); Corcoran v. Chicago Park Dist., 875 F.2d 609, 611 (7th Cir.1989); Marmon Group, Inc. v. Rexnord, Inc., 822 F.2d 31, 34 (7th Cir.1987). The issue is not whether the Trustee will ultimately prevail, but whether he has pleaded a cause of action sufficient to entitle him to offer evidence in support of his claims. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the sufficiency of the complaint, not to decide the merits of the case. Demitropoulos v. Bank One Milwaukee, N.A., 915 F.Supp. 1399, 1406 (N.D.Ill.1996) (citing Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir.1990)).

IV. DISCUSSION

First, the Court will address the Trustee's argument that the Illinois Fraudulent Transfer Act is inapplicable. Judge Gettleman stated that "in the instant case, the Debtor and his spouse argue that because the amended § 12-112 must be applied, the Illinois Fraudulent Transfer Act is inapplicable and the motion to dismiss should have been granted. The court agrees." Stacy, 223 B.R. at 136. Based upon Judge Gettleman's decision, which serves as the law of the case, the Court finds that the Trustee's requested relief in Count I of the amended complaint under the Illinois Fraudulent Transfer Act is improper. The law of the case doctrine requires a lower court judge to comply with the rulings made by higher courts in the same case. See State of Arizona v. State of California, 460 U.S. 605, 618, 103 S.Ct. 1382, 75 L.Ed.2d 318 (1983); Cole Energy Dev. Co. v. Ingersoll-Rand Co., 8 F.3d 607, 609 (7th Cir.1993) (citations omitted). "Explicit...