Liquidation of MedCare HMO, Inc.

• Decision Date: 31 December 1997
• Docket Number: No. 1-95-2578,1-95-2578
• Citation: 689 N.E.2d 374,294 Ill.App.3d 42,228 Ill.Dec. 502
• Parties: , 228 Ill.Dec. 502 In the Matter of the LIQUIDATION OF MEDCARE HMO, INC. (James Schacht, Acting Director of Insurance of the State of Illinois, as Liquidator of MedCare HMO, Inc., Plaintiff-Appellant, v. Katten Muchin & Zavis, Defendant-Appellee).
• Court: United States Appellate Court of Illinois

Page 374

689 N.E.2d 374

294 Ill.App.3d 42, 228 Ill.Dec. 502

In the Matter of the LIQUIDATION OF MEDCARE HMO, INC.

(James Schacht, Acting Director of Insurance of the State of

Illinois, as Liquidator of MedCare HMO, Inc.,

Plaintiff-Appellant, v. Katten Muchin & Zavis, Defendant-Appellee).

No. 1-95-2578.

Appellate Court of Illinois,

First District, Third Division.

Dec. 31, 1997.

Barry Gross, Cary E. Donham, Shefsky Froelich & Devine Ltd., Chicago, for Plaintiff-Appellant.

Amy A. Hijjawi, Scott A. Semenek, Katten Muchin & Zavis, Chicago, for Defendant-Appellee.

Justice GORDON delivered the opinion of the court:

James Schacht, Acting Director of Insurance for the State of Illinois (the Director), ¹ as liquidator of the estate of MedCare HMO, Inc. (Medcare), an Illinois-licensed health maintenance organization (HMO), brought this action to recover attorney's fees paid to the law firm of Katten Muchin & Zavis (Katten Muchin). The Director argued that the fees were recoverable as a voidable preference under section 204 of the Illinois Insurance Code (215 ILCS 5/204 (West 1992)) (the Insurance Code) and as a fraudulent conveyance under the Uniform Fraudulent Transfer Act (740 ILCS 160/1 et seq. (West 1992)). On December 22, 1994, the trial court granted Katten Muchin's section 2-615 motion to dismiss the fraudulent conveyance count (735 ILCS 5/2-615 (West 1994)) and, on June 21, 1995, granted summary judgment on the voidable preference count. The Director filed its notice of appeal from both rulings on July 21, 1995.

I. Appellate Jurisdiction

Before reaching the merits of the instant appeal, we must first address Katten Muchin's argument that this court lacks jurisdiction to hear the Director's appeal from the section 2-615 dismissal of its fraudulent conveyance count. Katten Muchin contends that the December 22, 1994 order dismissing that count was a final and appealable order on that date and should have been appealed under Supreme Court Rule 304(b)(2) (155 Ill.2d R. 304(b)(2)) within 30 days of its entry.

Generally, where multiple claims or multiple parties are involved in an action, an appeal from a final judgment as to one or more but fewer than all of the parties or claims may be taken only if the trial court has made an express written finding that there is no just reason for delaying either enforcement or appeal. 155 Ill.2d R. 304(a). However, under certain circumstances specified in Supreme Court Rule 304(b) appeals from final judgments that do not dispose of entire proceedings can be taken notwithstanding the absence of an express written finding of appealability by the trial court. One exception is a judgment or order entered in the administration of a liquidation which finally determines a right or status of a party. 155 Ill.2d R. 304(b)(2). Orders within the scope of Supreme Court Rule 304(b) must be appealed within 30 days of their entry. See McCaffrey v. Nauman, 204 Ill.App.3d 761, 150 Ill.Dec. 98, 562 N.E.2d 628 (1990) (stating that interlocutory appeal pursuant to Supreme Court Rule 304(b)(2) is mandatory); Estate of Kime, 95 Ill.App.3d 262, 50 Ill.Dec. 797, 419 N.E.2d 1246 (1981).

Katten Muchin argues that the order of December 22, 1994 dismissing the Director's fraudulent conveyance count was an order entered in the administration of a liquidation which finally determined a right. We disagree. A mandatory appeal under Rule 304(b) can occur only when the judgment or order finally determines a right or status. In re Estate of Devey, 239 Ill.App.3d 630, 180 Ill.Dec. 616, 607 N.E.2d 685 (1993). The ultimate right, not the theory upon which that right is premised must be determined. Here, the Director sought recovery of the attorney's fees paid to Katten Muchin on two alternative theories, fraudulent conveyance and voidable preference. Although the fraudulent conveyance theory had been adjudicated, Katten Muchin's right to retain the fees could not have been finally determined until the Director's alternative claim of voidable preference was adjudicated.

In reaching this conclusion we are persuaded by the decision of In re Estate of Devey, 239 Ill.App.3d 630, 180 Ill.Dec. 616, 607 N.E.2d 685 (1993), which applied Supreme Court Rule 304(b)(1), a rule analogous to Supreme Court Rule 304(b)(2). Supreme Court Rule 304(b)(1) provides for the mandatory appeal from a judgment or order entered in the administration of an estate which finally determines a right or status of a party. In Devey, the administrator of an estate filed a petition for citation to recover the decedent's property obtained by the operator of a long-term care facility arguing that the decedent's contract with the operator violated the Life Care Facilities Act (Ill.Rev.Stat.1987, ch. 111 1/2, par. 4160-1 et seq.). The court, on the administrator's motion for summary judgment, declared the decedent's contract with the operator void; and the operator sought to appeal that finding. The appellate court dismissed the appeal for lack of jurisdiction finding that the trial court's order lacked finality under Supreme Court Rule 304(a) and 304(b). ² With respect to Supreme Court Rule 304(b), the court found that the summary judgment order did not finally determine the rights of either the operator or the estate to possession of the decedent's assets.

In Devey, while the court found the contract between the decedent and the operator void, such that the operator was not entitled to retain the assets it received thereunder, the court nevertheless found the operator's appeal premature because the rights of the parties to those assets had not been determined. Here, as in Devey, the rights of the parties to the monies paid to Katten Muchin were not finally determined when the trial court dismissed the Director's fraudulent conveyance count. The Director's right to recover the payment on the related but alternative theory of voidable preference had yet to be determined. Thus, the Director could not take an appeal on December 22, 1994 pursuant to Supreme Court Rule 304(b) when his fraudulent conveyance count was dismissed. The Director's appeal on July 21, 1995, after the trial court granted summary judgment on the voidable preference count conferred jurisdiction on this court to review both the December 22, 1994 order and the June 21, 1995 order regarding the attorney's fees paid to Katten Muchin.

II. Merits of Appeal

A. Background Facts

The facts are not in dispute. MedCare was an Illinois licensed health maintenance organization which filed for bankruptcy on June 3, 1992. On March 3, 1993, prior to that filing, the Illinois Director of Insurance issued a Notice of Impairment to MedCare stating that MedCare was insolvent and giving MedCare 30 days to correct the impairment. On April 7, 1992, the Director issued an Amended Notice of Impairment indicating that the impairment had worsened, and, pursuant to MedCare's request, gave MedCare 60 days to correct the impairment. Through the month of May, MedCare did not correct its impairment, and a complaint for liquidation of MedCare was prepared by the Director. On June 3, 1992, before that complaint could be filed by the Director, MedCare filed a bankruptcy petition which in acCordance wiTh the automatic stay provisions of the bankruptcy code (see 11 U.S.C. § 362(a) (1992)), prevented the Director's filing of the state-court complaint seeking liquidation.

The facts further show that on June 8, 1992, the Director filed a motion to intervene in the bankruptcy action and moved to dismiss the bankruptcy petition for lack of subject matter jurisdiction. The bankruptcy judge permitted the Director's intervention but on July 28, 1992 denied the Director's motion to dismiss. Also on that date, the court denied the Director's motion to stay proceedings pending appeal. On December 8, 1992, the United States District Court reversed the bankruptcy court finding that the bankruptcy court lacked subject matter jurisdiction. The Court of Appeals for the Seventh Circuit affirmed the district court on June 30, 1993, finding that MedCare, a health maintenance organization, was the substantial equivalent of a domestic insurance company and, as such, was ineligible to be a Chapter 11 debtor. In re Estate of Medcare HMO, 998 F.2d 436 (7th Cir.1993).

On December 22, 1992, after the federal district court made its subject matter jurisdiction ruling, the Director filed a Complaint for Conservation of the Estate of MedCare in the state court. The Director was subsequently appointed liquidator of MedCare on January 3, 1993. Pursuant to its powers as liquidator, the Director instituted the instant action against Katten Muchin seeking the return of attorney's fees paid to Katten Muchin pursuant to orders entered by the bankruptcy court. Those fees related to Katten Muchen's representation of the MedCare Committee of Unsecured Creditors, a committee of the bankruptcy estate of Medcare. See 11 U.S.C. § 1102 (1993) (mandating the appointment of unsecured creditors' committees). That Committee had selected Katten Muchin as its counsel; and the bankruptcy court had approved that appointment in a retention order entered on June 24, 1992.

According to the Director's amended complaint filed in the instant action, Katten Muchen received $250,000 between June 24, 1992 and September 14, 1992. As will be more fully discussed below, the Director sought recovery of those fees based upon theories of fraudulent conveyance and voidable preference. The fraudulent conveyance count was dismissed for failure to state a cause of action pursuant to section 2-615; and the voidable preference count was dismissed pursuant to the grant of summary judgment in Katten Muchin's favor.

B. Fraudulent Conveyance Count

A section 2-615 motion to dismiss is used to attack the legal sufficiency of a complaint. E.g., Reuben H. Donnelley Corp. v. Brauer, 275 Ill.App.3d 300, 211 Ill.Dec. 779, 655 N.E.2d 1162 (1995). A cause of action should not be...