Tcherepnin v. Franz, 64 C 1285.

• Decision Date: 21 September 1978
• Docket Number: No. 64 C 1285.,64 C 1285.
• Citation: 457 F. Supp. 832
• Parties: Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

457 F. Supp. 832

Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants.

No. 64 C 1285.

United States District Court, N. D. Illinois, E. D.

September 21, 1978.

COPYRIGHT MATERIAL OMITTED

Don H. Reuben and James Klenk, Reuben & Proctor, Chicago, Ill., for receiver.

L. Edward Bryant, Jr., Stephen M. Gatlin, Gardner, Carton & Douglas, Chicago, Ill., for defendants Rush-Presbyterian-St. Luke's Medical Center, Principia Corp., Catholic Children's Home in Alton, and the Jersey County Historical Society.

Raymond F. McNally, Jr., St. Louis, Mo., Edward S. Macie, Elward & Macie, Chicago, Ill., for defendants First Nat. Bank & Trust Co. in Alton, executor of the Knight Estate, and trustee of the Knight Trust.

MEMORANDUM AND ORDER

ROBSON, Senior District Judge.

This cause is before the court on the motion of crossplaintiff City Savings Association, by its receiver Samuel Berke, hereinafter the receiver and pursuant to Fed.R. Civ.Proc. 56 for entry of summary judgment on Count IX of his amended first crosscomplaint against defendant First National Bank and Trust Company of Alton as executor of the estate of Joseph E. Knight and as trustee of the Joseph E. Knight Trust hereinafter the Bank of Alton and third party defendants — the Jersey County Historical Society, Principia College of Elsah, Illinois, the Catholic Children's Home of Alton, and Rush Medical College of Chicago — as beneficiaries of the Joseph E. Knight Trust hereinafter collectively referred to as the charities. For the reasons hereinafter stated, the receiver's motion for summary judgment as to Count IX shall be granted.

On July 12, 1977, this court granted the receiver's motion for leave to file Count IX of his amended first crosscomplaint. Count IX is part of the protracted litigation involving the events surrounding the collapse of the City Savings Association, a savings and loan association chartered by the State of Illinois and presently under the control of a federal receiver.¹ This count is brought by defendant and crossplaintiff City Savings Association, by its receiver, to set aside a fraudulent conveyance pursuant to Ill.Rev.Stat. ch. 59, § 4 (1977), and Fed.R. Civ.Proc. 18. Named and joined as defendants in this action are crossdefendant First National Bank and Trust Company of Alton as executor of the Knight estate; third party defendant First National Bank and Trust Company of Alton as trustee of the Knight Trust; and third party defendants — the Jersey County Historical Society, Principia College of Elsah, Illinois, the Catholic Children's Home of Alton, and Rush Medical College of Chicago — as beneficiaries of the Joseph E. Knight Trust.

Prior to the filing of Count IX, this court granted the receiver's motion for summary judgment against the executor of the Knight estate,² on April 14, 1975, reported at 393 F.Supp. 1197 (N.D.Ill.1975), and entered judgment against the estate on November 30, 1976, in the amount of $13,969,504, reported at 424 F.Supp. 778 (N.D.Ill. 1976). The judgment was affirmed by the Seventh Circuit Court of Appeals on January 23, 1978, reported at 570 F.2d 187 (7th Cir. 1978). The certiorari petition of the executor of the Knight estate is now pending in the Supreme Court. In Count IX, the receiver alleges that the assets of the estate of Knight are insufficient to satisfy its judgment against the Knight estate.³ Thus, the receiver seeks to set aside the conveyance by a deed in trust of real estate in Jersey County, Illinois, executed by Joseph E. Knight in 1970 during the pendency of the receiver's action against Joseph E. Knight.

The receiver seeks summary judgment on Count IX on the ground that Knight's conveyance of real estate to the Knight trust in 1970 constitutes a fraudulent conveyance under Illinois law. Memoranda have been filed in support of the motion by the receiver, in opposition to the motion by the Bank of Alton and the charities, and in reply by the receiver.

On January 15, 1969, the receiver filed its first crosscomplaint praying that judgment be entered against Knight for $15,295,711. On September 23, 1969, the receiver filed its first crosscomplaint praying that judgment be entered against Knight for $15,295,711. On September 23, 1969, the receiver filed an amended first crosscomplaint against Knight stating a claim in excess of $20,000,000. On February 20, 1970, Knight created a charitable remainder unitrust naming the Bank of Alton as trustee and conveying all his right, title, and interest to certain real estate in Jersey County, Illinois, to the trust. This real estate was valued at $332,996.50 in 1973. The terms of the trust provided Knight with the income from the trust during his lifetime. Upon his death on April 2, 1973, the income from the trust is payable for twenty years to the Jersey County Historical Society, Rush Medical College of Chicago, Principia College of Elsah, Illinois, and the Catholic Children's Home of Alton, Illinois. After the twenty years, the trust property is to be sold with the net proceeds of the sale to be paid to the charities.

The Knight trust provides that it is "irrevocable and unamendable." Despite this provision, on July 8, 1970, Knight executed a correction deed and affidavit attempting to withdraw from the trust certain of the real estate he had conveyed to it on February 20, 1970. The Bank of Alton concedes that the trust is irrevocable and unamendable and has administered the property subject to the trust as if the correction deed was null and void.

Since Knight's death, the income on the trust property has been deposited in an account with the Bank of Alton. Pending the resolution of this litigation, the parties have agreed that no funds should be distributed to the charities. As of January 1, 1978, the balance in the account exceeds $280,000.

The receiver seeks all of the property conveyed by Knight to the trust, as well as the accumulated income of the trust since Knight's death.

I. Illinois Fraudulent Conveyance Law

The receiver seeks a finding that the conveyance by Knight to the trust with income for life to Knight, thereafter to the charities, and the principal to the charities twenty years after Knight's death constituted a fraudulent conveyance in violation of Ill.Rev.Stat. ch. 59, § 4. Ill.Rev.Stat. ch. 59, § 4 provides that:

Every gift, grant, conveyance, assignment or transfer of, or charge upon any estate, real or personal, or right or thing in action, or any rent or profit thereof, made with the intent to disturb, delay, hinder or defraud creditors or other persons, and every bond or other evidence of debt given, suit commenced, or judgment entered, with like intent, shall be void as against such creditors, purchasers and other persons.

Illinois courts have divided fraudulent conveyance cases into two categories: fraud in law and fraud in fact. Wilkey v. Wax, 82 Ill.App.2d 67, 70, 225 N.E.2d 813 (1st Dist. 1967); Second National Bank v. Jones, 309 Ill.App. 358, 365, 33 N.E.2d 732 (4th Dist. 1941). The proof requirements for these categories differ so that in fraud in fact cases, a court must find a specific intent to defraud creditors, while in fraud in law cases, fraud is presumed from the circumstances. Wilkey v. Wax, supra, 82 Ill. App.2d at 70, 225 N.E.2d 813.

The receiver is proceeding on the theory that Knight's conveyance to the trust of the real estate constituted fraud in law. For a finding of fraud in law, there must be a voluntary transfer without consideration, and the transfer must impair the rights of creditors. Second National Bank, supra, 309 Ill.App. at 365, 33 N.E.2d 732. To prove fraud in law the following must be shown: first, a voluntary gift; second, an existing or contemplated indebtedness against the debtor; and third, the failure of the debtor to retain sufficient property to pay the indebtedness. Mills v. Susanka, 394 Ill. 439, 448, 68 N.E.2d 904 (1946); State Bank v. Barnett, 250 Ill. 312, 317-18, 95 N.E. 178 (1911).

II. Elements of Fraud in Law

A. Voluntary Gift

Where a conveyance is made for a valuable consideration, the creditor must prove an intent to defraud. Third National Bank v. Norris, 331 Ill. 230, 234, 162 N.E. 829 (1928). Where a conveyance is made without consideration and where the transfer directly tends to or does impair the rights of creditors, the question of fraudulent intent is immaterial. Second National Bank v. Jones, supra, 309 Ill.App. at 365, 33 N.E.2d 732.

Knight provided in his trust agreement that:

Anything to the contrary notwithstanding, it is the intention of the Grantor that the charitable remainders trust in this Agreement qualify as a unitrust under the Tax Reform Act of 1969, and any language tending not to so qualify the charitable remainders shall be disregarded. Joseph E. Knight Irrevocable Trust Agreement ¶ 1.

By these express terms, Knight sought to make a gift to all the charities. To qualify as a charitable remainder unitrust, the remainder interests must be charitable gifts or contributions under Section 170 of the Internal Revenue Code. 26 U.S.C. § 170; Treas.Reg. §§ 1.664-1(a)(iii)(a), 1.664-3(a). Contributions supported by consideration are not charitable contributions or gifts under section 170. Singer Co. v. United States, 449 F.2d 413, 422-23, 196 Ct.Cl. 90 (1971). Thus, by the express terms of the Knight trust, Knight sought to make a gift unsupported by consideration to the charity beneficiaries.

Four charities — the Jersey County Historical Society, Principia College of Elsah, Illinois, the Catholic Children's Home of Alton, and Rush Medical College of Chicago — were the beneficiaries of Knight's conveyance to the Knight trust. The Jersey County Historical Society and the Catholic Children's Home of Alton admit that they "gave no consideration to Joseph E. Knight for their beneficial interests in the property conveyed by him into irrevocable trust on February 20, 1970." Respective Answers of the Jersey County...