Does Transferring a Company's Assets to Individuals or Companies Owned by Them Come Under Uniform Fraudulent Transfer Act ?
In Wachovia Securities, LLC v. Neuhauser, 528 F. Supp. 2d 834 (N.D. Ill. 2007), margin accounts were opened by individual defendants and related companies for the purpose of acquiring a substantial amount of a particular stock.
When that stock plummeted, the margin accounts became due and the bank brought several counts against the defendants under the Illinois Uniform Fraudulent Transfer Act for transferring the company's assets to the individual defendants, making it impossible for the bank to collect on its $ 2.9 million margin call.
After the company incurred its margin debt, it received an extension of an existing line of credit from a separate company in exchange for a security interest in all of its assets, despite the fact that the company was in default.
The subsidiary was owned by an individual defendant's family trust and the individual defendant was its only employee. Wachovia Securities, 528 F. Supp. 2d at 859.
The court denied the summary judgment motions of three of the individual defendants as to both actual fraud and constructive fraud under sections 5(a)(1) and (2) and 6(a)(1) of the Illinois Uniform Fraudulent Transfer Act.
The court held there was sufficient evidence to create a genuine issue of material fact that the transfer of the property was made to an insider to defraud the bank, as both corporations were owned by the same individuals, and the transfer was of stock from a company they owned to another company they owned. Wachovia Securities, 528 F. Supp. 2d at 858.
There was also evidence that the transaction was without reasonably equivalent value, and there was no evidence as to what, if any, consideration was received for the transfer. Wachovia Securities, 528 F. Supp. 2d at 859-60.
Thus, summary judgment was denied as to the actual and constructive fraud claims.