2015 IL App (1st) 143187 No. 1-14-3187 Opinion filed August 12, 2015 Third Division ______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
______________________________________________________________________________
MARCIAL VILLAVERDE, ) Appeal from the Circuit Court ) of Cook County. Plaintiff-Appellant and Cross-Appellee, ) ) v. ) No. 12 CH 43070 ) IP ACQUISITON VIII, LLC, BARBARA M ) SPAIN 2004 REVOCABLE TRUST, and ) PATRICK SPAIN, ) ) The Honorable Defendants-Appellees and Cross- ) Neil Cohen, Appellants. Judge, presiding.
______________________________________________________________________________
JUSTICE HYMAN delivered the judgment of the court, with opinion. Justices Lavin and Mason concurred in the judgment and opinion.
OPINION
¶1 Defendant, Marcial Villaverde won a $166,000 judgment for unpaid wages against his
former employer, S1 Audio, LLC, owned by Christopher Gantz. During the wage litigation,
creditors of S1 Audio, defendants IP Acquisition VIII, LLC, Barbara M. Spain 2004 Revocable
Trust (Spain Trust or Trust) and Patrick Spain (collectively, defendants), conducted a foreclosure
sale and acquired S1 Audio's most valuable asset—its intellectual property, preventing
Villaverde from being able to collect his judgment. 1-14-3187
¶2 Villaverde filed suit alleging (1) successor liability; (2) civil conspiracy; and (3) violation
of the Illinois Uniform Fraudulent Transfer Act (UFTA) (740 ILCS 160/1 et seq. (West 2010)).
Defendants moved for summary judgment, and sanctions under Illinois Supreme Court Rule 137
(eff. July 1, 2013) for filing the suit. The trial court granted summary judgment in favor of
defendants, finding that IP Acquisition was not a successor corporation to S1 Audio and that no
transfer of assets took place between S1 Audio and IP Acquisition in violation of the UFTA. The
court also denied the motion for sanctions.
¶3 Villaverde seeks reversal of the summary judgment order, claiming IP Acquisition
conducted the foreclosure sale solely to avoid paying Villaverde's judgment. Villaverde contends
a genuine issue of material fact exists on whether IP Acquisition constitutes a successor to S1
Audio. He further contends ample evidence exists to support his civil conspiracy claim.
Defendants cross-appealed contending the trial court should have granted their motion for
sanctions, arguing the complaint contains false statements and meritless legal claims.
¶4 We affirm the trial court's grant of summary judgment on the basis that no exception to
the doctrine of corporate successor nonliability applies under the facts of this case. Furthermore,
the trial court acted well within its discretion in denying defendants' motion for sanctions against
Villaverde.
¶5 BACKGROUND
¶6 Christopher Gantz owned S1 Audio between 2007 and December 2011, and employed
five individuals. Gantz paid $750,000 to acquire the rights to NxSet's intellectual property for a
headphone that sits on a person's shoulders. S1 Audio developed and attempted to sell, license,
and market NxSet.
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¶7 Villaverde worked for S1 Audio from November 2008 to July 16, 2010. On September
24, 2010, Villaverde filed suit against Gantz and S1 Audio for failing to pay him wages. On
February 19, 2013, Villaverde obtained a judgment in the wage litigation against Gantz and S1
Audio in the amount of $166,000.
¶8 On December 4, 2012, some 10 weeks before the trial court entered judgment in the wage
litigation, Villaverde filed this suit against defendants and Gantz to recover the judgment from
his unpaid wages. In his first amended complaint, Villaverde alleged: (1) a violation of the
UFTA (740 ILCS 160/1 et seq. (West 2010)) based on the transfer of the intellectual property
from the Trust to IP Acquisition; (2) successor liability (claiming IP Acquisition is a merger or
consolidation of S1 Audio and that defendants foreclosed the intellectual property to defraud
Villaverde); and (3) civil conspiracy.
¶9 Gantz-Spain Relationship
¶ 10 Gantz had been friends with Patrick Spain since 1979. Between 2007 and 2010, Spain,
either individually or through the Spain Trust, provided eight different loans to Gantz and S1
Audio. In 2009, the Spain Trust loaned S1 Audio $100,000 in exchange for a security interest in
the company's intellectual property. S1 Audio did not make any loan payments to Spain or the
Spain Trust. On November 4, 2011, the Spain Trust provided the only notice of default,
informing S1 Audio it had until November 11 to satisfy the $267,276.74 owed the Trust. S1
Audio did not cure the default and the Trust exercised its right as the primary secured creditor to
foreclose its security interest.
¶ 11 In December 2011, the Spain Trust advertised in the Chicago Daily Law Bulletin the
foreclosure sale of the intellectual property. On December 7, 2011, the date of the public sale, no
outside bids were made for the intellectual property. The sale was extended, and on December
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19, 2011, the Trust sold its security interest in S1 Audio to IP Acquisition of which Spain served
as the managing member. The next day, IP Acquisition acquired the intellectual property of S1
Audio by making a credit bid—offering the amount of the debt S1 Audio owed.
¶ 12 Spain admitted IP Acquisition has only one asset—the S1 Audio intellectual property.
Unlike S1 Audio, which developed and attempted to sell, license, and market the headphones, IP
Acquisition's business involved only selling or licensing the intellectual property. IP Acquisition
attempted to sell the intellectual property at a targeted online auction, but received only one bid
of $5,000. IP Acquisition claims that before the auction, they offered Villaverde the right to
share in the proceeds of any sale, but he refused.
¶ 13 On October 1, 2012, IP Acquisition hired Gantz as an independent sales representative.
The agreement, dated June 1, 2012, provides Gantz with 20% of any money that IP Acquisition
receives for the intellectual property. Gantz continued to try to license or market the intellectual
property by working with prospective investors in America, Korea, and Japan. Gantz
communicated with the potential investors; Spain did not participate in the conversations.
¶ 14 Neither Spain, the Trust, nor IP Acquisition entered into an agreement with S1 Audio to
assume its liabilities after purchasing its assets.
¶ 15 Communications Between the Parties
¶ 16 Settlement Negotiations
¶ 17 IP Acquisition contends that Spain, as the Trust's trustee, periodically sought information
on when the loans to S1 Audio would be repaid. Defendants claim that in 2011, five months
before the foreclosure, Spain threatened to foreclose on the Trust's secured interest in S1 Audio's
intellectual property. That fall, Spain advised Gantz that the Trust lost confidence in the ability
of S1 Audio to meet its obligations and advised Gantz that the trust would foreclose its security
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interest. According to defendants, Gantz was "not happy with the situation" and stayed out of the
foreclosure process.
¶ 18 Between September 2011 (before the foreclosure) and January 24, 2012 (after the
foreclosure), Spain, through his then counsel, Ken Obel, and Villaverde, through his counsel, the
Prinz Law Firm, participated in settlement conversations. During a September 2011 meeting,
Spain explained that he was attempting to settle Villaverde's litigation against S1 Audio because
he was trying to sell the intellectual property. During defendants' first written offer for Villaverde
to share in the proceeds from any sale or license of the intellectual property, defendants outlined
three different payment scenarios in exchange for Villaverde agreeing to dismiss his wage
litigation, and in all three, Villaverde's ability to share in the proceeds was second only to
Spain's. The agreement would allow Villaverde to still pursue the amounts he was owed if S1
Audio could not sell or license the intellectual property within six months of the agreement.
Defendants sent Villaverde their second written settlement offer in December 2011. Again,
Villaverde's payment would be second only to Spain, but Gantz could receive proceeds only after
Villaverde was paid in full. Defendants made a third written offer in January 2012—if Villaverde
was not fully paid by April 29, 2012, the release he provided would be ineffective and he could
pursue a claim for any deficiency. Again, Gantz would not receive proceeds from the sale or
license of the intellectual property until Villaverde was paid in full.
¶ 19 On May 31, 2013, Gantz filed for bankruptcy and was removed from this litigation.
¶ 20 Email Correspondence
¶ 21 On February 9, 2011, Spain emailed Gantz,
"It may be time to go BK to clear a bunch of this stuff up or at a minimum do an
assignment for creditors. This will get rid of EAR [investor—Equipment
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Acquisition Resources] as well. Does Gould [counsel for Defendants] have a BK
lawyer we can talk to? I will get the IP in a BK, but I will contribute it to a new
company."
On February 17, Spain wrote, "If we BK the company, which I think we must, I will have a total
nuisance of a co-security interest holder with an aggressive uninformed atty." That same day, he
wrote, "I really don't want them to have access to IP. Please don't give them that." Five days
later, Spain wrote, "getting the IP out of Sync1 ASAP is very important though."
¶ 22 On March 28, 2011, Spain stated,
"I looked at Assignment FBC again and I think this may be a viable way to go if
you abandon the old company and sell the assets to the new company. I am not
sure how slow you can go. Also, it does not stop court proceedings but makes
them pretty pointless, effectively stopping many of them."
¶ 23 In October 2011, Spain sent two emails to Gantz. In the first email, Spain wrote,
"We need to be ready to foreclose on the assets by Monday, as we don't want a
judgment entered next week. It will go better for all if we have your cooperation
and get your signature on the documents this week."
The next day, Spain emailed Gantz again and wrote,
"And if Villaverde gets a judgment and the IP is still in the company he will likely
get paid before me. The only way [I] know that I can make sure I get paid first
and completely (assuming there is any cash) is to own the IP."
¶ 24 On March 12, 2013, well after Villaverde received a judgment on his unpaid wages,
Spain wrote Gantz, "It would have been simple as hell not to book [employees'] compensation as
salary and we would both have been spared a lot of grief and expense."
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¶ 25 Summary Judgment and Sanction Motions
¶ 26 On February 19, 2014, the trial court granted summary judgment in favor of IP
Acquisition, holding that IP Acquisition had a perfected security interest and did not violate the
UFTA (740 ILCS 160/1 et seq. (West 2010)). The court further found no evidence of civil
conspiracy.
¶ 27 The court denied Villaverde's motion to reconsider, stating:
"This court found that even assuming IP Acquisition was the successor of
S1Audio, Inc. a fact for which there was no evidentiary support, there was no
wrongdoing for which IP Acquisition could be held liable. The foreclosure of the
IP was not fraudulent, but specifically authorized by the Uniform Commercial
Code ***. IP Acquisition foreclosed on a valid lien as it was entitled to under the
Uniform Commercial Code."
¶ 28 On September 19, 2014, the trial court denied IP Acquisition's Rule 137 motion. The
court held that sanctions would “punish a party or attorney for being zealous, yet unsuccessful."
The court explained that although it found Villaverde's legal arguments to be "unconvincing,"
sanctions could not be used to punish him for "misapplying the law." Even though the court
found the evidence did not support Villaverde's position, it concluded that Villaverde acted
reasonably in filing suit.
¶ 29 ANALYSIS
¶ 30 Villaverde argues errors of law and fact and that the trial court's holding "allows
unscrupulous businesspersons to avoid a court judgment by merely changing the form of the
transfer of assets."
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¶ 31 Summary judgment is proper where there are no genuine issues of material fact and the
moving party is entitled to judgment as a matter of law. 735 ILCS 5/2-1005 (West 2010).
Summary judgment should be entered whenever the plaintiff fails to establish a prima facie case
on an essential element of his or her claim. Pyne v. Witmer, 129 Ill. 2d 351, 358 (1989). We
review the trial court's decision to grant summary judgment de novo. Outboard Marine Corp. v.
Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102 (1992).
¶ 32 Uniform Commercial Code Applicability to Successor Liability
¶ 33 Villaverde asserts that the trial court premised its denial of his claims on the notion that a
Uniform Commercial Code sale preempts any claim for successor liability. IP Acquisition
responds that the trial court did and said no such thing. We agree. The ruling on summary
judgment does not turn on whether a UCC sale preempts successor liability, and Villaverde's
argument to the contrary is without merit. The trial court entered summary judgment in IP
Acquisition's favor because "there was no evidence in the record to support [Villaverde's]
allegations that any of the defendants qualified as successors of S1" and "the record was devoid
of any evidence of a tortious or unlawful act by IP Acquisition, Spain, or the Trust which would
support a conspiracy claim."
¶ 34 Illinois Uniform Fraudulent Transfer Act
¶ 35 Villaverde maintains that IP Acquisition served as a continuation of S1 Audio and
defendants concocted the foreclosure sale for the fraudulent purpose of escaping liability.
Villaverde accuses S1 Audio, through Gantz, of colluding with Spain, to place the only valuable
asset—the intellectual property (Nxset)—into a new corporation (IP Acquisition) to avoid paying
Villaverde's wage litigation judgment. Villaverde raises, as genuine issues of material fact,
whether the foreclosure proceedings and public sale were fraudulent. According to Villaverde,
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the trial court improperly concluded that IP Acquisition could be liable under the fraud exception
to successor liability only after a fraudulent transfer as provided in the UFTA (740 ILCS 160/1 et
seq. (West 2010)).
¶ 36 Defendants respond that they did not participate in fraud. Rather, as a secured creditor of
S1 Audio, IP Acquisition properly foreclosed and bought S1 Audio's intellectual property at a
public sale. IP Acquisition offered to share the proceeds of any sale or license of the intellectual
property with Villaverde, both before and after the foreclosure of S1 Audio, despite no legal
obligation to do so. Villaverde counters that the facts as presented, specifically the relevant email
correspondence, as well as Spain's and Gantz's conduct, create issues of material fact sufficient
to defeat IP Acquisition's motion for summary judgment.
¶ 37 The UFTA allows a creditor to defeat a debtor's transfer of assets to which the creditor
was entitled. 740 ILCS 160/5 (West 2010). Under the controlling definitions of the UFTA, the
intellectual property here was not an "asset" and its "transfer" could not be a violation of the
UFTA. " 'Asset' means property of a debtor, but the term does not include *** property to the
extent it is encumbered by a valid lien." 740 ILCS 160/2(b)(1) (West 2010). Accordingly, the
trial court properly granted summary judgment on count I of Villaverde's complaint.
¶ 38 We disagree with Villaverde that the trial court based its ruling on count II (successor
liability) and count III (civil conspiracy) on its denial of count I. The trial court addressed each
claim individually, as will we.
¶ 39 Successor Corporate Liability
¶ 40 Generally, when a corporation sells its assets to another corporation, the seller's liabilities
do not become a part of the successor corporation unless an agreement so provides. Diguilio v.
Goss International Corp., 389 Ill. App. 3d 1052, 1060-61 (2009) (citing Vernon v. Schuster, 179
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Ill. 2d 338, 345 (1997)). But, four exceptions apply: (1) the transaction includes an express or
implied agreement of assumption; (2) the transaction constitutes a consolidation or merger of the
purchaser or seller corporation; (3) the purchaser is a continuation of the seller; or (4) the
transaction is an improper attempt to escape liability for the seller's obligations. Id. at 1060.
¶ 41 Villaverde argues, based on the evidence, that he met two exceptions to the general rule
of successor corporate nonliability: (1) the transaction between S1 Audio and IP Acquisition was
an attempt by the seller to escape liability for its obligations to Villaverde (exception 4) and (2)
IP Acquisition exists as a continuation of S1 Audio (exception 3).
¶ 42 Evading Liability Exception
¶ 43 Villaverde argues IP Acquisition's conduct before and after the 2011 foreclosure sale
offers evidence that fraud tainted the transactions. As support, Villaverde offers these facts he
claims are undisputed: (1) Villaverde filed a successful lawsuit for unpaid wages; (2) during the
wage litigation, Spain sent several emails to Gantz in which Spain expressed concern Villaverde
would receive a judgment; (3) Spain sent Gantz the only default notice less than two weeks after
the emails and four years of no repayment; and (4) IP Acquisition conducted the foreclosure sale
less than two months after Spain admitted he did not want a "judgment entered." Villaverde also
attaches great significance to his claim that Spain sought Gantz's "corroboration." As further
evidence the sale attempts to escape liability, Villaverde questions the notice of the foreclosure
sale being published solely in the Chicago Daily Law Bulletin and appearance of only the
secured creditor at the public auction. Villaverde challenges the relevancy of IP Acquisition's
security interest in the intellectual property because "it is clear" the intent of the foreclosure sale
was to avoid his judgment.
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¶ 44 In addition, Villaverde relies on the factors outlined in the UFTA to support his claim of
fraud. The UFTA offers 11 "badges of fraud" to consider when determining actual intent: "(1)
the transfer or obligation was to an insider; (2) the debtor retained possession or control of the
property transferred after the transfer; (3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or
threatened with suit; (5) the transfer was of substantially all the debtor's assets; (6) the debtor
absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration
received by the debtor was reasonably equivalent to the value of the asset transferred or the
amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after
the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or
shortly after a substantial debt was incurred; and (11) the debtor transferred the essential assets
of the business to a lienor who transferred the assets to an insider of the debtor." 740 ILCS
160/5(b) (West 2010); see also Kennedy v. Four Boys Labor Services, Inc., 279 Ill. App. 3d 361,
369 (1996). The presence of these "badges of fraud" may give rise to an inference or
presumption of fraud; they are "considerations" the trial court should use in determining whether
fraud occurred. Steel Co. v. Morgan Marshall Industries, Inc., 278 Ill. App. 3d 241, 251 (1996)
(citing Kaibab Industries, Inc. v. Family Ready Homes, Inc., 80 Ill. App. 3d 782, 786 (1978)
(four "badges of fraud" sufficient to give rise to inference of fraud)).
¶ 45 Villaverde relies on badges four and five and eight, nine, and ten, arguing the following:
Before the foreclosure, Spain was aware that Villaverde had filed suit against Gantz and S1
Audio for unpaid wages (4). IP Acquisition acquired the intellectual property—S1 Audio's most
valuable asset—during the foreclosure (5 & 9), after which, Gantz personally filed bankruptcy
(9). Although Gantz originally paid $750,000 for the intellectual property, IP Acquisition
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received their security interest in the intellectual property for $100,000 (8). During the wage
litigation, the court entered a substantial judgment against S1 Audio and Gantz for Villaverde's
unpaid wages (10).
¶ 46 Villaverde further contends the record supports finding badges one, two, three, and
eleven. Spain and Gantz have been friends since 1979 and, hence, even if they are not "insiders,"
their 30-year relationship meant they were unable to bargain at arm's-length (1). After the
foreclosure, Gantz continued with his same day-to-day duties. Potential clients assumed Gantz
owned the patent and rarely spoke to Spain (2). By advertising the intellectual property sale in
the Chicago Daily Law Bulletin, the defendants essentially concealed the transfer, particularly in
light of the absence of an outside bidder at the auction (3). Lastly, when the Spain Trust
transferred its interest in the intellectual property to IP Acquisition, the debtor transferred
essential assets to a lienor who transferred the assets to an insider, because Spain controls both
entities (11).
¶ 47 We disagree with Villaverde's major contention—that the trial court held the foreclosure
sale automatically terminates successor liability. The court's holding relates only to the facts as
presented. The foreclosure sale was not an improper attempt to shed the debt obligations of
unsecured creditors, such as Villaverde, but a proper means for the secured creditor to collect on
its debt after a default and, therefore, any exception to the general rule against successor liability
was inappropriate. See 15 William Meade Fletcher et al., Private Corporations § 7333, at 642-44
(perm. ed. 1999) ("where an individual purchases the assets of a corporation at a foreclosure sale
and then resells to a new company composed largely of the members of the company whose
assets were sold, and there is no fraud, the new company is not liable for the debts of the old").
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¶ 48 We agree with the trial court that the so-called badges of fraud identified by Villaverde
do not establish, individually or collectively, that the foreclosure transaction was a fraud to avoid
paying Villaverde his judgment. Examining the factors listed in section 5(b) of the UFTA, there
is not a significant number of "badges of fraud" present to support a presumption of fraud. Under
the UFTA, when the debtor is a corporation, like S1 Audio, an "insider" includes a director of the
corporation, an officer of the corporation, anyone in control of the corporation, and a relative of a
person in control of the corporation. 740 ILCS 160/2(g)(2) (West 2010). Spain does not qualify
as an insider, but as a creditor of S1 Audio (1). His friendship with Gantz does not alter his role
relative to the corporation. Neither S1 Audio nor Gantz retained possession or control of the
intellectual property after the foreclosure sale (2). Before the foreclosure sale, the Trust
irrevocably sold and assigned its security interest in S1 Audio to IP Acquisition, whose
managing member was Spain (who never worked for S1 Audio). Subsequently, IP Acquisition
bid an amount equal to the amount S1 Audio owed under the promissory notes and obtained its
intellectual property. IP Acquisition hired Gantz as an independent contractor for his expertise to
help in IP Acquisition's efforts to sell or license the intellectual property; Gantz's employment
does not mean he possessed or controlled the intellectual property. Spain and IP Acquisition
controlled the intellectual property after the foreclosure. Defendants never tried to conceal the
transfer of the asset (3), and actually kept Villaverde up to date on the intellectual property and
offered to share the proceeds of any sale or license before or after the foreclosure. The debtor had
not been sued or threatened with suit before the transfer was made or the obligation incurred (4).
Between 2009 and 2010, the Trust purchased promissory notes from S1 Audio in return for a
security interest in the intellectual property. Villaverde did not seek judgment or any other relief
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against S1 Audio and Gantz until at least December 14, 2011. Accordingly, the obligation was
incurred well before the threat of suit.
¶ 49 Whether the transfer was of substantially all the debtor's assets (5) is the only factor that
potentially supports a finding of fraud. From the record before us, S1 Audio's only asset was the
intellectual property. This factor, however, is neutral at best because there is no in-depth
discussion concerning whether S1 Audio owned other intellectual property or was involved in
any other business pursuits. Gantz has not absconded (6); he actively sought to sell or license the
intellectual property as an employee of IP Acquisition after the foreclosure sale. The intellectual
property is the only asset at issue and Villaverde never contended its existence was concealed
from him (7). The valuation of the intellectual property does not support finding fraud (8), where
the undisputed facts establish the current value as $5,000 based on an outside bid at the online
auction. The record shows Gantz personally filed bankruptcy, but there is no evidence
concerning how S1 Audio fared following the foreclosure, so (9) does not support a finding of
fraud. No allegation was made that the transfer of the intellectual property occurred before a
substantial debt (10); in fact, the foreclosure sale took place four years after the promissory notes
were executed. Lastly, there was no allegation that a third party was involved (11)—neither S1
Audio nor Gantz transferred the intellectual property to a lienor who transferred the assets to an
insider. The undisputed facts do not support finding an inference of fraud based on the factors
listed in section 5(b) of the UFTA.
¶ 50 Further, we are unpersuaded by Villaverde's position regarding the value of the
intellectual property. Even though a third party valued the intellectual property at $800,000 at
one point and Gantz originally paid $750,000 for it, the only current valuation was the $5,000
bid received during the public online auction in the Spring 2012. Accordingly, Spain's acquiring
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of the intellectual property as a security interest for his loan of $100,000 was not inadequate.
Likewise, we are unpersuaded that the foreclosure process itself establishes fraud. Villaverde's
suggestion cannot be reconciled with defendants' repeated attempts to have Villaverde share in
the proceeds from any sale or license of the intellectual property. Additionally, after the
foreclosure, defendants attempted to sell or market the intellectual property almost immediately
and continued their offer to have Villaverde share in the proceeds.
¶ 51 Nor does the email correspondence indicate fraudulent intent. The email exchange shows
a creditor exercising its right to be informed about its loan and the likelihood of repayment.
Undisputed is that only Spain and his counsel participated in the foreclosure process.
¶ 52 Both before and after the foreclosure sale, defendants, who were under no legal
obligation to do so, offered to enter into an agreement with Villaverde to provide him with
proceeds from the license or sale of the IP, but he refused. Before the foreclosure sale,
defendants were motivated by their need to sell the IP to recoup their investment and likely
believed it would be easier to sell without Villaverde's judgment. After the foreclosure,
defendants, as a successor corporation, were under no legal obligation to pay Villaverde's
judgment, but again, probably believed it would be easier to sell the IP without it.
¶ 53 Continuation Exception
¶ 54 Villaverde argues the undisputed facts also establish that IP Acquisition serves as a
continuation of S1 Audio and should be liable for his wage litigation judgment. Villaverde finds
it significant that both before and after the foreclosure, Gantz and Spain were the only
individuals who could receive any money from the sale or license of the intellectual property,
and both had the same essential duties before as after the sale.
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¶ 55 The correct standard for evaluating whether the continuation exception applies is set out
in Vernon v. Schuster, 179 Ill. 2d 338, 346 (1997), cited by defendants, and not Steel Co. v.
Morgan Marshall Industries, Inc., 278 Ill. App. 3d 241 (1996), as suggested by Villaverde.
Illinois courts have held that the most important factor in determining whether a merger has
occurred for purposes of the continuation exception is the identity of the ownership of the new
and former corporations. Vernon, 179 Ill. 2d at 346-47; see also Diguilio v. Goss International
Corp., 389 Ill. App. 3d 1052, 1062 (2009) (deciding factor whether there is a continuation of
corporate entity of seller, not whether seller's business operation continues). The exception seeks
to avoid the situation that would "allow the predecessor to escape liability by merely changing
hats." (Internal quotation marks omitted.) Vernon, 179 Ill. 2d at 346.
¶ 56 Spain, the owner of IP Acquisition, was not an officer, director, or stockholder of S1
Audio—he was a creditor. Gantz, the CEO of S1 Audio is not an officer, director, or stockholder
of IP Acquisition—he is an employee/independent contractor. The focus for the continuation
exception is on the corporate entity of the seller and not whether there is a continuation of the
seller's business operation. See id. at 347 (identity of ownership necessary to impose successor
liability).
¶ 57 No identity of ownership between S1 Audio and IP Acquisition exists that would justify
the application of the continuation exception to the general rule of successor corporate
nonliability. Under these facts, IP Acquisition, as a secured creditor of S1 Audio, properly
foreclosed on the secured collateral following default and collected on its debt. As a successor
corporation, IP Acquisition is not liable for the debts of S1 Audio and, because none of the four
exceptions apply, summary judgment in IP Acquisition's favor is proper.
¶ 58 Civil Conspiracy
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¶ 59 Villaverde argues the foreclosure sale was a civil conspiracy intended to delay recovery
of his unpaid wages.
¶ 60 "Civil conspiracy consists of a combination of two or more persons for the purpose of
accomplishing by some concerted action either an unlawful purpose or a lawful purpose by
unlawful means. *** A cause of action for civil conspiracy exists only if one of the parties to the
agreement commits some act in furtherance of the agreement, which is itself a tort." Adcock v.
Brakegate, Ltd., 164 Ill. 2d 54, 62-63 (1994).
¶ 61 As support for this position, Villaverde relies on Zokoych v. Spalding, 36 Ill. App. 3d
654, 667 (1976), in which the court found a secured creditor bank cooperated with a co-owner of
a business in a scheme to breach his fiduciary obligations to his fellow owner and, thus, engaged
in a conspiracy to commit fraud. The bank claimed to be protecting its secured interest in
company machinery from a third-party creditor by allowing the defendant co-owner to
unilaterally transfer the secured machinery. Id. The court found the bank acted against the
company and other co-owner's rights by knowingly allowing the secured assets to be converted
by the defendant co-owner without default on the underlying loan and with knowledge of the
plaintiff co-owner's interest in the company. Id.
¶ 62 We disagree that Zokoych resembles the facts here. The Spain Trust, the primary secured
creditor of S1 Audio, enforced its undisputed right to foreclose on the secured collateral
(intellectual property) following default. IP Acquisition took no action that defrauded, hindered,
or delayed Villaverde from receiving his judgment. In contrast, IP Acquisition presented
evidence of communication with Villaverde both before and after the foreclosure for him to
share in any proceeds from the sale or license of the intellectual property.
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¶ 63 The trial court properly found that the foreclosure and subsequent licensing of the
intellectual property did not violate the UFTA and, therefore, there is no unlawful act to support
a cause of action for a civil conspiracy. We affirm the trial court's decision to grant summary
judgment on the civil conspiracy claim.
¶ 64 Summary Judgment Affirmed
¶ 65 Villaverde fails to present a question of material fact precluding summary judgment for
defendants and the trial court correctly found no exception to the doctrine of successor
nonliability.
¶ 66 Cross-Appeal on Denial of Rule 137 Sanctions
¶ 67 Defendants' cross-appeal on the denial of Rule 137 sanctions for the filing of a vexatious
and harassing lawsuit. They argue that Villaverde and his counsel sought a guaranteed payment
through a lawsuit which purposely omitted key facts. As defendants tell it, Villaverde and his
counsel "twist the story and try to make it fit into the theory underlying their nuisance pleading,
ultimately setting forth a false and misleading version of the truth."
¶ 68 Rule 137 provides a mechanism to keep parties from abusing the judicial process through
the availability of sanctions for "vexatious and harassing actions" based on unsupported
allegations of fact or law. (Internal quotation marks omitted.) Burrows v. Pick, 306 Ill. App. 3d
1048, 1050 (1999). The party moving for sanctions must show the other side made untrue and
false allegations without reasonable cause. Id. at 1050-51. The trial court uses an objective
standard to determine whether the party made a reasonable inquiry into the facts and law
supporting the allegations. Id. at 1051.
¶ 69 We will uphold a ruling on Rule 137 sanctions unless the trial court abused its discretion.
Yassin v. Certified Grocers of Illinois, Inc., 133 Ill. 2d 458, 467 (1990). The trial court, which
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sits in the best position to evaluate the circumstances, abuses its discretion only if no reasonable
person would take its view. Fremarek v. John Hancock Mutual Life Insurance Co., 272 Ill. App.
3d 1067, 1074 (1995). Courts consider an allegedly offending complaint at the time of its filing
rather than engage in hindsight. Lewy v. Koeckritz International, Inc., 211 Ill. App. 3d 330, 334
(1991). In reviewing the trial court's decision, we determine whether it was "informed, based on
valid reasons, and followed logically from the circumstances of the case." Burrows, 306 Ill. App.
3d at 1051 (citing In re Estate of Smith, 201 Ill. App. 3d 1005, 1009-10 (1990).
¶ 70 The trial court thoroughly examined the sanctions' motion before issuing its ruling. As
the trial court observed in its Memorandum and Order, "[w]hile this court ultimately found
plaintiff's legal arguments to be unconvincing, sanctions are not intended to punish litigants for
misapplying the law." As for the evidence, the trial court observed that despite having concluded
that the evidence did not support Villaverde's claims, "this does not mean that plaintiff could not
reasonably argue that the facts supported [his] position. Defendants have failed to persuade us
that the trial court abused its discretion in finding that Villaverde made a reasonable inquiry into
the facts, a good faith argument, and did not file his suit for the improper purpose of harassment.
Accordingly, we will not disturb the trial court's denial of Rule 137 sanctions.
¶ 71 CONCLUSION
¶ 72 We affirm both the grant of summary judgment and the denial of sanctions.
¶ 73 Affirmed.
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