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Uniform Fraudulent Transfer Act

What the court held

Case: Creditor’s Committee of Jumer’s Castle Lodge, Inc., v. Jumer, No. 06-1862

Issue: Is a transfer of $2.7 million in accounts receivable for little or no value a fraudulent transfer?

Holding: No. Where the likelihood of collecting the accounts is next to nothing, the transfer is not fraudulent.

If the likelihood of collecting receivable accounts is little to none, then transferring the account for little to nothing is not a fraudulent conveyance, the Seventh Circuit held on Jan. 2.

D. James Jumer was the principal shareholder of Jumer’s Castle Lodge (JCL), a financially unstable corporation that owned a hotel chain. Knowing that the company was struggling, Jumer attempted to sell it to Saranow Gaming Investors, Inc.

Saranow declined to purchase JCL outright, but agreed to purchase thirty percent of JCL’s stock for $2 million, with the condition that JCL and Jumer make a number of transfers aimed at improving JCL’s balance sheet.

The agreements resulted in the following transfers:

Jumer gave JCL a hotel valued at $2.1 million, property adjacent to another hotel valued at $100,000, and $1 million in cash; Saranow gave JCL $2 million; JCL or Jumer (it is not clear which) gave Saranow 30 percent of JCL’s stock; and JCL gave Jumer an account receivable, the book value of which was $2,767,545; additional accounts receivable valued at $1,459,110; three automobiles valued at $64,000; a number of life insurance policies valued at $100,504; and a gas station valued at $106,493.

However, the influx of capital was not enough to keep JCL solvent, and in 1999, it filed for bankruptcy.

JCL’s creditors committee then filed suit against Jumer, seeking to set aside the transaction under the Illinois Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/6. The Committee alleged that JCL did not receive reasonably equivalent value for the items it transferred to Jumer.

Jumer moved for summary judgment, arguing that the $2.7 million in accounts receivable were uncollectable and essentially worthless.

The bankruptcy court found that the transfer was for “reasonably equivalent value,” and granted summary judgment in favor of Jumer. On appeal, the district court affirmed.

The Committee appealed, but the Seventh Circuit also affirmed, in a decision by Judge Joel M. Flaum.

The UFTA provides, “A transfer made or obligation incurred by a debtor is fraudulent … if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.”

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The court concluded that summary judgment was appropriate. Jumer presented evidence that there was little to no likelihood that JSC would ever repay Jumer the debt, because the total assets of JSC were worth less than $17,000, and the Committee offered no evidence except the account’s book value.

The court observed, “the Committee offered the account’s book value but offered no evidence concerning the likelihood that the account would ever be repaid. This evidence is insufficient to create a genuine

issue of material fact. Simply put, no jury reasonably could find that the JSC account was worth its full book value, knowing that JSC had virtually no assets or ongoing operations.”

Accordingly, the court affirmed.

Click here for Case Analysis.

David Ziemer can be reached by email.

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