Efstathios Regopoulos managed the Rego Group Ltd., an Illinois real estate company owned by the Regopoulos family. The 2008 financial statements for the Rego Group listed a net worth of over $25 million. One of the loans listed on the statements was from HSBC Bank for $2,150,250 and which secured a mortgage on property estimated to be worth about that same amount.
Among these assets, the Rego Group listed 102 silver bars worth in excess of $1 million which backed the HSBC Bank loan to the Rego Group, and which silver bars were held in HSBC's vault as collateral.
Still in 2008, Golden Eagle Community Bank made a $1,484,000 loan to the Rego Group, and Efstathios personally guaranteed the loan. The loan was secured by what was known as the Fountain Square real estate project, and at that time the project had an appraised value in excess of $2 million. Financial statements provided to Golden Eagle showed the silver bars as included in the Rego Group's assets.
Now in January of 2009, the Rego Group transferred the ownership of the silver bars to the various trusts of family members of the Rego Group in the same percentage as their ownership interests:
- The living trust of Efstathios Regopoulos received 28 silver bars.
- The living trust of his wife, Elaine Regopoulos received 10 silver bars (some of which she later transferred to her grandchildren).
- Their children's trust received the balance of 64 silver bars, which were then immediately transferred to the Rego Family LLC, which Efstathios managed and was owned by their four children. This transfer was handled by Efstathios.
Although title to the silver bars was changed as set forth above, the silver bars themselves continued to sit in the HSBC Bank vault until December 2009, when the HSBC loan was paid off.
In January of 2010, Efstathios' living trust transferred its 28 silver bars to Elaine's living trust, which were then used to back a loan from JP Morgan Chase. Thereafter, JP Morgan Chase kept those 28 silver bars in its vault as collateral for the loan.
This takes us to February of 2011, when the Golden Eagle loan came due, but the Rego Group did not pay it off. Golden Eagle sued the Rego Group and foreclosed on the Fountain Square project, but that collateral came up short and a $443,647 deficiency was entered in favor of Golden Eagle. Post-judgment discovery commenced 10 days later.
On Tax Day, 2013, Efstathios submitted an affidavit in the post-judgment enforcement proceedings where he laid out the transfers of the silver bars from the Rego Group to the various trusts, and from his trust to Elaine's trust.
Less than a month later, on May 8, 2013, Golden Eagle sued the Rego Group, the various Regopoulos trusts, plus Efstathios and Elaine, to set aside the 2009 transfers of the silver bars to the various trusts. All these defendants (who I will refer to as the "Rego defendants") lawyered-up, and litigation commenced in earnest.
On September 30, 2013, Golden Eagle served the Rego defendants with a thick stack of discovery documents, including Requests for Admissions. Such Requests are routine in litigation, and basically give the other party about a month to deny the Admissions or else they will be deemed to be true and correct for subsequent purposes in the litigation. The Requests for Admissions sent by Golden Eagle basically set out every salient factual issue they needed to make their case, and basically dared the Rego defendants to deny them.
But even beyond that -- and this would become a point of contention -- Request for Admission #18 basically said to the effect that "You admit that you transferred the silver bars to hinder or delay creditors", which is the ultimate issue in a fraudulent transfer case.
A month came and passed, but the Rego defendants did not respond or otherwise deny the Requests, and so they were deemed to be true. The defendants filed an Amended Answer which stated various defenses, but not until much later would they try to walk back their failure to respond to the Requests.
By December, 2013, Golden Eagle had prepared their case sufficiently so that they moved for summary judgment, which is common in fraudulent transfer cases (and rare in most other cases, since usually only will defendant seek an adjudication as a matter of law). Golden Eagle argued that under the undisputed facts set forth above, there really wasn't any controversy as to whether the silver bars had been fraudulently transferred, so there was no need for a trial and the court should simply grant Golden Eagle judgment.
For their part, the Rego defendants argued that under the Illinois Fraudulent Transfer Act (UFTA), an asset isn't an asset at all if it is subject to a valid security lien. Here, the silver bars were subject to HSBC Bank holding the silver bars as collateral at the time they were transferred (that loan wasn't paid off until 11 months later), and thus they were not guilty of any fraudulent transfer.
The parties also squabbled about whether Request for Admission #18 was valid, and in fact by this time the Rego defendants had finally figured out that they were in grave peril because of the Requests for Admissions, and were trying to walk them back by claiming that their attorney accidentally misplaced them and didn't know they were outstanding until Golden Eagle filed its Motion for Summary Judgment. The Rego defendants also filed belated denials of the Requests for Admissions.
The Court didn't buy any of the Rego defendants' arguments, and instead entered judgment in favor of Golden Eagle, holding in effect that there was substantial other evidence which supported the Requests for Admissions, whether or not the Court upheld the Rego defendants' failure to timely respond.
By the Court's judgment, the Rego defendants were required to place the silver bars with a third-party liquidator, with the first $520,997 of sale proceeds going to Golden Eagle, and the balance remitted back to the Rego defendants.
The Rego defendants moved for reconsideration, lost again, and then appealed to the Appellate Court of Illinois, which entered the Opinion that I shall now relate.
The Appellate Court first took up the issue of whether the Requests for Admissions, which the Rego defendants initially didn't respond to, and then belatedly denied. The Appellate Court shot down the Rego defendants' modern variation of The Dog Ate My Homework, which is that their attorney misplaced the Requests. The Appellate Court pointed out that even after this error had been discovered, the Rego defendants waited three months to do anything about it, although they could have sought leave to respond late if they had done so immediately upon determining the error. Even so, the Appellate Court would not give weight to Request for Admissions No. 18, which went to the ultimate issue in the case, but that really didn't help the Rego defendants that much.
For purposes of this article, the far more important issue was whether the silver bars were an "asset" for purposes of the Illinois UFTA, since they were held as additional collateral by HSBC Bank to back that bank's loan to the Rego Group.
Facially, this sounds like a good defense. Under the UFTA, the analysis works this way:
- First, an "asset" means any "property of the debtor", but is subject to various exceptions.
- Second, and this is one of the exceptions, an "asset" does not include property to the extent that it is "encumbered by a valid lien".
This second element is where the Rego defendants' argument came a-cropper. While HSBC Bank held the silver bar in its physical possession as its collateral, the Rego defendants never proved that HSBC Bank actually held any lien against the silver bars, or that the amount of the lien exceeded the value of the silver bars. As the Appellate Court explained in a footnote:
There is some question regarding whether the silver bars indeed served as collateral for the HSBC loan: although Efstathios averred that the silver was collateral and could not be removed from the HSBC vault until the loan was repaid, the financial statements prepared by Rego Group list the silver as an asset worth over $1 million, not as collateral subject to a possessory lien and held by a lender. The lack of any documentary evidence of (1) any recorded security interest in the silver or (2) any designation of the silver as collateral calls into question the validity and enforceability of the alleged possessory lien. Where the retention of collateral by the lender is unknown and thus fails to give notice of the security interest to third parties, that retention of collateral is ineffective to create a security interest.
In other words, the Rego defendants simply assumed (1) that HSBC Bank's possession of the silver bars gave rise to a possessory lien, and (2) HSBC Bank's possessory lien was for the full amount of the loan owed to HSBC Bank -- and both of those assumptions were bad. Recall that HSBC Bank had also taken a real lien against the real estate development for which the loan was issued, so at best the silver bars were only additional collateral in case of a default.
But this of course did not mean that the Rego Group's transfer of the silver bars was a fraudulent transfer. Golden Eagle still had to prove intent, and of course the Rego defendants claimed that their real motivations were as pure and white as the driven snow.
However, the Appellate Court looked at the surrounding circumstances, and decided that there was abundant evidence that the Rego Group did in fact intend to fraudulently transfer assets. This was evidenced (among other things) by the fact that the transfers were to "insiders" (the various trusts), Efstathios continued to control the silver bars, the Rego Group did not advise Golden Eagle of the transfers, the timing of the transfers was highly suspicious, and the Rego Group did not receive anything in return for the transfers. Thus:
In summary, the plaintiff established that five of the badges of fraud are present, and we note the presence of one more: the transfer of the silver was made to insiders; after the transfer, "the debtor retained possession or control of the asset"; the transfer was not disclosed; the asset was removed or concealed; the transfer occurred shortly after a substantial debt was incurred; and there was no consideration for the transfer.
The Rego defendants countered that there were other Badges of Fraud that were not present, and some were disputed, and so summary judgment was not appropriate. Basically, the Rego defendants argued what pretty much every defendant in a fraudulent transfer case argues, which is that they were innocent because most of the Badges did not indicate a fraudulent transfer. This argument is usually a loser, and it was here too.
The Appellate Court noted that even a single Badge of Fraud can sustain a fraudulent transfer finding, and really the courts are to look at the entirety of the circumstances to determine a debtor's true intent. In this case, the conclusion was inescapable that the Rego Group had transferred the silver bars to attempt to dodge Golden Eagle's collection against them.
The judgment of the lower court was thus affirmed, and Golden Eagle was able to have the silver bars liquidated to satisfy its judgment.
ANALYSIS
To fully understand the importance of this case, we need to travel back in time over four centuries, to Twyne's Case which was decided in 1601.
There, a farmer by the name of Pierce owed his creditor £200. To prevent the creditor from collecting on Pierce's most valuable asset, a flock of sheep, Pierce claimed that he sold the flock to pay off a £400 debt that he owed to his buddy, Twyne. Despite the purported sale, Pierce continued to possess and manage the flock, including putting his own marks on the sheep and shearing them.
When the creditor got the Sheriff of Southampton to go out and collect the sheep, Twyne told the Sheriff something to the effect of "bugger off" and threatened violence, whereupon the matter landed before the infamous Star Chamber.
That court ruled to the effect that debtors will tell porkies, and so therefore the courts must instead look to the circumstances to indicate the debtor's true intent, which the Star Chamber expressed this way in Twyne's Case:
1st. That this gift had the signs and marks of fraud, because the gift is general, without exception of his apparel, or any thing of necessity; for it is commonly said, quod dolus versatur in generalibus.
2nd. The donor continued in possession, and used them as his own; and by reason thereof he traded and trafficked with others, and defrauded and deceived them.
3rd. It was made in secret, et dona clandestina sunt semper suspiciosa.
4th. It was made pending the writ.
5th. Here was a trust between the parties, for the donor possessed all, and used them as his proper goods, and fraud is always apparelled and clad with a trust, and a trust is the cover of fraud.
6th. The deed contains, that the gift was made honestly, truly, and bona fide: et clausulæ inconsuet’ semper inducunt suspicionem.
These facts became known as the Badges of Fraud, and arguably was the English law's sole significant contribution to fraudulent transfer law, the vast majority of which has descended with remarkably little material variation from Roman Law (which was incorporated, poorly, into English law in the simplistically-drafted Fraudulent Conveyances Act of 1571).
Yet, the Badges of Fraud were an innovation, and over the years, various courts on both sides of the Atlantic added more and more Badges of Fraud to where the list at some point exceeded 40 such Badges and had become cumbersome and impractical. When the Uniform Fraudulent Conveyances Act was adopted in the U.S. in 1918, the Uniform Law Commission cut down the Badges to the dozen or so that are most commonly referenced today.
However, the Badges of Fraud really do little more than provide a construct for the courts to look at the totality of the relevant facts and circumstances and decide whether a debtor had the intent to defeat the collection rights of his creditors. In other words, the fraudulent transfer laws essentially presume that desperate debtors will lie about their intent, so the courts instead should look at the entire context of what really happened to ferret out the truth.
As the Rego defendants did here, litigants will mistakenly focus on the Badges of Fraud as if they are a game where the creditor will win only if the creditor can satisfy most of them, and loses if the creditor cannot -- sort of a Falcons beat Rams by 7-3 sort of analysis.
But, as discussed, that is the wrong approach. The courts instead will look at the totality of the facts and circumstances, and if even just a single such fact or circumstance indicates that the debtor was trying to cheat his creditors, then the creditor has a chance of winning.
Here, the facts and circumstances were overwhelming that the Rego Group was trying to cheat Golden Eagle out of collecting against the silver bars, and so Golden Eagle won and Rego Group lost. That is the correct analysis.
Another point worthy of discussion goes to the Rego Group's failure to put on proof that HSBC Bank actually held a "lien", as opposed to simply holding collateral, which is different. The fraudulent transfer laws in fact represent an increasingly highly-technical area of law, and shooting from the hip based only on some sort of fuzzy general understanding of the UFTA (now being retitled as the Uniform Voidable Transaction Act) will often bring litigants to grief.
As here.
Finally, I can't let this case go without mentioning a common act of stupidity by debtors, which is to try to hide assets that they have previously disclosed on financial statements.
After a judgment is entered, the creditor will take post-judgment discovery of the debtor, and one of the most obvious things that a creditor will do is to take the debtor's financial statements and simply go down the list asking where assets went. If a debtor has transferred away a particular asset without consideration, as here, the creditor will then track it down and bring a fraudulent transfer action to collect against the asset.
It is stupid to believe that a court will allow a debtor to list an asset on a financial statement for purposes of acquiring a loan, and then let the debtor later take that asset off the table when the financial winds start to blow sour. Yet, debtors seem to think that they can have it both ways: Use the asset to entice creditors to extend loans, but then retain the asset for personal use while stiffing creditors.
When I am evaluating a client for asset protection planning, I almost always ask them if they have obtained financing for projects, and to provide me with the financial statement that they have provided to the lender. Those are assets that the client probably cannot do much in the way of protecting, and often must be left on the table.
The problem, of course, is that loans are like heroin to real estate developers. I am convinced that if a broke real estate developer found his last dime in the street, he would take it to the bank and try to a loan for 9 cents against it. To get the biggest loans they can at the most favorable rates, developers list every last asset that they can think of. They also give out like candy personal guarantees which are essentially pledges that the entirety of their non-exempt worldly worthy will be available to creditors to pay their debts.
However, this works against them from an asset protection perspective as those assets become easy game for creditors if (or maybe "when" is a better word) things go south for the developer. The creditor's attorney simply goes down the financial statement, and those assets are collected against or hauled back into the debtor's estate by way of a fraudulent transfer case.
As here.
There is an old gambling truism to the effect that to be a winner, you have to walk away from the table a winner. To even have a chance of this usually means taking some chips off the table as you go, and not simply go all-in every single hand.
Taking chips (or silver bars) off the table before a problem arises is what asset protection is about. Once the problem arises, trying to take chips off the table is fundamentally no different than a cheat who would try to steal them off the table when the cards turn bad; remedied in a casino by criminal prosecution, and remedied in the creditor's rights context by a fraudulent transfer action.
As here.
CITE AS
Golden Eagle Community Bank v. Rego Group, Ltd., 2015 IL App (2d) 141127-U, 2015 WL 5783290 (Ill.App., Sept. 30, 2015). http://goo.gl/vak4fS
This article is at http://onforb.es/1PSANSC and http://goo.gl/yXpWGg
