Illinois Bankruptcy Court Allows Recovery of Transfers Made for the Benefit of Debtor’s Controlling Shareholders

March 30, 2022, Illinois – The Bankruptcy Court for the Central District of Illinois has allowed Sheldon Stone, the Trustee for the debtor International Supply Co. (ISCO), to avoid and recover transfers in the amount of $ 1,720,000 made “from International Supply Co. to Citizens Equity First Credit Union (CEFCU)” on behalf of Lee Hofmann. The Trustee had stated in his Complaint that “Mr. Hofmann and his wife Rebecca Hofmann were Illinois residents and officers, controlling shareholders, and paid employees of ISCO.” The Trustee had alleged that this payment was “constructively fraudulent and is brought specifically under a provision of the Illinois Uniform Fraudulent Transfer Act (“IUFTA”).” The disputed issues were “whether ISCO was insolvent when the transfers were made or became insolvent by reason of the transfers and whether ISCO received reasonably equivalent value for all or some portion of the transfers it made.”

The Court analyzed the expert testimony on three tests to determine ISCO’s solvency and found that ISCO was insolvent before, at the time of, and after the CEFCU transfers were made in August 2013. The Court further observed that “Courts do recognize indirect benefits of paying the debts of third parties as value received in certain situations where the debtor and third party share an identity of interests, the benefit is “fairly concrete,” or the debtor receives the benefit of the original consideration” but found none of such scenarios present in the current case. Instead, the Court noted that “every action taken by ISCO for Mr. Hofmann’s benefit did more harm than good to ISCO” and “over time, ISCO came to be used as the personal piggy bank of its controlling shareholder Lee Hofmann.” Therefore, the Court concluded that “ISCO received no value in exchange for the two transfers it made to CEFCU totaling $1.72 million”.

Stone v. Citizens Equity First Credit Union (In re Int’l Supply Co.), 2022 Bankr. LEXIS 865

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