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In re We’ll Clean Incorporated

24 BK 00151
The chapter 7 trustee (the “Trustee”) moved for a determination that creditors’ pre-petition state court claims against non-Debtor third-parties for successor liability, fraudulent conveyance, and creation of a constructive trust were property of the estate.  Creditors objected to the motion.  They agreed with the trustee regarding two of the claims.  However, they argued the Trustee was barred from bringing the successor liability claim under the doctrine of in pari delicto.

Pre-petition, the creditors had extended loans to the Debtor, its President/sole shareholder, and a related entity (collectively, the “borrowers”).  Following the borrowers’ default, the lending creditors sued the borrowers and third parties that had allegedly offered the Debtor’s President debt counseling services.  The third parties included the current owner of the car wash—a corporation called Avalon—and its managers, two individuals. The creditors alleged the Debtor’s President and the third parties had engaged in a fraudulent scheme to interfere with debt negotiations between the creditors and borrowers and transferred the assets of the car wash business to the non-Debtor third parties to avoid the borrowers’ liability under the loans. The creditors brought the successor liability claim against Avalon, the corporate successor and current owner of the car wash; they asserted the fraud exception to Illinois’ general rule of successor corporate nonliability applied, arguing that Avalon should be held liable for payment of the loans due to its managers’ involvement in said fraudulent scheme. 

The court agreed with the objecting creditors, holding that the Trustee could not assert the successor liability claim, but for a different reason.  The court reasoned that the successor liability claim was a claim that was personal to the lending creditors, since it was for breach of loan agreements that were not common to all creditors, relying on Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1348-49 (7th Cir. 1987). Since the lending creditors had also alleged that some of the Debtor’s President’s actions in facilitating the transfer of the car were taken under duress, the court found that whether in pari delictoapplied was more appropriately resolvable in state court by a judge or jury.

Tuesday, May 21, 2024