Illinois Court rules that merger doctrine satisfies judgment

In Access Realty Grp., Inc. v. Kane, 2019 IL App (1st) 180173 (Sept. 13, 2019) an Illinois Appellate Court upheld the dismissal of a citation proceeding by the creditor’s assignee on the grounds that the merger doctrine satisfied the underlying judgment. Because the plaintiff was no longer a judgment creditor, it also upheld the dismissal of the assignee’s damages suit relating to that judgment

The lender brought a suit against the original debtor for defaulting on a loan. The parties settled and the court entered a $783,000 judgment against the debtor. The lender then brought a supplementary proceeding to identify any assets of the debtor that could satisfy the judgment.

A year or so later, the debtor’s business partner (“partner”) executed a promissory note for $1.2 million, payable to the debtor. As part of the citation proceedings, the trial court ordered the note be transferred from the debtor to the lender. The turnover order also instructed that the proceeds from the note be used to pay the judgment.

The partner’s company (“assignee”) subsequently acquired the judgment through an assignment. It then substituted into the citation proceeding as the judgment creditor. The debtor then moved to dismiss the proceedings arguing that once the lender assigned the judgment to the assignee, the merger doctrine extinguished the judgment debt. Debtor claimed that since the partner controlled the assignee as an instrumentality to conduct his own personal affairs, the partner’s interest in the the judgment merged with his obligation as the payor of the note, which had been turned over to satisfy the judgment. The trial court agreed and dismissed the proceedings.

In a separate lawsuit, the assignee sought damages from the debtor based on alleged violations of the Uniform Fraudulent Transfer Act related to the debt underlying the lender’s judgment. But once the court in the citation proceeding found that the judgment was satisfied, it ruled that the assignee lacked standing to bring this suit.

Both decisions were affirmed on appeal. The assignee argued that the merger doctrine was inapplicable because the obligor of the note is the partner, an individual shareholder and officer, whereas the holder of the judgment is a corporation. They are thus separate entities precluding the application of the doctrine.

The Court was not persuaded. It acknowledged the assignee was a separate legal entity from the partner. But it may disregard a corporate entity where it is merely the alter ego or business conduit of another person. The court did not engage in a veil-piercing analysis, but said that some of the principles of the veil-piercing doctrine apply to determine whether the assignee and the partner share the same “qualities” for purposes of the merger doctrine. The partner was the assignee’s sole shareholder, president, secretary, and registered agent. And the assignee never denied that the partner controlled the company and used it as an instrumentality to conduct his personal business. As such, “[i]t would be unsound and an absurd result to permit [the partner], through the company he wholly owns and controls, to hold his own note and fail to pay himself, and then collect the [ ] judgment from [debtor]’s other assets.”

The court further noted that for purposes of the merger doctrine, the relevant inquiry is whether the “qualities” of debtor and creditor have become united in the same individual. It found that they were. The partner was entitled to receive the balance owing on the judgment as the sole shareholder of the assignee. At the same time, he was the payor on the note, and was bound to pay his own company the balance because the trial court had ordered the note be turned over to pay off the judgment. Thus, the partner was on both sides of the same obligation.

The dissent cautioned against disregarding the corporate fiction and criticized the majority’s conclusion that the partner was merely the assignee’s alter ego without going through the extensive veil-piercing analysis. The majority’s “qualities” analysis was flawed because the “quality of creditor” and the “quality of debtor” are always attributable to the obligee and the obligor, respectively.

The dissent found no support for the theory that the merger doctrine allows a money judgment to be satisfied by tendering an unliquidated—and perhaps uncollectible—debt rather than payment. The dissent warned that “[i]f merger were applied to every debt between a sole shareholder and his closely held corporation, the doctrine would effectively collapse all such debtor/creditor relationships. Shareholder loans could never exist between a sole shareholder and his corporation because the merger doctrine would automatically extinguish them at the moment of inception.”

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