2018 IL App (1st) 172281
Ill. App. Ct.2018Background
- PSG purchased workers’ compensation coverage from Zurich under a Loss Retrospective Agreement that required PSG to reimburse Zurich for paid claims and included a binding-arbitration clause for disputes "arising out of the interpretation, performance or alleged breach of th[e] Agreement."
- PSG and Zurich later disputed amounts due; Zurich demanded arbitration in December 2016 seeking past retrospective premiums (~$4.6M) and a large letter-of-credit for future exposure.
- Before the arbitration, Zurich sued in Cook County alleging PSG had made 2015 transfers ($4.5M to PSG’s majority member and $5.8M to a management company) in violation of the Uniform Fraudulent Transfer Act to frustrate collection of any arbitration award.
- Defendants moved to dismiss, compel arbitration of the fraudulent-transfer claims, or stay those claims pending arbitration; they also asserted a defense that no debt existed in 2015. PSG filed counterclaims that mirror issues raised in arbitration.
- The circuit court denied the defendants’ motions to compel arbitration and to stay the fraudulent-transfer claims, denied judgment on the pleadings, and granted Zurich’s motion to compel arbitration of the counterclaims. Defendants appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Zurich’s fraudulent-transfer claims must be compelled to arbitration | Zurich: claims concern collection of a potential arbitration award and are not within the contract’s arbitration scope | Defendants: fraudulent-transfer claims "arise out of" the Agreement and fall within the arbitration clause | Denied — fraudulent-transfer claims concern collection/enforcement and are not arbitrable under the Agreement |
| Whether court proceedings on fraudulent-transfer claims should be stayed pending arbitration | Zurich: Act claims protect creditors and may proceed pre-judgment; staying would frustrate Act purposes | Defendants: stay is appropriate pending resolution of contract arbitration | Denied — staying would undermine the Uniform Fraudulent Transfer Act’s purpose to prevent asset dissipation |
| Whether the complaint should be dismissed / judgment on the pleadings because no debt existed in 2015 | Zurich: timely challenge to transfers as fraudulent despite contingent debt | Defendants: no claim in 2015 because debt allegedly arose later; court erred procedurally | Not decided on merits by this appeal — appellate jurisdiction under Rule 307 does not extend to denial of §2‑615 dismissal here |
| Whether PSG’s counterclaims must be arbitrated | Zurich: counterclaims arise out of the Agreement and fall squarely within arbitration clause | Defendants: (conceded) counterclaims arise under the Agreement | Granted — counterclaims are arbitrable and were properly compelled |
Key Cases Cited
- Miller v. Flume, 139 F.3d 1130 (7th Cir. 1998) (arbitrability of fraudulent-transfer claims depends on the breadth of the arbitration clause)
- Apparel Art Int’l, Inc. v. Jacobson, 967 F.2d 720 (1st Cir. 1992) (fraudulent-transfer action brought to collect on an arbitration award is a court action, not arbitration)
- Northern Tankers (Cyprus) Ltd. v. Backstrom, 967 F. Supp. 1391 (D. Conn. 1997) (fraudulent-transfer claim treated as collection effort and adjudicated in court)
- Ryan Racing, LLC v. Gentilozzi, 231 F. Supp. 3d 269 (W.D. Mich. 2017) (same: fraudulent-transfer suit related to collection of arbitration award belongs in court)
- Geneva Corporate Fin. v. G.B.E. Liquidation Corp., 598 N.W.2d 331 (Iowa Ct. App. 1999) (distinguishing liability under contract from post-award collection proceedings; fraudulent-transfer claims are collection-related)