Under the merger doctrine, when the same person is both the creditor and the debtor with respect to a debt, that debt is extinguished. Yet, in Access Realty Group, Inc. v. Kane, No. 18-0173, 2019 IL App (1st) 180173 (Sept. 13, 2019), the Illinois appellate court affirmed the application of this doctrine to extinguish debt where the creditor and debtor were admittedly not the same. The creditor was a closely held corporation and the debtor was it sole shareholder. Unfortunately, in doing so it did not articulate a clear standard that courts and practitioners could apply in similar circumstances in the future.
In 2011, SFG Capital, LLC and Patrick Kane agreed to the entry of a consent judgment against Kane in the amount of $783,000 (the “Judgment Debt”). (¶ 4.) Subsequent citation proceedings took place in which the Circuit Court ordered Kane to turnover a $1.2 million promissory note to SFG, which William Platt had executed in Kane’s favor (the “Platt Note”). (¶ 6.) The order directed SFG to use the Platt Note to satisfy the Judgment Debt. (Id.) Thereafter, SFG assigned the Judgment Debt to Access Realty Group, Inc., and Access substituted in as the judgment creditor in the citation proceedings. (¶¶ 7-8.) Access was no stranger to this dispute because Platt – the maker of the Platt Note – was Access’s sole shareholder, president, secretary, and registered agent. (¶ 7.)
The net result of these machinations was that: (1) Platt’s wholly owned and controlled company, Access, was the creditor on the Judgment Debt; and (2) Platt himself was the debtor on the Platt Note, which had been turned over for the express purpose of satisfying the Judgment Debt. In some sense Platt was, directly or indirectly, both the creditor and debtor in relation to the Judgment Debt.
Kane, who was still the judgment debtor in the citation proceedings, moved to dismiss those proceedings on the grounds that Platt’s indirect interest in the Judgment Debt had merged with, and been extinguished by, Platt’s direct obligations on the Platt Note. (¶ 9.) The Circuit Court agreed, and dismissed the case. (¶ 10.)
On appeal, Access argued that the merger doctrine did not apply because the judgment creditor and Platt Note debtor were not the same. (¶ 20.) Access, the creditor, was a corporation and Platt, the debtor, was an individual.
The Appellate Court rejected Access’s argument. While acknowledging that corporations are legally separate from their shareholders, the Court stated that courts “may disregard a corporate entity where the corporation is merely the alter ego or business conduit of another person.” (¶ 24.) Yet the Court explicitly declined to conduct a veil-piercing analysis, which would have involved weighing several factors. (¶ 24.) Instead, relying on a 130 year old opinion, the Court stated that “the relevant inquiry” in merger doctrine cases is “whether the qualities of debtor and creditor have become united in the same individual.” (¶ 26.) But what exactly are the “qualities” of debtors and creditors? The Court offered little guidance on this question.
No one disputed that Platt was the creditor on the Platt Note. But, for its conclusion that Platt had the requisite “qualities” of creditor on the Judgment Debt, the Court said only that, “as the sole shareholder of Access,” Platt was “entitled to receive” the proceeds paid on the Judgment Debt. (Id.) The Court did not explain the reasoning behind this statement, and provided no further reasoning behind its conclusion that Platt had the requisite “qualities of a debtor” sufficient to apply the merger doctrine. Thus, it did little to clarify the relevant standard when determining when a unity of interest between a corporation and its owners is sufficient for merger doctrine purposes.
In fact, the Court took pains to reduce any far-reaching precedential effects of its opinion. It emphasized that “the merger doctrine is fact specific” and expressly confined its analysis to “the unique facts of this case.” (¶ 27.) The Court also made clear that it was not implying that “the merger doctrine would automatically extinguish loans between a sole shareholder and his corporation” (although the Court did not explain why). (Id.) In the final analysis, while Access Realty clearly opened the door to application of the merger doctrine in cases where the creditor and debtor are in the relation of corporation/sole shareholder, it did not articulate a clear standard for courts or practitioners to apply in the future in such cases.