# Sheldon Stone, as Creditor Trustee of the Internat v. Citizens Equity First Credit Union

> United States Bankruptcy Court, C.D. Illinois · March 30, 2022

URL: https://www.frixlaw.com/law-library/cases/10457491

## Case

- **Court:** United States Bankruptcy Court, C.D. Illinois
- **Decided:** March 30, 2022
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

SIGNED THIS: March 30, 2022

Mary P. Gorman
United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF ILLINOIS
In Re )
) Case No. 15-81467
INTERNATIONAL SUPPLY CoO., )
) Chapter 11
Debtor. )

)
SHELDON STONE, not individually )
but solely as trustee of the )
International Supply Co. Creditor )}
Trust, )
)
Plaintiff, )
)
Vv. ) Adv. No. 17-08049
)
CITIZENS EQUITY FIRST CREDIT )
UNION, )
)
Defendant. )

□□□

Before the Court for decision after trial is a complaint brought by the
Trustee of the International Supply Co. creditor trust to avoid and recover
prepetition fraudulent transfers made to Citizens Equity First Credit Union.
Because International Supply Co. was insolvent when it made the transfers,

not to satisfy its own debts, but rather for the benefit of its controlling
shareholder, the transfers will be avoided and judgment will be entered in favor
of the Trustee.

I. Factual and Procedural Background
The Debtor, International Supply Co. (“ISCO”), filed its voluntary petition
under Chapter 11 of the Bankruptcy Code on September 24, 2015. Shortly
thereafter, ISCO sought permission to sell substantially all its assets. The

request was granted, and the closing of the sale generated more than $10
million gross for the bankruptcy estate. The previously-appointed creditors
committee then filed a liquidating plan that was confirmed and established a
creditor trust. Sheldon Stone was appointed as Trustee of the creditor trust
and was vested with the authority to pursue causes of action for the benefit of
the estate’s creditors, including actions to avoid and recover fraudulent
conveyances under the Bankruptcy Code or applicable nonbankruptcy law.
The Trustee commenced this proceeding by filing his ten-count complaint

against Citizens Equity First Credit Union (“CEFCU”), E. Lee Hofmann, and
Rebecca Hofmann, seeking to avoid transfers of money from ISCO to CEFCU
and Rebecca Hofmann made on behalf of Lee Hofmann. The complaint seeks
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relief under the Bankruptcy Code and the Illinois Uniform Fraudulent Transfer
Act. In the alternative, the complaint seeks judgment against the defendants
for unjust enrichment and includes a count seeking damages against the
Hofmanns for breach of their fiduciary duties to ISCO. Each of the defendants

answered the complaint; CEFCU also asserted a cross claim against Lee
Hofmann for breach of contract.
Following an initial pretrial conference, the judge presiding over the ISCO
bankruptcy case and related proceedings entered an order recusing himself
from further involvement in this proceeding due to a conflict. The matter was
reassigned to another judge and proceeded with pretrial discovery. In March
2019, Lee Hofmann filed an individual voluntary bankruptcy petition; he was
subsequently dismissed as a defendant from this proceeding. After an extended

discovery period through which expert testimony was disclosed, the matter was
finally set for trial beginning December 1, 2021. After a preliminary pretrial
conference held in October 2021, the judge to whom the case had been
previously reassigned recused himself and the matter was reassigned to this
Court. Thereafter, CEFCU and the Trustee filed a joint final pretrial statement
stipulating to almost all relevant facts. The trial was held as scheduled by video
conference. Prior to the commencement of the trial, the Trustee’s oral motion to
dismiss Rebecca Hofmann as a defendant due to her recent filing of a Chapter

7 bankruptcy case was granted. The trial proceeded against CEFCU as the sole
defendant.

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A. Undisputed Events Giving Rise to the Complaint1
Lee Hofmann founded ISCO in 1983. At all relevant times, Mr. Hofmann
and his wife Rebecca Hofmann were Illinois residents and officers, controlling
shareholders, and paid employees of ISCO.2 In addition to her roles with ISCO,

Mrs. Hofmann was a manager of a separate company, Games Management,
LLC.
In September 2004, Games Management, LLC executed a note in favor of
CEFCU for a $2.7 million loan (“CEFCU Note”). At that time, Lee Hofmann
executed a commercial guaranty of the CEFCU Note, personally guaranteeing
payment. Thereafter, Games Management, LLC defaulted on the CEFCU Note,
triggering Lee Hofmann’s liability. On January 19, 2011, CEFCU obtained a
judgment in state court against Lee Hofmann in the amount of $2,803,491.25

based on his default under the guaranty. On March 18, 2011, a second state
court judgment was entered in favor of CEFCU and against Lee Hofmann in the
amount of $253,627.19.
As part of its effort to enforce or collect on the judgments against Lee
Hofmann (“Hofmann judgments”), CEFCU served process and obtained citation
liens against Lee Hofmann’s non-exempt personal property, including his
wages from ISCO. In an apparent attempt to avoid payment on the Hofmann

1 The factual events underlying the Trustee’s complaint in this proceeding are largely uncontested. These findings
are based on facts admitted in the pleadings and the parties’ joint final pretrial statement and are supported by
documentary evidence.
2 CEFCU denied this specific allegation in its answer to the complaint but has since acknowledged, in both its
motion for summary judgment and the joint pretrial statement, that Lee and Rebecca Hofmann were officers and
board members of ISCO. In any event, Lee and Rebecca Hofmann admitted in their answer to the complaint that
they “were officers (President and Secretary, respectively), directors, and the controlling shareholders of” ISCO at
all relevant times.
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judgments, Lee Hofmann’s salary from ISCO was diverted to Rebecca Hofmann.
Once the diversion was discovered, CEFCU obtained a state court judgment
against ISCO and Rebecca Hofmann, jointly and severally, in the amount of
$261,800 (“ISCO/Rebecca judgment”). The ISCO/Rebecca judgment expressly

stated that any amounts collected were to be applied toward the satisfaction of
the judgments against Lee Hofmann. The issue of attorney fees and costs was
reserved for determination at a later date; CEFCU now asserts such fees and
costs to have been at least $81,947.50.
While an appeal of the ISCO/Rebecca judgment was pending, CEFCU,
Lee Hofmann, Rebecca Hofmann, and ISCO entered into a global settlement
agreement. By the terms of the agreement, Lee Hofmann agreed to pay CEFCU
$2,010,000 on or before August 1, 2013, upon receipt of which CEFCU would

release all judgments and dismiss any related proceedings against Lee
Hofmann, Rebecca Hofmann, and ISCO. The parties also agreed that the
pending appeal of the ISCO/Rebecca judgment would be dismissed. In
addition, CEFCU agreed to abstain, pending receipt of the settlement payment,
from recording a deed to property previously transferred to CEFCU from the
Hofmann Irrevocable Trust (“Hofmann Trust”) by court order. Payment was not
timely made, however, and CEFCU recorded the deed to the trust property. The
settlement was renegotiated and an amended settlement agreement, dated

August 2, 2013, was entered into increasing the amount to be paid to CEFCU
to $2,020,000, with $1,400,000 due immediately and the balance of $620,000
due by August 15, 2013. If the balance owed was not paid by August 15, 2013,
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CEFCU would retain the trust property and apply any proceeds from the sale of
the property to satisfy the outstanding balance on the judgments.
On August 2, 2013, ISCO tendered a cashier’s check to CEFCU for the
$1.4 million installment due from Lee Hofmann under the amended settlement

agreement. On August 16, 2013, ISCO transferred another $320,000 from its
savings account at Heartland Bank & Trust Company (“Heartland Bank”) to the
Games Management, LLC account at CEFCU, which CEFCU, in turn, applied
to the balance due under the amended settlement agreement. The same day,
Lee Hofmann and ISCO together borrowed $300,000 from Morton Community
Bank, which was distributed directly to CEFCU as final payment due under the
amended settlement agreement. Upon receipt of the final $300,000 payment,
CEFCU released its judgments, dismissed the related proceedings, and

transferred the real estate property it was holding as security back to the
Hofmann Trust from which it came. The Hofmann Trust recorded the deed on
the real estate a week later and, eventually, transferred the property by
quitclaim deed to the Hofmanns.
On October 1, 2014, ISCO signed a promissory note in favor of Heartland
Bank in the amount of $3.75 million. The same day, the Hofmanns signed a
deed of trust in favor of Heartland Bank for the real estate previously held by
the Hofmann Trust and that deed of trust was subsequently recorded. ISCO

filed its bankruptcy petition on September 24, 2015. And on August 1, 2016,
Heartland Bank released the deed of trust; the Hofmanns thereafter transferred
the trust property to a third party.
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B. Evidence at Trial
The evidence at trial focused primarily on the nature of the transfers
complained of by the Trustee and ISCO’s financial condition at the relevant
times. 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.
Sheldon Stone testified first, providing background on his appointment
as Trustee of the creditor trust and the commencement of this action against
CEFCU. The Trustee’s case against CEFCU was otherwise based entirely on the
opinions of his expert, Bradley Sargent.
Mr. Sargent identified himself as, among other things, a certified public

accountant, certified fraud examiner, and the managing member of The
Sargent Consulting Group, LLC, a financial advisory and forensic accounting
firm that also provides litigation consultation services. He explained that he
and his firm were retained by the Trustee to review and analyze ISCO’s
financial condition and potential fraudulent transfers from ISCO to CEFCU.
After questioning Mr. Sargent on his qualifications, the Trustee tendered him
as an expert in the area of insolvency. CEFCU raised no objection, and the
Trustee’s examination of Mr. Sargent as an expert proceeded.

As part of his engagement for this proceeding, Mr. Sargent issued a
written report of his findings and opinions. As set forth in his report, Mr.
Sargent summarized his opinions as being that (1) ISCO received no equivalent
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value for the CEFCU transfers—which he defined as occurring August 2, 2013,
and August 16, 2013, totaling $1.72 million—prior to, contemporaneous to, or
after the transfers occurred; and (2) ISCO was insolvent, unable to pay its
debts as they became due, and under-capitalized before and after the transfers

occurred.
In forming his opinions, Mr. Sargent said he relied primarily on the
Trustee’s adversary complaint, ISCO’s independently-reviewed annual financial
statements prepared by its accounting firm, Gordon, Stockman & Waugh P.C.,
(“GSW Financials”), certain credit analysis forms prepared by ISCO’s lender,
Heartland Bank, deposition testimony of CEFCU representatives, the
underlying state court judgment orders and settlement agreements, FASB
(Financial Accounting Standards Board) codified accounting standards, and

§548 of the Bankruptcy Code. To a lesser degree, he relied on ISCO’s
internally-prepared interim financial data, asserting that the independently-
reviewed GSW Financials had a higher degree of reliability. He limited the
temporal scope of his insolvency analysis to the 2011, 2012, 2013, and 2014
calendar years, basing his analysis on year-end financials for each year.
As to Mr. Sargent’s conclusion that ISCO received no equivalent value for
the transfers it made to CEFCU, he said he reviewed ISCO’s accounting and
bank records looking for any corresponding in-flow of value or reduction of

liabilities and found none. Mr. Sargent further stated that he had also reviewed
the deposition testimony of both Rhonda Heinz, an attorney who represented
CEFCU in its collection efforts against ISCO and the Hofmanns, and Gary
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Moss, Vice President of Collections for CEFCU, to understand the relationship
between ISCO and CEFCU. Based on his review of that testimony, Mr. Sargent
determined that ISCO was not a client, customer, or borrower of CEFCU and
that there was no other contractual relationship between them. According to

Mr. Sargent, ISCO’s relationship with and obligation to CEFCU was limited to
the ISCO/Rebecca judgment. He concluded ISCO received no value in
exchange for the two transfers it made to CEFCU totaling $1.72 million.
As for his opinion regarding ISCO’s solvency, Mr. Sargent explained that
he looked to the three tests prescribed by §548, which he described as the
balance sheet test, the cash flow test, and the adequate capital test.3 Mr.
Sargent said he analyzed ISCO’s financials under the tests over the four years
surrounding the subject transfers. Before detailing his analysis under each

test, Mr. Sargent highlighted aspects of ISCO’s overall financial history that he
found to be of particular significance.
In his review of the GSW Financials for the years leading up to and
following the CEFCU transfers, Mr. Sargent noted a strong correlation between
ISCO’s redemption of numerous certificates of deposit (“CDs”) and the cash
advances it was making to Mr. Hofmann or on his behalf. The liquidation of
those assets and use of other cash reserves funded ISCO’s significant
shareholder advances to Mr. Hofmann. In 2009, for instance, ISCO redeemed

$2.94 million in CDs and advanced $2.98 million to Mr. Hofmann. In 2010, the
company redeemed $5.8 million in CDs and had cash flow from operations of

3 Mr. Sargent was referring to 11 U.S.C. §548.
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more than $2.25 million, but it also made advances to Mr. Hofmann in excess
of $7 million. In 2011, ISCO redeemed another $900,000 in CDs and had
nearly $1.8 million in cash flow from operations, but more than $1.8 million
was advanced to Mr. Hofmann. According to Mr. Sargent, the balance sheets

included in the GSW Financials show the value of CDs held by ISCO
decreasing each year. Mr. Sargent believed this trend was very significant in
understanding the overall picture of ISCO’s “fatal disease” of making
shareholder advances to Mr. Hofmann.
By the end of 2011, ISCO had all but depleted its cash reserves,
redeeming nearly $10 million in CDs, and had made shareholder advances to
Mr. Hofmann totaling approximately $13.7 million. The 2011 GSW Financials
noted that roughly $8.3 million of those shareholder advances had been

reclassified to dividends during 2010, with the remainder being shown as a
reduction in stockholder equity—what Mr. Sargent referred to as “contra-
equity.” Mr. Sargent opined that, because Mr. Hofmann was out over his own
equity in ISCO, the IRS essentially forced the company to recharacterize a
significant portion of the transactions as income to Mr. Hofmann rather than
as loans that could be recorded as assets by ISCO. Still, ISCO continued to
advance money to Mr. Hofmann resulting in corresponding reductions in both
stockholder equity and the overall value of ISCO. Between 2012 and 2014,

ISCO advanced more than $10 million to Mr. Hofmann, repayment of which,
Mr. Sargent noted, was entirely dependent on the future income of the
company.
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Like the GSW Financials, the Heartland Bank credit analyses were both
quantitatively and qualitatively instructive to Mr. Sargent. He described them
as internal documents of the lender that assessed ISCO’s creditworthiness
while also providing other relevant information about ISCO and Mr. Hofmann.

The credit analyses highlighted important financial data and provided insight
into Heartland Bank’s conclusions about that data. Mr. Sargent believed
Heartland Bank’s assessments of risk based on perceived strengths and
weaknesses were particularly relevant to understanding the state of affairs at
ISCO.
For example, in the credit analysis dated March 1, 2012, Heartland Bank
identified several strengths that favored approving ISCO’s request for financing,
including the personal cash flow of Mr. Hofmann and a proposed sale of the

company that was apparently in the works and would pay off all debt with the
bank. According to Mr. Sargent, that said a lot about Heartland Bank’s
motivation for lending to ISCO. In recommending approval of ISCO’s request for
a loan, the loan officer specified that the “extension of existing debt will allow
for continued operation of the company leading to the completion of sale.”
When Heartland Bank completed another credit analysis a few months later,
however, there was no mention of any proposed sale and the sole strength
favoring loan approval was that “ISCO appears to be a profitable company.”

Weaknesses included a $2.2 million tax lien against Mr. Hofmann and ISCO’s
reported negative net worth at the end of 2011—both presumably related to the
reclassification of shareholder advances as dividends and contra-equity
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accounts—as well as the fact that all excess cash flow from ISCO was being
used to support Mr. Hofmann’s other business ventures. Nevertheless, the loan
officer ultimately recommended approval of the loan request.
Mr. Sargent placed particular importance on the Heartland Bank credit

analysis dated June 24, 2013, because it was completed immediately before
the CEFCU transfers. The analysis confirmed that the anticipated sale of
ISCO—for an expected $19 million—had fallen through, and the value of the
company was adjusted down to $7 million. The analysis also noted several
problems with Mr. Hofmann’s personal financial reporting, including inflated
values of his interest in business ventures, the omission of $3 million in tax
liens, and the omission of money judgments against him. The only strengths
identified by Heartland Bank were that the company exhibited acceptable debt

service coverage and reported sufficient collateral coverage.
The noted purpose of the June 2013 Heartland Bank credit analysis was
to evaluate a request to renew maturing loans and obtain a new loan of
$1,065,000 to cover input costs on a project for NC Machinery/Microsoft. The
project contract included a price of $2.44 million to paid in five monthly
installments of $244,000 plus a $1.2 million balloon payment in December
2013. The terms of repayment on the $1 million loan request for input costs
were commensurate with the contract price—five monthly installments of

$100,000 with the balance due in January 2014. In Mr. Sargent’s view, it was
very significant that ISCO did not have $1 million to cover its input costs on

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the NC Machinery/Microsoft contract just before it transferred $1.72 million to
CEFCU.
Mr. Sargent acknowledged that ISCO had significant earning potential.
At the time of the new contract, ISCO’s total sales were down, but its profit

margins were increasing. The new contract was expected to generate additional
profits, and the company was growing. All excess cash, however, was going
directly to Mr. Hofmann. In Mr. Sargent’s view, the vast majority of ISCO’s
borrowing was being used to postpone the maturity of existing loans or to fund
shareholder advances rather than to fund the company’s operations or growth;
everything was being used to satisfy Mr. Hofmann’s personal obligations. And,
in Mr. Sargent’s opinion, the shareholder advances and resulting debt load
directly led to ISCO’s insolvency and eventual bankruptcy filing. Mr. Sargent

ultimately concluded to a reasonable degree of professional certainty that ISCO
was insolvent before and after the CEFCU transfers.
Turning to his application of each of the three tests for insolvency, Mr.
Sargent began with his analysis under the balance sheet test. He first noted
that the balance sheets in the GSW Financials showed negative equity for each
of the years analyzed. But, he said, it would not be appropriate to completely
rely on the GSW balance sheets because they were based on the book value of
assets and, in conducting the balance sheet test, the fair value of assets

controls.4 Mr. Sargent drew a distinction between “fair value” and “fair market

4 The GSW Financials included notations stating that they were prepared based on the assumption that ISCO would
continue as a going concern, which they said was uncertain given ISCO’s negative equity. Mr. Sargent opined that
the accounting firm was flagging an area of concern, consistent with generally accepted accounting principles.
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value.” He said that “fair value” is “the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.” But “fair value” could be based on a
transaction completed under compulsion and without full knowledge of all

relevant facts. “Fair market value,” on the other hand, presumes a willing
buyer and willing seller, with knowledge of all relevant facts and under no
compulsion to transact. Given this distinction, Mr. Sargent said that fair
market value would generally yield the highest price but that fair value and fair
market value may be similar and similarly determined.
Mr. Sargent explained that calculating the fair value of a company’s
assets is accomplished by first calculating the fair value of invested capital—
which is equity plus interest-bearing debt—and then adding non-interest-

bearing debt. Together, these calculations comprise the basic balance sheet
equation—assets equal liabilities plus equity.
To determine the fair value of invested capital of ISCO, Mr. Sargent used
a weighted average between what he called the market approach and income
approach. Under the market approach, Mr. Sargent said he canvased the
market and public records for comparable sales and from there determined a
multiplier based on market value of invested capital and EBITDA (earnings
before interest, taxes, depreciation, and amortization) and applied that

multiplier to ISCO’s historical EBITDA to determine the market value of
invested capital of ISCO. Applying a multiplier of 4.85 to EBITDA for 2011,
2012, 2013, and 2014—with certain adjustments noted in his report—yielded
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the market value of invested capital for ISCO in each of the four years
analyzed.5 Mr. Sargent said that the market approach can be a very accurate
measure of value when there is a large amount of data for comparison. But
when comparable sales data is limited, the accuracy or reliability of the market

approach is also limited. In this instance, he said he found only three
comparable sales and therefore gave the market approach less weight than the
income approach.
Under the income approach, Mr. Sargent said he started with projected
EBITDA—what he expected earnings to be the following year based on
historical data—and then tax effected the earnings by deducting depreciation
based on historical data and calculating the income tax liability to determine
ISCO’s debt-free income.6 He then added the depreciation back into the debt-

free income and made a deduction for capital expenditures based on historical
data, which gave him ISCO’s distributable cash flows for the year. Finally, Mr.
Sargent said he applied a multiplier based on a capitalization rate—what equity
holders and debt holders would expect as a reasonable return for investing—to
ISCO’s distributable cash flows, arriving at ISCO’s calculated enterprise value.7
Using the weighted average of the market values of invested capital under the
market approach and the calculated enterprise values under the income

5 Mr. Sargent calculated the market value of invested capital for 2011, 2012, 2013, and 2014 to be $5.59 million,
$15.21 million, $16.83 million, and $15.95 million, respectively.
6 Mr. Sargent acknowledged that ISCO was an S corporation and that its earnings would generally flow through to
the owners who then have the tax obligation. By including a deduction for income taxes in his analysis, he was
recognizing the existence of the expense and that it would need to be paid somehow, most likely from a distribution
of cash from ISCO.
7 Mr. Sargent’s calculated enterprise values for 2011, 2012, 2013, and 2014 were $7.11 million, $10.58 million,
$11.27 million, and $11.34 million, respectively.
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approach,8 Mr. Sargent then added in ISCO’s non-interest-bearing liabilities to
determine the fair value of ISCO’s total assets. Offsetting the total assets by
total liabilities, Mr. Sargent determined that ISCO had positive equity from
2011 through 2013 but negative equity in 2014.9

Based on his determination of ISCO’s equity for each year, Mr. Sargent
concluded that ISCO passed the balance sheet test for 2011, 2012, and 2013
but failed the test for 2014. Importantly, Mr. Sargent explained that passing
the balance sheet test did not mean ISCO was solvent; the balance sheet test is
but one of three tests and failing any one of the three signals insolvency. Again,
Mr. Sargent explained that the balance sheet test clearly showed ISCO’s
positive earnings and earning capacity but did not contemplate the shareholder
advances to Mr. Hofmann that directly correlated with ISCO’s increasing

liabilities.
Moving on to the cash flow test, Mr. Sargent explained that the test was
intended to demonstrate ISCO’s ability to pay its debts as they became due. He
evaluated ISCO’s cash flow on a twelve-month basis because that was when
ISCO’s debts were due. Based on his review of the Heartland Bank credit
analyses and GSW Financials previously discussed, Mr. Sargent determined
that 99% of ISCO’s debts were “current” debts, meaning they were due within
the next twelve months. He believed this was an indication that lenders were

8 10% and 90%, respectively.
9 Mr. Sargent’s calculations showed positive equity of approximately $1.79 million, $5.9 million, and $5.575 million
in 2011, 2012, and 2013, respectively. In 2014, ISCO had equity of approximately ($700,000).
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not willing to lend to ISCO on a long-term basis; he opined that Heartland
Bank was only willing to extend existing debt until the company could be sold.
With that background, Mr. Sargent explained his calculations under the
cash flow test. For each period, he started with whatever cash ISCO had in its

bank accounts and then analyzed the actual cash flows to invested capital for
that year using the same formula for determining cash flow to invested capital
under the income approach of the balance sheet test.10 After determining how
much cash flow was expected for the twelve-month period, Mr. Sargent said he
measured that figure against projected interest expenses and scheduled
principal debt payments for the same period.11 The result was the cash surplus
or shortfall for that period. Finally, the amount of cash on hand from the
beginning of the period was added in to arrive at ending cash and cash

equivalents for the period. The result in each of the years analyzed was an
ending cash shortfall of more than $3 million. The cash flow calculations from
Mr. Sargent’s report are:

10 Again, Mr. Sargent deducted as much as $1.2 million from ISCO’s earnings each year for the income tax liability
of the company’s owners, but he explained that the ultimate result would be the same if he had not made the
deduction. His cash flow analysis also included an additional component described as “changes in working capital”
that Mr. Sargent said he conservatively estimated at zero.
11 Mr. Sargent said that he conservatively set the interest expense at $250,000 for each year even though the amount
certainly would have increased over time. He also noted that scheduled principal payments included notes payable
and the current portion of long-term debt.
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Description 2011 2012 2013 2014
(Exhibit C-2a) (Exhibit C-2b) (Exhibit C-2c) (Exhibit C-2d)
Cash Flow to Invested Capital $ 1,051,500 $ 1,549,760 $ 1,717,200 $ 1,656,800
Projected Interest Expense (250,000) (250,000) (250,000) (250,000)
Scheduled Principal Payments0> 4,602,214) (4,408,430) (5,604,014) (6,172,316)
Cash Surplus/(Shortfall) $ (3,800,714) $ (3,108,670) $ (4,136,814) S (4,765,516)

Beginning Cash and Cash Equivalents 2,889 5,746 6,819 7,353
Ending Cash and Cash Equivalents $ (3,797,825) $ (3,102,924) $ (4,129,995) $ (4,758,163)

Notes: 1.) Notes payable and current portion of long-term debt
Thus, Mr. Sargent concluded that ISCO failed the cash flow test in each
of the four years observed. In his view, the shareholder advances to Mr.
Hofmann rendered ISCO in deep insolvency from 2011 on under the cash flow
test. Admittedly, his analysis was based on year-end numbers from the GSW
Financials, but given how deep the insolvency was, Mr. Sargent thought it
highly unlikely that ISCO was solvent at any time after 2011.
Questioned about how ISCO was able to continue operating after 2011,
Mr. Sargent replied that Heartland Bank’s willingness to extend the maturity
dates of its loans to ISCO year after year allowed the company to stay afloat.
And while financing is generally considered a source of cash, Mr. Sargent said
he did not include the refinancing as cash proceeds because he did not believe
it was truly a source of cash; the refinancing merely extended the due date of
existing debt into the next year but added no new cash into the business. Mr.
Sargent asserted that to treat the refinancing transactions as cash proceeds
would be to render the cash flow test worthless and useless.
Mr. Sargent conceded that if he had included as a cash source the $6.5
million net cash from financing as stated on the 2014 GSW Financials, the
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result of his calculation for that year would have yielded a net positive for
ending cash. But Mr. Sargent reiterated that this was not money that actually
entered ISCO’s bank accounts. And all cash that came in was canceled out by
the millions being advanced to Mr. Hofmann. He also noted that, while

available credit would normally be included in cash flows, he did not include
any available credit in his analysis simply because ISCO did not have any
available credit; whatever credit was being extended was due within the same
year.
Reconciling the different results under his balance sheet and cash flow
tests, Mr. Sargent said that, together, the tests illustrated the reality of what
was happening within ISCO. On the one hand, ISCO was a profitable company;
it had positive earnings from operations and was growing in terms of revenue.

It was the company’s earning capacity that yielded significant value for its
assets under the balance sheet test. On the other hand, the balance sheet test
did not account for the shareholder advances to Mr. Hofmann and the resulting
contra-equity accounts. Those shareholder advances, fueled first by the
liquidation of company assets and later by increased borrowing, had a major
negative impact on the cash flow test.
Finally, Mr. Sargent described the purpose of the third test, the adequate
capital test, as demonstrating whether an entity has adequate capital to meet

its operating expenses, capital expenditures, and debt repayment obligations—
typically measured for the following year. As for its application here, Mr.
Sargent said that he did not conduct a full analysis because, having
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determined that ISCO failed the cash flow test analyzed over a twelve-month
period, by default ISCO also failed the adequate capital test. Simply put,
because ISCO did not have enough money to satisfy current debts as they
became due in each of the one-year periods analyzed, it also could not have

had enough money to fund its other capital needs. Mr. Sargent explained that
he would have conducted a separate analysis had ISCO’s debt been spread over
a longer term. But under the circumstances, Mr. Sargent determined that ISCO
necessarily failed the adequate capital test all four years and was insolvent at
all relevant times before, during, and after the CEFCU transfers.
Upon conclusion of Mr. Sargent’s testimony, the Trustee rested. Mr.
Sargent’s expert report was admitted into evidence subject to the caveat that
the Court would rely only on Mr. Sargent’s testimony as evidence and would

use the report as backup to notes taken during that testimony. Other exhibits
discussed by and relied upon by Mr. Sargent, including the GSW Financials
and the Heartland Bank credit analyses, were also admitted without objection.
CEFCU began its case by calling Neil Gerber as its expert witness. Mr.
Gerber identified himself as a CPA with the accounting firm Sikich LLP. In his
44-year career, Mr. Gerber has done public accounting work, financial analysis
work for business clients, audit work, and occasional fraud investigations. He
is a certified fraud examiner and is accredited in business valuations. Mr.

Gerber said that he has done numerous business valuations over several
decades for both buyers and sellers as well as for litigation purposes. Over the
years, he has testified an estimated 100 times in depositions and at trials. He
-20-
said he is familiar with the insolvency tests at issue here and that he
conducted those tests at the request of CEFCU. He submitted an expert report
to CEFCU providing his written opinion on the issue of insolvency.
Mr. Gerber was tendered as an expert by CEFCU. He was questioned by

counsel for the Trustee about his particular expertise on the issue of
insolvency. He admitted that he had not published on the topic and that the
only other case in which he had provided a written opinion on insolvency had
not yet gone to trial. The Trustee objected to Mr. Gerber being allowed to offer
an expert opinion on insolvency. The objection was overruled with this Court
finding that the insolvency tests at issue involved common accounting
principles about which Mr. Gerber was well qualified to testify. Allowing Mr.
Gerber to testify as an expert was, however, without prejudice to cross-

examination by the Trustee’s attorney.
Back on direct examination, Mr. Gerber said that he had been asked to
analyze whether ISCO was insolvent when it made transfers to CEFCU of $1.4
million on August 2, 2013, and $320,000 on August 16, 2013, in settlement of
Mr. Hofmann’s personal debt obligations. He was familiar with Mr. Sargent’s
report and relied on many of the same documents in making his own report.
He said he also relied on general internet searches regarding ISCO to gain an
understanding of the company and its history.

In conducting the balance sheet test, Mr. Gerber relied in part on the
GSW Financials, acknowledging, as Mr. Sargent had, that the asset values
needed to be adjusted from book value. He also agreed that the market
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approach was generally the best indicator of value and said that he did not
conduct a separate analysis under the income approach because his
calculations would have been the same. He applied an EBITDA multiplier of
5.0, which he said came from comparable sales of similar-sized companies. He

also added in available cash for the periods analyzed and made deductions for
ISCO’s actual and contingent liabilities. He estimated ISCO’s contingent
liabilities, which related to corporate guarantees of Mr. Hofmann’s personal
debts, using a weighted-average-probability method. The result for the periods
analyzed was a net equity value in excess of $8 million.
Unlike Mr. Sargent, Mr. Gerber conducted his analysis looking
specifically at July 2013 and August 2013 using ISCO’s in-house, interim
financials because he believed it was important to look at information from as

close to the transfer dates as possible; he did not see any material
inconsistencies when he checked his calculations against the year-end GSW
Financials. He did not dispute that independently-reviewed financials provide
an added layer of reliability but also said that does not make internal financials
unreliable. In addition, he tested his calculations against the Heartland Bank
credit analyses, which showed growing revenues, new projects, increasing
accounts receivables, and stable profit margins. That told him that ISCO had
significant earning capacity and that its assets should be valued accordingly.

His conclusion was that ISCO passed the balance sheet test at all relevant
times. He said problems for ISCO did not arise until the end of 2014 and into

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2015 after the company’s debt doubled in order to make advances to Mr.
Hofmann to pay off his personal debt obligations.
Mr. Gerber described the cash flow test as a measure of an entity’s ability
to meet its obligations as they become due, typically within a twelve-month

period. As with the balance sheet test, Mr. Gerber looked specifically at the
months of July and August 2013. He used the statements of cash flows in the
year-end GSW Financials to calculate net repayments of debt on a yearly basis
for 2011, 2012, 2013, and 2014. The result, he said, showed that ISCO paid
down more debt than it incurred in 2011 and 2012 but incurred $1 million and
$6.5 million more debt than it paid down in 2013 and 2014, respectively. He
said the change in 2013 was directly related to the transfers made to CEFCU
but opined that the increased borrowing was also necessary to match ISCO’s

growth and could be expected to be repaid from future operations.
As to Mr. Gerber’s analysis of cash flows in July and August 2013, he
explained that he used information from ISCO’s internal financials for those
months, the Heartland Bank credit analyses, and the GSW Financials to
determine annualized projections for each month. For both periods, he started
with EBITDA of $3.5 million and then figured in projected sales growth and
input costs based on the full value of the NC Machinery/Microsoft contract. He
then made upward adjustments for cash on hand and the refinancing of

existing bank debt to calculate ISCO’s total sources of cash for the two periods.
From there, Mr. Gerber deducted total uses of cash, including capital
expenditures, interest expense, and the repayment of existing debt, to
-23-
determine ISCO’s annualized net cash flows for July and August 2013. The
calculations of projected cash flows from Mr. Gerber’s report are:

July 2013
= = — — — August2013 —
Historical Projected Historical Projected
(based on (base on (based on (base on
historical forecasted historical forecasted
amounts) growth) amounts) growth)
Sources ofCash
EBITDA $ 3,500,000 $ 3,500,000
Projected sales growth 2,440,000
Less input costs (1,065,000)
Restated EBITDA 3,500,000 4,875,000 $ 3,500,000 $ 4,875,000
Adjustments:
Cash on hand 362,000 362,000 32,000 32,000
Refinancing of existing bank debt 3,600,000 3,600,000 3,600,000 3,600,000
Total sources of cash 7,462,000 8,837,000 7,132,000 8,507,000
Uses of Cash
Capital expenditures (450,000) (450,000) (450,000) (450,000)
Illinois replacement taxes (40,000) (60,000) (40,000) (60,000)
Repayment of existing bank debt (4,080,000) (4,080,000) (5,319,000) (5,319,000)
Interest expense (250,000) (250,000) (310,000) (310,000)
Total uses of cash (4,820,000) (4,840,000) (6,119,000) (6,139,000)
NetCash Flows $ 2,642,000 $ 3,997,000 $ 1,013,000 $ 2,368,000

According to Mr. Gerber, it was important to include the refinancing of
debt as a source of cash for ISCO because manufacturers rely on lines of credit
for their operations. He said a 50/50 debt to equity ratio would be completely
normal. He conceded, however, that it was atypical for a company to have all
its debts due in the short term. Still, Mr. Gerber noted that Heartland Bank
was willing to extend credit to ISCO because the company had positive earning
capacity and, looking specifically at the first half of 2013, was able to erase the
deficit in stockholder equity from the end of 2012 caused by advances to Mr.
Hofmann. And while stockholder equity dropped nearly $2 million into negative
territory between July and August 2013, Mr. Gerber opined that ISCO’s
24-

revenues were strong enough to also erase that deficit in the short term,
barring something bad happening as it did in 2014. Between the end of 2013
and 2014, shareholder advances nearly doubled and EBITDA dropped, eroding
the debt service coverage ratio. It was not until that point, Mr. Gerber

concluded, that ISCO was really in trouble.
In Mr. Gerber’s opinion, to exclude the refinanced debt as a source of
cash would be to make the assumption that companies like ISCO have to be
debt free. He admitted that if he were to remove the refinancing as cash from
his analysis, ISCO would fail the cash flow test. And he conceded on cross-
examination that he would have treated long-term debts as only a use of cash;
he treated the refinanced debt as both a source and use of cash because it was
due in the same year. Under the circumstances, he did not believe it

reasonable to ignore the refinanced debt as a cash source. He therefore
concluded that ISCO was solvent immediately before and after the CEFCU
transfers and passed the cash flow test in July and August 2013.
Moving on to the adequate capital test, Mr. Gerber said that it is used to
determine whether an entity has adequate capital relative to its assets and its
ability to meet its obligations as they become due. He said that all three tests
are interconnected, providing different ways of looking at the same issues.
While quantitative in nature like the balance sheet and cash flow tests, Mr.

Gerber explained that, in his view, the adequate capital test also involves
qualitative factors, like the value of a company’s goodwill. He said that ISCO
had intangible value created from its technology, earnings, customer base, and
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ability to generate profits, among other things. Because, under his analysis,
ISCO passed the cash flow test, Mr. Gerber ultimately concluded that, with the
added value of goodwill, ISCO passed the adequate capital test as well.
On cross-examination, Mr. Gerber conceded that it was the shareholder

advances to Mr. Hofmann that ultimately left ISCO with limited assets and
significantly increased debt, but he did not think the trend became problematic
until 2014. When challenged on his contention that $3.6 million from
refinancing should be included as a source of cash under the cash flow test,
Mr. Gerber responded that if it were not included then the repayment of that
debt as a use of cash would also have to be excluded even though the
obligation still existed. Mr. Gerber was also challenged on his EBITDA
calculations under the cash flow test. He conceded that the $3.5 million

historical EBITDA used in both July and August 2013 would have included
payments already made under the NC Machinery/Microsoft contract, but he
still included the full amount of the contract less input costs—a net increase of
$1.375 million—in calculating a projected EBITDA of $4.875 million for both
months. And although he admitted knowing at the time of conducting his
analysis that ISCO never achieved an EBITDA of even $4 million, he
maintained that his calculations were sound. He claimed that the only reason
ISCO did not ultimately meet projections was that the company ran into

production problems in 2014.
When asked why ISCO would need to borrow the $1 million in 2013 to
cover input costs on the NC Machinery/Microsoft contract if it were solvent at
-26-
that time, Mr. Gerber acknowledged that all the company’s cash was going
directly to Mr. Hofmann and that ISCO had to rely on financing to cover its
operating costs. And with all of ISCO’s cash going to Mr. Hofmann, Mr. Gerber
admitted, ISCO was unable to pay its debts absent refinancing.

Mr. Gerber acknowledged that current assets are those that are readily
liquidated to satisfy the needs of a company. He also admitted that almost all
liabilities of ISCO were current. Assuming that ISCO could not refinance or
borrow more, its current assets in July and August 2013 were not sufficient to
cover its current liabilities. When asked to agree that adding $3.6 million for
refinancing to the $3.5 million in current assets for August 2013 would still not
be enough to cover then-current liabilities exceeding $8 million, Mr. Gerber
responded that an important part of the equation was being left out—cash flow

from operations and ISCO’s significant earning potential. Mr. Gerber remained
firm in his opinion that ISCO was solvent in July and August 2013.
CEFCU next called as a witness Rhonda Heinz, an attorney with the law
firm of Westervelt Johnson Nicoll and Keller LLC (“WJNK”) that represented
CEFCU in various collection actions against the Hofmanns and ISCO. Attorney
Heinz said she joined the firm in March 2012 and began working on the
Hofmann and ISCO matters at that time. She identified the ISCO/Rebecca
judgment, entered January 11, 2013, and signed by her as the attorney for

CEFCU. The judgment had been entered against ISCO and Rebecca Hofmann,
jointly and severally, in the amount of $261,800; the issue of costs and
attorney fees was expressly reserved in the judgment. Attorney Heinz also
-27-
identified a heavily-redacted set of attorney time and billing records generated
by WJNK purporting to show the fees incurred by attorneys in the firm for
collection work against the Hofmanns and ISCO between January 1, 2011, and
January 31, 2013. According to Attorney Heinz, the time and billing records

included time for all collection efforts against the Hofmanns and their various
related business entities. She had been tasked with redacting entries not
specifically attributable to the collection efforts against ISCO. She claimed that
she had completed the task and that the resulting amount of time properly
billed for the ISCO collection work was $81,947.50. CEFCU sought to admit
the time and billing records as a business record.
The Trustee objected to the admission of the time and billing records,
challenging the reliability and relevance of the records, as well as Attorney

Heinz’s foundation for testifying about them. On cross-examination, Attorney
Heinz acknowledged that she was not associated with the firm for much of the
period covered by the records and was therefore not actually familiar with the
entries that she reviewed and then either redacted or charged to ISCO. She also
had not spoken with most of the attorneys who did the work about whether
their time should be redacted; several of the attorneys who billed significant
amounts of time in the collection efforts were no longer with WJNK. Although
she testified that the time records had been carefully reviewed and redacted to

show only compensable time attributable specifically to collection from ISCO,
she also acknowledged several discrepancies that raised questions about the
accuracy of the redacted records. Attorney Heinz was also asked why CEFCU
-28-
did not seek fees in state court at the time. She responded that there was a lot
happening at the time and that the fees were not pursued for strategic reasons.
The Trustee’s objection was sustained, and the time and billing records
of WJNK were not admitted. Although the records were kept in the ordinary

course of business by WJNK, the nature of the records involved a level of
subjectivity that required more foundation than Attorney Heinz was able to
provide. Further, the records had been altered by Attorney Heinz’s significant
redactions. Her testimony confirmed that she did not have sufficient knowledge
of what had occurred before she joined the firm to independently redact the
records; she was unable to explain why several entries were not redacted that
appeared to relate to entities other than ISCO. The Court found the records to
not be reliable evidence of the amounts incurred specifically and solely related

to collection efforts against ISCO. Further, the Court questioned whether it
could go back at this time to essentially award fees and costs to WJNK as part
of a judgment that had been released in a case that had been settled years
earlier. Because of those concerns, the Court also sustained the Trustee’s
objection as to the relevance of the records.
CEFCU rested at the conclusion of Attorney Heinz’s testimony. Several
exhibits including Mr. Gerber’s expert report were admitted into evidence. Mr.
Gerber’s report was admitted with the same caveat as Mr. Sargent’s report.

The Trustee recalled Mr. Sargent as a rebuttal witness. He strongly
disagreed with Mr. Gerber’s opinions, specifically as they related to his
application of the cash flow test. In Mr. Sargent’s opinion, Mr. Gerber’s
-29-
description of the cash flow test was misleading in that it gave the impression
that most debts become due within twelve months. Although that happened to
be the case for ISCO, Mr. Sargent said that was atypical. He also disagreed
with Mr. Gerber’s contention that the $3.6 million refinanced debt was properly

included as a source of cash. He said that Mr. Gerber’s reasoning relied on an
assumption that refinancing creates actual cash flow to an entity even though,
here, it merely extended the maturity date on debt that had clearly been
incurred years prior. Mr. Sargent also said that Mr. Gerber’s approach was not
mathematically sound. If, as Mr. Gerber surmised, loan proceeds were being
used to pay off existing debt and that debt was replaced with a “new” loan,
then the amount of the new debt would need to be added in. Mr. Sargent said
that Mr. Gerber did not do so and, as a result, his analysis was completely

misleading.
Mr. Sargent further stated that Mr. Gerber’s calculation of “projected”
EBITDA in his July and August 2013 cash flow analysis was also inappropriate
and misleading for several reasons. First, while ISCO’s profit margin was
increasing at the time, its sales numbers were down, resulting in some leveling-
off of projected growth. Second, projected sales growth was included in the
EBITDA calculation itself; separately adding in the full value of the NC
Machinery/Microsoft contract in July and August 2013 to arrive at the restated

EBITDA for those periods surely resulted in double counting of growth
projections. And third, simply subtracting the $1 million loan request to cover
input costs from the $2.44 million contract price to create an additional $1.375
-30-
million in projected sales growth was not mathematically correct.
Administrative and other costs of doing business should also have been
charged against the contract proceeds to determine net earnings. Further, both
the costs and revenue from the contract were payable in monthly installments

that had already begun and would continue for the remainder of the year. Mr.
Sargent said he was aware of the NC Machinery/Microsoft contract in
conducting his cash flow analysis and factored it into EBITDA as set forth in
his report. It was inappropriate, in his opinion, for Mr. Gerber to include it
twice and in full in his restated EBITDA under the cash flow test. He also
disagreed with Mr. Gerber’s opinion that the adequate capital test was
qualitative in nature and that all three tests should yield similar results.
After considering the evidence and the arguments of the parties, the

matter is ready for decision.

II. Jurisdiction
This Court has jurisdiction over proceedings “arising under title 11, or
arising in or related to cases under title 11” pursuant to 28 U.S.C. §1334. All
bankruptcy cases and proceedings filed in the Central District of Illinois have
been referred to the bankruptcy judges. CDIL-Bankr. LR 4.1; see 28 U.S.C.
§157(a). Actions to “determine, avoid, or recover fraudulent conveyances” are

core proceedings. 28 U.S.C. §157(b)(2)(H). Because actions to recover
fraudulent conveyances do not arise exclusively under the Bankruptcy Code
and do not strictly arise in a bankruptcy case—the same cause of action often
-31-
could be prosecuted under state law in a state court—this Court is exercising
“related to” jurisdiction in this proceeding, raising the question of whether
there is a constitutional impediment to the entry of a final judgment. Executive
Benefits Ins. Agency v. Arkinson, 573 U.S. 25, 37 (2014); Stern v. Marshall, 564

U.S. 462, 493 (2011). Any impediment to the entry of a final judgment may,
however, be overcome by the knowing and voluntary consent of the parties to
final adjudication by a bankruptcy judge. Wellness Int’l Network, Ltd. v. Sharif,
575 U.S. 665, 669 (2015). In their initial pleadings, the parties here resolved
the issue by both affirmatively consenting to the entry of a final judgment by
this Court.

III. Legal Analysis

The Trustee filed a ten-count complaint. His authority to bring this
proceeding on behalf of ISCO’s creditors was specifically provided for in the
confirmed liquidating plan and is based on the so-called “strong arm”
provisions of the Code that allow trustees to stand in the shoes of certain lien
creditors, unsecured creditors, or bona fide purchasers. 11 U.S.C. §544.
CEFCU has not challenged the Trustee’s standing.
Counts I and II seek judgment against CEFCU to avoid constructively
fraudulent transfers. Count III seeks relief against CEFCU based on allegations

of unjust enrichment. Count VIII seeks to recover avoided fraudulent transfers

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from and prays for relief against CEFCU. The Trustee focused his evidence at
trial on Counts I, II, and VIII.12
Count I alleges that $1.72 million in payments made by ISCO to CEFCU
in August 2013 were constructively fraudulent and is brought specifically

under a provision of the Illinois Uniform Fraudulent Transfer Act (“IUFTA”)
which provides, in part:
§5. (a) A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor’s claim arose
before or after the transfer was made or the obligation was
incurred, if the debtor made the transfer or incurred the obligation:

. . .

(2) without receiving a reasonably equivalent value in exchange for
the transfer or obligation, and the debtor:

(A) was engaged or was about to engage in a business or a
transaction for which the remaining assets of the debtor were
unreasonably small in relation to the business or transaction; or

(B) intended to incur, or believed or reasonably should have
believed that he would incur, debts beyond his ability to pay as
they became due.

740 ILCS 160/5(a)(2).
Likewise, Count II also alleges that the August 2013 payments were
constructively fraudulent conveyances and relies on another provision of the
IUFTA, which provides:
§6. (a) A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor whose claim arose before the transfer
was made or the obligation was incurred if the debtor made the
transfer or incurred the obligation without receiving a reasonably

12 Both Lee Hofmann and Rebecca Hofmann have been dismissed as parties to this proceeding, but the orders of
dismissal did not address the specific counts against them. For clarification purposes, the Order entered with this
Opinion will include dismissal of the counts against the two individuals. The dismissals will be without prejudice.
-33-
equivalent value in exchange for the transfer or obligation and the
debtor was insolvent at the time or the debtor became insolvent as
a result of the transfer or obligation.

(b) A transfer made by a debtor is fraudulent as to a creditor whose
claim arose before the transfer was made if the transfer was made
to an insider for an antecedent debt, the debtor was insolvent at
that time, and the insider had reasonable cause to believe that the
debtor was insolvent.

740 ILCS 160/6.
Count VIII seeks to recover the August 2013 transfers, if found to be
fraudulent conveyances, from CEFCU as transferee pursuant to §550 of the
Code, which provides, in part:
(a) Except as otherwise provided in this section, to the extent that
a transfer is avoided under section 544, 545, 547, 548, 549,
553(b), or 724(a) of this title, the trustee may recover, for the
benefit of the estate, the property transferred, or, if the court so
orders, the value of such property, from—

(1) the initial transferee of such transfer or the entity for whose
benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial
transferee.

11 U.S.C. §550(a).
Constructive fraud is sometimes referred to as fraud in law and, unlike
actual fraud, does not require proof of fraudulent intent. Society of Lloyd’s v.
Collins, 284 F.3d 727, 730 (7th Cir. 2002). Rather, fraud in law is established
by proof that a debtor made a voluntary transfer without consideration or for
inadequate consideration that hinders or delays the rights of creditors. Id.
Specifically, §160/5(a)(2) of the IUFTA requires proof: (1) that the debtor made
a voluntary transfer; (2) when the debtor had debt or was about to incur debt;
-34-
(3) without receiving a reasonably equivalent value in exchange; (4) resulting in
the debtor retaining insufficient property to pay debts. Grochocinski v.
Schlossberg, 402 B.R. 825, 838 (N.D. Ill. 2009) (citations omitted). Section
160/6 requires similar proof except the final element of insufficient assets

remaining to pay debts is replaced by requiring proof that the debtor was
insolvent when the transfer was made or became insolvent as a result of the
transfer. Id. at 838-39 (citations omitted). The Trustee has the burden of proof
by a preponderance of the evidence. Brown v. Phillips (In re Phillips), 379 B.R.
765, 778 (Bankr. N.D. Ill. 2007).
Section 548 of the Bankruptcy Code provides a similar basis to avoid
constructively fraudulent transfers. 11 U.S.C. §548(a)(1)(B). A transfer made
without receiving reasonably equivalent value in exchange may be avoided if it

is made when the debtor was insolvent, it renders the debtor insolvent, or it
leaves the debtor with unreasonably small capital or unable to pay debts as
they mature. Id. Although the language of §548 is not identical to §§5 and 6 of
the IUFTA, the provisions have been called “materially identical,” making the
case law developed under §548 relevant to an analysis under the IUFTA. Baldi
v. Samuel Son & Co., 548 F.3d 579, 581 (7th Cir. 2008); Cox v. Nostaw, Inc. (In
re Central Illinois Energy Cooperative), 521 B.R. 868, 871-72 (Bankr. C.D. Ill.
2014) (Perkins, J.); Grochocinski v. Zeigler (In re Zeigler), 320 B.R. 362, 372

(Bankr. N.D. Ill. 2005) (citing Scholes v. Lehmann, 56 F.3d 750, 756 (7th Cir.
1995)) (other citations omitted).

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The Trustee did not plead any counts in his complaint under §548, most
likely because, by the time of his appointment, the two-year statute of
limitations under §548 had run. 11 U.S.C. §548(a)(1). The IUFTA, however,
contains a four-year statute of limitations allowing the Trustee here, not

appointed until confirmation of the liquidating plan in May 2016, to reach the
August 2013 transfers. 740 ILCS 160/10.
The Trustee and CEFCU stipulated to many of the relevant facts. The
occurrence and amounts of the transfers are not in dispute. The fact that the
transfers were used to satisfy CEFCU’s judgments against Lee Hofmann and
the ISCO/Rebecca judgment is not in dispute. It is also not disputed that the
judgments were not released until the settlement amounts were paid in full.
What remains in dispute is whether ISCO was insolvent at the time the

transfers were made or became insolvent as a result of the transfers and
whether CEFCU provided reasonably equivalent value for the first two transfers
it received in August 2013. These two issues were the focus of the evidence
presented at trial and each will be reviewed here.

A. ISCO Was Insolvent When It Transferred Funds to CEFCU
Under the IUFTA, “[a] debtor is insolvent if the sum of the debtor’s debts
is greater than all of the debtor’s assets at a fair valuation.” 740 ILCS 160/3(a).

This provision “mirrors” the definition of insolvency in the Code. 11 U.S.C.
§101(32); Zeigler, 320 B.R. at 375. Alternatively, the IUFTA provides that a
“debtor who is generally not paying his debts as they become due is presumed
-36-
to be insolvent.” 740 ILCS 160/3(b). Whether an entity is insolvent is a
question of fact. Bachrach Clothing, Inc. v. Bachrach (In re Bachrach Clothing,
Inc.) 480 B.R. 820, 859 (Bankr. N.D. Ill. 2012) (citations omitted). Bankruptcy
courts have broad discretion to determine insolvency. Schlossberg, 402 B.R. at

836-37.
Both the Trustee and CEFCU presented expert testimony on the issue of
ISCO’s solvency. Mr. Sargent and Mr. Gerber both prepared expert reports and
testified using three different tests for insolvency: the balance sheet test, the
cash flow test, and the adequate capital test. Each expert referenced the tests
as being compelled by §548 without reference to the IUFTA. The three tests are,
however, regularly relied on by courts deciding issues of insolvency under both
the Code and the IUFTA. See, e.g., Paloian v. LaSalle Bank Nat’l Ass’n (In re

Doctors Hosp. of Hyde Park, Inc.) 507 B.R. 558, 632 (Bankr. N.D. Ill. 2013).
This Court found the use of the three tests helpful in understanding the
financial condition of ISCO and in rendering its decision about ISCO’s solvency.
Each test and each expert’s analysis will be discussed.
Before discussing the tests, a few comments about the experts are
warranted. Both Mr. Sargent and Mr. Gerber were well qualified by education
and experience to testify and provide expert opinions in this matter. Each
testified professionally under both direct and cross-examination. The testimony

of both experts was helpful to the Court. They agreed that ISCO’s business
operation, standing alone, was a profitable enterprise. Both also agreed that
ISCO’s financial condition could not be determined by looking only at its
-37-
operations; the depletion of cash reserves and frequent diversion of cash
generated by operations to Lee Hofmann and the debts of his other businesses
also had to be considered. In large measure the experts parted ways in
considering the weight to be given to the diversion of cash from ISCO to Lee

Hofmann. In running the three tests, Mr. Sargent placed significant weight on
those diversions, and the diversions were key to his finding that ISCO was
insolvent. Mr. Gerber placed more weight on the positive outcomes of ISCO’s
manufacturing operations and, although not totally dismissive, placed much
less weight on the diversions in making his assumptions and finding that ISCO
was solvent when the CEFCU transfers were made. As will be explained below,
this Court found Mr. Sargent’s approach more persuasive.

1. The Balance Sheet Test
The balance sheet test determines whether a debtor’s assets exceed its
liabilities; a debtor is considered solvent under the balance sheet test if assets
exceed liabilities. In discussing the balance sheet test, Mr. Sargent said that he
conducted the test for the years 2011, 2012, 2013, and 2014. He noted that,
for each of those years, the balance sheets included in the GSW Financials
showed that ISCO had negative equity—its liabilities exceeded its assets. For
each of those years, GSW had also included a “going concern qualification” on

the GSW Financials noting that ISCO “had negative working capital and total
liabilities exceed total assets.” Mr. Sargent said that the GSW Financials,
although helpful, were not determinative because the value of assets on the
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GSW Financials were listed at book values and, to properly determine solvency,
the “fair value” of assets should be used.
Mr. Sargent used both a market approach and an income approach to
determine the fair value of invested capital—the formula he said was best to

determine the fair value of ISCO’s assets. He said that, because he could not
find many comparable sales upon which to base his market approach
valuation, he gave more weight to the income approach.13 From the fair values
he determined for each of the years in question, he subtracted the total
liabilities for each year as shown on the GSW Financials. That resulted in
positive equity and a finding of solvency for 2011, 2012, and 2013, but it
resulted in negative equity and a finding of insolvency for 2014. Mr. Sargent
qualified his finding of solvency for the earlier years by pointing to the steep

rise in ISCO’s liabilities from year to year and the corresponding increases in
cumulative shareholder advances made to Lee Hofmann. He also noted that the
balance sheet test should be viewed somewhat cautiously because of the
mandated reclassification of $8.3 million of shareholder advances in 2010.
With those qualifications, he said that, according to the balance sheet test for
2013, ISCO was solvent when the CEFCU transfers were made.
Mr. Gerber described the balance sheet test similarly to Mr. Sargent. He
opined that the assets needed to be adjusted from book value to fair market

value and made his calculations for the more limited periods of July 2013 and

13 Mr. Sargent discussed his calculations in detail and provided charts and graphs in his written report to assist in
understanding his calculations.
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August 2013.14 He applied a multiplier to what he referred to as “normalized
EBITDA” to determine the value of invested capital—the term also used by Mr.
Sargent. He subtracted from that figure the actual liabilities as shown on the
monthly, in-house accounting records for July and August. He also subtracted

contingent liabilities described as ISCO’s guarantees of Lee Hofmann’s debts,
which he had adjusted downward based on assumptions he made about the
likelihood that ISCO would be called upon to pay such debts. His calculation
resulted in positive net equity in excess of $8 million for both July and August
2013. Thus, he opined that, based on the balance sheet test, ISCO was solvent
both before and after the CEFCU transfers were made.
Mr. Sargent and Mr. Gerber disagreed on the use of some terminology
and methodology related to the balance sheet test. Because they both

ultimately opined that ISCO passed the balance sheet test for the relevant
periods, there is no need for the Court to resolve those disagreements.

2. The Cash Flow Test
The cash flow test is used to determine whether a debtor has cash
available to pay its debts as they become due within a period. Because the vast
majority of ISCO’s debt was current debt, meaning it was due within twelve
months, it is appropriate to evaluate ISCO’s cash flows over a twelve-month

period. Mr. Sargent performed the cash flow test for ISCO for the years 2011,

14 Mr. Gerber also testified in detail about his calculations and provided charts and graphs in his written report to
support his testimony.
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2012, 2013, and 2014 and opined that ISCO was insolvent throughout each of
those periods.
In performing the cash flow test, Mr. Sargent said that available cash
includes beginning cash balances, cash flow from the period, and unused and

available credit. Cash flow from the period was calculated by Mr. Sargent by
projecting EBITDA for the year and then adjusting that figure for projected
income taxes.15 The adjusted amount was added to the beginning cash
balances. No amount was included for available credit because the GSW
Financials for each year said no credit was available. From the total sources of
cash, Mr. Sargent deducted interest and scheduled principal payments. The
net sum in each year was negative, resulting in his conclusion that ISCO was
insolvent.

Particularly for 2013, the year the CEFCU transfers were made, Mr.
Sargent projected EBITDA at $3.4 million. After adjusting for taxes, he
calculated “cash flow to invested capital” as $1,717,200. To that amount he
added beginning cash of $6819 and subtracted interest expense of $250,000
and scheduled principal payments of $5,604,014. This resulted in negative
cash flow for 2013 of $4,129,995.

15 In admitting the expert reports of both Mr. Sargent and Mr. Gerber, the Court stated that it would rely on their
testimony and use the reports as backup to that testimony but would not consider information in the reports not
presented in testimony. That said, the Court did notice that Mr. Gerber said in his report that he did not adjust for
taxes in his cash flow test because ISCO was an S corporation and tax obligations passed through to shareholders
rather than being paid by the company. Mr. Sargent testified that he made adjustments for taxes in recognition of the
fact that the tax obligation existed and would need to be paid somehow by someone. Mr. Sargent also said that
removing the adjustment would not change the results of his analysis. The issue was not discussed at length at trial,
but the Court agrees that the issue is not dispositive of either expert’s analysis and therefore makes no finding as to
whether adjusting for taxes was appropriate.
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Mr. Sargent said that, in each year, ISCO had an atypical amount of
current debt versus long-term debt. For example, in 2013, 99.5% of its debt
was current—due with twelve months. He said that the Heartland Bank credit
analyses indicated an unwillingness to lend long term and that fact is reflected

in the cash flow test. He also noted that ISCO’s dire cash situation was
evidenced by the fact that it did not have the cash in June 2013 to cover the
start-up costs for materials and labor associated with the new contract with NC
Machinery/Microsoft. ISCO had to borrow $1 million to maintain operations
and start the project. He concluded by saying that, based on the cash flow test,
ISCO was insolvent at all times from 2011 through 2014—the entire period he
tested.
Mr. Gerber described the cash flow test in similar terms as Mr. Sargent,

with an eye toward the current, twelve-month period, and agreed that the
methodology involves determining sources of cash and subtracting current
debt from the total available. As with the balance sheet test, however, he
performed the cash flow test for the limited periods of July 2013 and August
2013 and opined that ISCO was solvent at the end of each month.
Mr. Gerber began his cash flow test, as Mr. Sargent had, projecting
EBITDA for the one-year period in the future. He estimated $3.5 million in
EBITDA based on ISCO’s history. He also included cash on hand in his

calculation—$362,000 in July and $32,000 in August. Mr. Gerber made two
other adjustments to his sources of cash that differed significantly from Mr.
Sargent’s calculations. First, he added in the total $2,440,000 contract price of
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the NC Machinery/Microsoft contract as a source of cash and then deducted
from that the $1,065,000 in start-up costs associated with the contract as
discussed in the June 2013 Heartland Bank credit analysis. This resulted in
what he called “Restated EBITDA” of $4.875 million, which he used for both

months. Secondly, he added the refinancing of $3.6 million in otherwise
current debt due to Heartland Bank as a source of cash. With these
adjustments, he projected ISCO to have positive cash flow even after paying all
current debt. Mr. Sargent strongly criticized both adjustments. Because,
without the adjustments, ISCO fails the cash flow test as conducted by Mr.
Gerber, each adjustment must be closely examined.
With respect to adding in the full NC Machinery/Microsoft contract price,
Mr. Gerber attempted to justify the adjustment by saying that the contract was

the first of a series and he expected significant growth for ISCO over the years
that followed. But he admitted that deducting only the start-up costs from the
expected gross proceeds resulted in a margin in excess of 50%, something that
had never occurred in ISCO’s history. He also admitted that ISCO’s income
statements calculating earnings and profits always included deductions of
administrative costs associated with operations in addition to direct costs of
labor and materials. He failed to consider those other costs. Further, he
admitted that the in-house accounting records he used in making his

calculations for July and August already included several months of contract
proceeds. Thus, when the figures from those documents were annualized to
project EBITDA, as he had done, at least part of the new contract proceeds
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were already in his $3.5 million calculation. To some degree, he was double
counting the contract revenue. Mr. Gerber maintained that the adjustment was
appropriate by expressing confidence in ISCO’s ongoing operations and said
that he used the best evidence he had.

Mr. Sargent, in rebuttal, criticized the adjustment as double counting
and incomplete because of the deduction of only the start-up operating costs.
He said that ISCO’s actual year-end EBITDA for 2013 was $3.67 million and
that the “restated EBITDA” Mr. Gerber calculated at $4.875 million was well
outside any reasonable range of assumptions or projections. Mr. Sargent’s
unrebutted testimony was that ISCO had never, in any year, achieved EBITDA
that exceeded $4 million. Mr. Gerber said during his testimony that, when
accountants make assumptions, the results of those assumptions must be

“sanity checked” to avoid unsupportable results. Mr. Sargent suggested that
Mr. Gerber should have seen that the EBITDA number he ended up with after
adding in the additional contract proceeds was simply too high to pass a sanity
check.
The Court agrees with Mr. Sargent on this issue. Mr. Gerber’s upward
adjustment of $1.375 million as additional cash related to the new contract is
simply wrong. He added in the full contract price even though the monthly
payments already received were included in the annualized calculation leading

him to his initial $3.5 million EBITDA figure; this clearly resulted in some
double counting. And he adjusted for expenses by deducting only the start-up
costs rather than all costs associated with the project. So, again, his number is
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wrong. The Court cannot say that no adjustment to EBITDA could have been
justified based on the new contract. The Court can say, however, without any
hesitation or doubt, that the adjustment Mr. Gerber made did not reflect the
reality of what was going on with ISCO’s operations. The adjustment skewed

Mr. Gerber’s cash flow calculation, and he has offered no alternate or corrected
calculation. The entire adjustment must be disregarded.
The adjustment Mr. Gerber made by adding the $3.6 million of
refinanced debt into the calculation as a source of cash is also problematic. Mr.
Gerber acknowledged that the refinance did not bring new cash into ISCO’s
accounts. He also admitted that the $3.6 million was current debt due within
twelve months and that ISCO having virtually all its debt due in the short term
was unusual. He justified the inclusion of the refinanced debt as a source of

cash by asserting that ISCO had previously refinanced the debt, he expected
ISCO to refinance the debt again when it became due, and, in fact, ISCO had
refinanced the debt. He stated that, if he had not included the $3.6 million as a
source of cash, he would have removed that same amount from the total
current debt to be paid, resulting in the same bottom line.
Mr. Sargent strongly criticized the inclusion of the $3.6 million refinance
as a source of cash. He emphasized that it was not a cash infusion to ISCO and
that the purpose of the cash flow test was to determine if ISCO had enough

projected cash flow to pay its debts, the vast majority of which happened to be
due in the current period. He said that removing from the equation debt that
was undoubtedly current but could not be paid in the current period was
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inappropriate and that such a practice would routinely result in companies
with cash flow problems nevertheless passing the cash flow test. The Court
agrees with Mr. Sargent on this issue.
Mr. Gerber assumed that ISCO would not pay the $3.6 million when it

became due and therefore treated the debt as though it would not be due. He
said that to do otherwise was to assume that companies had to be debt free.
But the fact that ISCO repeatedly refinanced the $3.6 million debt did not
make the debt long-term debt—it always remained due within twelve months.
Heartland Bank always had the option of nonrenewal. The Court cannot find
that Mr. Gerber properly conducted the cash flow test when he effectively
reduced current debt by the amount of such debt that ISCO could not pay. The
fact that ISCO could not pay this debt and had to refinance it supports a

finding of insolvency. The use of the $3.6 million refinance as a source of cash
must be disregarded.
Recomputing Mr. Gerber’s cash flow test calculation with the
adjustments for the new contract proceeds and the $3.6 million refinance
removed results in negative cash flow under both his historical and projected
calculations for July 2013 and August 2013. This is true even though he used
$3.5 million as his historical EBITDA and did not make any deductions for
federal taxes—both matters which were different from the calculations of Mr.

Sargent. But neither difference is enough to alter the ultimate outcome of the
calculation. Giving Mr. Gerber the benefit of any doubt or question on these
other contested issues still results in ISCO failing the cash flow test. Based on
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Mr. Sargent’s cash flow analysis, which the Court found credible, and on Mr.
Gerber’s cash flow analysis, as altered by the rejection of the two adjustments,
it is clear that ISCO was insolvent both before and after making the transfers
at issue to CEFCU.

3. The Adequate Capital Test
Mr. Sargent described the adequate capital test as one to determine
whether a debtor has sufficient available capital to pay not only its debts but
also all operating expenses and capital expenditures within a specific period,
typically twelve months. He opined that, because ISCO failed the cash flow test,
by definition, it also failed the adequate capital test. If it did not have enough
cash to pay its overwhelmingly current debts as they became due in the twelve-

month period analyzed, it could not have had enough cash and other resources
to pay current debts plus other expenses for the same period. He noted that
both the GSW Financials and the Heartland Bank credit analyses repeatedly
showed that ISCO had negative working capital through the relevant years. He
concluded that ISCO failed the adequate capital test.
Mr. Gerber described the test in a similar manner. He relied on his cash
flow test results to suggest that ISCO had significant revenues and cash
available to pay current debts. He also noted that, although historical financial

statements showed that ISCO had negative equity, his balance sheet test
showed significant equity. He dismissed concerns about negative working
capital, saying that the cause was the high level of ISCO’s short-term debt that
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would be remedied by refinancing. He also said that he considered goodwill as
an asset not on the balance sheets but nevertheless of significant value.
The Court finds that Mr. Sargent has the better position on this test as
well. Mr. Gerber’s cash flow test contained errors, and his reliance on his cash

flow results to justify ISCO passing the adequate capital test is therefore
flawed. ISCO did not pass the cash flow test and had significant negative
working capital positions throughout all relevant time periods. For the reasons
expressed by Mr. Sargent, ISCO failed the adequate capital test.
Based on an analysis of the expert testimony on all three insolvency
tests, this Court finds that ISCO was insolvent before, at the time of, and after
the CEFCU transfers were made in August 2013.

B. ISCO Received Less Than Reasonably Equivalent Value in Exchange
Having determined that ISCO was insolvent, the transfers it made to
CEFCU are avoidable as fraudulent only if made “without receiving a
reasonably equivalent value in exchange” therefor. 740 ILCS 160/5(a)(2); 740
ILCS 160/6; see also 11 U.S.C. §548(a)(1)(B)(i). As with the other statutory
elements, here too, bankruptcy courts may look to cases decided under §548
and other states’ versions of the UFTA when determining whether reasonably
equivalent value was received. Creditor’s Committee of Jumer’s Castle Lodge,

Inc. v. Jumer, 472 F.3d 943, 947 (7th Cir. 2007) (citing Leibowitz v. Parkway
Bank & Trust Co. (In re Image Worldwide, Ltd.), 139 F.3d 574, 577 (7th Cir.
1998)); see also Reinbold v. Morton Community Bank (In re Mid-Illini Hardwoods,
-48-
LLC), 576 B.R. 598, 604 (Bankr. C.D. Ill. 2017) (Perkins, J.). The Trustee bears
the burden of proving by a preponderance of the evidence that ISCO received
less than equivalent value in exchange for the transfers to CEFCU totaling
$1.72 million. Stone v. Ottawa Plant Food, Inc. (In re Hennings Feed & Crop

Care, Inc.), 365 B.R. 868, 874-75 (Bankr. C.D. Ill. 2007). Once the Trustee’s
burden has been met, however, the burden shifts to CEFCU to demonstrate
what value was received in exchange for the subject transfers. Chatz v.
Stepaniants (In re Fatoorehci), 546 B.R. 786, 793 (Bankr. N.D. Ill. 2016);
Combs-Skinner v. Gorman (In re Premier Data Solutions, Inc.), 2012 WL 400063,
at *2 (Bankr. C.D. Ill. Feb. 7, 2012) (Fines, J.).
Determining whether a debtor received reasonably equivalent value in
exchange for a transfer it made “involves a three-part inquiry: (1) the court

must determine that a debtor received some value; (2) the value received must
have been in exchange for a transfer made by the debtor; and (3) the value of
what was received by the debtor must have at least a reasonable equivalence to
the value of what the debtor transferred.” Mid-Illini Hardwoods, 576 B.R. at
604. Under Illinois law, value is given for a transfer if, in exchange for the
transfer, property is transferred or an antecedent debt is secured or satisfied.
740 ILCS 160/4(a). As for whether there is a reasonable equivalence between
values exchanged, the Seventh Circuit has described the test—at least under

§548—as one not controlled by a fixed mathematical formula but, instead, a
comparison of the value of what was transferred to the value of what the debtor
received in exchange. Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir.
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1997). There appears to be no dispute that the test as articulated by the
Seventh Circuit sets forth the correct standard for evaluating the reasonable
equivalence of value under the IUFTA.16

1. The Trustee Met his Burden on Value
The Trustee met his prima facie burden of establishing that ISCO
received less than reasonably equivalent value in exchange for the transfers to
CEFCU totaling $1.72 million. Mr. Sargent testified that, based on his
investigation of ISCO’s finances and review of the testimony of CEFCU’s
representatives, ISCO’s relationship with and indebtedness to CEFCU was
limited to the ISCO/Rebecca judgment of $261,800. The parties agree that
CEFCU received a total of $2.02 million to settle all claims and debts relating to

Hofmann judgments, including the ISCO/Rebecca judgment. In addition to the
transfers at issue here, ISCO, along with Mr. Hofmann, borrowed $300,000
from Morton Community Bank (“MCB”) that MCB paid directly to CEFCU on
ISCO and Mr. Hofmann’s behalf. And there is no dispute that, notwithstanding
ISCO’s $1.72 million in payments to CEFCU, the ISCO/Rebecca judgment was
not released and satisfied until CEFCU received the final settlement payment of
$300,000 from MCB. According to the Trustee, if the ISCO/Rebecca judgment
was not satisfied until CEFCU received the final $300,000 payment from MCB

on ISCO and Mr. Hofmann’s behalf, then the judgment must be found to have

16 In its motion for summary judgment, CEFCU took the position that, given the lack of Illinois case law on this
issue, the Seventh Circuit’s approach to determining reasonably equivalent value under §548 is also applicable to
fraudulent conveyance actions brought under Illinois law. The Trustee has made no assertions to the contrary.
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been satisfied in exchange for those funds rather than ISCO’s prior payments
totaling $1.72 million. This Court agrees.
The MCB payment was part and parcel of the completed settlement
between CEFCU, the Hofmanns, and ISCO. The $300,000 repayment obligation

incurred by ISCO cannot be ignored when accounting for what value was
exchanged in the transaction. But whether comparing $261,800 to $2.02
million or to $1.72 million, as CEFCU would have it, the result is the same:
ISCO did not receive reasonably equivalent value for the CEFCU transfers. As
such, the burden shifted to CEFCU to show what value ISCO did receive in
exchange.

2. CEFCU Failed to Show ISCO Received Value for the Transfers

In addition to the $261,800 ISCO/Rebecca judgment being satisfied,
CEFCU says it waived its right to pursue fees, which Attorney Heinz testified to
being as much as $81,947.50, as well as costs and postjudgment interest.
CEFCU also contends that ISCO received the benefit of CEFCU releasing back
to the Hofmann Trust property purportedly worth $900,000 or more, making it
available thereafter as collateral for future borrowing. Each of CEFCU’s
contentions are untenable.

i. Satisfaction of the ISCO/Rebecca Judgment
As stated above, this Court disagrees with CEFCU’s contention that ISCO
received satisfaction of the ISCO/Rebecca judgment in exchange for the
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transfers to CEFCU totaling $1.72 million—at least inasmuch as CEFCU has
failed to show that it has not received credit for that value in exchange for the
final settlement payment. By the Trustee pursuing the $1.72 million in
transfers from ISCO to CEFCU and not the final $300,000 payment in the

hands of CEFCU from MCB, the inference to be drawn, at least from the
creditors’ perspective, is that reasonably equivalent value was given in
exchange for the MCB funds. And the most concrete item of value to ISCO that
was received in the transaction was the release of the ISCO/Rebecca
judgment.17
Indeed, in a separate proceeding commenced by the Trustee against
MCB, the court determined that the satisfaction of the ISCO/Rebecca judgment
was value exchanged for ISCO incurring liability on the MCB note used to

make the final settlement payment. Stone v. Morton Community Bank (In re Int’l
Supply Co.), 631 B.R. 331, 343-44 (Bankr. C.D. Ill. 2021) (Perkins, J.). While
not binding on CEFCU, the Morton Community Bank decision sheds light on the
totality of the transactions and their import from the perspective of ISCO’s
creditors. And there is sufficient evidence in the record for this Court to take
the MCB payment into account when considering what was exchanged; the
parties agree that CEFCU received a total of $2.02 million from or on behalf of
ISCO and CEFCU gave nothing in return until it received the final $300,000

17 The Trustee has argued that the satisfaction of judgment was not value received by ISCO because the underlying
debts were always Mr. Hofmann’s and ISCO only became liable because of Mr. Hofmann’s actions to cause his own
salary at ISCO to be diverted to his wife. While the Trustee is correct in his assessment of how ISCO’s obligation to
CEFCU arose, the fact remains that ISCO was indebted to CEFCU. And the satisfaction of an antecedent debt
constitutes value as a matter of law under the IUFTA. See 740 ILCS 160/4(a); see also 11 U.S.C. §548(d)(2)(a).
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payment through the MCB loan proceeds. To give CEFCU credit for the release
of the ISCO/Rebecca judgment as value exchanged for the previous $1.72
million paid to it would be to ignore the final $300,000 payment and double
count the value that was actually provided.

ii. Waiver of Entitlement to Fees, Costs, and Interest
To a large extent, the same reasoning applies to CEFCU’s waiver of
whatever entitlement it had to attorney fees, costs, and postjudgment interest
on the ISCO/Rebecca judgment. See Morton Community Bank, 631 B.R. at 343.
While a dollar-for-dollar match is not required, the difference in value between
the $300,000 MCB note and the $261,800 released judgment is easily made up
by taking into account the value of whatever fees, costs, and postjudgment

interest CEFCU might have been entitled to but waived as part of the
settlement. Of course, CEFCU contends that the value is much greater. But
that was CEFCU’s burden to prove, and the record does not support such a
finding.
CEFCU essentially asks this Court to make a finding as to the fees and
costs that it would have been awarded by the state court had the matter been
pursued. Several procedural and evidentiary hurdles prevent the Court from
determining what value unpursued fees and costs yielded to ISCO. There is no

dispute that the ISCO/Rebecca judgment arose from a supplemental
proceeding to collect on the Hofmann judgments and that the amount of the
ISCO/Rebecca judgment was “to be applied towards the satisfaction of the
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judgments” against Mr. Hofmann. Attorney Heinz testified that the issues of
fees and costs were specifically reserved in the judgment and that such fees
and costs were never ultimately pursued. Determining what fees or costs
should be assessed against which party under these circumstances involves

thorny issues of state law best resolved by the state court where the matters
were pending.18 Combing through Illinois statutes and rules to support a
finding of what fees and costs CEFCU might have been entitled to in decade-old
state court proceedings with an incomplete record and no indication of how the
state court might have ruled on issues that CEFCU declined to pursue is not
an appropriate undertaking for this Court.
And even if the Court were in a position to evaluate the fees and costs
that might have been awarded by the state court, the evidence presented does

little to assist the Court in ascribing a value to the waiver of such fees and
costs. Attorney Heinz asserted that CEFCU’s attorney fees relating to the
collection of the ISCO/Rebecca judgment totaled $81,947.50, but the Court
determined that the billing and time records upon which Attorney Heinz’s
assertion was based were not reliable and that she was unable to provide the

18 For instance, the Illinois statute cited by the state court as the basis for entering judgment against ISCO provides,
in part, that the court “may enter judgment against [third parties who transfer property in violation of a citation] in
the amount of the unpaid portion of the judgment and costs allowable under this Section, or in the amount of the
value of the property transferred, whichever is lesser.” 735 ILCS 5/2-1402(f)(1). The same section of the statute
makes reference to other sections governing wage deductions and garnishments, which, separately, set forth their
own procedures regarding the assessment of costs and fees. 735 ILCS 5/2-1402(k-3), (k-5); 735 ILCS 5/12-715; 735
ILCS 5/12-814. Elsewhere, the statute provides that costs may be “allowed, assessed and paid in accordance with
rules,” unless the court, in its discretion, determines that the costs were improperly incurred. 735 ILCS 5/2-1402(h).
The Illinois Supreme Court Rules, in turn, provide for the taxing of certain costs in supplemental proceedings. Ill. S.
Ct. R. 277(i).
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foundation necessary to support her assertions.19 Further, while Attorney
Heinz said that CEFCU’s attorney fees totaled $81,947.50, it is unclear
whether that figure includes costs.20 To the extent that Attorney Heinz’s
assertion was limited to attorney fees, CEFCU presented no evidence of discrete

costs that it incurred and were attributable to ISCO.
In addition, the above obstacles do not account for but would certainly
be impacted by the fact that ISCO and Mrs. Hofmann appealed the judgment
entered against them, and that appeal was pending when the parties
negotiated the global settlement of all claims, the terms of which provided for
dismissal of the appeal. Setting aside the issue of what additional value
dismissal provided to CEFCU, the appeal itself only raises more questions
about what fees and costs, if any, would have been taxed against ISCO. And,

again, the Court will not speculate about what might have happened had
CEFCU pursued such relief at the time.
The appeal of the ISCO/Rebecca judgment also raises questions about
what postjudgment interest had accrued by the time the parties reached an
agreement on settlement.21 The ISCO/Rebecca judgment was entered January
11, 2013, and the first settlement agreement was dated June 6, 2013. No

19 As previously discussed, the heavily-redacted billing records covered periods predating Attorney Heinz’s
association with the WJNK firm. While she said she reviewed the records and made the redactions to show only
entries relating to collection efforts against ISCO, she admitted that she did not speak with the other attorneys
involved about their work on the matter and acknowledged several discrepancies that raised significant concerns
about how charges were allocated to ISCO and the overall reliability of the records.
20 In its motion for summary judgment, CEFCU asserted that the $81,947.50 represented its attorney fees and costs.
Attorney Heinz’s testimony, however, gave the impression that the amount covered only CEFCU’s attorney fees.
21 CEFCU’s motion for summary judgment claimed with little explanation that statutory postjudgment interest had
accrued in the amount of $56,674.90. In his response to CEFCU’s motion, the Trustee disputed CEFCU’s math and
asserted that the maximum amount of statutory interest possibly available would have been $9424.30.
-55-
evidence was presented as to when ISCO filed its appeal, what bond was
provided to stay the judgment pending the appeal, or whether enforcement of
the judgment and therefore the accrual of postjudgment interest was in fact
stayed. See 735 ILCS 5/2-1303(a). Absent any evidence on these issues, the

Court cannot assume that significant interest accrued and if it did in what
amount before the parties’ settlement agreement was completed. Based on the
record before it, this Court cannot quantify the value of CEFCU’s waiver of
whatever entitlement it might have had to payment of attorney fees, costs, and
postjudgment interest against ISCO.

iii. Release of the Hofmann Irrevocable Trust Property
Finally, CEFCU’s assertion that its release of the Hofmann Trust property

was value received by ISCO in exchange for the transfers to CEFCU is not
convincing. As the Trustee pointed out, ISCO never owned the trust property. It
appears, though it is not entirely evident, that CEFCU obtained the deed to the
Hofmann Trust property for recording as security for some portion of the
collective judgments or the settlement. And as part of the global settlement
between CEFCU, the Hofmanns, and ISCO, CEFCU agreed to release the
property back to the Hofmann Trust. But at no point in time did ISCO have
title to the trust property. CEFCU seems to believe that, because it was

thereafter transferred to the Hofmanns, who, a year later, signed a deed of
trust for the property in favor of Heartland Bank the same day that ISCO

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signed a promissory note in favor of Heartland Bank, the release of the trust
property was a benefit to and thus value received by ISCO.
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. See, e.g., Mid-Illini Hardwoods, 576
B.R. at 607-10 (citations omitted). But none of these scenarios are
representative of the present case. While Mr. Hofmann did control ISCO and
what benefitted ISCO would also generally benefit him, the inverse was not
necessarily true. As far as the Court can tell, every action taken by ISCO for
Mr. Hofmann’s benefit did more harm than good to ISCO. Although Mr.
Hofmann treated ISCO as if its interests were aligned with his own, their

interests often diverged. As a distinct legal entity, ISCO is presumed to exist
separate from its owners and in furtherance of its own interests. Flores v.
Westmont Engineering Co., 2021 IL App (1st) 190379, ¶29. Mr. Hofmann’s
interests were not devoted to ISCO’s success; he was separately focused on
financing his personal and other business endeavors even at the expense of
ISCO.
Whatever benefit ISCO stood to gain from the release of the Hofmann
Trust property was too attenuated for it to constitute value received.

Reasonably equivalent value is a factual issue that “must be evaluated as of the
date of the transaction.” Daley v. Chang (In re Joy Recovery Tech. Corp.), 286
B.R. 54, 75 (Bankr. N.D. Ill. 2002) (citation omitted). At the time CEFCU
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released the property back to the Hofmann Trust, it was not apparent that the
property would later be transferred to Mr. Hofmann himself or that he might
use it to bolster ISCO’s borrowing power. And even if it was contemplated at
the time that the release of the Hofmann Trust property would be used to

secure additional credit for ISCO, there is nothing in the record for the Court to
assume that it would have necessarily benefited ISCO’s creditors.22 Id. (“[S]ince
the purpose of fraudulent conveyance law is to protect creditors, the
determination of value is looked at from the vantage point of the debtor’s
creditors.”) (citation omitted). CEFCU’s release of the trust property was not
value received by ISCO.
CEFCU failed to show that ISCO received value for the transfers it made
to CEFCU in settlement of Mr. Hofmann’s debts. The Hofmann Trust property

never belonged to ISCO and was not value it received in exchange for payment.
To the extent ISCO received value in the form of the satisfied ISCO/Rebecca
judgment and associated fees, costs, and interest, this Court finds that such
value was exchanged for payment other than the $1.72 million at issue here or
was otherwise not established in concrete, measurable terms. Thus, the Court
concludes that ISCO did not receive any value in exchange for the August 2013
transfers to CEFCU totaling $1.72 million.

22 No information was presented about the use of the loan proceeds received when the Hofmann Trust property was
pledged to Heartland Bank. The proceeds may well have been diverted to Lee Hofmann.
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C. The Trustee’s Recovery
Because ISCO was insolvent and undercapitalized when it made the
August 2013 transfers to CEFCU totaling $1.72 million without receiving value
in exchange therefor, those transfers will be avoided under §544(b)(1) of the

Bankruptcy Code through §§160/5(a)(2) and 160/6 of the IUFTA. As such, the
Court must address Count VIII of the Trustee’s complaint seeking recovery of
the transfers and an award of attorney fees, costs, and prejudgment interest.

1. Recovery of the Avoided Transfers
Section 550(a)(1) provides for recovery of a fraudulent transfer from the
“initial transferee.” 11 U.S.C. §550(a)(1). Under §550(a)(2), a fraudulent transfer
may also be recovered from an “immediate or mediate transferee of such initial

transferee.” 11 U.S.C. §550(a)(2). Section 550(b) creates a defense against
recovery for an immediate or mediate transferee of the initial transferee if such
transferee “takes for value, including satisfaction or securing of a present or
antecedent debt, in good faith, and without knowledge of the voidability of the
transfer avoided[,]” as well as for any subsequent “immediate or mediate good
faith transferee of such transferee.” 11 U.S.C. §550(b). The defense is an
affirmative one, and the transferee invoking §550(b) bears the burden of
persuasion on the issue. Smith v. SIPI, LLC (In re Smith), 811 F.3d 228, 246 (7th

Cir. 2016).
The term “transferee” is not defined in the Code. But the Seventh Circuit
has described a “transferee” as one that has “dominion over the money or other
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asset, the right to put the money to one’s own purposes.” Bonded Financial
Servs., Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir. 1988).
Naturally, an initial transferee is the first transferee in the line. Smith, 811 F.3d
at 244. An immediate or mediate transferee, then, is “one who takes in a later

transfer down the chain of title or possession.” Grochocinski v. Knippen (In re
Knippen), 355 B.R. 710, 728 (Bankr. N.D. Ill. 2006) (quoting First Nat’l Bank of
Barnesville v. Rafoth (In re Baker & Getty Fin. Servs., Inc.), 974 F.2d 712, 722
(6th Cir. 1992)). There is no defense against liability for an initial transferee
under §550. Smith, 811 F.3d at 244.
Turning to the transfers at issue here, the first was made when ISCO
delivered to CEFCU a cashier’s check in the amount of $1.4 million on August
2, 2013. Without question, CEFCU was the initial transferee of the $1.4 million

cashier’s check and has no defense against recovery under §550. As such, the
Trustee is entitled to recover the full value of that transfer.
The second transfer is a bit more complicated. It occurred on August 16,
2013, when ISCO transferred $320,000 from its savings account at Heartland
Bank to the Games Management, LLC account at CEFCU, which, according to
the parties’ joint pretrial statement, CEFCU then applied “to the principal of
the loan that CEFCU previously made to Games Management, LLC, as part of
the settlement payment.” No other evidence of CEFCU’s status as transferee of

the funds was presented.
In setting forth the seminal “dominion and control” definition of a
transferee, the Seventh Circuit in Bonded Financial determined that a bank
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that accepted deposit into an account was a mere conduit for payment to the
account holder and became a subsequent transferee only after the account
holder directed that the funds be applied toward the repayment of his fully-
secured, current loan with the bank. Bonded Fin. Servs., 838 F.2d at 893-94.

The court contrasted the “two-step” transaction before it from a hypothetical
“one-step” transaction where funds are transferred to a bank with instructions
to apply it to reduce a debt owed to the bank. Id. Importantly, the court found
that the bank did not have a right to set off when the funds were deposited and
that the account holder was free to use the funds at his discretion. Id. In a
subsequent decision finding that a bank acting as trustee of a trust account
could be liable as an initial transferee, the Seventh Circuit cited with approval
several decisions from other circuit courts adopting and applying Bonded

Financial but holding that “an entity that receives funds for use in paying down
a loan, or passing money to investors in a pool, is an ‘initial transferee’ even
though the recipient is obliged by contract to apply the funds according to a
formula.” Paloian v. LaSalle Bank, N.A., 619 F.3d 688, 691-92 (7th Cir. 2010)
(citations omitted); accord Barber v. Colchester State Bank (In re KZK Livestock,
Inc.), 1998 WL 34064931, at *2 (Bankr. C.D. Ill. Oct. 14, 1998) (Altenberger, J.)
(distinguishing Bonded Financial from the facts of the case before it where the
account to which funds were transferred was overdrawn).

It is clear that CEFCU was a transferee of the $320,000 deposit into the
Games Management, LLC account because it applied the funds to pay down
amounts it was owed. Whether CEFCU was the initial transferee depends on
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Games Management, LLC’s status as transferee. Under Bonded Financial, the
fact that CEFCU applied the funds to pay down “the loan that CEFCU
previously made to Games Management, LLC, as part of the settlement
payment” is not dispositive. Bonded Fin. Servs., 838 F.2d at 893-94. It is

unclear whether CEFCU applied the funds at the direction of the account
holder or based on some other authority. Under Illinois common law, banks
may, in certain circumstances, be able to apply a deposit to matured debts the
account holder owes to the bank. Symanski v. First Nat. Bank of Danville, 242
Ill. App. 3d 391, 396-97 (1993). But absent evidence of whether Games
Management, LLC ever had “dominion and control” over the $320,000
deposited into its account at CEFCU or what set off rights CEFCU had and
when, the Court cannot determine whether Games Management, LLC was a

transferee such that CEFCU was not the initial transferee.
The Court’s inability to determine whether CEFCU was the initial
transferee, however, does not bar recovery by the Trustee. Section 550(a)
provides for recovery against the initial transferee, as well as any immediate or
mediate transferee. If not the initial transferee, CEFCU was, without question,
an immediate or mediate transferee. If CEFCU had a defense to recovery as an
immediate or mediate transferee under §550(b), it was CEFCU’s burden to
establish as much. As stated, no such showing was made. The Court has

already determined that ISCO did not receive value for the transfers to CEFCU
totaling $1.72 million. It would be remiss if it simply assumed good faith on the
part of CEFCU, especially given the history between all involved in the
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transactions. The Trustee is therefore entitled to recovery of the $320,000
transfer from ISCO to the Games Management, LLC account at CEFCU.

2. Awarding Prejudgment Interest, Attorney Fees, and Costs

The Trustee asks for an award of prejudgment interest “at the legally
allowable rate.” Although the Bankruptcy Code makes no provision for it,
bankruptcy courts have the discretion to award prejudgment interest to a
trustee in a fraudulent conveyance action. Carmel v. River Bank America (In re
FBN Food Services, Inc.), 175 B.R. 671, 690 (Bankr. N.D. Ill. 1994); see also In
re Milwaukee Cheese Wisconsin, Inc., 112 F.3d 845, 849 (7th Cir. 1997). But
that discretion is not unfettered; it must be exercised according to the law.
Milwaukee Cheese, 112 F.3d at 849. And the Seventh Circuit has expressed its

preference for awarding prejudgment interest as a component of compensation
in federal cases unless there is sound reason not to do so. Id.; Gorenstein
Enters., Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 436 (7th Cir. 1989). In
other words, “[t]he purpose of allowing prejudgment interest is compensatory,
not punitive; such interest is granted to make the prevailing party whole.”
Phillips, 379 B.R. at 788 (citation omitted). After all, “[c]ompensation deferred is
compensation reduced by the time value of money; . . . [t]hat is why
prejudgment interest is an ingredient of full compensation.” Milwaukee Cheese,

112 F.3d at 849.
Although the transfers here are avoidable under Illinois law, it is federal
law under which the transfers are being avoided and that permits the Trustee
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to recover the avoided transfers in bankruptcy. See 11 U.S.C. §§544(b), 550(a).
Again, the Bankruptcy Code does not specifically provide for awarding
prejudgment interest. Absent other controlling authority, bankruptcy courts
have awarded prejudgment interest pursuant to the rate set forth in 28 U.S.C.

§1961 from the date the adversary proceeding was filed. See, e.g., Phillips, 379
B.R. at 788; Hennings Feed, 365 B.R. at 892; Krol v. Wilcek (In re H. King &
Assocs.), 295 B.R. 246, 291 (Bankr. N.D. Ill. 2003); FBN Food Serv., 175 B.R. at
690-91. This Court will exercise its discretion and award the Trustee
prejudgment interest from the date this adversary proceeding was commenced,
September 22, 2017, pursuant to the rate set forth in 28 U.S.C. §1961.23 See
Phillips, 379 B.R. at 788; Hennings Feed, 365 B.R. at 892. To be clear, the
interest awarded is “simply an ingredient of full compensation and should not

be considered a windfall” to the Trustee or as punishment for any wrongdoing
by CEFCU. H. King & Assocs., 295 B.R. at 290 (citations omitted) (internal
quotation marks omitted).
As for the Trustee’s request for an award of fees, he has failed to cite any
authority for his request. Neither §544 nor §550, the Code provisions upon
which the Trustee relies in this proceeding, specifically authorizes the Court to
award such fees. See Phillips, 379 B.R. at 789. Illinois law, which provides the
basis for avoiding the transfers here, generally follows the “American Rule” that

attorney fees are “not available to a prevailing party absent statutory authority

23 Section 1961 provides that “[i]nterest shall be calculated . . . at a rate equal to the weekly average 1-year constant
maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar
week preceding[ ] the date of the judgment.” 28 U.S.C. §1961(a).
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or an express contractual provision between the parties.” Id. (citations omitted).
The Court is not aware of specific statutory authority or any agreement
between the parties that would provide for an award of fees. Absent any
showing of such authority and what fees he in fact incurred, the Trustee’s

request for fees must be denied.
The Trustee also asks that he be awarded costs. Bankruptcy Rule
7054(b) provides that “[t]he court may allow costs to the prevailing party except
when a statute of the United States or these rules otherwise provides.” Fed. R.
Bankr. P. 7054(b)(1). Although the decision whether to award costs falls within
the bankruptcy court’s discretion, there is a presumption that the prevailing
party is entitled to costs absent “good reasons” for not doing so. Mungo v.
Taylor, 355 F.3d 969, 978-79 (7th Cir. 2004). At this juncture, the only

cognizable cost that the Trustee is entitled to without further showing is the
filing fee for commencing this adversary proceeding. The Court will award the
Trustee that filing fee cost of $350 and allow him to seek whatever further
costs he believes he is entitled to under applicable law.
The Trustee will be given 14 days from the date of the Order entered with
this Opinion to file a bill of costs if further costs are to be pursued; CEFCU will
be given 14 days from the date of the filing of the bill of costs to respond or
object. The matter will be taken under advisement thereafter. That said, the

Court is disinclined to award additional costs as a matter of course or to set
the matter for further hearing or argument. Any bill of costs filed by the
Trustee should be narrowly tailored to the claims against CEFCU upon which
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he prevailed, specifically itemized, and accompanied by a supporting
memorandum justifying his factual and legal entitlement to any costs asserted.
Any response or objection from CEFCU should be made in kind.

D. Unjust Enrichment
Count III, pleaded in the alternative to the Trustee’s avoidance claims
under the IUFTA and Bankruptcy Code §§544 and 550, seeks recovery of the
entire $1.72 million received by CEFCU based on unjust enrichment. Recovery
under a theory of unjust enrichment is an equitable remedy only available
when there is no adequate remedy at law. Season Comfort Corp. v. Ben A.
Borenstein Co., 281 Ill. App. 3d 648, 656 (1995). It appears that, under Illinois
law, unjust enrichment may be recognized as a stand-alone cause of action.

See, e.g., Raintree Homes, Inc. v. Village of Long Grove, 209 Ill. 2d 248, 258
(2004). But at least one Illinois appellate court has suggested that the opposite
is true: as an equitable remedy, unjust enrichment is not a separate cause of
action but is tied to another underlying claim found in tort, contract, or
statute. Martis v. Grinnell Mut. Reinsurance Co., 388 Ill. App. 3d 1017, 1024-25
(2009). Merging the two interpretations, the Seventh Circuit has reasoned that,
while a plaintiff may be able to maintain a stand-alone cause of action for
unjust enrichment, such a claim often rests on the same conduct or set of facts

forming the basis for another claim against the same defendant, and, in such
latter case, will be tied to and “will stand or fall with the related claim.” Cleary
v. Philip Morris Inc., 656 F.3d 511, 516-17 (7th Cir. 2011) (citations omitted).
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Although the Trustee set forth his unjust enrichment claim in a separate
count, the claim itself relies on the same allegations that formed the basis for
his avoidance claims under Illinois fraudulent transfer law and the Bankruptcy
Code. Incorporating those allegations by reference, Count III consists of only

two other paragraphs alleging that ISCO paid CEFCU even though not
obligated to and that CEFCU retained the money to ISCO’s detriment,24
violating the fundamental principles of justice, equity, and good conscience.
This begs the question whether the Trustee’s unjust enrichment claim is tied to
his avoidance claims, the resolution of which would be dispositive of the unjust
enrichment claim, or whether the unjust enrichment claim stands alone.
But the Court does not need to decide what relief may be available to the
Trustee under a theory of unjust enrichment or whether he has met his burden

of proof on the issue. It suffices to say that, because it was pleaded in the
alternative to the fraudulent transfer claims under the IUFTA and §§544 and
550 of the Bankruptcy Code upon which the Trustee has prevailed, the Court
need not consider the claim for unjust enrichment. Count III will therefore be
dismissed without prejudice to reinstatement should the judgment against
CEFCU on Counts I, II, and VIII be reconsidered or modified by further court
order.

24 The Trustee alleges that CEFCU retained the money to ISCO’s—rather than ISCO’s creditors’—detriment.
Importantly, as discussed supra, the Trustee’s standing to prosecute his avoidance claims is predicated on the
“strong arm” provisions of the Code that allow trustees to stand in the shoes of certain lien creditors, unsecured
creditors, or bona fide purchasers. See 11 U.S.C. §544.
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IV. Conclusion
Viewed in isolation, ISCO bore all the hallmarks of a successful
company. It was operationally profitable and showed potential for significant
growth. At one point it had sizeable assets compared to its debts and was able

to generate sufficient cash flows to meet its demands. But that was only half of
the story. Over time, ISCO came to be used as the personal piggy bank of its
controlling shareholder Lee Hofmann. In the years leading up to the events at
issue in this proceeding, Mr. Hofmann caused ISCO to liquidate the company’s
assets to fund millions of dollars in distributions to himself or others on his
behalf. When there were no longer sufficient assets to continue funding the
shareholder distributions, Mr. Hofmann caused ISCO to incur substantial
amounts of debt to provide him with needed cash. What resulted was an

otherwise profitable company that was no longer adequately capitalized, unable
to pay its debts, and unable to meet its own operational demands without
incurring additional debt that it could not pay.
Despite its inability to meet its own obligations ISCO continued to funnel
whatever cash it had to Mr. Hofmann to satisfy his personal obligations and
endeavors. The culmination of this practice came when, despite being unable to
cover $1 million of its own input costs on a multi-million-dollar contract, ISCO
paid CEFCU $1.72 million and incurred liability on another $300,000 loan to

satisfy what were primarily Lee Hofmann’s debts. And although ISCO was able
to stay afloat for some time due to its lender’s willingness to renew and extend
the maturity of its existing loans on an annual basis, the company was
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stretched so thin by the siphoning of cash for Mr. Hofmann’s benefit that it was
only a matter of time before it sought relief under the Bankruptcy Code.
It is an unfortunate result for CEFCU to have the $1.72 million
transferred to it by ISCO on Mr. Hofmann’s behalf avoided and to be required

to refund the sums to ISCO’s bankruptcy estate. But the result here is required
by the law and evidence. Judgment for the full $1.72 million plus prejudgment
interest and costs will be entered in favor of the Trustee and against CEFCU.
This Opinion is to serve as Findings of Fact and Conclusions of Law
pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
###

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10457491. Public record. Not legal advice.