Collecting Your Illinois Judgment Part II: the Citation Order

Per my earlier post – neophyte collection lawyers often wonder what they should put in the order once the citation examination concludes.  Section 2-1402(c) sets forth several possible orders that can enter.

The Citation Respondent Appeared and Answered

Broadly, if the debtor appears and you conduct the examination, you can either dismiss or discharge the citation, continue it, or order a turnover of funds or property.  I enter a dismissal if the debtor fully complied and has no assets, I continue the proceedings if the debtor does not produce the requested documents, and I enter a turnover order if the debtor or a third-party answers that there are funds or property that can be applied towards the judgment.

For a third-party citation, typically issued to the debtor’s bank, I enter a dismissal order which provides that the bank turnover the non-exempt funds within 7 days.  If the bank fails to pay, I move for a Rule to Show Cause and entry of conditional judgment.  This gets the bank’s attention.

Another possible order on the citation return date is an installment payment order which I file with the court.  An example of this is found at: http://12.218.239.52/Forms/pdf_files/CCG0105.pdf.

Citation Fails to Appear

Surprisingly, debtors often fail to appear on the Citation return date.  When this happens, you ask for a “Rule” – shorthand nomenclature for Rule to Show Cause.  That’s also a pre-printed form found in the courtroom.  You fill out the required information and have it served personally on the debtor.  If the debtor fails to respond to the served Rule, you request a body attachment or “writ of attachment”.  That order will contain a $1,000 bond amount (usually), and should be placed with the Sheriff, who – at some point – will contact the debtor and physically bring him/her to the courtroom.

Collection counsel should familiarize themselves with House Bill 5434 – eff. July, 2012 (http://www.ilga.gov/legislation/BillStatus.asp?DocNum=5434&GAID=11&DocTypeID=HB&LegId=65695&SessionID=84)

which added requirements specifically concerning body attachments.  Basically, no body attachment will issue until creditor obtains personal or abode service of a Rule to Show Cause on the debtor, there is a maximum $1,000 bond amount, and the body attachment expires after 1 year.

The Computer Fraud and Abuse Act: ‘Damage’ and ‘Loss’ Elements (7th Circuit/ND IL)

Security7_610x426The Computer Fraud And Abuse Act, 18 U.S.C. s. 1030 et seq. (CFAA) – the Federal statute that criminalizes various forms of computer hacking – is an odd mix of precise terms of art and vague, amorphous phrasing.

One CFAA area rife with unsettled litigation is the Act’s “damage” and “loss” requirements.  The CFAA specifically defines both terms but the unsettled question concerns whether underlying physical damage to the computer or computer data is necessary to prove “loss.”  That is, does a CFAA plaintiff have to prove computer damage FIRST before it can try to satisfy the $5,000 loss threshold?

Under the CFAA, “Damage” means any impairment to the integrity or availability of data, a program, a system, or information (e.g. physical damage to a computer or its data).  18 U.S.C. § 1030(e)(8).  “Loss” equals the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense as well as any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.  18 U.S.C. § 1030(11)

Q: What Constitutes Damage Under the CFAA? 

A: A synthesis of Seventh Circuit cases provides the following “damage” examples:

(i) destruction, corruption, or deletion of electronic files;

(ii) physical destruction of a hard drive;

(iii) smashing hard drive with a hammer; installing shredding software;

(iv) installing secure-erasure software; and

(v) diminishing usability of computer system.

Q: What Does Not Constitute Damage?

A:  (i) copying, e-mailing or printing electronic files;

(ii) stealing employer computer data and sending it to competitor;

(iii) e-mailing confidential data to private email address to use in competing business; and

(iv) disclosure of trade secrets.

Q: What Constitutes ‘Loss’ Under the CFAA

A: The Northern District (Ill.) holds that CFAA “loss” encompasses

(1) the cost of investigating or repairing a computer or computer system following a violation that caused damage to a computer or computer system, or

(2) revenue lost, cost incurred, or other consequential damages incurred because of the interruption of service.

TriTeq, 2012 WL 394229, * 7; Navistar, Inc. v. New Baltimore Garage, Inc., 2012 WL 4338816, *8 (N.D.Ill. 2012); Farmers Ins. Exchange v. Auto Club Group, 823 F.Supp.2d 847 (N.D.Ill. 2011) 

Q: Is Physical Computer Damage Required In Order to Establish CFAA ‘Loss’?

A: This is the question that is the most unsettled, both in the Seventh Circuit and nation-wide.  Some courts adopt an expansive view of loss and hold that damage isn’t required. Others give a restrictive reading to CFAA loss and hold that a CFAA plaintiff can still satisfy the statutory loss element even if there’s no underlying computer damage.

Some District Court cases in the Seventh Circuit that hold that underlying computer damage is required to show loss include: TriTeq Lock & Sec. LLC v. Innovative Secured Solutions,LLC, 2012 WL 394229 (N.D.Ill. 2012); Farmers Ins. Exchange v. Auto Club Group, 823 F.Supp.2d 847, 851-856 (N.D.Ill. 2011); 1st Rate Mortg. Corp. v. Vision Mortg. Servs. Corp., 2011 WL 666088 at *2 (E.D.Wis. Feb. 15, 2011).

Cases that represent a broader of view of loss – that physical damage or data destruction is not required to show loss – include Navistar, Inc. v. New Baltimore Garage, Inc., 2012 WL 4338816, *8 (N.D.Ill. 2012); SKF USA, Inc. v. Bjerkness, 636 F.Supp.2d 696, 721 (N.D.Ill. 2009).

The statutory text supports the expansive application of the latter cases: that physical damage is not a prerequisite to establishing CFAA loss; at least with respect to CFAA information (defendant accesses protected computer and obtains information) and fraud (defendant breaches computer in connection with furthering a fraud) claims.  18 U.S.C. § 1030(a)(2), (4).

Afterwords: The strongest case from a CFAA plaintiff’s perspective is where the defendant has caused physical damage including data destruction or deletion, coupled with quantifiable monetary loss to remedy the damage.

The weakest case will be where there the plaintiff is trying to recover money damages in the absence of physical harm to computer equipment or data.  In cases where a computer or its data hasn’t been harmed or compromised, a CFAA plaintiff’s claim will likely hinge on the severity of the defendant’s conduct; such as whether he violated a non-disclosure or non-compete and whether he accessed trade secrets or confidential information belonging to the plaintiff.

 

 

 

Corporate Successor Liability in Illinois: the Rule and Exceptions

Corporate successor liability’s focal point is whether a purchasing corporation (Company 2) is responsible for the purchased corporation’s (Company 1) pre-sale contract obligations. 

It’s an important question because the Company 1 will usually have no assets after the purchase.  Creditors of Company 1 will then try to pin liability on Company 2.

The general rule in Illinois is that a corporation that purchases the assets of another corporation is not responsible for the debts or liabilities of a transferor corporation.  

The rule is designed to protect good faith purchasers from unassumed liability and to maximize the fluidity of corporate assets.  

The four exceptions to this rule are: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; and (4) where the transaction is fraudulent – done for the purpose of escaping the seller’s obligations.

The express assumption exception only applies if the plaintiff can produce an agreement where the purchasing corporation agrees to assume the selling corporation’s obligations.

If the agreement is silent, there is no express assumption.  Implied assumption is trickier and requires an examination of the selling and buying corporations’ conduct.  

The merger or consolidation exception applies where the plaintiff demonstrates: (a) continuity of management, personnel, physical location, assets, and business operations; (b) continuity of shareholders; (c) that the seller ceases its business operations quickly after the sale; and (d) the buyer assumes the seller’s liabilities and obligations that are necessary for seamless perpetuation of the seller’s business operations. 

In examining the continuation exception, the court’s focus is whether the purchasing corporation is a reincarnation of the seller corporation and has same or similar management but merely “wears different clothes”. 

The continuity calculus includes whether there is a common identity of officers, directors and shareholders between the selling and purchasing corporations.    

Exact commonality between the selling and purchasing corporations’ management isn’t required for the court to find a continuation.

In assessing whether the fraud exception applies to the general rule of no corporate successor liability, the court looks at multiple factors set forth in the Illinois Fraudulent Transfer Act. 740 ILCS 160/5(b)(1)-(11) including the timing of the transfer from seller to purchaser, whether the seller paid and whether purchaser received adequate consideration, whether the seller became insolvent at or shortly after the transfer, whether the transfer was to an insider (officer, director shareholder of the selling corporation), etc.

Conclusion

To temper the possible harsh results of a corporate transfer wiping out any chance of creditor recovery, I try to put language in a contract saying that if there is a transfer from defendant to another entity during the term of the contract, the defendant promises to both promptly notify my client in writing and make the new, purchasing company aware of the contract and its obligations under it.