Defendant Bank Not Liable for Permitting Judgment Debtor to Transfer Over $700,000 from Accounts

The Citation to Discover Assets to a Third Party or “third-party citation”  allows a judgment creditor to serve a citation on a third-party –  a bank, for instance – who holds property of the judgment debtor and attach that property until the court orders the property released.  See 735 ILCS 5/2-1402(f)(1). 

The third-party citation prohibits the citation respondent from allowing any transfer or other disposition of debtor’s property pending further order of court or termination of the citation. 

When a bank is the third-party citation respondent, the creditor serves the citation upon the bank (either by personal service or certified mail) and upon receipt of the citation, the bank must freeze the debtor’s account until the court enters an order dismissing the citation or releasing the account. 

What’s simultaneously enticing (to a creditor) and sinister (to a debtor) about third-party citation practice is that the creditor doesn’t have to notify the debtor of the third-party citation until 3 business days have passed. 735 ILCS 5/2-1402(b).  This makes it next to impossible for a debtor to deplete his bank account(s) and hide funds – something which could easily happen if he caught wind of a creditor’s attempts to seize his accounts. 

Mendez v. Republic Bank, 2013 WL 3821532 (7th Cir. 2013), examines whether a bank that unfreezes the wrong bank accounts (and allows a judgment debtor to transfer hundreds of thousands of dollars in the process) can be liable to the judgment creditor for violating a citation’s restraining provisions. 

The Court affirmed the trial court’s finding that the bank was not liable to the plaintiff.

The plaintiff won a judgment and froze some 22 separate accounts of the corporate judgment debtor.  After several of the banks moved to quash various citations, the district court judge entered an order requiring that all bank accounts except for three (3) specified accounts be unfrozen. 

The defendant bank released from the citation two of the debtors’ accounts which totalled over $700,000 – all of  which of course was dissipated by the debtors within a few months. 

Plaintiff then moved to refreeze the accounts and to hold the bank liable for violating the citation restraining provision.

The District Judge, while originally siding with plaintiff, reversed herself and found the bank not liable.  The reason: the prior judge’s order requiring the bank to unfreeze accounts was ambiguous “at best” and the bank’s actions were a reasonable response to and interpretation of that order.  *4.

The Seventh Circuit affirmed, noting that the prior judge’s order unfreezing certain accounts was poorly drafted and the defendant bank followed the most reasonable interpretation of the order. 

Acknowledging that under Illinois law, a citation respondent can be liable for any transfer that violates a citation’s restraining provisions (regardless of whether there is intent or contempt), the bank’s actions were reasonable in light of the order’s text.* 11. 

Take-away: In my experience, from a creditor’s standpoint, attaching a corporate debtor’s bank account via a third-party citation is often my only real chance of collecting anything on a judgment.  Any real estate is usually mortgaged to the hilt, and the corporate debtor often lacks sufficient accounts receivable, inventory or personal property to meaningfully make a dent in the judgment amount.  

This case shows why hyper-precision in drafting citation orders is critical in post-judgment enforcement proceedings.  If the order is not drafted by the parties (i.e. it’s prepared by the court) and it’s text is unclear, it is incumbent on a party to file a motion seeking clarification of the order. 

 

Discovery Rule Saves Plaintiffs’ Fraud Claims Against Investment Firm (IL – 2d Dist)

Rasgaitis v. Waterstone Financial Group, Inc., 2012 IL App (2d) 111112-U, a 20-plus page Second District case, presents a detailed synopsis of Illinois agency law, the discovery rule and the “forward-looking” fraud rule (statements of future intent or opinion do not equal fraud).

Facts: The plaintiffs sued the defendant financial services firm and two of its agents for fraud and other tort claims based on defendants’ misrepresentations in connection with selling investment and insurance products to plaintiffs.  (¶ 10).  Defendants moved to dismiss, arguing that the claims were time-barred, were non-actionable statements of future intent and was too conclusory to show an agency relationship between the individuals and the investment firm.  The trial court agreed and dismissed all 15 complaint counts.

Held: The Second District reversed the trial court on 14 of the 15 counts (the Court sustained dismissal of negligent supervision claim based on economic loss rule) and held that plaintiffs’ suit was timely based on the discovery rule.

Reasoning:

The discovery rule stops the running of the statute of limitations until a plaintiff knows or should know of his injuries and that the injuries were caused by defendant’s wrongful conduct. (¶ 31).  The rule generally presents a fact question (the question being – when did the plaintiff reasonably know he was injured?) but can be an issue of law where the key facts are undisputed.  Id.

Here, the Court held that while the defendants’ underlying misrepresentations were made in 2005 and 2006, and plaintiffs didn’t sue until 2010, the plaintiffs still pled they didn’t learn of the false promises until 2009 when they learned that the chosen investment vehicle wasn’t as good as advertised.  And since plaintiffs filed suit approximately 14 months after they discovered the defendants’ wrongful conduct (in April 2010) – the complaint was timely under the two and three-year limitations periods for suits based on the sale of life insurance policies and annuities.  ¶¶ 24, 32,  735 ILCS 5/13-214.4, 815 ILCS 5/13.

Fraud Claim Analysis

The Second District also sustained plaintiffs’ fraud claims against defendants’ various Section 2-615 arguments.  While acknowledging that statements of opinion, future intent or financial projections are generally not actionable, the Court focused on the context, not the content of defendants’ statements.  (¶ 43)  The Court held that the plaintiffs sufficiently alleged that the defendants’ statements (that plaintiffs’ funds were 100% safe and the investment plan was proven to be successful) were sufficiently factual to state statutory and common law fraud claims under Illinois pleading rules. (¶ 44).

 Agency Analysis

Sustaining the plaintiffs’ agency allegations (and therefore upholding the claims against defendants’ 2-615 motion attack), the Court provided an agency law primer:

– agency is a fiduciary relationship where the principal can control the agent’s conduct and the agent can act on the principal’s behalf;

– an agent’s authority can be actual or apparent;

– actual authority can be express or implied;

– express authority = principal explicitly grants the agent authority to perform a given act;

implied authority = actual authority proved by circumstantial evidence of the agent.  That is, the principal’s conduct reasonably leads the agent to believe that the principal wants the agent to act on the principal’s behalf;

– apparent agency = principal holds out agent as having authority to act on principal’s behalf and a reasonably prudent third party would assume the agent’s authority based on the principal’s conduct.

(¶¶ 49-51).

Applying these rules, the Court held that the plaintiffs pled sufficient facts to establish an agency relationship between the two individual financial agents and the investment firm.  Factors the court considered in its agency calculus included that the defendants used the corporate employer’s offices, business cards and same phone number. ¶ 51.  The Court also cited the fact that plaintiffs had multiple meetings with the individual defendants at the corporate defendant’s office – something that would likely lead a reasonable person to assume that the individual defendants were authorized to act for the corporate principal.  As a result, plaintiffs’ stated colorable claims under Illinois fact-pleading rules.  14 of plaintiff’s 15 claims were reinstated.

Take-aways: The discovery rule applies to common law and consumer fraud claims.  The more detailed a plaintiff’s allegations, the better chance they will survive a limitations defense.  Fraud claims cannot be based on future intent, opinions or financial forecasts unless the statements are sufficiently present-tense and factual.   The case is also instructive on what agency allegations will and won’t satisfy Illinois fact-pleading rules where a plaintiff attempts to impute an agent’s conduct to a corporate principal.

Those Slippery People: Six (6) Failed Service Attempts Not Enough For Service by Special Order of Court (IL Law)

warning_slippery

Code Section 2-203.1, titled “Service by Special Order of Court” allows a plaintiff to request service by alternative or “comparable” means when faced with an elusive defendant.  735 ILCS 5/2-203.1.  The statute requires a supporting affidavit that details the specific attempts made to locate a defendant and permits the court to authorize service in a manner that complies with due process.  Id. 

I usually file Section 2-203.1 motions in cases involving high-rise condominium defendants (typically in mechanics’ lien actions).  Some of these condos are impenetrable fortresses it seems; which makes it next to impossible to serve a building resident.  I support the motion with an affidavit of a special process server who details the efforts he made (including dates, times, locations, methods) to serve the defendant. 

If the court grants the motion, I tell the process-server to leave a copy of the summons and complaint with the defendant’s doorman (where a condo is involved) or by leaving process on defendant’s porch or posting on the front door (in case of a house) while also mailing the process to the defendant’s home and place of business (if known).  

But how many times do you have to try to serve a defendant directly before alternate service methods can be employed?  

In Sutton v. Ekong, 2013 IL App (1st) 121975 , the First District vacated a trial court default judgment and held that six unsuccessful service attempts was insufficient to merit service by special order of court. 

The reason: the personal injury plaintiff made no attempt to serve defendant at his easily discoverable business address prior to filing his 2-203.1 motion. 

After his sixth failed attempt, the plaintiff served defendant through the Illinois Secretary of State pursuant to Section 10-301 of the Illinois Vehicle Code: the section that governs serving non-resident defendants.  Ekong, at ¶ 6; 625 ILCS 5/10-301.  

A plaintiff who seeks to invoke special order of court service under Code Section 2-203.1 must strictly comply with that section and a failure to do so results in improper service. 

 The record demonstrated that Defendant’s business address was “easily obtainable” and “in the phone book.”  (¶¶ 21-22).  Evidence of the defendant’s easily found work address was the fact that plaintiff served a citation to discover assets on the defendant at the work address. (¶ 23). 

The First District held that the plaintiff failed to perform the type of search or investigation “an earnest person” trying to serve a defendant would make and should have tried to serve defendant at his business address before seeking alternative service methods. 

The Court distinguished In re Marriage of Schmitt (http://caselaw.findlaw.com/il-court-of-appeals/1123974.html) a divorce case where a plaintiff was allowed to employ alternate service methods after eleven (11) unsuccessful attempts.  (¶ 24).

But here, the Court found that since there was no basis to justify service through the Secretary of State, the trial court never properly acquired jurisdiction over the defendant.  Accordingly, the default judgment is void from its inception.

Take-aways: I feel the plaintiff’s pain on this one.  Slippery defendants can be nightmares to serve through normal channels.  But this case’s lesson is clear: plaintiffs should make thorough and meaningful efforts to investigate a defendant’s whereabouts and try to serve him not only at his home but also his business address. 

Service through the Secretary of State or through comparable methods really should be a last resort.  Where a defendant’s residence or business address is readily obtainable through rudimentary investigation, service by special order of court isn’t warranted and any default judgment based on such service will likely be vacated.