Pawn Broker Wins Priority Dispute Against Creditor Involving Debtor’s Harley Davidson Motorcycle

In Coal City Red-Mix Company v. Kavanaugh, 2014 IL App (3d) 130332-U, two competing creditors – a judgment creditor and a pawn shop – each claimed superior rights to the debtor defendant’s Harley Davidson motorcycle (the “Bike”).  The plaintiff got a default money judgment against the defendant in February 2012 and issued post-judgment citation proceedings to discover whether the defendant had assets to apply to the judgment.  About seven months later, and before he appeared in response to the citation, the defendant secretly pawned the Bike to a local pawn shop for a $3,500 loan.  The pawn shop took possession of the Bike but didn’t take title to it.  The defendant kept the Bike’s title.

When the plaintiff discovered that the defendant pledged the Bike, the plaintiff served a third-party citation on the pawn shop and sought a court order requiring the pawn shop to turn the Bike over to the plaintiff.  After an evidentiary hearing, the Court ruled that the plaintiff had a superior interest in the Bike and the pawn shop appealed.

Held: Reversed.  The pawn shop’s interest in the Bike trumps the plaintiff’s.

Rules/Reasoning:

In finding for the pawn shop, the Court noted that under Illinois judgment collection rules, a creditor like the plaintiff can issue a citation not only to the debtor but also to a third party (like the pawn shop) who has property belonging to the debtor  in its possession.  735 ILCS 5/2-1402(m)(1)-(2).  Once a citation is served, it become a lien on a debtor’s non-exempt personal property.  But a citation lien doesn’t impact the rights of respondents in property prior to service of a citation, and it also doesn’t affect the rights of bona fide purchasers or “lenders without notice” of the citation.  735 ILCS 5/2-1402(m).

Here, the plaintiff properly directed a third party citation to the pawn shop since it had personal property – the Bike – that belonged to the debtor in its possession.  The pawn shop argued that it was a bona fide purchaser since the debtor signed a power of attorney that allowed the pawn shop to transfer title to the Bike if the debtor failed to repay the pawn shop loan.  Illinois law defines a bona fide purchaser as someone “who takes title in good faith for value without notice of outstanding rights or interests of others.”  (¶ 15).  The parties’ intent (and not formalistic labels) determines whether ownership in personal property is transferred.  In this case, the Court found that the pawn broker wasn’t a bona fide purchaser since it had only a possessory interest in the debtor’s Bike.  It never “took title” to it.  (¶¶ 16-17).

But the pawn shop still won the priority dispute.  That’s because it was a  “lender without notice” under Code Section 2-1402(m).

The Illinois Pawnbroker Regulation Act, 205 ILCS 510/0.01 (the Pawnbroker Act)  specifically defines a pawnbroker as an individual or entity that lends money on the deposit or pledge of physically delivered personal property (among other things). (¶23).  A pawn transaction is viewed as a “super secured loan transaction” where the lender (pawn shop) holds a borrower’s personal property as security for a loan.

Here, the pawnbroker was clearly covered by the Pawnbroker Act and so it met the statutory definition of a lender.  The pawn shop also lacked notice of the plaintiff’s prior citation lien since it didn’t find out about plaintiff’s judgment until the plaintiff served the third-party citation and sought the Bike’s turnover.

Since the pawn shop met the statutory definition of a “lender” and because it lacked notice of plaintiff’s prior judgment, it was a “lender without notice” under  Code Section 2-1402(m).  As a result, the plaintiff’s citation lien on the defendant’s property – including the Bike – didn’t affect the rights of the pawn shop.  The pawn shop had superior rights to the Bike over the plaintiff.

Take-away: I can relate to how frustrated the plaintiff creditor must have been in this case.  It followed the supplementary proceedings rules to the letter yet still lost out to a competing (and unwitting) claimant.  If I was in plaintiff’s position,  I think I would now focus my energies on trying to freeze the defendant’s bank account (if he has one), on serving a wage deduction summons on defendant’s employer (if he has a job) or attempting to levy on any of the defendant’s non-exempt personal property.  Either way, this case illustrates how arduous a task it is for a creditor to collect on a money judgment.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.