In the perpetual cat-and-mouse game played out across the collection law landscape, an important recurring question is what rights a creditor has to a debtor’s joint bank account – an account with two or more account holders.
The creditor wants to attach as much of the account as possible to satisfy or pay down a judgment balance while the non-debtor account holder (who has nothing to do with the lawsuit or judgment against the debtor) wants to protect the account or at least the account funds that belong uniquely to her.
A joint bank account – like the name suggests – is an account with multiple account holders all of whom have equal account access. See (http://www.nerdwallet.com/blog/banking-faqs/personal-joint-checking/).
A 2002 Seventh Circuit case provides a snapshot of the operative rules that control a creditor’s attempt to garnish a debtor’s life insurance policy and joint checking account. In Society of Lloyd’s v. Collins, 284 F. 3d 727 (7th Cir. 2002), the plaintiff global insurance behemoth obtained a default judgment in a British court of almost $1,000,000 against two Illinois residents who were members of a Lloyd’s-controlled insurance syndicate.
After registering the judgment in Illinois, the plaintiff insurance giant tried to garnish defendant’s nine life insurance policy premiums (which named his wife as beneficiary) and the other defendant’s joint bank account. The District court quashed the garnishments against the insurance policy and the bank account and the Seventh Circuit affirmed.
Q: Why Did the Creditor Lose?
A: Insurance policies (either insuring the debtor or insuring someone whom the debtor is dependent) are normally exempt from a judgment creditor’s reach. 735 ILCS 5/12-1001 (judgment exemptions generally).
However, life insurance policies can be attached where (1) the life insurance policy was purchased with the intent of converting nonexempt property into exempt property; and (2) if the policy was purchased to defraud creditors.
The fraud exception applies where there is actual fraud or constructive fraud. A court will find a transfer constructively fraudulent where (1) an insolvent debtor pays insurance premiums instead of the debt to the creditor, and (2) where the debtor pays premiums without getting any consideration for the transfer. Id. at 730.
Here, neither exception applied. The plaintiff creditor couldn’t show that the defendant tried to convert nonexempt personal property to exempt property since defendant purchased the life insurance policies long before his involvement with plaintiff. There was also no evidence of fraud: the debtor was solvent at the time he made the life insurance premiums and he received consideration – life insurance coverage – for the premium payments. Based on this, the Court struck the creditor’s attempts to lien the insurance policies.
The Court also declared the other debtor defendant’s joint checking account exempt from the plaintiff’s judgment. The plaintiff had the initial burden of establishing that the joint checking account funds belonged to the debtor. Once the plaintiff met this burden, the burden shifted to the debtor’s wife – as joint account holder – to show that all or part of the joint account funds belonged to her. I’d. at 730.
The debtor’s wife satisfied this burden by proving that the joint account funds (totaling $12,000) consisted of rent monies received from properties she owned. She also proved that she for the most part controlled the joint account funds and the debtor’s involvement in the account was minimal. The only access debtor had to the account was to pay joint bills. Without any evidence that the debtor used the joint account funds for his personal use, the Court held that the joint checking account was exempt from creditor attachment.
Take-away: in situations where a debtor has joint bank account funds, a creditor needs to be tenacious in establishing which funds uniquely belong to the debtor as opposed to the joint holder.