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. 

 

Collecting Post-Judgment Attorneys’ Fees in Illinois

Collecting a judgment against sophisticated corporate and individual debtors can be a time-consuming and futile exercise. Post-judgment enforcement proceedings can drag on for months (sometimes years), often generating astronomical attorneys’ fees and expenses.

Tobias v. Lake Forest Partners, LLC, 402 Ill.App.3d 484 (1st Dist. 2010) addresses some tricky questions involving competing money judgment priority and when post-judgment attorneys’ fees can be recovered.  There, two judgment creditors – one in Illinois, the other in Florida – got judgments totalling nearly $5 million against common defendants.  

The Illinois judgment – eight days “older” than the Florida one – stemmed from a loan agreement that provided that the plaintiff could recover “all costs of collection” in the event of a breach. 

The Florida creditor registered its judgment in Illinois and intervened in the Illinois post-judgment proceedings started by the Illinois creditor.  Before the Florida creditor intervened, however, the Illinois judgment creditor served a third party citation on a corporation (the “Respondent”) to discover if the Respondent had any assets of one of the judgment debtors.  

When the Respondent answered that it was holding approximately $340,000 in judgment debtor assets, the Illinois post-judgment judge divvied up the debtor’s assets and ordered Respondent to disburse $87,000 to plaintiff “as full satisfaction” of plaintiff’s judgment, $126,000 to the Florida creditor and $126,000 back to the defendant.  The court denied the Illinois creditor’s request for over two years’ worth of attorneys’ fees incurred in trying to enforce the judgment.

The Illinois creditor appealed, arguing that the trial court should have given its (the Illinois creditor) claim for post-judgment attorneys’ fees priority over the later Florida judgment.  

The Appeals court affirmed the trial court’s disposition of the judgment debtor’s assets.  

The Court first held that under the Illinois wage deduction statute – 735 ILCS 5/12-801 et seq., a judgment creditor can attach only 15% of a debtor’s gross wages.  Once a third-party citation is served, it impresses a lien on the debtor’s nonexempt personal property in the third party’s possession up to the judgment amount 735 ILCS 5/2-1402(a), (m).  And since Respondent was holding the debtor’s wages, the Court found that the Illinois and Florida creditors could collectively attach only 15% of the wages. 

On the subject of post-judgment fees, the court squarely held that unless the creditor’s post-judgment claim for attorneys’ fees is reduced to judgment (that is, assigned a specific dollar value), those fees could not lien the debtor’s property (here, wages) in Respondent’s possession. 

The Court made it clear that no claim can achieve lien status until the claim has been reduced to an enforceable judgment.  Since the plaintiff’s counsel never had his attorneys’ fees converted to a specific dollar amount, the fees could not trump the Florida creditor – even though the Illinois judgment predated the Florida one.

Afterwords:

The lesson for creditor’s counsel is clear: when an underlying contract or judgment provides that post-judgment attorneys’ fees can be added to the judgment amount, creditor’s counsel should document its fees and present a petition so that the fee amount can be liquidated (reduced to a specific sum). 

Once that happens, the fees can be added to the judgment amount and can take priority over a competing creditor’s claim.