Creditor Rights In and To a Debtor’s Joint Bank Account – Part II

In re Kuhl, 2012 WL 5935101 (S.D.Ill. 2012) provides a recent synopsis of the rules governing creditor attempts to attach a debtor’s joint bank account.  In it, the Chapter 7 bankruptcy trustee sought turnover of the bankrupt debtor’s funds held in three separate joint accounts with her husband.  The debtor challenged the trustee’s turnover motion, claiming that the funds in all three accounts belonged to her non-debtor husband (and not to her).  The court denied the trustee’s motion on two of the accounts and ordered the turnover of 50% (just over $8,000) of the funds in the third account.

In Illinois, a presumption exists that each owner of a joint bank account owns all of the account funds. Once that presumption is established, the burden shifts to the debtor and non-debtor to prove what part, if any, of the account funds belong to the non-debtor and as a result, are exempt from garnishment. 

The factors a court considers to determine ownership of joint bank account monies include: (1) who controls the account funds; (2) the source of the funds (who contributed what to the account?); (3) whether any contribution to the account was a gift to the other account holder; (4) who paid taxes on earnings from the account; and (5) the purpose for which the account was set up.  The first two factors – control and source of funds – are the main factors that dominate the court’s analysis.  Kuhl, at *2.

Here, the non-debtor (debtor’s husband) exclusively funded the three accounts.  Two of the accounts were set up exclusively to pay the non-debtor’s truck payment and the couples’ joint health insurance premiums, respectively.  Because of this, the court found that the debtor didn’t sufficiently control these two accounts and it denied the trustee’s turnover request directed to these accounts.

But the third account was a closer call.  This account had just over $16,000 and was funded solely by the non-debtor husband.  However, the debtor clearly controlled the funds and freely made withdrawals from the account to pay her personal expenses including at Target and Wal-Mart.  Since it was clear that debtor’s use of these account funds clearly benefitted her individually, the Court found that the Trustee was entitled to at least some of the funds.  The Court held that the Trustee was entitled to one-half of the total funds in the account – just over $8,000.  Kuhl, at *3.

Afterwords: This case provides a good summary of the rules that dictate if and when a creditor can attach a joint bank account.  Clearly, the key factors are control (who controls the account?) over the account and contributions (who funded it?) to the account.  Where control and contributions are vested in two separate parties – one debtor, the other a non-debtor – this case shows that the Court can order a “split the baby” distribution so that the creditor gets half the funds while the contributing non-debtor gets to keep the other half.

Like Pulling Teeth: The Struggles of Collecting Judgments from Corporate Debtors

 

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As someone who does some collection work, I experience first-hand how difficult it is to collect on judgments – especially from small corporate debtors.  A 2011 Second District case illustrates in stark relief just how challenging and frustrating enforcing a judgment can be.

In Conserv v. Von Bergen Trucking, 2011 IL App (2d) 101225U (2011), the Court followed Pyshos v. Heart-Land Development Co., 258 Ill.App.3d 618 (1994) and held that a judgment creditor cannot try to pierce the corporate veil of a corporate defendant in citation proceedings.  In doing so, the court narrowly construed post-judgment proceedings (or supplementary proceedings) and clarified that a piercing claim (one where the creditor tries to hold the corporate officer personally liable for the corporate debt) is beyond the scope of a citation/supplementary proceeding.

If ever there was a case for piercing, this was it.  Even when the trial court denied the creditor’s motion to pierce the corporate veil, the court noted that the defendant was “definitely getting away with something.  But the law allows him to get away with something.”  Cold comfort for the creditor indeed.

In Conserv, once the money judgment was entered, the corporate debtor immediately emptied its bank accounts and began operating under a different (though similar) name.  The “new” corporation was grossly undercapitalized, commingled personal and corporate funds and failed to follow any corporate formalities (keeping minutes, filing annual reports, paying required fees, etc).

The reincarnated corporation was a blatant sham or alter-ego of the principal officer.  Still, the court denied the creditor’s piercing motion stating that a citation proceeding’s only relevant inquiries are (1) whether the judgment debtor possesses assets that can be applied toward the judgment; or (2) whether a third party is holding assets of the judgment debtor.  Period.

So – what should a creditor do when it learns that a corporate debtor is an alter-ego of an individual?  The answer:  (1) issue a third-party citation  against the shareholders or against another corporation the creditor believes ha s assets of the debtor corporation; or (2) file a new breach of contract claim against the corporation.

Under option (2) above, you argue that the officer is responsible for the corporation’s debts because that corporation is a hollow front for the officer’s business dealings.