joint checking account

No Fraud, No Problem – Unjust Enrichment Enough of ‘Hook’ For Constructive Trust – IL 4th Dist.

June 12, 2017 by PaulP

Tummelson v. White, a 2015 4th District appellate case, considers the inconvenient topic of what rights a former cohabitant has to funds he contributed to a home after he gets ousted from it by an ex-.

The parties lived together for several years in two different homes and paid mortgage and household expenses from a joint account which each party periodically funded. When the couple broke up and plaintiff was kicked out of the (second) house, he sued to recover damages for equity from the sale of the first home and to recoup mortgage payments and a down payment he made on the second home. The trial court entered judgment for the plaintiff after an evidentiary hearing and assessed a constructive trust on about $17,000 of the equity gained from the sale of the first home. Defendant appealed.

In partially affirming the trial court, the Fourth District examines the nature of the constructive trust remedy, the legal status of joint checking account funds, and whether fiduciary duties apply to live-in partners.

Two essential elements of a constructive trust include (1) an identifiable property to serve as the basis (or “thing”) for the constructive trust, and (2) possession of that property by the person to be deemed the “constructive trustee.”

A constructive trust can generally apply in one of two situations: where there is actual fraud or where a fiduciary abuses his authority over a more vulnerable counterpart. The fiduciary relationship question itself distils to whether there is a fiduciary relationship (1) as a matter of law, or (2) as a matter of fact. A “matter of fact” fiduciary relationship applies where one reposes special trust and confidence in another, who, as a result of the trust and confidence, is able to gain a position of dominance and influence over the weaker party.

Critically, though, the superiority and influence must result specifically from the plaintiff’s trust and confidence placed in the defendant. It isn’t enough to say one party has influence over another in a vacuum.

The Court rejected plaintiff’s argument that defendant stood in a dominant position because the homes were titled in defendant’s name who could kick plaintiff out at any time. The Court found that a licensor’s (here, the defendant) control over a licensee (plaintiff) wasn’t the kind of control required to establish a fiduciary-in-fact relationship. Since there was no evidence that the defendant ever influenced the plaintiff to do anything involving the homes against his will (plaintiff paid the mortgage and household bills voluntarily), there was no abuse of fiduciary relationship.

Still, the Court affirmed the constructive trust finding. While fraud and breach of fiduciary duty are the usual constructive trust grounds, the device also applies to remedy unjust enrichment. That is, even though there is no wrongdoing a court can still impose a constructive trust to avoid unjust enrichment.

Citing secondary authority (American Law Institute and Restatement (Third) of Restitution), the Court noted that an established basis for unjust enrichment is where one party to a relationship resembling marriage makes tangible uncompensated contributions in the form of property or services and the other party enjoys the benefits of those contributions. In such a case, the person making the contributions has a restitution claim for the value of the property or services if and when the relationship fails.

The court disagreed that the plaintiff’s mortgage and home expense payments from the couple’s joint account were ‘contributions’ that could support an unjust enrichment finding. This is because under the law money deposited to a joint account is presumed a gift from one account “tenant” to the other.

Once plaintiff deposited funds into the joint account from which the mortgages were paid, those funds were no longer “plaintiff’s money.” Instead, the money deposited into the account became a gift to the defendant – the other account holder. As a result, no constructive trust could attach to plaintiff’s mortgage payments on the two homes.

The Court did agree with the trial court that the plaintiff should be able to recoup some of the money he put into the homes. It attached a constructive trust on the plaintiff’s $7,000 down payment towards the second home’s purchase price.

Afterwords:

This case provides a useful summary of the factors involved in assessing fiduciary relationships and the constructive trust remedy. This court squarely held that actual wrongdoing is not required and all that’s necessary is unjust enrichment for a court to impose a constructive trust. Another key lesson is that deposits to a joint bank account are deemed gifts from one party to the other and that household expenses paid out of a joint account likely won’t be deemed a recoverable contribution by only one of the joint account holders.

Joint Owner of Checking Account Must Prove Exclusive Right to Funds by Elevated Burden of Proof – IL Appeals Court

October 4, 2016 by PaulP

Gataric v. Colak, 2016 IL App (1st) 151281 presents a collection tug of war between a judgment creditor and a third party concerning funds in a joint bank account. The salient issue is what level of proof the third party must meet in order to rebut the presumption that the bank account funds belong not to the third party, but to the judgment debtor.

The plaintiff judgment creditor served a third-party citation on the judgment debtor’s bank who then froze the account. The respondent, a joint account holder, intervened and asserted she was the account’s sole owner and the debtor was only added for “convenience” purposes.

The trial court sided with the plaintiff, and found the respondent failed to prove by clear and convincing evidence that she was entitled to all funds in the account and did not intend to gift the joint account funds to the debtor at the time the account was opened. The court granted the creditor’s turnover motion and defendant appealed.

Held: Affirmed.

Reasons:

The defendant argued that she was only required to prove her rights to the joint account by a preponderance of evidence – a less exacting burden than the clear and convincing evidence standard applied by the trial court. To meet the preponderance standard, the claimant must prove that her allegations “more likely than not” occurred. The common mathematical description of the preponderance standard is that there is a 51% chance that plaintiff’s version of events happened as opposed to defendant’s.

The third party in Gatarik argued that she alone set up the joint account as a convenience account. She claimed to add the judgment debtor as a joint account holder simply to facilitate the repayment of a short-term loan.

Under Illinois law, joint bank account holders are presumed to have equal access to account funds and a creditor of only one holder can attach the account. The burden shifts to the non-debtor account owner to establish what part of the account belongs to him/her.

When a garnishee (i.e. a bank or bank account holder) answers that a judgment debtor holds money in a joint bank account, this establishes a prima facie case that the money in the account belongs to the judgment debtor. The burden then shifts to the garnishee to prove what part of the funds belong exclusively to him/her.

When deciding who owns joint bank account funds, the court examines: (1) who exercised control of the funds, (2) who made contributions to the account and from what source and in what amount, (3) who paid taxes on the account’s earnings, and (4) the purpose for which the account was established. (¶¶ 19-20)

Here, the trial court found, after hearing live testimony, that the citation respondent didn’t establish by clear and convincing evidence that she was the sole owner of the account funds and that the account was a mere convenience account.

Since the respondent couldn’t show that the trial court misapplied the law or the facts, her appeal failed. As a result, the trial court’s turnover order related to the account funds was upheld.

Afterwords:

In situations where two or more people are claiming rights in frozen bank account funds, it is incumbent on the non-debtor to establish by clear and convincing evidence his/her dominant right to the funds.

The clear and convincing evidentiary burden falls midway between preponderance of evidence (the most relaxed burden) and beyond a reasonable doubt (the most severe) on the proof spectrum.

Creditor Rights To A Debtor’s Joint Bank Account Funds and Life Insurance Policies

April 20, 2014 by PaulP

(Photo credit: www.wisegeek.com: Google images)

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.

joint checking account

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