Tag: post-judgment attorneys’ fees

Judgment Creditor Can Recover Attorneys’ Fees Spent Pursuing Successful Veil Piercing Suit Versus Corporate Officers

Q:           Can a judgment creditor recover attorneys’ fees incurred in both its post-judgment discovery efforts after a default judgment against a defunct corporation and a subsequent piercing the corporate veil action to enforce the prior judgment where the contract with the defunct entity contains an attorneys’ fees provision?

A:            Yes.

That’s the salient and nuanced holding from Steiner Electric Company v. Maniscalco, 2016 IL App (1st) 132023, a case that’s a boon to creditor’s rights attorneys and corporate litigators.

There, the First District held in a matter of first impression that a plaintiff could recover fees in a later piercing the corporate veil suit where the underlying contract litigated to judgment in an earlier case against a corporation has an attorneys’ fees provision.

The plaintiff supplied electrical and generator components on credit over several years to a company owned by the defendant.  The governing document between the parties was a credit agreement that had a broad attorneys’ fees provision.

When the company defaulted by failing to pay for ordered and delivered equipment, the plaintiff sued and won a default judgment against the company for about $230K. After its post-judgment efforts came up empty, the plaintiff filed a new action to pierce the corporate veil hold the company president responsible for the earlier money judgment.

The trial court pierced the corporate veil and found the company president responsible for the money judgment against his company but declined to award plaintiff its attorneys’ fees generated in litigating the piercing action.

The First District affirmed the piercing judgment and reversed the trial court’s refusal to assess attorneys’ fees against the company President.

The Court first affirmed the piercing judgment on the basis that the company was inadequately capitalized (the company had a consistent negative balance), commingled funds with a related entity and the individual defendant and failed to follow basic corporate formalities (it failed to appoint any officers or document significant financial transactions).

In finding the plaintiff could recover its attorneys’ fees – both in the underlying suit and in the second piercing suit to enforce the prior judgment – the court stressed that piercing is an equitable remedy and not a standalone cause of action.  The court further refined its description of the piercing remedy by casting it as a means of enforcing liability on an underlying claim – such as the prior breach of contract action against the defendant’s judgment-proof company.

While a prevailing party in Illinois must normally pay its own attorneys’ fees, the fees can be shifted to the losing party where a statute or contract says so.  And there must be clear language in a contract for a court to award attorneys’ fees to a prevailing litigant.

Looking to Illinois (Fontana v. TLD Builders, Inc.), Seventh Circuit (Centerpoint v. Halim) (see write-up here and Colorado (Swinerton Builders v. Nassi) case precedent for guidance, the Court found that since the underlying contract – the Credit Agreement – contained expansive fee-shifting language, the plaintiff could recoup from the defendant the fees expended in both the first breach of contract suit against the company and the second, piercing case against the company president.  The Court echoed the Colorado appeals court’s (in Swinerton) depiction of piercing the corporate veil as a “procedural mechanism” to enforce an underlying judgment.

The combination of broad contractual fees language in the credit application and case law from different jurisdictions that fastened fee awards to company officers on similar facts led the First District to reverse the trial court and tax fees against the company president. (¶¶ 74-90)

Afterwords:

An important case and one that fee-seeking commercial litigators should look to for support of their recovery efforts.  A key lesson of Steiner is that broad, unequivocal attorneys’ fees language in a contract not only applies to an initial breach of contract suit against a dissolved company but also to a second, piercing lawsuit to enforce the earlier judgment against a company officer or controlling shareholder.

For the dominant shareholders of dissolved corporations, the case spells possible trouble since it upends the firmly entrenched principle that fee-shifting language in a contract only binds parties to the contract (not third parties).

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.