The Third-Party Citation: How Long Does It Last?

Shipley v. Hoke, 2014 IL App (4th) 130810 provides an exhaustive discussion of Illinois’ post-judgment enforcement rules in the context of a judgment creditor trying to reach debtor assets held by third parties.

It’s key points concerning a citation’s life span include:

– Code Section 2-1402 allows a judgment creditor to prosecute supplementary proceedings for the purposes of examining a judgment debtor and to compel the application of non-exempt assets or income discovered toward the payment of a judgment;

– Section 2-1402(f)(1) contains a “restraining provision” that prohibits any person served with a citation from allowing a transfer of property belonging to a judgment debtor that may be applied to the outstanding judgment amount;

– If someone violates the restraining provision, the Court can punish the violator by holding him in contempt or entering a money judgment against him in the amount of the property he transferred; 

– A third-party citation must be served in the same manner a (“first party”) citation is served (e.g. either by personal service or certified mail);

– Supreme Court Rule 277(f) provides that a citation proceeding automatically terminates six months from the date of the respondent’s first personal appearance unless the court grants an extension of the citation;

– This six-month rule is an affirmative defense that must be raised by a citation respondent or else it’s waived;

-Rule 277(f)’s purpose is to prevent a creditor from harassing a judgment debtor or a third party subject to a citation proceeding and is designed to provide an incentive for creditor’s to diligently work to discover debtor assets;

– While a court can retain jurisdiction over a turnover order entered before but not complied with until after the expiration of the six-months, the court does not maintain jurisdiction to enforce any restraining provision violations past that six-month mark.

– Rule 277 does permit a creditor to request an extension of the six-month limitation period indefinitely to fit the needs of a given case.

(¶¶ 78-81, 92-93).

Take-away: While I often serve bank respondents with third-party citations by certified mail (since banks usually aren’t motivated to evade service),  a judgment creditor should serve any non-bank respondent by personal service; either via county sheriff or a special process server.

In addition, the creditor should keep track of when a judgment debtor first appears in response to a citation.  If it looks like the creditor’s post-judgment case isn’t going to be finished at the six-month mark, he should move to extend the citation for as long as necessary to complete his examination of the debtor and any third-party(ies).

 

Release and Satisfaction of Judgment and Guaranty Liability – IL Law

ReleaseBrahos v. Chickerneo,  2014 IL App (2d) 130543-U, examines Illinois money damages rules, the extent of a guarantor’s liability and satisfaction-of-judgment requirements against the backdrop of a business dispute involving a failed car dealership.

The plaintiff got a multi-million dollar fraud judgment against multiple defendants that stemmed from a failed car dealership business venture.  In post-judgment proceedings, the dealership was sold and the sale proceeds satisfied plaintiff’s judgment against all defendants except for one.  That remaining defendant then moved to dismiss the citation proceedings and for satisfaction of the remaining judgment balance – about $600K.  The trial court agreed and ordered the judgment satisfied.  The plaintiff appealed.

Held: Reversed.  The $600,000 still owed the plaintiff on the money judgment was not satisfied by the bank releasing the investor guarantors from liability under the various dealership loans.

Rules/Reasoning:

Reversing the trial court and finding that the plaintiff still could purse defendant for the balance of the money judgment, the Court applied several salient guaranty and release/satisfaction-of-judgment rules:

– Generally, the discharge of the principal obligation discharges the guarantor’s obligation;

Code Section 12-183 (735 ILCS 5/12-183) requires a judgment creditor to sign a release and satisfaction of judgment so that the debtor can record that release with the Court that entered the judgment

– the party seeking the release of a judgment bears the burden of proving that a judgment entered against him was released;

– a release is a contract and is governed by contract law;

– the contracting parties intention is determined by the plain language of the contract;

– it is only where a contract is ambiguous (reasonably susceptible to two opposing meanings) that evidence is allowed in to explain what the contracting parties intended;

– typically, a money judgment can only be satisfied by paying the judgment unless the parties agree otherwise.

(¶¶ 32-35).

The Second District sided with the plaintiff and found that his money judgment shouldn’t have been deemed satisfied by the trial court.  The plaintiff never agreed to release his money judgment against the defendant and there was no evidence that plaintiff agreed to accept a “noncash benefit”- namely, the release from his guarantor liability to the bank.

The Court also pointed to the promissory note that required defendant to pay the judgment’s remaining $600K to the plaintiff.  The bank’s release of the dealership investors from their loan and guaranty liabilities didn’t  affect the defendant’s note liability.

In addition, the dealership lender’s release of the various investors (including plaintiff) from their bank obligations didn’t mention plaintiff’s damage award against the remaining defendant. (¶ 35).

The defendant’s double recovery argument – that the plaintiff got a windfall having his guaranty liability to the bank released while getting paid $600K from the defendant – was also rejected. 

The Court found there was no double recovery because plaintiff was not getting paid twice for the same injury and the bank was not a “joint tortfeasor” with the defendant.  Instead, the bank was a third-party creditor. ¶ 37.

Take-aways: 

–  A release of judgment will be construed as written and not expanded beyond its clear terms;

– A creditor isn’t required to release a money judgment unless that creditor is paid or the parties agree otherwise.  

The Illinois Fraudulent Transfer Act – An Illinois Case Note

Heartland Bank v. Goers, 2013 IL App (3d) 12084-U illustrates the procedural and substantive hurdles a creditor’s counsel must clear to enforce a judgment against a guarantor who transfers his personal assets into a trust.

The plaintiff bank in sued the defendant for breach of a commercial guarantee after defendant’s company defaulted on a $650,000 loan.  The bank obtained a money judgment against the defendant and issued citation proceedings against him.  During post-judgment proceedings, the bank learned that before the money judgment entered against the defendant, he transferred all  his assets, including a house, cars and bank accounts into a family trust (the Trust).

The trial court ordered the defendant to relinquish one-half of his bank and stock accounts, two cars, and 50% of the sale proceeds of his residence. Defendant appealed.

Result and Reasons:

The Court first held that the trial court wrongly ordered the sale and turnover of 50% of the house sale proceeds under the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (the UFTA).

The UFTA deems a transfer fraudulent against a creditor where (1) for claims arising before or after the transfer, the debtor transfers property with the actual intent to impede the creditor; or (2) for claims arising before the transfer, the debtor was insolvent or became insolvent as a result of the transfer.  740 ILCS 160/5, 6; ¶ 16.

A “transfer” means the disposal of an “asset” – defined by the UFTA as property of the debtor that is not held in tenancy by entirety. ¶ 16

It’s difficult to prove a debtor’s subjective intent to impede a creditor (a UFTA Section 5 claim) so most UFTA claims are brought under UFTA Section 6: that the debtor’s transfer caused its insolvency.

The court found the defendant and his wife owned the home in tenancy by entirety at the time they transferred the home to the trust.  Because of this, the UFTA didn’t apply to the transfer.

An interest in tenant-by-the-entirety property cannot be fraudulently transferred against a creditor of only one of the tenants. (¶ 18).

Reversing the turnover and sale of the house, the Court cited Illinois’ post-judgment statute which dictates that real property held in tenancy by the entirety is not liable to be sold upon judgment entered against only one of the tenants.  (¶ 18,) 735 ILCS 5/12-112.

The Court did uphold the trial court’s turnover order involving the defendant’s investment account funds.

Under UFTA Section 6 – which governs pre-transfer claims – a creditor must show by a preponderance of the evidence (it’s “more likely than not”) that:

  • its claim arose before the transfer,
  • the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transferred property; and
  • the debtor was insolvent at the time of the transfer or was rendered insolvent as a result of the transfer.

Here, the corporate borrower’s default in July 2009 immediately triggered defendant’s obligations under the guarantee.  And since the corporation’s default predated defendant’s transferring his bank account to the trust by two months, plaintiff’s claim against defendant arose before he transferred the investment account to the Trust. ( ¶¶ 31-33)

The court also found that at the time defendant transferred the account, he was insolvent within the meaning of the UFTA.  The defendant’s financial statements revealed that the guaranteed loan amount far exceeded defendant’s total assets.  As a result, plaintiff established all required elements of a UFTA Section 6 constructive fraud claim. ( ¶ 35)

Take-aways:

1/ A judgment creditor can’t force the sale of debtor’s real estate that’s held in tenancy by entirety property;

2/ A UFTA claim applies to any right to payment; regardless of whether or not the claim is liquidated (reduced to a fixed numerical amount);

3/ The Court’s UFTA  insolvency calculus takes into account a debtor’s contingent liabilities; not just its current ones.