Author: PaulP

Litigation attorney at Bielski Chapman, Ltd. representing businesses and individuals in business litigation, post-judgment enforcement, collections and real estate litigation.

Corporate Successor Liability in Illinois: the Rule and Exceptions

Corporate successor liability’s focal point is whether a purchasing corporation (Company 2) is responsible for the purchased corporation’s (Company 1) pre-sale contract obligations. 

It’s an important question because the Company 1 will usually have no assets after the purchase.  Creditors of Company 1 will then try to pin liability on Company 2.

The general rule in Illinois is that a corporation that purchases the assets of another corporation is not responsible for the debts or liabilities of a transferor corporation.  

The rule is designed to protect good faith purchasers from unassumed liability and to maximize the fluidity of corporate assets.  

The four exceptions to this rule are: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; and (4) where the transaction is fraudulent – done for the purpose of escaping the seller’s obligations.

The express assumption exception only applies if the plaintiff can produce an agreement where the purchasing corporation agrees to assume the selling corporation’s obligations.

If the agreement is silent, there is no express assumption.  Implied assumption is trickier and requires an examination of the selling and buying corporations’ conduct.  

The merger or consolidation exception applies where the plaintiff demonstrates: (a) continuity of management, personnel, physical location, assets, and business operations; (b) continuity of shareholders; (c) that the seller ceases its business operations quickly after the sale; and (d) the buyer assumes the seller’s liabilities and obligations that are necessary for seamless perpetuation of the seller’s business operations. 

In examining the continuation exception, the court’s focus is whether the purchasing corporation is a reincarnation of the seller corporation and has same or similar management but merely “wears different clothes”. 

The continuity calculus includes whether there is a common identity of officers, directors and shareholders between the selling and purchasing corporations.    

Exact commonality between the selling and purchasing corporations’ management isn’t required for the court to find a continuation.

In assessing whether the fraud exception applies to the general rule of no corporate successor liability, the court looks at multiple factors set forth in the Illinois Fraudulent Transfer Act. 740 ILCS 160/5(b)(1)-(11) including the timing of the transfer from seller to purchaser, whether the seller paid and whether purchaser received adequate consideration, whether the seller became insolvent at or shortly after the transfer, whether the transfer was to an insider (officer, director shareholder of the selling corporation), etc.

Conclusion

To temper the possible harsh results of a corporate transfer wiping out any chance of creditor recovery, I try to put language in a contract saying that if there is a transfer from defendant to another entity during the term of the contract, the defendant promises to both promptly notify my client in writing and make the new, purchasing company aware of the contract and its obligations under it.

Collecting Your Cook County (IL) Judgment: A Primer

8390885150_7973d44ed1_bBlood From A Turnip (www.flickr.com)(visited 3.9.16)

735 ILCS 5/2-1402 and Supreme Court Rule 277 govern post-judgment or supplementary proceedings in Illinois. 735 ILCS 5/12-101 through 12-183 provide additional post-judgment specifics like the mechanics of levying on a debtor’s property, the seven-year period to enforce a judgment (12-108), the lien on debtor’s real estate and personal property, enforcement in other counties, etc.

The Citation to Discover Assets

The first step is to issue a Citation to Discover Assets and Citation Notice.  The Citation and Notice of Citation are pre-printed fillable forms found on the Cook County website.

On the form, I list the name of the creditor (my client), the debtor (the person we got a judgment against), the date and amount of judgment and address of debtor.  I attach a copy of the underlying judgment and include a Rider to the Citation asking for documents relating to the debtor’s assets.

In the Rider, I usually ask for State and Federal tax returns for the past 2-3 years, a years’ worth of bank statements, six most recent paystubs, title papers to cars and real estate, and a signed statement of personal and real assets.  I may also request documents pertaining to any stocks, bonds, securities, furnishings or electronic equipment.  The larger the judgment, the more painstaking I am in my Citation Rider requests.

Section 2-1402(b-1) now requires a creditor to include an Income and Asset Form with the Citation. The debtor is supposed to fill out and bring it to the Citation hearing.  A sample Income and Asset Form is included in the statutory text.

To “issue” the Citation, I take it to the 6th floor (Muni cases) or 8th floor (Law Division) pay $80 (usually) and get it certified by the Clerk.  I am then given the “return date” which is the day it is set for hearing.

The Citation hearing will be in Room 1401 of the Daley Center (if judgment is less than $30K) or Room 2503 if the judgment is over $30K (or for judgments entered in Law Division cases).  Chancery money judgment citations are scheduled before the Chancery judge.

Serving the Citation

Once the Citation is issued, I either place it with the Sheriff or a Special Process Server (SPS).  A citation can be served in the first instance by a process server (unlike a complaint and summons – which must first be placed with the county sheriff).  I’ve found that an SPS is usually more persistent and able to track down evasive debtors with better success than the county sheriff. For this reason, I almost always serve a Citation through an SPS.

But with a corporate debtor that usually has a registered agent, I will usually serve through the sheriff (since there is less chance of dodging service).

The Citation Examination

The examination often takes place in the glamorous Daley Center hallway!  Sometimes, the judge will allow you to do the exam in a jury room.  I’ve also agreed to conduct examinations at my office or opposing counsel’s office.  However, to avoid the stonewalling debtor situation, I usually prefer to do the examination at the courthouse so I can ask the judge to intervene if necessary.

On the Citation return date, if the debtor shows up, he is sworn in by the Clerk and I conduct the examination.  I ask myself: “If this person owed me money, and I really wanted it, what would I ask this person?”  Simple as that.

I first ask if the debtor brought the requested Rider documents – such as their  tax returns, bank records, motor vehicle title, pay stubs, etc.  More often than not, the debtor brings  nothing and I have to continue the hearing for another date.  Even if the debtor shows up empty-handed, I still conduct the examination but in the continuance order, I specify which documents the debtor must produce within 7 or 14 days.  I then continue the citation hearing for 3-4 weeks.  I also reserve the right to re-examine the debtor if the documents he produces raises additional questions.

If the debtor or his/her counsel is uncooperative, threatening  or verbally abusive during the citation exam (I’ve experienced all three), I stop the exam and simply say “I’m going to have the case called”.  Usually, that results in some cooperation.  If not, and the debtor persists in not cooperating (giving “I don’t know” answers to every question) I let the judge scold the debtor for being obstructionist. In my experience, collection judges have little tolerance for a debtor that is not taking the citation proceeding seriously.

At the examination, three key questions I focus on before I look through the debtors’ documents are: (1) is he/she employed?; (2) Does he/she have bank accounts?; and (3) does the debtor own real estate?

(1) Employment: If the debtor answers yes to Item 1 (debtor has job) – I issue a wage deduction against the debtor’s employer.  You can have 15% of debtors’ gross, pre-tax wages under Illinois law under the Wage Deduction statute: 735 ILCS 5/12-801 et seq.

(2) Bank Account: If debtor has a bank account, I find out where and immediately issue and send a third-party citation to the bank’s Keeper of Records and serve it by certified mail.

Once the debtor’s bank receives the third-party citation, the bank must freeze the debtor’s account until further order of court.  I usually wait 2-3 days to send the debtor notice of the third-party citation.  Otherwise, if the debtor catches wind of the third-party citation, he/she can race to the bank, empty his/her accounts and you will get nothing (and NOT like it).

(2)(a) The Third-Party Citation

I have found a third-party citation to be a very  powerful enforcement tool.  People don’t like it when they can’t withdraw money from their account (individual) or make payroll (corporate debtor).

But, more often than not, the debtor’s bank account has little or no money in it.

Illinois law also has a $4,000 catch-all exemption: a debtor can declare up to $4,000 in his account as exempt (this is good information for someone representing a judgment debtor).

Example: debtor’s bank answers the third-party citation that the debtor has $4,050 in his/her checking account.  The debtor could declare $4,000 exempt and you (the creditor) would only get a paltry $50.  The burden is clearly on the debtor to claim this exemption.

The third-party citation will have a separate “return date”.  I try to schedule both the underlying “first party” citation (the one against the debtor) and third-party citation (against the debtor’s bank, e.g.) on the same day.

If the bank (or other third party respondent) files an answer stating that the debtor does have funds on deposit, I request a Turnover Order.  This is a court order which requires the bank/third-party to remit funds to the creditor’s counsel.

Once the turnover order issues, I send it to the bank/third-party with a letter saying “enclosed please find a copy of today’s order requiring you to turn over the sum of $____ within 7 days.  Please remit to the undersigned and make your check payable to_____”.  If the bank fails to pay (a rarity), I move to vacate the dismissal of the third-party citation and request that a conditional judgment enter against the bank. This almost always gets the bank’s attention since it doesn’t want to deal with a money judgment against it.

(3) Real Estate

If the debtor owns real estate, I record a Memorandum of Judgment against the property.

The Memorandum of Judgment must be signed by the judge that entered the underlying judgment (not the 1401 judge).  So, if a Muni judge entered it (on the 11th floor), you must have that judge sign the Memorandum.  If you forget at the time of judgment, simply file a motion requesting the judge to sign the Memorandum.

I attach a legal description to the Memorandum of Judgment along with the real estate PIN number.  Then, I record the Memorandum in the Recorder of Deeds.  For a Chicago-land debtor, I record in the Cook County Recorder of Deeds.  This puts a cloud on the debtor’s title.  The lien will interfere with the debtor’s attempts to refinance or sell his property.

If there is equity in the real estate, I can file suit to foreclose the lien and force a sale of debtor’s property.  But, before I do this, I run a title search – or at least check Cook County Assessor’s and Recorder of Deeds site to determine any prior recorded liens on the property.

A prior mortgage or other lien will trump my judgment lien and can make foreclosing the lien ( forcing a sale of the property) cost-prohibitive.

If the debtor answers that he has non-exempt personal property (e.g. car, jewelry, furniture, etc)., I explore whether the client wants to levy on the property.  Usually, it involves placing documents with the Sheriff and posting a bond.  This is where 735 ILCS 5/12-101-183 comes into play.  Levying on personalty can be time-consuming and expensive.

Other exemptions a debtor can assert in citation/supplementary proceedings are found at Section 2-1402(b)(1) and include unemployment benefits, Social Security benefits, worker’s comp benefits, $2,400 in car, $15,000 in home, $4,000 catch-all exemption among others.

Conclusion

There are many more details and nuances to collecting on a judgment.  But the above steps are a good starting point for a collection attorney trying to enforce a judgment for his client.  I can tell you this: when you are able to recover monies in citation proceedings through dogged efforts, clients are very appreciative which is very gratifying.

Facebooking at Work: A Federal Offense? (With ‘Aarons Law’ Update)

Can surfing the Net on company time get you fired?  Perhaps.  Can it subject you to Federal criminal and civil penalties?  Not yet.  At least not in the  Tampa, Florida area.  Wendy Lee v. PMSI, 2011 WL 1742028 (M.D.Fla. 2011) illustrates a creative attempt to expand the reach of the Computer Fraud and Abuse Act (CFAA)(which, incidentally, will be the subject of some future posts).  The CFAA, codified at 18 U.S.C. s. 1030, is a criminal statute with a civil component. It provides a private civil cause of action for anyone who sustains damage or loss as a result of an unauthorized user hacking into a computer system who then destroys, erases or transfers computer data.  It also prohibits authorized users from accessing protected information and from exceeding the limits of their authorization.  In this latter context, the CFAA is typically used by an employer when a rogue employee or “insider” accesses private employer computer data and sends the data to a competitor.

In PMSI, the Plaintiff filed a Federal pregnancy discrimination suit against her employer.  The employer fired back with a counterclaim based on the CFAA – saying that the Plaintiff spent her workdays surfing the Internet and playing on Facebook.  So egregious was the Plaintiff’s personal computer use, that the employer asserted a CFAA violation claiming the Plaintiff violated her employer’s published computer/Internet use policy.

The Court dismissed the CFAA count and said that while Facebooking at work may be a fireable offense; it does not subject one to Federal criminal or civil liability.  The court gave a narrow reading to the CFAA and held that the statute did not apply to a private employee’s violation of an employer’s internet policy.  Otherwise, the court said, every employee across the land who used a company computer to send and receive personal e-mails or who surfed the Net for non-work reasons could potentially be subject to Federal liability.

So, for now, Tampa area office workers can safely surf the net on company time without being subject to CFAA liability.   Whether the same workers can be fired for violating an employer computer policy, is an issue for another day and perhaps another post.

Update (7.15.13):  Recently, some proposed changes to CFAA were introduced by Zoe Lofgren and Ron Wyden, democratic congressman and senator from California and Oregon, respectively.  These changes, known as “Aarons” law (named for the late internet activist Aaron Schwartz), are designed to narrow the reach of the CFAA so that the statute is only used to prosecute outside hackers, rather than criminalize every-day violations of private employer computer policies or Internet terms of use.  Some helpful links follow.

http://www.wired.com/opinion/2013/06/aarons-law-is-finally-here/

http://www.lofgren.house.gov/images/stories/pdf/aarons%20law%20summary%20-%20lofgren%20-%20061913.pdf