Paul Porvaznik - Business Litigator

Case Notes and Summaries of Recent Cases (State and Federal Courts - Illinois Focus)

Post-judgment - Collections

Uniform Fraudulent Transfer Act: Actual Fraud, Constructive Fraud and Transfers for Insufficient Value: IL Law Basics

by

The Illinois Fraudulent Transfer Act (“FTA”) – 740 ILCS 160/1 et seq. – is a powerful creditor enforcement tool aimed at capturing assets transferred by a judgment debtor to elude a money judgment.  

In United Central Bank v. Sindhu, 2014 WL 3748555, the bank obtained a $4.3M judgment against the defendant.  After initiating various citations to discover assets, the bank learned that several months after the judgment, the defendant transferred three properties to his sister – including one residence property valued at over $3M.   He also received and turned over several rent checks on one of the transferred commercial properties.

 The plaintiff filed an FTA suit against the defendant and his sister seeking the turnover of the $3M property and the rent checks.  The defendants moved to dismiss all complaint counts.  The Court denied the bulk of the motion.

Operative Rules and Reasoning:

FTA Sections 5(a)(1), (2) and 6 govern claims based on actual fraud, constructive fraud and for pre-transfer claims, respectively.

The FTA’s actual fraud provision – Section 5(a)(1) – requires a plaintiff to plead that a debtor transferred property with actual intent to hinder or defraud a creditor, whether the claim arose before or after the transfer was made. 

Actual fraud factors include whether (1) the transfer or obligation was to an insider;

(2) the transfer or obligation was disclosed or concealed;

(3) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(4) the transfer was of substantially all the debtor’s assets;

(5) the debtor removed or concealed assets;

(6) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. 

To plead FTA constructive fraud (Section 5(a)(2)), the plaintiff must allege that the transfer was made, before or after a creditor’s claim matured, and the debtor never received reasonably equivalent value in exchange for the transfer.

The constructive fraud plaintiff must also allege that the debtor engaged in or was about to engage in a transaction that left the debtor with zero or unreasonably small remaining assets, or should have believed that he (the debtor) would incur debts beyond his ability to pay as they became due. (*3).

FTA Section 6(a) applies only to creditor claims that arose before a debtor’s transfer of assets.  

An FTA Section 6(a) plaintiff must establish that (1) the debtor made a transfer without receiving a reasonably equivalent in exchange for the transfer; (2) that the debtor was insolvent at that time or became insolvent as the result of the transfer; and (3) the creditor’s claim arose before the transfer.  (*3).

The Court found that the plaintiff sufficiently alleged valid FTA claims under all three sections.

The thrust of the complaint was that (a) several months after the money judgment, (b) the defendant secretly transferred multiple million dollar properties and rent checks to a family member (an insider) and (c) received little or nothing in return for the transfers. 

Defendant’s sister (the transferee) argued that she retired over $1.5M in the debtor’s mortgage debt in return for the conveyance of the $3M residence property. 

However, since the property was worth more than twice the amount of the retired mortgage debt, the Court found that the defendant didn’t receive a reasonably equivalent value in exchange. 

Taken together, the Court found these allegations satisfied the pleading standards for an FTA actual fraud and constructive fraud claim for transfers made before or after a creditor’s claim arose. 

Take-aways:

Sindhu shows in sharp relief the fruits of aggressive post-judgment collection efforts.  

Had the plaintiff not so ardently pursued its claims, the defendant could have transferred substantial assets properties and likely escaped the judgment.  

Chiropractor’s Lien Can Be Adjudicated by Court Without Obtaining Personal Jurisdiction Over Chiropractor

by

Illinois’ Healthcare Services Lien Act, 770 ILCS 23/1 (the Act), allows a health care provider to impress a lien on a patient’s claim for personal injuries up to the amount of the provider’s services.  So, if I give medical services to an injured patient worth $2,000, that patient doesn’t pay me, and he later settles a personal injury suit for $10,000, I will have a claim to $2,000 of that settlement amount.  I would then ask the court – through a written petition – to validate (or “adjudicate”) the lien.

Smith v. Hammel, 2014 IL App (5th) 130227, examines the elements of a statutory healthcare service lien and the court’s expansive jurisdictional power to assess the validity and amount of a lien in the context of a personal injury claim.

The defendant lien claimant was a chiropractor who rendered about $3,000 worth of services to a patient who was injured in a car crash.  The chiropractor served notice of his healthcare services lien under the Act.  That patient later settled with the other driver before filing a personal injury suit.  The patient’s attorney (who negotiated the settlement with the other driver) filed a petition to adjudicate the chiropractor’s lien and served it by certified mail on the chiropractor.  When the chiropractor failed to show up on the petition date, the Court entered a default against the chiropractor and deemed the lien “void and discharged.”  About 18 months later, the chiropractor moved to vacate the order nullifying his lien on the basis that he was never personally served and so the Court lacked personal jurisdiction over him.  The court denied his motion.

Result: Affirmed

Reasons:

To perfect a healthcare services lien, the medical provider must serve notice of his lien by certified mail or in person upon (a) the injured party  and (b) the person against whom the claim exists.  770 ILCS 23/10(b).  To have the lien adjudicated by the court, either the injured party or the lien claimant may file a petition to adjudicate the lien and serve the petition by personal service, substitute service, registered or certified mail.  770 ILCS 23/30.

The Court found that the plaintiff’s counsel’s certified mail service of his petition to adjudicate the lien was sufficient to confer jurisdiction over the settlement proceeds.  The chiropractor argued that the Court lacked jurisdiction over him since he wasn’t personally served with a summons or the petition to adjudicate.

Personal jurisdiction means a court’s authority to determine the rights and duties of a litigant.  Firmly entrenched alternatives to personal jurisdiction are in rem jurisdiction and quasi in rem (“power against a thing”) jurisdiction – which involve jurisdiction based on the relationship between the defendant and a state with respect to specific property in the state.  (So, if I live in Florida but have a bank account in IL, a lawsuit seeking control over my IL bank account would implicate in rem jurisdiction.)  In rem jurisdiction rests exclusively on the site of the res (or “thing”).  A state has jurisdiction over property located within its borders and the settlement funds – here, the “res” – don’t have to be deposited into court for the court to exercise jurisdiction over them.

Since the litigation involved the settlement proceeds (the “thing” or “res”) paid to the plaintiff, he didn’t have to serve a summons on the chiropractor and the court didn’t have to have personal jurisdiction over him in order to adjudicate his lien.  By serving notice of the petition to adjudicate by certified mail in compliance with the statute, the plaintiff satisfied the predicate for the court to exercise in rem jurisdiction over the settlement funds.  (¶¶ 26-27).

Take-aways:

If you receive a notice of a petition to adjudicate a healthcare services lien, you should show up – even  if you’re not personally served.  The case is also noteworthy for its illustration of a court’s expansive jurisdictional power over property – even where claimants to that property haven’t been personally served with summons.  To adjudicate a lien, all that’s required is the court to have jurisdiction over the settlement funds.  It doesn’t have to have personal jurisdiction over the individual parties claiming an interest in the funds.

Pawn Broker Wins Priority Dispute Against Creditor Involving Debtor’s Harley Davidson Motorcycle

by

In Coal City Red-Mix Company v. Kavanaugh, 2014 IL App (3d) 130332-U, two competing creditors – a judgment creditor and a pawn shop – each claimed superior rights to the debtor defendant’s Harley Davidson motorcycle (the “Bike”).  The plaintiff got a default money judgment against the defendant in February 2012 and issued post-judgment citation proceedings to discover whether the defendant had assets to apply to the judgment.  About seven months later, and before he appeared in response to the citation, the defendant secretly pawned the Bike to a local pawn shop for a $3,500 loan.  The pawn shop took possession of the Bike but didn’t take title to it.  The defendant kept the Bike’s title.

When the plaintiff discovered that the defendant pledged the Bike, the plaintiff served a third-party citation on the pawn shop and sought a court order requiring the pawn shop to turn the Bike over to the plaintiff.  After an evidentiary hearing, the Court ruled that the plaintiff had a superior interest in the Bike and the pawn shop appealed.

Held: Reversed.  The pawn shop’s interest in the Bike trumps the plaintiff’s.

Rules/Reasoning:

In finding for the pawn shop, the Court noted that under Illinois judgment collection rules, a creditor like the plaintiff can issue a citation not only to the debtor but also to a third party (like the pawn shop) who has property belonging to the debtor  in its possession.  735 ILCS 5/2-1402(m)(1)-(2).  Once a citation is served, it become a lien on a debtor’s non-exempt personal property.  But a citation lien doesn’t impact the rights of respondents in property prior to service of a citation, and it also doesn’t affect the rights of bona fide purchasers or “lenders without notice” of the citation.  735 ILCS 5/2-1402(m).

Here, the plaintiff properly directed a third party citation to the pawn shop since it had personal property – the Bike – that belonged to the debtor in its possession.  The pawn shop argued that it was a bona fide purchaser since the debtor signed a power of attorney that allowed the pawn shop to transfer title to the Bike if the debtor failed to repay the pawn shop loan.  Illinois law defines a bona fide purchaser as someone “who takes title in good faith for value without notice of outstanding rights or interests of others.”  (¶ 15).  The parties’ intent (and not formalistic labels) determines whether ownership in personal property is transferred.  In this case, the Court found that the pawn broker wasn’t a bona fide purchaser since it had only a possessory interest in the debtor’s Bike.  It never “took title” to it.  (¶¶ 16-17).

But the pawn shop still won the priority dispute.  That’s because it was a  “lender without notice” under Code Section 2-1402(m).

The Illinois Pawnbroker Regulation Act, 205 ILCS 510/0.01 (the Pawnbroker Act)  specifically defines a pawnbroker as an individual or entity that lends money on the deposit or pledge of physically delivered personal property (among other things). (¶23).  A pawn transaction is viewed as a “super secured loan transaction” where the lender (pawn shop) holds a borrower’s personal property as security for a loan.

Here, the pawnbroker was clearly covered by the Pawnbroker Act and so it met the statutory definition of a lender.  The pawn shop also lacked notice of the plaintiff’s prior citation lien since it didn’t find out about plaintiff’s judgment until the plaintiff served the third-party citation and sought the Bike’s turnover.

Since the pawn shop met the statutory definition of a “lender” and because it lacked notice of plaintiff’s prior judgment, it was a “lender without notice” under  Code Section 2-1402(m).  As a result, the plaintiff’s citation lien on the defendant’s property – including the Bike – didn’t affect the rights of the pawn shop.  The pawn shop had superior rights to the Bike over the plaintiff.

Take-away: I can relate to how frustrated the plaintiff creditor must have been in this case.  It followed the supplementary proceedings rules to the letter yet still lost out to a competing (and unwitting) claimant.  If I was in plaintiff’s position,  I think I would now focus my energies on trying to freeze the defendant’s bank account (if he has one), on serving a wage deduction summons on defendant’s employer (if he has a job) or attempting to levy on any of the defendant’s non-exempt personal property.  Either way, this case illustrates how arduous a task it is for a creditor to collect on a money judgment.