Saying “I Wasn’t Served” Not Enough to Challenge Service Return On Corp. Registered Agent – IL Law
In Charles Austin, Ltd. v. A-1 Food Services, Inc., 2014 IL App (1st) 132384, the First District affirmed the denial of a corporate defendant’s Section 2-1401 motion to vacate a judgment.
About three months after judgment, the defendant sought to vacate the judgment claiming it was never served with the lawsuit. The trial court denied the motion leaving the judgment intact.
Q: Why?
A:
1/ A party can serve a private corporation by leaving the complaint and summons with the registered agent or any officer or agent of the corporation found anywhere in the State. 735 ILCS 5/2-204;
2/ An affidavit of service is prima facie proof of proper service and the court will indulge every presumption in favor of finding that service was proper;
3/ To attack service, the moving party must produce evidence that casts doubt on the return of service by clear and convincing evidence;
4/ A conclusory affidavit that merely says “I was never served” isn’t sufficient to refute a return of service. ¶ 16.
Here, the defendant’s affidavit saying he didn’t recall receiving the plaintiff’s complaint wasn’t enough to contest service on the corporation. A defendant’s bare assertion that it doesn’t remember receiving a summons and complaint is not the kind of evidence required to impeach a facially valid service return. ¶ 19.
In Illinois, to vacate a judgment more than 30 days old, a petitioner must show (1) the existence of a meritorious defense, (2) due diligence in presenting the defense in the underlying claim, and due diligence in filing the 2-1401 petition.
The defendant failed to show a meritorious defense. The plaintiff alleged the predecessor corporation secretly sold its assets to the defendant – the acquiring entity – while the litigation was pending and did so to elude the debt to the plaintiff. A well-known exception to the general rule that a successor corporation doesn’t assume the debts of a corporate predecessor is where the seller engages in a fraudulent transaction to avoid the seller’s contract obligations.
Here, the court found that the fraud exception to the rule against successor liability applied.
The court found that plaintiff sufficiently pled under Illinois fact-pleading rules that the sale of the predecessor’s assets to the defendant was fraudulent and done for the purpose of evading the plaintiff’s contract rights. As a result, the meritorious defense argument failed. ¶¶ 28-37.
The defendant also failed to establish due diligence in raising its defenses to the underlying breach of contract suit. The court noted the defendant’s registered agent was served with process in October 2012, the judgment entered in January 2013, the defendant’s bank account was liened in May 2013 and it didn’t file its 2-1401 motion until June 2013.
The eight month delay in responding to the lawsuit signaled its lack of diligence in defending the suit.
Take-aways:
– To challenge service, a defendant must do more than blanketly allege that he doesn’t recall receiving a pleading;
– If a plaintiff alleges factual basis for his claim, the defendant trying to vacate a default judgment will have difficulty meeting 2-1401’s meritorious defense element.
Prior Charging Order Trumps Later Divorce Court Order Involving Restaurant LLC Payouts
The Third District Appellate Court answers some important questions concerning the priority of competing creditors’ rights in the assets of a common debtor and the nature of appellate jurisdiction in FirstMerit Bank v. McEnery, 2014 IL App (3d) 130231-U.
There, a creditor obtained a $1.8M judgment against a defendant who had interests in several restaurant LLC ventures (the “LLCs”). The creditor then moved for and received a charging order against all current and future distributions flowing from the LLCs until the judgment was satisfied. The effect of the charging order was to place a lien or “hold” on the defendant’s distributions. (See http://paulporvaznik.com/charging-orders-judgment-debtor-llc-member/5961).
A couple years later, defendant’s wife obtained an order in a divorce case that gave her a 50% interest in the LLCs. About a year after that (divorce case) order, the trial court (presiding over the underlying suit) granted the plaintiff’s “turn over” motion (motion to require defendant to turn over future LLC distributions to the plaintiff/judgment-creditor.
The disputed issue: what took precedence? The charging order against the LLCs or the later divorce court ruling giving defendant’s wife a 50% interest in the LLCs? The trial court found that the prior charging order took priority over the defendant’s wife’s interest in the LLCs. Defendant’s wife appealed.
Held: Affirmed. Plaintiff’s charging order take priority over defendant’s wife’s interests in the LLCs
Reasons:
The Court first held that the trial court’s turn over order didn’t conflict with the divorce court order giving the wife a 50% share of the LLCs since that later order wasn’t “final” and appealable.
– Illinois Supreme Court Rule 301 provides that every final judgment is appealable as of right;
An order is final where it either terminates the litigation between the parties on the merits or disposes of the rights of the parties – either the entire controversy, or a separate branch of the litigation;
– A notice of appeal must be filed within 30 days after the entry of a final order or within 30 days after entry of the order disposing of the last pending post-judgment motion;
– Where multiple parties and claims are involved, a party seeking an appeal must request a Rule 304(a) finding (that there is no reason to delay enforcement of or appeal from an order) from the trial judge;
– An order entered in a citation proceeding under Code Section 2-1402 is final when the citation petitioner is in a position to collect against the judgment debtor or third party or the petitioner has been foreclosed from doing so
(¶¶ 30-33)
Here, the divorce court order granting the defendant’s wife a 50% share in the LLCs – while entered before the turn over order – wasn’t final because it didn’t terminate the divorce case. There was no order of marital dissolution and the divorce case continued for further status. As a result, the divorce court’s 50% share order was subordinate to the trial court’s charging order and later turn over order.
Take-away:
This case rewards aggressive creditor enforcement steps. By charging (liening) the debtor’s LLC interests, the creditor was in a position to take “first dibs” on the LLC distributions to the debtor, even though a court order later gave the debtor’s spouse a 50% share in the LLCs.
The case also cements the proposition that a charging order impresses a lien on a debtor’s LLC distributions and that this charging lien will take primacy over any later judgment or lien filing related to the same LLC distributions.