Land Trust Beneficial Interest is Personal Property; Related Realty Can’t Be Liened by Creditor (IL Law)

It’s easy to robotically parrot the “beneficial interest in a land trust is personal property” rule but First Clover Leaf Bank v. Bank of Edwarsville, 2014 WL 6612947 (5th Dist. 2014) actually examines the rule’s impact against the factual backdrop of a judgment creditor trying to lien a debtor’s residence.

The creditor plaintiff obtained a $400,000-plus judgment against a husband and wife (the “Shareholders”) on various commercial guaranties they signed.  A corporation that the Shareholders each held a 50% stake in was the beneficiary of a land trust that held title to the Shareholders’ home (the “Property”).

When plaintiff learned that the Shareholders were trying to sell the Property for over $700,000, it recorded a lis pendens based on its earlier breach of guaranty judgment.  The lis pendens filing dissuaded the Property’s contract purchaser from closing and a lender later sued to foreclose on the Property.

The plaintiff then filed suit against the land trust, the corporate beneficiary (the Shareholders’ company) and the Shareholders to impose a constructive trust over the foreclosure sale proceeds.  The trial court granted plaintiff’s summary judgment motion and imposed a constructive trust on the proceeds.  The court also held that the corporate beneficiary was the alter ego of the Shareholders and so plaintiff was entitled to a constructive trust on each Shareholder’s equitable interest in the foreclosure sale proceeds.  The land trust appealed.

Held: reversed.  Land trust beneficial interest is personal property; not real property.  As a result, the lis pendens recording didn’t affect the corporate beneficiary’s interest in the Property.

Rules/reasoning:

– A beneficiary’s interest in a land trust is personal property and is not considered real estate;

– To create a security interest in personal property, a creditor must look to Article 9 of the UCC;

– Assignment of a beneficial interest in an Illinois land trust transfers an interest in personal property and does not give the assignee a direct interest in the real estate subject to the trust;

– A lien on a beneficial interest is not a lien on the real estate itself;

– A corporation will be deemed an alter ego of a controlling shareholder where the corporation is inadequately capitalized, doesn’t issue stock or observe corporate formalities, fails to pay dividends, is insolvent, has no records and nonfunctioning officers;

– Illinois has a general reluctance to pierce the corporate veil and a party seeking to pierce must make a substantial showing on all these factors;

– A lis pendens notice can only be filed when real estate is involved (735 ILCS 5/2-1901); it is not proper to file in connection with a personal judgment against someone

(¶¶ 15-18)

Here, the Shareholders had no legal interest in the Property.  They were shareholders in a corporation that was a beneficiary of the land trust that held title to the Property.  The corporate beneficiary’s interest in the land trust was personal property.  Because of this, the Shareholders interest in that corporate beneficiary was also personal property.

The net effect: plaintiff could not impress a lien against the Property in efforts to enforce its guaranty judgments against the Shareholders. Instead, Plaintiff should have filed a UCC financing statement (in the Secretary of State’s office) to lien the beneficial interest in the land trust.  Since the shareholders had no definable legal interest in the Property (it was owned by the land trust), plaintiff couldn’t assert a constructive trust against the Property foreclosure sale proceeds.

Take-away:  A factually convoluted and tortured case that illustrates the challenges creditors face trying to untangle complex webs of corporate protection to reach a controlling individual’s assets.  If in the creditor’s position, in addition to filing a UCC statement, I think I would issue third-party citations on the land trust entity and the corporate beneficiary.  Then, I would try to impress a lien or seek a turnover order as to any of the Shareholders interests in either the land trust or the corporate beneficiary.

Motions to Continue Trial: Illinois Standards

 

imageIn K&K Iron Works v. Marc Realty, LLC, 2014 IL App(1st) 133688, a construction dispute involving a Chicago fitness center, the court discusses the factors a court considers when deciding whether to grant a trial continuance.  There, on the day of trial, after several years of litigation, the property manager defendant fired its attorney and sought a continuance (through its corporate agent).  The trial judge denied the continuance and entered a $150,000-plus judgment for the plaintiff subcontractor.

Affirming the trial court, the First District enunciated the key legislative, judicial and local court rules that together govern a court’s analysis when faced with a motion to continue trial:

– A litigant doesn’t have an absolute right to a continuance;

– The decision to grant or deny a motion for continuance is within sound discretion of the trial court and won’t be disturbed on appeal absent a “palpable injustice” or a “manifest abuse of discretion”;

– Section 2-1007 allows additional time for doing any act in the litigation process on “good cause shown”;

– Illinois Supreme Court Rule 231(f) provides that no continuance motion will be granted after the case has reached trial unless a sufficient excuse for the delay is shown;

– Once a case gets to trial, a continuance will only be allowed where the movant offers “especially grave reasons” for the continuance such as potential inconvenience to the witnesses, parties, and the court;

– Cook County Circuit Court Rule 5.2(b) provides that a continuance will not be granted on the basis of a substitution or addition of attorneys;

– There is no constitutional right to counsel in a civil trial between corporations;

– An important continuance factor is the degree of diligence (during the whole case) shown by a party that seeks the continuance;

(¶¶ 22-25); 735 ILCS 5/2-1007; SCR 231(f); Cook Co. Cir. Ct. R. 5.2(b)

Affirming the denial of the continuance, the Court noted that the property manager defendant had multiple chances to seek a continuance before the trial date.  By waiting until the day of trial, the defendant gambled (and lost) that the judge would give it additional time to secure alternate counsel.

The Court also rejected the defendant’s argument that under Supreme Court Rule 13 (the rule that governs withdrawal of counsel), it should have been given 21 days to find substitute counsel.  The Court noted that here, the defendant’s counsel didn’t withdraw.  Instead, the defendant chose to fire its attorney on the eve of trial.  As a result, Rule 13’s 21-day period to find substitute counsel didn’t apply.

Take-aways:

(1) A litigant’s right to a continuance of a trial has limits and the closer to the trial date, the harder it is to get a continuance;

(2) If a litigant moves for continuance on day of trial, he must show extreme necessity;

(3) waiting to fire an attorney on day of trial is a risky gambit;

(4) The 21-day period to get substitute counsel under Rule 13 doesn’t apply where a defendant fires a lawyer as opposed to that lawyer moving to withdraw.

 

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).