Paul Porvaznik – Business Litigator – Page 132 – Case Notes and Summaries of Recent Cases (State and Federal Courts

Creditor Rights To A Debtor’s Joint Bank Account Funds and Life Insurance Policies

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In the perpetual cat-and-mouse game played out across the collection law landscape, an important recurring question is what rights a creditor has to a debtor’s joint bank account – an account with two or more account holders.

The creditor wants to attach as much of the account as possible to satisfy or pay down a judgment balance while the non-debtor account holder (who has nothing to do with the lawsuit or judgment against the debtor) wants to protect the account or at least the account funds that belong uniquely to her.

A joint bank account – like the name suggests – is an account with multiple account holders all of whom have equal account access. See (http://www.nerdwallet.com/blog/banking-faqs/personal-joint-checking/).

A 2002 Seventh Circuit case provides a snapshot of the operative rules that control a creditor’s attempt to garnish a debtor’s life insurance policy and joint checking account. In Society of Lloyd’s v. Collins, 284 F. 3d 727 (7th Cir. 2002), the plaintiff global insurance behemoth obtained a default judgment in a British court of almost $1,000,000 against two Illinois residents who were members of a Lloyd’s-controlled insurance syndicate.

After registering the judgment in Illinois, the plaintiff insurance giant tried to garnish defendant’s nine life insurance policy premiums (which named his wife as beneficiary) and the other defendant’s joint bank account. The District court quashed the garnishments against the insurance policy and the bank account and the Seventh Circuit affirmed.

Q: Why Did the Creditor Lose?

A: Insurance policies (either insuring the debtor or insuring someone whom the debtor is dependent) are normally exempt from a judgment creditor’s reach. 735 ILCS 5/12-1001 (judgment exemptions generally).

However, life insurance policies can be attached where (1) the life insurance policy was purchased with the intent of converting nonexempt property into exempt property; and (2) if the policy was purchased to defraud creditors.

The fraud exception applies where there is actual fraud or constructive fraud. A court will find a transfer constructively fraudulent where (1) an insolvent debtor pays insurance premiums instead of the debt to the creditor, and (2) where the debtor pays premiums without getting any consideration for the transfer. Id. at 730.

Here, neither exception applied. The plaintiff creditor couldn’t show that the defendant tried to convert nonexempt personal property to exempt property since defendant purchased the life insurance policies long before his involvement with plaintiff. There was also no evidence of fraud: the debtor was solvent at the time he made the life insurance premiums and he received consideration – life insurance coverage – for the premium payments. Based on this, the Court struck the creditor’s attempts to lien the insurance policies.

The Court also declared the other debtor defendant’s joint checking account exempt from the plaintiff’s judgment. The plaintiff had the initial burden of establishing that the joint checking account funds belonged to the debtor. Once the plaintiff met this burden, the burden shifted to the debtor’s wife – as joint account holder – to show that all or part of the joint account funds belonged to her. I’d. at 730.

The debtor’s wife satisfied this burden by proving that the joint account funds (totaling $12,000) consisted of rent monies received from properties she owned. She also proved that she for the most part controlled the joint account funds and the debtor’s involvement in the account was minimal. The only access debtor had to the account was to pay joint bills. Without any evidence that the debtor used the joint account funds for his personal use, the Court held that the joint checking account was exempt from creditor attachment.

Take-away: in situations where a debtor has joint bank account funds, a creditor needs to be tenacious in establishing which funds uniquely belong to the debtor as opposed to the joint holder.

Corporate Registered Agent’s Inaction Not Binding On Corporation: Court Vacates One-Year Old Default Judgment

West Bend Mut. Ins. Co. v. 3RC Mechanical and Contracting, Inc., 2014 IL App (1st) 123213, presents a recent and detailed illustration of the prevailing Section 2-1401 (735 ILCS 5/2-1401) standards to vacate judgments that are between 30 days and two years old.

The plaintiff (as subrogee of its insured) filed suit against a mechanical contractor – an Illinois LLC – for breach of an oral construction contract. But before plaintiff filed suit, and without plaintiff’s knowledge, the contractor filed for bankruptcy protection. When plaintiff learned of the contractor’s bankruptcy, it got permission from the bankruptcy court to continue the breach of contract suit against the contractor in state court.

Over the next several months, the contractor was a no-show at several (breach of contract suit) court hearings. The plaintiff sent two motions for default and a default order to the contractor’s former registered agent and to the contractor’s former business address – an address from which the contractor moved before the lawsuit was filed. The registered agent never notified the contractor’s managing partner of the state court case’s status and never sent the managing partner court orders or motions even though the partner’s identity and address was listed in the corporate bankruptcy filings. The trial court entered an approximately $80,000 default judgment against the contractor. About five months later, when the contractor learned of the default, it filed a Section 2-1401 petition to vacate the default judgment. The contractor’s petition to vacate was granted and the plaintiff appealed.

Held: Affirmed.

Rules/Reasoning:

Code Section 2-1401 provides a mechanism for someone to vacate a judgment more than 30 days old. The party moving to vacate a 30-plus days’ old judgment must support the petition with an affidavit and show (1) a meritorious defense; (2) due diligence in raising the defense in the underlying case; and (3) due diligence in filing the section 2-1401 petition for relief from the judgment. 3RC, ¶ 11.

Due diligence in bringing the 2-1401 motion is established as long as it’s filed within two years of the judgment. 2-1401(c), (¶ 12). A meritorious defense is one that raises a question of law that deserves to be factually investigated. As for the second element – due diligence in raising a defense – the court looks to whether the 2-1401 petitioner had a reasonable excuse for failing to timely act as opposed to simple oversight or negligence. The petitioner must show that his failure to defend the suit was an “excusable mistake” and that he acted reasonably in initially failing to defend the suit. (¶ 14).

Here, the contractor defendant established due diligence in filing the petition since it brought the petition to vacate some five months after the judgment entered – well within the two-year statutory cut-off. The contractor also established a meritorious defense: it asserted that there was no written or verbal contract between it and the plaintiff and filed a supporting, sworn affidavit.

On the due diligence in presenting a defense element, the court noted that plaintiff repeatedly sent court papers to the corporation’s former registered agent and to the wrong address – the corporation’s former place of business that had been closed for more than a year. The corporation’s ex-registered agent failed to notify the corporate managing partner of the lawsuit and the default order.

The Court also noted that plaintiff failed to send court orders directly to the corporate managing partner, even though the managing partners’ address was prominently listed in various corporate bankruptcy filings. Because of this, the Court agreed with the trial court and found that defendant demonstrated a reasonable excuse for not appearing in and defending the underlying case. (¶¶ 14-16).

Take-aways: This case presents a good snapshot of Section 2-1401 motion practice including the required showings necessary to vacate a dated judgment (between 31-730 days old). It also shows the perils of not properly serving default orders on a corporate defendant.

When dealing with a defunct or financially foundering corporation that’s not represented by counsel, I always try to serve the corporation at its registered office or, failing that, I serve a corporate officer. If necessary, I hire a process server to skiptrace the corporate principals so I can show the court I did all I could to notify the corporate defendant of a default order or judgment.

Discovery Sanctions and Getting Medical Records Into Evidence – Illinois Case Note

In Fraser v. Jackson, 2014 IL App (2d) 130283, the Second District affirmed a $600K-plus jury verdict for the personal injury plaintiff. The Court also upheld the trial court’s exclusion of defendant’s medical expert testimony at trial and found that the defendant failed to answer plaintiff’s request to admit medical records in good faith.

Discovery Sanctions: Rule 219 and 213 Interplay

Illinois Supreme Court Rule 213(f)(3) requires a party, upon written interrogatory to identify controlled expert witnesses and provide testimonial subjects, conclusions, opinions, qualifications and any written reports. SCR 213(f)(3). The rule demands strict compliance. Rule 219 provides a trial judge with an array of sanctions options including barring testimony from a party or its expert where it fails to comply with discovery rules or orders. SCR 219(c)(iv). Sanctions are committed to the trial court’s discretion and the purpose of sanctions is not to punish; but to motivate discovery compliance. (¶¶ 28-29).

The Court found that the trial court properly barred defendant’s medical expert from testifying. The defendant violated several discovery orders and its retained expert failed to respond to a documents subpoena despite repeated requests. The trial judge gave defendant many chances to comply with discovery and entered progressive sanctions before barring outright the defendant’s expert from testifying.

Medical Records: Evidentiary Foundation Rules

The Court also held that plaintiff laid a sufficient foundation for the admission of his medical bills in evidence.

In Illinois, the evidentiary foundation for admitting medical records can be established by a doctor’s deposition testimony or through testimony of a non-doctor employee familiar with the medical practice’s billing methods and reasonableness of the charges. (¶40).

At trial, the plaintiff offered evidence deposition testimony of several treating physicians and a medical billing specialist – all of whom testified that plaintiff’s medical treatment and bills were reasonable and commensurate with the type of injury that plaintiff suffered in the car crash. This testimony cumulatively satisfied the foundation requirements for admitting medical bills into evidence.

Costs and Attorneys’ Fees (Rule 219(b) and 216 interplay)

The Court upheld the trial court’s $4,000 plus sanctions award against defendant for failing to respond in good faith to plaintiff’s request to admit that the medical bills were reasonable and necessary.

Illinois law allows a plaintiff to utilize a Rule 216 Request to Admit to seek admissions that his medical treatment and related expenses were reasonable and necessary in view of the plaintiff’s injury.

Rule 219(b) allows a plaintiff to recover fees and costs where he proves a requested fact that the defendant denies where the denial isn’t in good faith, based on privilege or some other permissible reason – even if the defendant doesn’t have a specific intent to obstruct the litigation process. SCR 219(b), ((¶¶44-46).

The court found the defendant’s failure to admit the reasonableness and amount of plaintiff’s medical bills was not in good faith. Because of the defendant’s denial, the plaintiff had to open up a case in another state (Wisc.) and subpoena a medical records agent to testify telephonically at trial. The Court found that because defendant made plaintiff jump through so many logistical hoops to get a billing agent to testify on a mundane issue, the trial court’s fees and costs award was proper. (¶47).

Take-aways:

– A trial court has wide latitude to assess discovery sanctions including barring witnesses;

– A request to admit a fact that’s not subject to meaningful dispute should be admitted by the opposing side. Otherwise, the party denying the requested fact or document will have to pay the requesting party’s fees and costs incurred in proving that fact/document.

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