When The Person You Have A Judgment Against Has His Property Tied Up In A Trust: What Then?

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In earlier posts, I’ve discussed how time-consuming and frustrating it can be to collect on a money judgment.  The primary creditor enforcement methods include freezing the debtor’s bank accounts, garnishing his wages, and liening his real estate by recording the judgment in the county where his land is located.  Recording a lien against a debtor’s real estate is an especially strong tactic.  Once a creditor records the judgment, he can sue to foreclose the property and force its sale.  But where a debtor has no assets or source of income, the judgment is worthless. 

Adding yet another layer of difficulty to the collection process is where a debtor’s property is sheltered in a trust.  The most common scenario I encounter this in my practice is with real estate held in a land trust.  Typically, the property will be owned by a trustee (usually a bank) and lived in by the debtor who most likely is the trust beneficiary. 

In Illinois, a debtor’s beneficial interest in a land trust is regarded as personal property: he (the debtor) doesn’t possess a direct ownership interest in the trust real estate.  The practical effect: you can’t lien the real estate by recording the judgment since the trust – not the debtor – owns the land.  The debtor’s beneficial interest in a land trust is considered intangible personal (not real) property.  

Illinois’ post-judgment statutory scheme expressly allows a creditor to impress a lien on a debtor’s intangible property via the citation to discover assets.  Once a citation is served on the debtor, the judgment becomes a lien on all of a debtor’s nonexempt personal property (including a beneficial interest in a land trust) on the date the citation is served. 

The citation results in the judgment binding the debtor’s personal property (everything that’s not land basically: cars, jewelry, stereo equipment, stocks, bonds, etc.) in his possession or which later comes into his possession before the citation expires.  735 ILCS 5/2-1402(m)(1). 

Code Section 2-1403 (735 ILCS 5/2-1403) provides that no court can order the satisfaction of any judgment out of property held in trust if (a) the trust was created in good faith; and (b) created by someone other than the debtor.  So, if the trust was created by a third party, the trust property is protected from creditors.  However, once any trust property is distributed “out of” the trust, the creditor can attach and lien the disbursement.

Creditor’s counsel should be leery of property held in trust for the debtor’s benefit and be cognizant of other standard exemptions (property that creditor’s can’t touch) like pension funds, retirement accounts, unemployment benefits, etc. 

Assuming there is no fraud or other suspicious circumstances surrounding the trust’s creation, the trust property will be shielded from creditors.  However, once the trust income is disbursed to the debtor, it’s fair game.  The creditor should then promptly move for a turnover order or ask the court to impress a judicial lien on the trust funds being distributed to the debtor. 

Contractor’s Failure to Provide Sworn Statement Dooms Mechanics Lien Suit

A contractor lost its nearly $400,000 mechanics’ lien when it failed to serve a “Section 5 statement”, which lists subcontractors and amounts owed and owing, after the property owner requested one.  770 ILCS 60/5 (the “Lien Act”).

In Cityline Construction v. Roberts, 2014 IL App (1st) 130730, the parties entered into an oral contract for fire restoration work.  The plaintiff contractor sued to foreclose a mechanics lien and for breach of contract and quantum meruit.  The owners, in turn, filed a declaratory judgment counterclaim seeking to invalidate the mechanics’ lien.  During discovery, the contractor admitted in response to the homeowner’s request to admit facts that it (the contractor) never provided a Section 5 statement despite the owner’s request for the statement.  The trial court granted summary judgment for the homeowners on their counterclaim.  The court held that the contractor’s failure to supply the statement was fatal to its lien claim.

Held: Affirmed.

Rules/reasoning:

The Lien Act is strictly construed and its provisions must be scrupulously followed.  Section 5 of the Lien Act requires a contractor to provide (and an owner to request) a sworn statement listing names and addresses of all parties furnishing labor and materials to a job and the amounts due or to become due each party.  770 ILCS 60/5.  The contractor admitted not providing a Section 5 statement but argued that strict compliance should be relaxed and that the failure to give the statement didn’t harm the owners.  Cityline, ¶¶ 11-12.

Rejecting this “no harm, no foul” argument, the Court provided a synopsis of several Illinois cases from the past several years that, in unison, have held that the technical requirements of Section 5 of the Lien Act must be strictly complied with for a lien to be valid.  Cityline, ¶¶ 13-17.  The Court refused to read any exceptions into or engraft any limitations on the Lien Act’s statutory language.  Since the evidence was clear that (a) the owners requested a Section 5 statement, and (b)  the contractor failed to supply the statement, the lien was invalid.

All is not lost for the contractor though.  The contractor still has valid breach of contract and quantum meruit claims.  The Cityline court stressed that a contractor’s failure to provide a Section 5 statement doesn’t defeat a breach of contract or alternative quantum meruit action.  But losing the lien claim is an obvious blow to the contractor though.  With no security for its claim, the contractor must now hope that if it wins a money judgment against the owners, they (the owners) will have non-real estate assets with which to satisfy a judgment.

Take-aways:

An example of strict statutory construction.  The contractor’s equitable (the purpose of the section was met) and policy arguments (the court shouldn’t vaunt form over substance) were discarded.  Lost in the analysis is that Section 5 also imposes a duty on the owner to specifically request a Section 5 statement.  The Court suggests that if the owner fails to ask for the statement, it possibly won’t defeat a contractor’s lien claim.  Cityline, ¶ 22.  But even so, the cases cited by the Court that hold that a Section 5 statement can be waived where the owner fails to request one, are more than 100 years old and involve an outdated version of the Lien Act.  Clearly, the prudent practice is for the owner to request a Section 5 statement and for the contractor to provide a Lien Act-compliant statement in response.

 

Suit Against Home Inspector Thrown Out Based on Contractual Liquidated Damages Clause and Disclaimers

In Boshyan v. Private I. Home Inspections, Inc., 2014 IL App (1st) 287715, the First District examines the interplay between a liquidated damages provision and limitation of liability language in a written home inspection contract.

The plaintiff home buyer sued his home inspector for breach of contract after the plaintiff encountered property defects after he moved into a house.  The trial court granted the  inspector’s Section 2-619 motion to dismiss based on the exculpatory contract language.

Held: affirmed

Rules/Reasoning:

The inspection contract was profuse with disclaimers.  Itlimited the plaintiff to damages of $500, it excluded latent defects from the inspection and also disclaimed any express or implied warranties.

Affirming dismissal of the home buyer’s suit, the Court held that the inspection contract’s $500 damage cap was a valid liquidated damages clause.  The Court defined a liquidated damages provision as one that specifies a method of determining damages in the event a contract is breached and that provides an agreed-upon measure of damages upon breach.

The court distinguished a liquidated damage clause from an exculpatory clause: the latter completely insulates the defaulting party’s liability.  ¶¶ 23-27.

The Court found the liquidated damages term unambiguous and contract manifested the parties’ intent to pre-calibrate damages at the contract’s outset.  ¶ 27.

The Court went further.  It held that even if the $500 damage cap wasn’t a valid liquidated damages clause (e.g. it was a penalty to secure performance or was optional in nature*), the term would still be enforced as an exculpatory clause.

Exculpatory clauses seek to strike a balance between freedom of contract principles on the one hand and any public policy considerations which would restrain that freedom on the other hand.

In the area of “nonregulated” contracts (e.g. contracts involving private parties), the Court permits competent parties to allocate business risks as they see fit.  Here, since there was no special relationship between the parties – the home buyer and inspector were on an equal bargaining footing – no public policy of Illinois was violated by the contract term limiting plaintiff’s damages to $500.

Take-away: Freedom of contract principles will trump public policy considerations where the contracting parties are on an equal contractual footing in terms of education and socio-economic status and there is no fraud or over-reaching by one of the parties.

Home buyers should be aware that home inspection agreements are often laden with either or both (like the one here) disclaimer language and liquidated damages terms.  They should be especially cognizant of damage caps in written home inspection agreements.  This case also stands for proposition that a technical violation of a business licensing statute won’t necessarily void a contract involving the violating business.

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* For Detailed Discussion of Liquidated Damages Clause, see  “Holdback Provision in Real Estate Contract Fails Liquidated Damages Test”, Chicago Daily Law Bulletin, Commercial Litigation Column, March 10, 2014 http://www.slideshare.net/slideshow/embed_code/32194241