citation – Page 2 – Paul Porvaznik

Technically Non-Final Default Judgment Still Final Enough to Support Post-Judgment Enforcement Action – IL Fed Court (From the Vault)

Dexia Credit Local v. Rogan, 629 F.3d 612 (7^th Cir. 2011) reminds me of a recent case I handled in a sales commission dispute. A Cook County Law Division Commercial Calendar arbitrator ruled for our client and against a corporate defendant and found for the individual defendant (an officer of the corporate defendant) against our client on a separate claim. On the judgment on award (JOA) date, the corporate defendant moved to extend the seven-day rejection period. The judge denied the motion and entered judgment on the arbitration award.

Inadvertently, the order recited only the plaintiff’s money award against the corporate defendant: it was silent on the “not liable” finding for the individual defendant. To pre-empt the corporate defendant’s attempt to argue the judgment wasn’t a final order (and not enforceable), we moved to correct the order retroactively or, nunc pro tunc, to the JOA date so that it recited both the plaintiff’s award against the corporation and the corporate officer’s award versus the plaintiff. This “backdated” clarification to the judgment order permitted us to immediately issue a Citation to Discover Assets to the corporate defendant without risking a motion to quash the Citation.

While our case didn’t involve Dexia’s big bucks or complicated facts, one commonality between our case and Dexia was the importance of clarifying whether an ostensibly final order is enforceable through post-judgment proceedings.

After getting a $124M default judgment against the debtor, the Dexia plaintiff filed a flurry of citations against the judgment debtor and three trusts the debtor created for his adult children’s’ benefit.

The trial court ordered the trustee to turnover almost all of the trust assets (save for some gifted monies) and the debtor’s children appealed.

Affirming, the Seventh Circuit first discussed the importance of final vs. non-final orders.

The defendants argued that the default judgment wasn’t final since it was silent as to one of the judgment debtor’s co-defendants – a company that filed bankruptcy during the lawsuit. The defendants asserted that since the judgment didn’t dispose of plaintiff’s claims against all defendants, the judgment wasn’t final and the creditor’s post-judgment citations were premature.

In Illinois, supplementary proceedings like Citations to Discover Assets are unavailable until after a creditor first obtains a judgment “capable of enforcement.” 735 ILCS 5/2-1402. The debtor’s children argued that the default judgment that was the basis for the citations wasn’t enforceable since it did not resolve all pending claims. As a result, according to debtor’s children, the citations were void from the start.

The Court rejected this argument as vaunting form over substance. The only action taken by the court after the default judgment was dismissing nondiverse, dispensable parties – which it had discretion to do under Federal Rule 21. Under the case law, a court’s dismissal of dispensable, non-diverse parties retroactively makes a pre-dismissal order final and enforceable.

Requiring the plaintiff to reissue post-judgment citations after the dismissal of the bankrupt co-defendant would waste court and party resources and serve no useful purpose. Once the court dismissed the non-diverse defendants, it “finalized” the earlier default judgment.

Afterwords:

A final order is normally required for post-judgment enforcement proceedings. However, where an order is technically not final since there are pending claims against dispensable parties, the order can retroactively become final (and therefore enforceable) after the court dismisses those parties and claims.

The case serves as a good example of a court looking at an order’s substance instead of its technical aspects to determine whether it is sufficiently final to underlie supplementary proceedings.

The case also makes clear that a creditor’s request for a third party to turn over assets to the creditor is not an action at law that would give the third party the right to a jury trial. Instead, the turnover order is coercive or equitable in nature and there is no right to a jury trial in actions that seek equitable relief.

Joint Owner of Checking Account Must Prove Exclusive Right to Funds by Elevated Burden of Proof – IL Appeals Court

Gataric v. Colak, 2016 IL App (1st) 151281 presents a collection tug of war between a judgment creditor and a third party concerning funds in a joint bank account. The salient issue is what level of proof the third party must meet in order to rebut the presumption that the bank account funds belong not to the third party, but to the judgment debtor.

The plaintiff judgment creditor served a third-party citation on the judgment debtor’s bank who then froze the account. The respondent, a joint account holder, intervened and asserted she was the account’s sole owner and the debtor was only added for “convenience” purposes.

The trial court sided with the plaintiff, and found the respondent failed to prove by clear and convincing evidence that she was entitled to all funds in the account and did not intend to gift the joint account funds to the debtor at the time the account was opened. The court granted the creditor’s turnover motion and defendant appealed.

Held: Affirmed.

Reasons:

The defendant argued that she was only required to prove her rights to the joint account by a preponderance of evidence – a less exacting burden than the clear and convincing evidence standard applied by the trial court. To meet the preponderance standard, the claimant must prove that her allegations “more likely than not” occurred. The common mathematical description of the preponderance standard is that there is a 51% chance that plaintiff’s version of events happened as opposed to defendant’s.

The third party in Gatarik argued that she alone set up the joint account as a convenience account. She claimed to add the judgment debtor as a joint account holder simply to facilitate the repayment of a short-term loan.

Under Illinois law, joint bank account holders are presumed to have equal access to account funds and a creditor of only one holder can attach the account. The burden shifts to the non-debtor account owner to establish what part of the account belongs to him/her.

When a garnishee (i.e. a bank or bank account holder) answers that a judgment debtor holds money in a joint bank account, this establishes a prima facie case that the money in the account belongs to the judgment debtor. The burden then shifts to the garnishee to prove what part of the funds belong exclusively to him/her.

When deciding who owns joint bank account funds, the court examines: (1) who exercised control of the funds, (2) who made contributions to the account and from what source and in what amount, (3) who paid taxes on the account’s earnings, and (4) the purpose for which the account was established. (¶¶ 19-20)

Here, the trial court found, after hearing live testimony, that the citation respondent didn’t establish by clear and convincing evidence that she was the sole owner of the account funds and that the account was a mere convenience account.

Since the respondent couldn’t show that the trial court misapplied the law or the facts, her appeal failed. As a result, the trial court’s turnover order related to the account funds was upheld.

Afterwords:

In situations where two or more people are claiming rights in frozen bank account funds, it is incumbent on the non-debtor to establish by clear and convincing evidence his/her dominant right to the funds.

The clear and convincing evidentiary burden falls midway between preponderance of evidence (the most relaxed burden) and beyond a reasonable doubt (the most severe) on the proof spectrum.

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

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.

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