garnishment – Paul Porvaznik – Business Litigator

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.

Creditor Rights In and To a Debtor’s Joint Bank Account – Part II

In re Kuhl, 2012 WL 5935101 (S.D.Ill. 2012) provides a recent synopsis of the rules governing creditor attempts to attach a debtor’s joint bank account. In it, the Chapter 7 bankruptcy trustee sought turnover of the bankrupt debtor’s funds held in three separate joint accounts with her husband. The debtor challenged the trustee’s turnover motion, claiming that the funds in all three accounts belonged to her non-debtor husband (and not to her). The court denied the trustee’s motion on two of the accounts and ordered the turnover of 50% (just over $8,000) of the funds in the third account.

In Illinois, a presumption exists that each owner of a joint bank account owns all of the account funds. Once that presumption is established, the burden shifts to the debtor and non-debtor to prove what part, if any, of the account funds belong to the non-debtor and as a result, are exempt from garnishment.

The factors a court considers to determine ownership of joint bank account monies include: (1) who controls the account funds; (2) the source of the funds (who contributed what to the account?); (3) whether any contribution to the account was a gift to the other account holder; (4) who paid taxes on earnings from the account; and (5) the purpose for which the account was set up. The first two factors – control and source of funds – are the main factors that dominate the court’s analysis. Kuhl, at *2.

Here, the non-debtor (debtor’s husband) exclusively funded the three accounts. Two of the accounts were set up exclusively to pay the non-debtor’s truck payment and the couples’ joint health insurance premiums, respectively. Because of this, the court found that the debtor didn’t sufficiently control these two accounts and it denied the trustee’s turnover request directed to these accounts.

But the third account was a closer call. This account had just over $16,000 and was funded solely by the non-debtor husband. However, the debtor clearly controlled the funds and freely made withdrawals from the account to pay her personal expenses including at Target and Wal-Mart. Since it was clear that debtor’s use of these account funds clearly benefitted her individually, the Court found that the Trustee was entitled to at least some of the funds. The Court held that the Trustee was entitled to one-half of the total funds in the account – just over $8,000. Kuhl, at *3.

Afterwords: This case provides a good summary of the rules that dictate if and when a creditor can attach a joint bank account. Clearly, the key factors are control (who controls the account?) over the account and contributions (who funded it?) to the account. Where control and contributions are vested in two separate parties – one debtor, the other a non-debtor – this case shows that the Court can order a “split the baby” distribution so that the creditor gets half the funds while the contributing non-debtor gets to keep the other half.

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

(Photo credit: www.wisegeek.com: Google images)

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.

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