third-party citation – Paul Porvaznik

Turnover Order Against Debtor’s Wife’s Company Upheld – IL First District

While the amount of the turnover order – less than $6,000 – challenged in Xcel Supply, LLC v. Horowitz, 2018 IL App (1st) 162986 was but a fraction of the underlying judgment – over $600,000 – the case provides a useful discussion of the interplay between Section 2-1402 and Rule 277 – Illinois’s twin supplementary (post-judgment) proceedings authorities – and when a third-party citation respondent is entitled to an evidentiary hearing.

About a month after a trial court entered a money judgment against defendant, his wife – through her company – wrote six checks to the defendant/ judgment debtor over a three-month span totaling $5,220.

On the creditor’s turnover motion, the trial court ordered the debtor’s wife and third-party citation respondent (the Respondent) to turn over $5,220 to plaintiff’s counsel (defendant’s wife’s company). The Respondent appealed.

Affirming, the Court examined Code Section 2-1402 and Rule 277 to assess whether the turnover order was supported by competent proof.

Code Section 2-1402(a) permits a judgment creditor to prosecute supplementary proceedings to discover assets or income of the debtor and apply assets or income discovered toward the payment of the judgment.

The creditor can initiate post-judgment proceedings against the debtor or any other third party who may have information concerning income or assets belonging to the judgment debtor.

Code Section 2-1402 vests the Court with broad powers to compel any person to deliver assets to be applied towards satisfaction of the judgment in situations where the judgment debtor can recover those assets. An order compelling a third-party to deliver assets in full or partial satisfaction of the judgment is called a turnover order. A court can enter judgement against someone who violates a citation’s restraining provision in the amount of the property transferred or up to the judgment amount. 2-1402(f)(1); ⁋⁋ 40-41.

Rule 277 works in tandem with Section 2-1402 and specifies how supplementary proceedings are conducted. Among other things, the Rule allows “any interested party” to subpoena witnesses and adduce evidence in the same manner it could at a civil trial.

Where a judgment creditor and third-party citation respondent each claim superior rights to the same debtor assets, the trial court should conduct an evidentiary hearing. However, where only the judgment creditor is claiming rights in the debtor’s assets, the trial court can decide the post-judgment proceeding without an evidentiary hearing.

Here, because the Respondent was the debtor’s wife – the Court viewed her as an illusory citation respondent. That is, the debtor and Respondent acted as a united front. Because this was not the prototypical “tug-of-war” between a judgment creditor and third-party citation respondent, the trial court was able to rule on the respondent’s argument without an evidentiary hearing.

The Court also rejected the respondent’s argument that the turnover order lacked an evidentiary basis. The Court noted that the judgment debtor admitted in his affidavit to cashing all six checks from the Respondent’s company and that Respondent did nothing to stop him from cashing the checks.

Since the Respondent never challenged the debtor’s right to cash the checks, the Court viewed it as strong proof that the checks were the debtor’s property to spend as he pleased.

Finally, the Court rejected Respondent’s argument that the money sent to the debtor wasn’t really his money as the funds were earmarked for their children’s expenses. According to the court, since both the debtor and Respondent had equal parental obligations to pay their children’s expenses, whether or not the money was for child expenses didn’t negate the trial court’s finding that the checks were defendant’s property and Respondent violated the citation by transferring the checks to the defendant after the date of the money judgment.

Afterwords: This case shows that citation restraining provisions which bar a third-party citation respondent from transferring money or property belonging to or to become due a judgment debtor have teeth.

While an evidentiary hearing is normally required where there are competing claimants to the same pool of assets, this rule is relaxed where the citation respondent is aligned (here, through marriage) with the debtor. In such a case, the court will look beyond the legal nomenclature and assess the reality of the parties’ relationship. Where the third-party citation respondent doesn’t have a meaningful claim to transferred debtor assets, the Court can decide a turnover motion without hearing live witness testimony.

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).

Priority Dispute Central: When a Bank and Creditor Both Vie for the Same Account Holder Funds

Banks and their commercial customers often enter loan agreements which give the bank the right to set-off or “swipe” the customer’s account if the customer defaults on a loan. The boilerplate loan documents will typically list as a default event, a judgment creditor of the customer attempting to attach the account funds.

The loan and security agreement will also give the bank “first dibs” on those funds: the bank can liquidate the account and apply the funds to the customer’s outstanding loan balance. This creates a classic priority dispute: the judgment creditor wants the customer’s account (because that is likely the only hope for recovering any monies) while the bank wants the same funds so it can salvage its loan rights.

One CW, LLC v. Cartridge World, 661 F.Supp.2d 931 (N.D.Ill. 2009) involves a priority dispute in a franchise suit. The plaintiff, a prospective franchisee, sued and obtained an arbitration award against the seller and entered the judgment (about $360K) in Federal court. The plaintiff then issued a third-party citation against the defendant/seller’s bank and sought turnover of over $81K held in the defendant’s bank account. The bank claimed priority to the entire funds pursuant to both a UCC filing against the defendant’s assets and under Code Section 12-708 which governs a third party citation respondent’s set-off rights. 735 ILCS 5/12-708.

In finding for the plaintiff creditor, the Court harmonized the various Illinois Code sections and some cases that govern post-judgment or supplementary proceedings. See 735 ILCS 5/2-1402 (governs citation proceedings); SCR 277 (same). The key rules:

– a judgment lien is created in a judgment debtor’s nonexempt assets upon proper service of a citation. Section 2-1402(m);

– citations may be served upon the judgment debtor or a third party (usually a bank) that has personal property of the debtor in its possession. 2-1402(m)(2);

– the citation lien that’s created upon service of a citation doesn’t affect the rights of citation respondents in property prior to service of the citation. 2-1402(m);

– a third party who violates the citation restraining provision (by not freezing the account, e.g.), can have judgment entered against it for – lesser of – unpaid judgment amount or in the amount of any property transferred. 2-1402(f)(1);

– a third-party citation respondent has a right to clam all set-offs against the judgment creditor that it could assert against the debtor and must hold, subject to court order, any non-exempt property of the debtor in the respondent’s possession. 12-707(a);

– the third-party respondent must also file a written answer (to the garnishment interrogatories) under oath, that states any property or indebtedness due or to become due the debtor in the third party’s possession or control. 12-707(b);

– a third-party respondent can exercise its set-off rights and deduct from a debtor’s deposit account amounts owing on a note even if the note is not yet due;

– the bank does not have to first proceed against an account holder’s collateral securing the loan before exercising its set-off rights.

pp. 934-936.

Applying these rules, the Court found that the third-party respondent bank failed to properly assert its prior security interest rights by unfreezing the debtor’s assets without court approval and by taking no action to foreclose on its security interest in the debtor’s bank account.

The Court also held that the bank lost its set-off rights by failing to comply with the third-party citation. The Court pointed out that the bank failed to take any steps to exercise its set-off rights such as accelerating the debtor’s defaulted loan and also failed to properly freeze the debtor’s account as required by the text of the third-party citation order and Section 2-1402(f)(1) and 2-1402(m).

Take-aways:

Creditor’s counsel should be leery of Section 12-708’s set-off provision and the caselaw’s expansive application of a third-party’s set-off rights. If a bank has a prior loan to an account holder/debtor, it can likely claim a set-off in the amount in default. It seems the best you can do as a creditor attorney in this situation is to have the bank prove that it is swiping the debtor’s funds and actually crediting the funds against the loan balance.

From the third-party respondent/bank’s vantage point – it should exercise all security interest rights by taking possession of a debtor’s collateral and applying the account funds to the outstanding loan balance. The responding bank should also timely and properly answer a creditor’s garnishment interrogatories and immediately assert its set-off rights in the debtor’s account funds.

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