Tag: turnover order

Debtor’s Use of LLC As ‘Personal Piggy Bank’ Leads to Turnover and Charging Orders

Golfwood Square, LLC v. O’Malley, 2018 IL App(1st) 172220-U, examines the interplay between a charging order and a third party citation to discover assets turnover order against an LLC member debtor.  The plaintiff in Golfwood engaged in a years’ long effort to unspool a judgment debtor’s multi-tiered business entity arrangement in the hopes of collecting a sizeable (about $1M) money judgment.

Through post-judgment proceedings, the plaintiff learned that the debtor owned a 90% interest in an LLC (Subsidiary or Sub-LLC) that was itself the sole member of another LLC (Parent LLC) that received about $225K from the sale of a Chicago condominium.

Plaintiff also discovered the defendant had unfettered access to Parent LLC’s bank account and had siphoned over $80K from it since the judgment date.

In 2013 and 2017, plaintiff respectively obtained a charging order against Sub-LLC and a turnover order against Parent LLC in which the plaintiff sought to attach the remaining condominium sale proceeds.  The issue confronting the court was whether a judgment creditor could get a turnover order against a parent company to enforce a prior charging order against a subsidiary entity.  In deciding for the creditor, the Court examined the content and purpose of citations to discover assets turnover orders and LLC charging orders.

Code Section 2-1402 empowers a judgment creditor can issue supplementary proceedings to discover whether a debtor is in possession of assets or whether a third party is holding assets of a debtor that can be applied to satisfy a judgment.

Section 30-20 of the Limited Liability Company Act allows that same judgment creditor to apply for a charging order against an LLC member’s distributional interest in a limited liability company. Once a charging order issues from the court, it becomes a lien (or “hold”) on the debtor’s distributional interest and requires the LLC to pay over to the charging order recipient all distributions that would otherwise be paid to the judgment debtor. 735 ILCS 5/2-1402; 805 ILCS 180/30-20. Importantly, a charging order applicant does not have to name the LLC(s) as a party defendant(s) since the holder of the charging order doesn’t gain membership or management rights  in the LLC. [⁋⁋ 22, 35]

Under Parent LLC’s operating agreement, once the condominium was sold, Parent LLC was to dissolve and distribute all assets directly to Sub-LLC – Parent’s lone member.  From there, any distributions from Sub-LLC should have gone to defendant (who held a 90% ownership interest in Sub-LLC) and then turned over to the plaintiff.

However, defendant circumvented the charging order by accessing the sale proceeds (held in Parent LLC’s account) and distributing them to himself. The Court noted that documents produced during post-judgment discovery showed that the defendant spent nearly $80,000 of the sale proceeds on his personal debts and to pay off his other business obligations.

Based on the debtor’s conduct in accessing and dissipating Parent LLC’s bank account with impunity, and preventing Parent LLC from distributing the assets to Sub-LLC, where they could be reached by plaintiff, the trial court ordered the debtor to turn all Parent LLC’s remaining account funds over to the plaintiff to enforce the earlier charging order against Sub-LLC.

The court rejected the defendant’s argument that Parent LLC was in serious debt and that the condo sale proceeds were needed to pay off its debts. The Court found this argument clashed with defendant’s deposition testimony where he stated under oath that Parent LLC “had no direct liabilities.” This judicial admission – a clear, unequivocal statement concerning a fact within a litigant’s knowledge – was binding on the defendant and prevented him from trying to contradict this testimony. The argument also fell short in light of defendant’s repeatedly raiding Parent LLC’s account to pay his personal debts and those of his other business ventures all to the exclusion of plaintiff.

The court then summarily dispensed with defendant’s claim that the plaintiff improperly pierced the corporate veils of Parent LLC and Sub-LLC in post-judgment proceedings. In Illinois, a judgment creditor typically cannot pierce a corporate veil in supplementary proceedings. Instead, it must file a new action in which it seeks piercing as a remedy for an underlying cause of action.

The Court found that the trial court’s turnover order did not hold defendant personally liable for either LLC’s debt. Instead, the turnover order required Parent LLC to turnover assets belonging to the judgment debtor – the remaining condominium sale proceeds – to the plaintiff creditor.

Afterwords:

This case presents in sharp relief the difficulty of collecting a judgment from a debtor who operates under a protective shield of several layers of corporate entities.

Where a debtor uses an LLC’s assets as his “personal piggy bank,” Golfwood and cases like it show that a court won’t hesitate to vindicate a creditor’s recovery right through use of a turnover and charging order.

The case is also noteworthy as it illustrates a court looking to an LLC operating agreement for textual support for its turnover order.

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.

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 (7th 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.