No. 68  Perspectives on Developments in the Law from The Sharp Law Firm, P.C. July 2012

Violation of Citation Justifies Serious Sanctions

Guardianship Assets Not Immune from Supplementary Proceedings’ Reach 

By John T. Hundley,, 618-242-0246

            Violations of the restraint provisions of citations to discover assets justified a finding of contempt of court and the appointment of a receiver to investigate the defendant-judgment debtors’ financial affairs, a panel of the Illinois Appellate Court has held.

            In a separate case, another panel has ruled that a citation may be used to reach assets of a guardianship estate and, when so used, it primes other claims upon that estate, including claims for administrative expenses. 

            The pair of recent cases demonstrate the often-overlooked power of the citation provisions of the Illinois Code of Civil Procedure (735 ILCS 5/2-1402) and the Illinois Supreme Court Rules (Ill. S. Ct. R. 277).


            The contempt and receivership case was Bank of America, N.A. v. Freed, 2012 IL App (1st) 113178.  At issue there were further ramifications of the financial collapse during the attempt to rebuild “Block 37” in downtown Chicago, which led previously to a widely-quoted opinion on appointment of receivers and mortgagees-in-possession in commercial cases.  See Bank of America v. 108 N. State Retail LLC, 401 Ill.App.3d 158 (2010); Sharp Thinking No. 36 (August 2010). 

            After foreclosure proceedings resulted in a $110,956,722 deficiency judgment, plaintiff served citations on the mortgagor’s corporate parent and principal, who had also been made judgment debtors by virtue of personal guaranties.  The citations contained restraints against transfer of assets or indebtedness in substantially the language set forth in 735 ILCS 5/2-1401(f)(1).  Nonetheless, some $5,000,000 in transfers occurred.                                                                                          

            Defendants contended they had not acted “willfully and contumaciously” so as to justify the remedy of contempt.  The court disagreed, finding the requisite mental state in the defendants’ failure to take steps to put freezes in place.  Accordingly, the court found defendants were in contempt. 

            Moreover, the court reasoned, there is no “ordinary course of business” or “proper corporate purpose” exception to the restraint which applies when a citation is pending.

            In another context, the proper remedy for permitting such transfers might have been personal liability therefor.  See 735 ILCS 5/2-1401(f)(1).  However, in Bank of America the citation respondents were already liable as judgment debtors on their personal guaranties. 

            Accordingly, the trial court invoked that portion of 735 ILCS 5/2-1402 which allows it to “[e]nter any order . . . that could be entered in any garnishment proceeding” (§ 2-1402(c)(4)), and held that it could appoint an investigating receiver in citation proceedings because such a receiver could be appointed in garnishment proceedings.  See 735 ILCS 5/12-718.  The court further relied upon the “necessary and equitable” powers applicable under that provision in garnishment proceedings, and the appellate panel affirmed on that point.  “[T]he trial court did not abuse its discretion in appointing a receiver to make inquiries of Freed, DDL and third parties about income and assets and to collect any indebtedness due to the Bank and to take possession, sell or otherwise dispose of any other property”, the Freed panel said.         

            The guardianship case was In re Estate of Denten, 2012 IL App (2d) 110814.  There a bank had instituted foreclosure proceedings on one of the ward’s properties when a guardian was appointed to manage her affairs, including representation in the foreclosure case.  The foreclosure case proceeded to judgment and sale, which resulted in a $4,646,360 deficiency judgment.  The bank recorded the judgment against the ward’s other real estate and served a citation in an attempt to perfect a lien against personal property under § 2-1402(m) and related case law.

            Attorneys for the estate resisted the bank’s attempt to be treated as a “secured” creditor, arguing that guardianship estate assets are immune under the in custodia legis (in custody of the law) doctrine.  The appellate court rejected that argument and ruled that the bank became entitled to secured creditor treatment as to realty upon recording of the deficiency judgment and as to personalty upon service of the citation upon the ward and the guardian. 

            In so ruling, the panel noted that the Probate Act says the Civil Practice Law (of which the citation statute is a part) applies in probate proceedings (755 ILCS 5/1-6). 

            Having found that the bank was entitled to treatment as a secured creditor, the panel next moved to the question whether there was any basis for avoiding the general rule that secured creditors have priority.  The estate’s response on this issue centered on an argument that the priority scheme which applies in decedent estates (755 ILCS 5/18-10, 5/18-13) should apply in guardianship estates and provide that “administrative” claims are paid first.  This dispute was not de minimisat issue were over $200,000 in attorneys’ fees previously approved by the trial court but never paid by the estate.  Noting a Supreme Court statement that “a guardianship proceeding is not governed by the priority schedule established in” §§ 18-10 and 18-13 (Estate of Gebis, 186 Ill.2d 188 (1999)), the appellate panel said the estate was “trying to invent a legislative priority scheme which does not exist”.

The panel further rejected an argument that 755 ILCS 5/18-15, providing that claims allowed against guardianship estates “shall be paid by the representative as he has funds therefor”, entitled the claimants to priority for the previously-allowed claims.  Other provisions of the Probate Act also were ruled irrelevant to the issue of priority, as was the fact that the guardian had recorded a lis pendens against the realty at issue.

            The panel noted the “harsh consequences of this ruling” but said that changes in the Probate Act “must occur in this state’s legislature and not in its courtrooms.”

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