The Appellate Court of Illinois, Second District, recently affirmed the trial court's entry of judgment in favor of the plaintiff mortgagee in a commercial mortgage foreclosure case, and against two corporate officers of two corporate guarantors.
The Court concluded that the trial court had discretion as to the nature of the sanction to impose against the two corporate officers personally for violating a restraining provision inherent in judgment enforcement proceedings in Illinois, and a finding of contempt was not a prerequisite to imposing a sanction.
A copy of the opinion is available at: Link to Opinion
This case arose from the plaintiff's commercial mortgage foreclosure case against three of the appellants, the mortgagor and two guarantors. Following the foreclosure, the trial court entered judgment against the guarantors.
Thereafter, the plaintiff issued judgment enforcement proceedings against the guarantors. The plaintiff mortgagee subsequently filed a motion for entry of judgment against two of the other appellants, two corporate officers of the guarantors, for violating the citations.
The trial court granted the motion and the corporate officer guarantor appellants appealed from this order. Additionally, during the proceedings, the appellant-intervenor, a mortgage servicing company, filed a petition to intervene, arguing that it had a right to have its alleged superior lien interest tried and determined. The trial court denied the petition. The appellant-intervenor mortgage servicer appealed from that order. The Second District consolidated the appeals.
The corporate officer guarantor appellants first contended on appeal that the trial court erred in reinstating the citations on April 25, 2017. They argued that the trial court was without authority to vacate the April 19, 2017 dismissal because the citations automatically terminated, pursuant to Rule 277(f), when they were dismissed without extension.
In Illinois, judgment enforcement proceedings automatically terminate six months after the cited party's first appearance, unless the trial court grants an extension. Rule 277(f) provides:
A proceeding under this rule continues until terminated by motion of the judgment creditor, order of the court, or satisfaction of the judgment, but terminates automatically 6 months from the date of (1) the respondent's first personal appearance pursuant to the citation or (2) the respondent's first personal appearance pursuant to subsequent process issued to enforce the citation, whichever is sooner. The court may, however, grant extensions beyond the 6 months, as justice may require. Orders for the payment of money continue in effect notwithstanding the termination of the proceedings until the judgment is satisfied or the court orders otherwise.
Ill. S. Ct. R. 277(f) (eff. Jan. 4, 2013).
The Second District held that the corporate officer guarantor appellants' contention is both forfeited and without merit. After the citations were dismissed on April 19, 2017, the plaintiff mortgagee filed a motion to vacate the default judgment pursuant to section 2-1301(e) of the Code (735 ILCS 2-1301(e)). Section 2-1301(e) states that "the court may in its discretion, before final order or judgment, set aside any default, and may on motion filed within 30 days after entry thereof set aside any final order or judgment upon any terms and conditions that shall be reasonable." Id. Thus, the Court concluded that a trial court retains the inherent power to vacate any of its judgments within 30 days upon good cause shown. Trojan v. Marquette National Bank, 88 Ill. App. 2d 428, 437-38 (1967).
Additionally, the Second District agreed with the trial court that the plaintiff mortgagee provided a reasonable explanation for failing to appear in court on April 19 and that its motion to vacate was timely filed several days later. Also, the Court noted that the appellants never argued at trial that the citations expired, even after the dismissal was vacated. Thus, the Court held that the citations did not automatically terminate under Rule 277(f).
The corporate officer guarantor appellants' next contention on appeal was that the trial court erred in finding that the subject account transfers violated the citations' restraining provision.
Under Illinois law, a judgment creditor may "prosecute supplementary proceedings for the purposes of examining the judgment debtor or any other person to discover assets or income of the debtor not exempt from the enforcement of the judgment… and of compelling the application of non-exempt assets or income discovered toward the payment of the amount due under the judgment." See 735 ILCS 5/2-1402(a). During the course of supplementary proceedings, a judgment creditor may serve a citation to discover assets on a third party, requiring it to freeze assets. Id. § 2-1402(f).
To protect assets from improper transfers, Illinois permits a citation to discover assets to include a restraining provision that "prohibit[s] the party to whom it is directed from making or allowing any transfer or other disposition of, or interfering with, any property not exempt from the enforcement of a judgment therefrom... until the further order of the court or the termination of the proceeding, whichever occurs first." Id. §2-1402(f)(1). In the present case, the Second District found that the citations issued to the guarantors contained language similar to the restraining provision in the statute.
The Illinois legislature has carved out two exceptions to the section 2-1402(f)(1) restraining provision. The first exception pertains to transfers of property "exempt from the enforcement of a judgment therefrom." 735 ILCS 5/2-1402(f)(1). The second exception applies to property of the judgment debtor in the hands of third parties that is in excess of an amount that is "double… the balance due sought to be enforced by the judgment creditor." Id.
In the present case, the corporate officer guarantor appellants did not argue that the transferred funds at issue fell within either exception to the statute. Instead, they argued only that the funds "did not belong to" the guarantors. However, the Second District observed that the statute did not allow the corporate officer guarantor appellants to independently assess any priority interests related to the operating accounts and act as they deemed proper. See Vendo Co. v. Stoner, 108 Ill. App. 3d 51, 57-58 (1982). Instead, the statute required the judgment debtor to hold the property in its possession in status quo until the judgment creditor's rights could be determined. Kirchheimer Brothers Co. v. Jewelry Mine, Ltd., 100 Ill. App. 3d 360, 362 (1981).
The Second District noted that the facts here were similar to those in City of Chicago v. Air Auto Leasing Co., 297 Ill. App. 3d 873 (1998), in that the appellants argued that transfers were made in the ordinary course of business for accounting reasons and that, even though the funds were transferred in and out of the guarantors' operating accounts, the funds never belonged to them. Id. at 876. However, similar to the holding in Air Auto, the Court here held that the statute did not contain an exception for fund transfers that are an accounting pass-through or only for accounting purposes. Id. at 878.
The corporate officer guarantor appellants' next contention on appeal was that the trial court erred in finding the two corporate officers personally liable for violating the citations' restraining provision. They argued that the officers were not issued any citations, as the citations were issued only to the guarantors. Thus, because the officers did not possess any assets of the guarantors, they were not "third parties" within the meaning of section 2-1402(f)(1) (735 ILCS 5/2-1402(f)(1) and thus could not be held personally liable. The corporate officer guarantor appellants further argued that, pursuant to the statute, the only recourse against the officers would be a finding of contempt, not a personal judgment.
In Kennedy v. Four Boys Labor Services, Inc., 279 Ill. App. 3d 361 (1996), a trial court held that a defendant corporation's transfers were fraudulent and ordered the director to turn over the proceeds received from the transfers. Id. at 365. When the director did not comply with this order, the trial court, pursuant to Rule 277(h), entered judgment against the director for the full amount of the underlying judgment. Id. Rule 277(h) states that "any person who fails to obey a citation, subpoena, or order or other direction of the court issued pursuant to any provision of this rule may be punished for contempt… The court may also enforce its order against the real and personal property of that person." Ill. S. Ct. R. 277(h).
The appellate court in Kennedy held that, pursuant to Rule 277(h), the trial court had the discretion as to the nature of the sanction to impose for violation of the turn-over order and that it was not an abuse of discretion for the trial court to enter a money judgment against the director for the entire amount of the underlying judgment. Kennedy, 279 Ill. App. 3d at 371
Based on the ruling in Kennedy, the Second District here did not find it necessary to interpret section 2-1402(f)(1) to determine whether the corporate officers were "third parties" or whether the trial court's sanction was appropriate under the statute.
According to the Court, the citations issued to the guarantors prohibited anyone acting on their behalf from allowing any transfer or other disposition of any property subject to the citations' restraining provision. The Court concluded that, under Rule 277(h), the trial court had the discretion as to the nature of the sanction to impose against the officers for violating the restraining provision and that a finding of contempt was not a prerequisite to imposing a sanction. Id. The Court thus affirmed the sanctions imposed against the officers.
Finally, the mortgage servicer appellant-intervenor argued that the trial court erred in denying its petition to intervene.
An appeal is considered moot where it presents no actual controversy or where the issues have ceased to exist. Richardson v. Rock Island County Officers Electoral Board, 179 Ill. 2d 252, 256 (1997). A moot appeal must be dismissed. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 2016 IL 118129, ¶ 21.
In the present case, the trial court terminated the citations after it entered judgment against the corporate officers. Because the Second District affirmed that determination, it could not grant the appellant-intervenor any effectual relief, as there was no longer a supplementary proceeding in which to intervene. The Court thus dismissed the appeal as moot.
Accordingly, the Second District affirmed the trial court's entry of judgment in favor of the plaintiff and dismissed the mortgage servicer appellant-intervenor's appeal as moot.
Ralph T. Wutscher
Maurice Wutscher LLP
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