Judgment debtor, under the lien of a citation to discover assets (“Citation”), has cash owed to him paid to other entities in which he has an ownership interest. The other entities are not subject to a Citation and permit the judgment debtor to disburse assets as he chooses. Is the judgment debtor violating the terms of the Citation? In Bank of America, N.A. v. Laurance H. Freed and DDL LLC, 2012 IL App (1st) 113178 (March 27, 2012), the First District Illinois Appellate Court affirmed that such conduct by a judgment debtor violates a Citation. The Court also affirmed the trial court’s finding of contempt and its appointment of a receiver.
Freed arises out of the foreclosure of a mortgage on a commercial property commonly known as “Block 37.” In 2007, Joseph Freed and Associates LLC (“JFA”), a Chicago based real-estate developer, purchased Block 37 and subsequently entered into a construction loan agreement with the bank. The loan was personally guaranteed by Joseph Freed and by JFA’s parent company, DDL LLC. In October 2009, the bank filed a foreclosure action against Defendants and judgment was entered. After a foreclosure sale was confirmed, the judgment balance was approximately $111 million.
In January 2011, the bank served a Citation on both Freed and DDL. Each Citation contained standard language prohibiting the judgment debtor from transferring, disposing or interfering with his property. In a motion for rule to show cause the bank alleged Defendants dissipated nearly $5 million. The trial court held an evidentiary hearing, found Defendants violated the Citation, entered a finding of contempt and appointed a receiver.
The Freed Court first considered the trial court’s finding of contempt. The Freed Court noted the trial court’s authority stemmed from Section 2-1401(f)(1) of the Illinois Code of Civil Procedure (“Code”) and Illinois Supreme Court Rule 277(h). The Court specifically found “the trial judge had authority to hold the defendants in contempt if she found that they had failed to comply with the citations.” ¶22. The Court concluded the evidence overwhelmingly supported the trial court’s finding that Defendants violated the Citation and further, that the trial court did not abuse its discretion in finding Defendants in contempt.
The Freed Court noted Defendants failed to inform JFA’s accounting department or Freed’s personal accountant that the Citation prohibited the transfer of funds belonging to Freed or DDL. Further, the accountants were under the impression that the Citation merely required them to gather documents. The evidence also showed, and Defendants admitted, that funds were transferred from Freed and DDL after the date the Citation issued. Finally, “book entries” showed assets belonging to Defendants and totaling nearly $5 million were transferred to other entities but used by Defendants to pay various obligations – all in violation of the Citation.
The Freed Court gave little credence to Defendant’s argument the book entry transfers preserved the value of Defendants’ real estate interests. The Court stated the evidence showed the money was used to meet JFA payroll obligations, to cover attorney fees and to make payment on Freed’s airplane. The Court further noted that even if the transfers were made in the ordinary course of business, Section 2-1402 of the Code does not provide an exception for such transfers.
The Freed Court also considered the trial court’s appointment of a receiver. Defendants argued the appointment improperly punished past conduct, was not authorized by Illinois law, and was invalid because it did not provide a viable means for them to purge the contempt.
The Freed Court opined that although past conduct could not be punished by the appointment of a receiver, it can be taken into consideration in determining how best to prevent future misconduct. The Court found the trial court had not abused its discretion in appointing a receiver. Although “the trial court considered defendants’ failure to comply with the terms of the citations… it appears that the court used that evidence to conclude that defendants may continue to ignore the citations in the future.” ¶32. The Court returned to the facts and recalled Defendants’ transfer of nearly $5 million through various LLCs in violation of the Citation, giving the trial court reason to be concerned their action would continue if no oversight was provided.
The Freed Court also considered whether the trial court had authority to appoint a receiver. The Court noted Section 12-718 of the Code permits the appointment of a receiver. The Court recounted Defendants took no steps to ensure JFA employees were abiding by the Citation and had permitted millions to be transferred to various entities in contradiction of the terms of the Citation. Based on the facts, the Court found no abuse of discretion in the trial court’s appointment of a receiver.
Finally as to that portion of the trial court’s order detailing how Defendants could purge the finding of contempt (“Purge Provision”), the Freed Court remanded for the trial court to amend its order. The trial court’s Purge Provision provided for discharge if: (1) Defendants cooperate with the receiver and the receiver reports her investigation is complete, (2) the receiver makes a recommendation to court as to the disposition of assets and Defendants cooperate with the disposition, and (3) Defendants assets are collected and sold and the cash applied towards the judgment. The Freed Court stated, “a valid contempt order must contain a purge provision which lifts the sanction when the contemnor complies with the order.” ¶42. In this case, the Court noted that even if Defendants complied with the trial court’s order the contempt order would not be purged until the receiver determined his investigation was complete and made a recommendation to the trial court. As such, the Court found the Purge Provision invalid.