Opinion
No. 94 C 1990
March 17, 1999
MEMORANDUM OPINION AND ORDER
Presently before this Court is plaintiff Tyrone Cefalu's oral motion for a protective order, which raises the question of whether a judgment debtor may be forced to answer deposition questions in supplemental proceedings regarding his income and assets (and any conveyances of that income or assets) that were made prior to the date of judgment giving rise to the liability. On the facts presented here, the Court answers that question in the affirmative, and thus denies plaintiff's motion for protective order.
I.
On March 30, 1994, Tyrone and William Cefalu filed this action against defendants, asserting claims under federal and state law for, among other things, false arrest, use of excessive force and malicious prosecution. The trial of this matter commenced on January 12, 1998 and, on February 6, 1998, a jury returned a verdict for the defendants. That same day, the Court entered judgment on that verdict. Thereafter, plaintiffs' post-trial motions were denied and, on July 6, 1998, plaintiffs filed their notice of appeal, which remains pending. However, plaintiffs failed to post an appeal bond.
Meanwhile, on February 19, 1998, the defendants petitioned the district court for an award of costs. Pursuant to a Memorandum Opinion and Order dated July 14, 1998, then-Magistrate Judge Pallmeyer (who was presiding over all aspects of the case pursuant to the consent of the parties) awarded defendants $20,691.83 in costs.
Plaintiffs failed to appeal that award of costs and, given plaintiffs' failure to post a bond on their appeal of the adverse jury verdict, there was no bar to defendants initiating proceedings to collect that judgment awarding costs. Not surprisingly, that is precisely what the defendants have done. They have sought to collect the judgment for costs from the plaintiffs and, in aid of that effort, have instituted supplemental proceedings to discover the plaintiffs' assets.
On February 4, 1999, plaintiff Tyrone Cefalu appeared for a deposition to discover his assets. In that deposition, Tyrone Cefalu was fully examined about his current financial status (which is that he now has virtually no income or assets), as well as his financial status dating back to about January 1998, shortly before the jury returned a defense verdict (which apparently is that he had virtually no income or assets during that earlier period as well). However, defense counsel encountered objections and instructions not to answer when she tried to inquire about Mr. Cefalu's financial situation prior to January 1998. Mr. Cefalu's counsel based his objections and instructions on the theory that defendants have no right to ask about Mr. Cefalu's finances for any period of time before Mr. Cefalu's obligation to pay costs first accrued — that is, on February 6, 1998, when the jury returned a verdict for defendants (and thus rendered plaintiffs liable for costs under Fed.R.Civ.P. 54(d)). Defense counsel disagreed, asserting the right to inquire about Tyrone Cefalu's finances as far back as 1994, when plaintiffs first initiated this lawsuit, since that was when there first arose a contingency that plaintiffs' suit would fail and that they would be liable for costs.
As a result of this disagreement, during the course of the deposition counsel for Tyrone Cefalu orally moved for a protective order barring defense counsel from inquiring into Mr. Cefalu's financial situation for any time period prior to January 1998. The Court has received legal memoranda from each side on this issue. As we explain below, the Court finds that Tyrone Cefalu must answer questions about his finances for the period from the initiation of this lawsuit through January 1998.
II.
In Illinois, a judgment creditor may initiate supplemental proceedings for the purpose of examining the judgment debtor in order to discover the existence of assets or income that are not exempt from the collection to satisfy the judgement. 735 ILCS 5/2-1402. In addition, in supplemental proceedings, the Uniform Fraudulent Transfer Act (hereinafter "UFTA") allows a creditor to void transactions that have been made with a fraudulent intent in order to shield assets from collection. In Re Mussa, 215 B.R. 158, 167 (N.D. Ill. 1997). The UFTA specifically provides that:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any creditor of the debtor.740 ILCS 160/5(a)(1).
Thus, a transfer is fraudulent if it is made with the actual intent to hinder, delay, or defraud creditors. In re Mussa, 215 B.R. at 167. Moreover, supplementary proceedings are permissible to determine whether property transfers were fraudulent. Michaelson v. Schor, 1997 WL 282929, *3 (N.D. Ill. 1997).
In determining whether a transfer is made with actual intent to defraud, UFTA sets out various factors (or "badges of fraud") which may be considered, including whether: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was disclosed or concealed; (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all of the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) the debtor transferred essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 740 ILCS 160/5(b). A court may presume fraud if it finds a sufficient number of these "badges." In re Mussa, 215 B.R. at 167.
Plaintiff Tyrone Cefalu makes a number of arguments in order to avoid answering questions by the defendants relating to what financial assets (if any) he possessed at various times prior to the jury verdict in February 1998, and if there were any assets, what happened to them. The Court finds that those inquiries are a proper subject of the supplemental proceedings, and that plaintiff's arguments do not dictate a different result.
First, plaintiff argues that the discovery requested by defendants is nothing more than a futile "fishing expedition," because defendants allegedly already "know" that any prejudgment assets disclosed cannot be subject to attachment in order to satisfy the judgment for costs. The underlying premise of plaintiff's argument is that no assets could have been fraudulently conveyed prior to the jury verdict, because prior to that time plaintiffs had no obligation to pay defendants' costs (and thus there was nothing for plaintiff to avoid by a transfer). The Court disagrees with that premise. The mere fact that prior to the jury verdict any obligation of plaintiffs to pay defendants' costs was a contingency, and not a reality, is of no moment. "For purposes of fraudulent conveyances, a party becomes a "creditor" when a claim arises, even if the claim is contingent, regardless of whether the claim has matured or has been reduced to a judgment." U.S. v. Brown, 820 F. Supp. 374, 383 (N.D. Ill. 1993). Thus, the Court cannot find that assets that plaintiff may have possessed but transferred during the pendency of this action, but prior to the jury verdict, would inevitably be immune from attachment.
Second, plaintiff argues that the only issue here is what the plaintiff currently owns because, under the UFTA ( 740 ILCS 160/10(c)), an action with regard to fraudulent transfer is extinguished unless brought within one year after the transfer was made or the obligation was incurred. Plaintiff argues that since one year has passed from the date that the obligation for costs was incurred (that is, when the jury returned its verdict for defendants), defendants cannot reach any transfer prior to January 1, 1998.
Plaintiff acknowledges that this one-year period does not apply where a transfer was made with "actual intent to hinder, delay, or defraud any creditor of the debtor," and that under those circumstances a four-year limitations period would apply. 740 ILCS 160/10. However, plaintiff argues that the four-year limitations period cannot apply in this case, on the theory that there could never be a finding of any intent to hinder, delay, or defraud defendants by any transfers that occurred prior to the jury verdict. For this argument, plaintiff relies on the fact that shortly before trial he refused the defendants' offer of judgment pursuant to Fed.R.Civ. 68 in the amount of $500,000, and instead decided to go to trial on the merits. Plaintiff claims that this shows that he did not believe that he was at risk for an adverse verdict (and a resulting obligation to pay costs), and that this conclusively proves that plaintiff could not have been making any transfers of assets to hinder collection of money he never believed he would owe.
The Court agrees that plaintiff's refusal to accept the substantial offer from the defendants could be construed as reflecting confidence in his legal position. However, the Court cannot agree that this is the only interpretation of plaintiffs' actions, or that this conclusively proves that there could not have been any fraudulent pre-judgment transfers. The confidence that plaintiffs claim to have had shortly before trial may have been newly found; plaintiffs may not have had the same level of confidence at all times during the pendency of the litigation. Moreover, it would not be implausible that a party with even supreme confidence in a litigation position might, at the same, time plan for the worst.
Here, the defendants point out that while plaintiff is currently insolvent, he previously had owned printing equipment in January 1998 which he no longer owned in February 1998; that he retains control of a home and lives in it rent-free, despite currently having no visible means of paying for rent, upkeep or utilities, and that he does not currently have a property interest in the house but did at some earlier point; and that he drives an automobile without cost, and without means of paying for it (Def. Mem. of Law, 8, 9). Those facts may point to a number of potential "badges of fraud," and defendants are entitled to use the supplemental proceedings to determine whether there are others that occurred during the pendency of this lawsuit, Michaelson v. Schor, 1997 WL 282929, *3 (N.D. Ill. 1997) — whether before or after the jury verdict. Whether fraudulent conveyances did in fact occur is not presently before this Court. All that this Court holds is that the defendants may question plaintiff regarding his income and financial assets during the pendency of this lawsuit and prior to the jury verdict. Resolution Trust Corp. v. Ruggiero, 994 F.2d 1221, 1226 (7th Cir. 1993).
Accordingly, plaintiff's oral motion for protective order is denied. The Court orders that Tyrone Cefalu appear for a resumption of his deposition in Chicago, Illinois, at a mutually agreeable date and time within the next 45 days. The continued examination is be limited to the subject of Tyrone Cefalu's income and financial assets, and any disposition of those income and assets, during the pendency of this lawsuit and up through January 1998. Furthermore, in light of the confidentiality concerns expressed by plaintiff and the atmosphere of distrust and animosity that appears to exist between the parties, the Court further orders that when Tyrone Cefalu's deposition is reconvened, it shall be attended only by counsel of record and the transcript of the deposition concerning any prejudgment income, assets or conveyances will be subject to a protective order providing that the testimony will be for "attorneys' eyes only" and will be used only for the purpose of satisfying the judgment for costs and for no other purpose. The parties are directed to provide a draft agreed protective order in line with the Court's comments by no later than March 31, 1999.