Opinion
3:20-mc-00004-NJR-GCS
05-24-2021
IRON WORKERS ST. LOUIS DISTRICT COUNSEL PENSION FUND TRUST, IRON WORKERS ST. LOUIS DISTRICT COUNSEL ANNUITY TRUST, and IRON WORKERS ST. LOUIS DISTRICT COUNSEL WELFARE PLAN, Plaintiffs, v. BUMPY'S STEEL ERECTION, LLC, Defendant.
REPORT & RECOMMENDATION
GILBERT C. SISON, UNITED STATES MAGISTRATE JUDGE
Background & Introduction
On December 4, 2019, Plaintiffs secured a default judgment against Defendant Bumpy's Steel Erection, LLC in the amount of $685,427.85 in the United States District Court for the Eastern District of Missouri (Case No. 4:18-cv-2032-HEA). On February 3, 2020, Plaintiffs registered the foreign judgment in this district. (Doc. 2). After Plaintiffs made numerous unsuccessful attempts to serve a Citation in Supplemental Proceedings to Discover Assets, on April 27, 2020 the Clerk of the Court issued an Alias Citation in Supplemental Proceedings to Discover Assets (“Alias Citation”) cited to Defendant. (Doc. 8). As Plaintiffs remained unsuccessful in their attempts to serve Defendant with the Alias Citation, the Court granted Plaintiff's motion to serve the Alias Citation by special order, including via mail and by posting copies of the Alias Citation at Defendant's registered address with the Illinois Secretary of State. (Doc. 10). Plaintiffs also served the Alias Citation via mail and by posting copies of the Alias Citation at the residential address of Defendant's sole manager, Ashanti Mitchell. Id.
The Alias Citation states as follows:
YOU ARE PROHIBITED from making or allowing any transfer or other disposition of, or interfering with, any property not exempt from execution or garnishment belonging to BUMPY'S STEEL ERECTION LLC, whether held individually or jointly, or to which it may be entitled or which may be acquired by or become due to it and from paying over or otherwise disposing of any money not so exempt, which is due or becomes due to it, until further order of the Court or termination of the proceedings. You are not required to withhold the payment of any money beyond double the amount of the Judgment.(Doc. 8) (emphasis in original). The Alias citation further required Defendant to produce all of its bank account records for the past twenty-four months; a current account receivable ledger; current financial statements; all payroll records for Defendant in the past twenty-four months; titles to any vehicles Defendant owns; a list of all personal property, including but not limited to tools, machinery, equipment and computers Defendant owns; copies of Defendant's federal tax returns for 2016, 2017 and 2018; copies of all contracts or other agreements that call for any payments of any kind to be made to Defendant; copies of all contracts for any project that Defendant is currently performing or is contracted to perform work for in the future or in the past twenty-four months; copies of all documents which evidence Defendant's interest in or ownership of any real property; documents relating to any and all transfers of anything of value from Defendant to any business owned in whole or in part by any other owner of the judgment debtor or their family members; and copies of any other documents which may show assets Defendant owns in whole or in part. Id.
On February 26, 2016, Defendant borrowed $48,000 from Midland States Bank in order to purchase a parcel of real property located in Centerville, Illinois (“Centerville Property”). (Doc. 27, p. 2). The promissory note was secured by a mortgage in favor Midland States Bank. Id. A second promissory note in the amount of $1,000,000 was also secured by the mortgage on the property. Id. According to a May 26, 2020 appraisal report, the Centerville Property is valued at approximately $63,600. (Doc. 24, Exh. 3).
The parties disagree as to whether the second promissory note was secured by a mortgage on the Centreville Property. See (Doc. 28, p. 4-5). However, whether the second promissory note was also secured by a mortgage on the property makes little legal difference for the purposes of this motion. Therefore, in the context of this motion and examining the facts in the light most favorable to the non-moving party, the Court adopts Defendant's view as to the second promissory note.
Midland States Bank filed a lawsuit in the Circuit Court of St. Clair County to foreclose on the Centerville Property on April 15, 2020. (Doc. 27, p. 2). At that time, Defendant owed Midland States Bank approximately $1,118,018, which was secured by a mortgage on the property. Id. In her capacity as sole manager of Defendant, Ms. Mitchell entered into a real estate purchase agreement with Ms. Dorrie Wise, Ms. Mitchell's mother, on May 28, 2020. (Doc. 24, p. 3). Pursuant to the real estate agreement, Defendant sold the Centerville Property to Ms. Wise for $50,000; approximately $14,000 less than the value of the property. Id. at Exh. 4. A warranty deed for the property was recorded with the St. Clair County Recorder of Deeds on July 17, 2020. Id. at p. 3. After the sale, Midland States Bank was paid $41,244, while Defendant retained $3,454. (Doc. 27, p. 3). However, Ms. Mitchell did not deposit the funds into Bumpy's operating account, but instead split the proceeds equally with her brother, Darnell Wise, who is also a ten percent owner of Defendant. (Doc. 28, p. 3).
The Court held a citation to discover assets hearing on July 16, 2020, but Defendant failed to appear. (Doc. 16, p. 1). During the hearing, counsel for Plaintiffs confirmed that they had served Defendant on multiple occasions. Id. at p. 1-2. The Court ordered Defendant to show cause in writing by August 7th why civil contempt sanctions should not be imposed due to Defendant's failure to appear; though Plaintiffs sent a copy of the order to Defendant via U.S. Mail, Defendant did not respond. Id. at p. 2. Accordingly, the Court adopted the undersigned's report and recommendation, found Defendant in civil contempt, and ordered Defendant to pay Plaintiffs a financial sanction in the amount of $2,253.38. (Doc. 17).
On November 16, 2020, Plaintiffs filed a motion for writ of body attachment as to Ms. Mitchell, as Defendant had still failed to appear or comply with the Alias Citation requiring production of certain documents. (Doc. 18). Ms. Mitchell and Defendant then retained counsel on November 30, 2020. (Doc. 22). On December 1, 2020, Defendant produced its federal tax returns for the years outlined in the Alias Citation. Id. at p. 2. Defendant also produced records reflecting the sale of the Centerville Property to Plaintiffs. Id. Both Defendant and Ms. Mitchell state that they are continuing to investigate what documentation they have responsive to the Alias Citation and intend on supplementing production if additional documents are discovered. Id. The record supports this assertion: on January 29, 2021, Ms. Mitchell submitted to a judgment debtor examination. (Doc. 28, p. 2). Defendant has also produced more than 177 pages of bank records, sales records, and other documents regarding the sale of the Centreville Property. Id.
Now before the Court are Plaintiffs' motion for sanctions (Doc. 24) and motion for writ of body attachment (Doc. 18). For the reasons delineated below, the undersigned RECOMMENDS that the Court find Ms. Mitchell in civil contempt and order Ms. Mitchell to pay a financial sanction in the amount of $63,600. The undersigned further RECOMMENDS that the Court deny Plaintiffs' motion for writ of body attachment as moot.
In their reply brief, Plaintiffs increase the amount requested from $63,600 to $74,976.15, alleging that Ms. Mitchell also transferred funds in violation of the Alias Citation. (Doc. 28, p. 7). Plaintiffs learned of these transfers after filing their motion for sanctions and stated that they had no objection to the Court granting Defendant an opportunity to file a sur-reply. Id. at p. 2. Courts will not entertain new arguments first presented at the reply stage. See Massey v. Cassens & Sons, Inc., No. 05-CV-598-DRH, 2006 WL 2433487, at *3 (S.D. Ill. Aug. 21, 2006). “Under no circumstances will sur-reply briefs be accepted.” SDIL-LR 7.1. Analyzing new arguments first raised in a reply deprives the opposing party of the opportunity to weigh in on that topic. See Massey, 2006 WL 2433487, at *3. If Plaintiffs believe that it is necessary to supplement their brief with new facts occurring after the filing of their brief, they must seek leave of the court to file a supplemental brief. SDIL-LR 7.1. As Plaintiffs did not seek leave, the undersigned will not entertain the new arguments first raised in their reply brief.
Analysis
I. Plaintiffs' Motion for Sanctions
Under Illinois law, a judgment creditor may attempt to collect the judgment by serving a citation to discover assets on the person or entity believed to possess the assets of the judgment debtor. See Ill. Sup. Ct. R. 277(B); 735 Ill. Comp. Stat. § 5/2-1402. The citation to discover assets begins a supplemental proceeding which permits a judgment creditor to determine whether the recipient has the assets in question. See Dexia Credit Local v. Rogan, 629 F.3d 612, 622 (7th Cir. 2010). If the recipient does possess the debtor's assets, the court may order them to turn over those funds. See 735 Ill. Comp. Stat. § 5/2-1402(c).
In order to protect assets from transfers designed to frustrate attempts to collect on the judgment, Illinois allows creditors to include restraining provisions in citations. Such provisions could prohibit the recipient “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 termination of the proceeding, whichever occurs first.” 735 Ill. Comp. Stat. § 5/2-1402(f)(1). A citation recipient who fails to abide by the restraining provision may be liable to the judgment creditor for any transferred funds belonging to the judgment debtor. See Bank of Aspen v. Fox Cartage, Inc., 126 Ill.2d 307, 313 (Ill. 1989)(internal citations omitted). A court then has two options for enforcing that liability:
The court may punish any party who violates the restraining provision of a citation as and for a contempt, or if the party is a third party may enter judgment against him or her in the amount of the unpaid portion of the judgment and costs allowable under this Section, or in the amount of the value of the property transferred, whichever is lesser.735 Ill. Comp. Stat. § 5/2-1402(f)(1) (emphasis added). The use of a disjunctive “or”indicates that the statutory punishment for a third party recipient who disposes of the property in violation of the citation under a mistaken “color of a legitimate claim to the property” is different from the appropriate punishment for a party to the litigation who “willfully or contumaciously” violates the citation. Bank of Aspen, 126 Ill.2d at 320-321. While the latter may be punished with criminal contempt, the former is instead punished “by way of the judgment remedy provided.” Id. at 320. When a third party corporate officer permits their corporation to make non-exempt payments in violation of a citation, that officer becomes personally liable for the judgment. See West Bend Mut. Ins. Co. v. Belmont State Corp., No. 09 C 354, 2010 WL 5419061, at *10 (N.D. Ill.Dec. 23, 2010); Shales v. T. Manning Concrete, Inc., 847 F.Supp.2d 1102, 1116 (N.D. Ill. 2012). In order to recover from a third party, a judgment creditor is therefore required to show only that: (i) they have an enforceable judgment, (ii) they properly served a citation on the recipient, and (iii) the recipient transferred assets of the judgment debtor in violation of the citation's restraining provision. See Mendez v. Republic Bank, 725 F.3d 651, 663 (7th Cir. 2013)(citing In re Weitzman, 381 B.R. 874, 882 (Bankr. N.D.Ill. 2008)).
The parties do not dispute that Plaintiffs have an enforceable judgment and that they properly served the Alias Citation on Ms. Mitchell. However, Defendant and Ms. Mitchell argue first, that Ms. Mitchell's conduct was not willful or contumacious; and second, that Plaintiffs were not legally entitled to the proceeds from the sale of the property. (Doc. 27, p. 2). Defendant points out that Midland States Bank, as a secured creditor of Defendant, had absolute priority to the proceeds of the sale. Id. at p. 3. The Centreville Property was therefore not subject to execution by Plaintiffs, and Plaintiffs were not entitled to foreclose on the property. Id. Furthermore, as Defendant was unrepresented at the time of the sale, and transferred the property to avoid foreclosure, rather than to hinder the judgment, Defendant argues that Ms. Mitchell's conduct was not willful and Plaintiffs' motion should be denied. Id.
As an initial matter, both parties apply the incorrect standard for evaluating Ms. Mitchell's conduct. See (Doc. 27, p. 2); (Doc. 24, p. 4). As Ms. Mitchell is a third party to this action, Plaintiffs do not need to prove that her conduct was willful or contumacious, as this is the standard for criminal contempt applied to parties who violate a citation. See Bank of Aspen, 126 Ill.2d at 320-321. As a third party to the litigation, Ms. Mitchell would be punished not by criminal contempt but by the remedy contemplated in section 2-1402(f). Accordingly, Plaintiffs do not need to meet the high burden required to show criminal contempt, but instead need only show that Ms. Mitchell transferred the assets in violation of the citation. See Bank of Aspen, 126 Ill.2d at 320-321; Mendez, 725 F.3d at 663.
Defendant's allegation that Plaintiffs' motion should be denied because Midland States Bank had absolute priority to the proceeds of the sale also fails. Section 2-1402(f)(1) establishes only two exceptions to the prohibition on transfer: (i) transfers of property exempt from the enforcement of the judgment, and (ii) transfers of property valued in excess of an amount that is double the balance due on the judgment. See City of Chicago v. Air Auto Leasing Co., 297 Ill.App.3d 873, 879 (Ill.App.Ct. 1998). The party proposing that a transferred property is exempt from judgment must show more than its subjective evaluation; it must provide a statutory exemption for the property in question. See Kauffman v. Wrenn, 399 Ill.Dec. 486, 495 (Ill.App.Ct. 2015). Defendant points to no statutory exemption which would prohibit satisfying a judgment from the Centreville Property. Further, Plaintiffs point out that, had Ms. Mitchell and Defendant complied with the Alias citation, the Plaintiffs would have had the opportunity to record a judgment lien against the Centreville Property. (Doc. 28, p. 5). The Plaintiffs would then have been able to intervene in the sale and recoup some of their judgment against Defendant. Id. Defendant's argument therefore fails to establish either that the property was exempt from the judgment or that Plaintiff's did not suffer harm as a result of Ms. Mitchell's actions.
Instead, Defendant's arguments are similar to that put forward by third party Wells Fargo Bank, N.A. (“Wells Fargo”) in Kauffman. In that case, the plaintiff argued that Wells Fargo violated a citation to discover assets by failing to freeze an Interest on Lawyers Trust Account (“IOLTA”), from which the defendant transferred funds to avoid the judgment. Id. at 489. Wells Fargo argued that, because the funds in an IOLTA account are held in trust for third parties, it subjectively believed that the funds were exempt from the judgment. Id. at 493. However, Wells Fargo could point to no statutory exemption for IOLTA accounts. Id. at 495. Without considering whether Wells Fargo's conduct was willful or contumacious, the Court held that Wells Fargo violated the citation to discover assets by failing to freeze the IOLTA account. Id. The appropriate sanction was therefore to require Wells Fargo to pay the entire amount of the judgment or the amount of the value of the property transferred. Id.
Equally, here, Defendant's and Ms. Mitchell's subjective beliefs that the foreclosure proceedings justified selling the property does not excuse their failure to abide by the Alias Citation's restriction provision. Plaintiffs have proven that both Defendant and Ms. Mitchell received the Alias Citation prior to the transfer of the Centreville Property. On May 6, 2020, Plaintiffs' served the Alias Citation at Defendant's address, 327 Missouri Avenue #520, East St. Louis, Illinois 62201, and Ms. Mitchell's residence, 9 Knoll Ridge Court, O'Fallon, Missouri 63366. The Alias Citation provided sufficient notice to Defendant and Ms. Mitchell that by transferring property included in the citation, either or both Defendant and Ms. Mitchell could face sanctions. See (Doc. 8); see also Bank of Aspen, 126 Ill.2d at 314. As Ms. Mitchell violated the Alias Citation, the appropriate sanction is to require Ms. Mitchell to either pay the entire amount of the judgment or the amount of the value of the property transferred. As the latter is lesser, the undersigned recommends that the Court enter a sanction against Ms. Mitchell for the amount of the Centreville property, or approximately $63,600.
II. Plaintiffs' Motion for Writ of Body Attachment
Plaintiffs point out that, prior to the filing of their motion for writ of body attachment on November 16, 2020, Defendant had failed to comply with the Alias Citation by providing any of the requested documents. (Doc. 18, p. 3). Defendant also failed to comply with the Court's order to show cause regarding Defendant's failure to appear at the June 16, 2020 judgment debtor examination. Id. Plaintiffs therefore requested that the Court issue a writ of body attachment for Ms. Mitchell as a coercive civil contempt sanction. Id. at p. 5. However, after Plaintiffs filed this motion and their motion for sanctions, Defendant obtained representation. (Doc. 22). Thereafter, Defendant has complied with the Alias Citation, turning over more than 177 pages of responsive documents and investigating whether further responsive documentation exists. Id. at p. 2. Plaintiffs themselves concede that Ms. Mitchell attended a later judgment debtor examination on behalf of Defendant. (Doc. 28, p. 2). As Defendant and Ms. Mitchell are now complying with the Alias Citation, the undersigned recommends the Court deny Plaintiffs' motion for writ of body attachment as moot.
Conclusion
For the foregoing reasons, it is RECOMMENDED to the District Court that the motion for sanctions (Doc. 24) be GRANTED. It is further RECOMMENDED to the District Court that Plaintiffs' motion for writ of body attachment (Doc. 18) be DENIED as MOOT.
Pursuant to 28 U.S.C. § 636(b)(1) and SDIL-LR 73.1(b), the parties shall have fourteen (14) days after service of this Report and Recommendation to file written objections thereto. The failure to file a timely objection may result in the waiver of the right to challenge this Report and Recommendation before either the District Court or the Court of Appeals. See Snyder v. Nolen, 380 F.3d 279, 284 (7th Cir. 2004). Objections to the Report are due on or before June 7, 2021.
IT IS SO ORDERED.