Illinois Fourth District Appellate Court Affirms Judgment Against Agent Appointed as P.O.A. for Changing I.R.A. Beneficiary Without Explicit Permission; Approves 1/3 Contingency Fee Award, Collins v. Noltensmeier, 2018 IL App (4th) 170443 (April 5, 2018)
The Illinois Appellate Court recently re-enforced the danger of self-dealing and personal benefit when handling the assets of another under a statutory power of attorney for property. A terminally ill man appointed his longtime girlfriend as P.O.A. January 16, 2011, one week before his death. The recently appointed agent and long term romantic partner then designated herself as the beneficiary of an I.R.A. valued at approximately $45,000.00.
The decedent’s brother and niece filed a complaint alleging that the re-designation was a breach of her fiduciary duty, and constituted conversion worthy of punitive damages. The central issue on appeal was whether the longtime girlfriend acted within the scope of her authority when the beneficiary was changed.
The court first discussed the burden of proof where an agent acting under a P.O.A. takes an action benefiting that agent, a/k/a “self-dealing.” Any transfer of property that benefits the person acting under a P.O.A. is presumed to be fraudulent. Where self-dealing has occurred, the agent must prove by clear and convincing evidence that the transaction was fair and did not result from their considerable power over the party granting them authority to act.
Clearly the change of beneficiary benefitted the agent here. It was then her burden to show that either the P.O.A. explicitly gave her the authority to self-deal, or that the terminally ill man intended for her to take that action. The girlfriend in this case argued that the following language in the POA permitted her to designate herself as the beneficiary: “power to make gifts, exercise powers of appointment, name or change beneficiaries under any beneficiary form or contractual arrangement.” The court rejected this argument, and found the language insufficient to overcome the presumption of fraud.
Essentially, regardless of any authority granted in a P.O.A., an agent cannot rely upon broad language to self-deal. When permitted, self-dealing must be is specifically and explicitly authorized in the document. Because nothing in the P.O.A. authorized the change of beneficiary, and no other evidence of his intent to allow the change was in the record, the presumption of fraud was not rebutted. For that reason, the agent was required to repay the value of the I.R.A. to the estate.
The Illinois Power of Attorney Act provides that where an agent has abused their authority, the agent must repay the value of anything taken. In addition, the agent must reimburse the principal (or the principal’s successor, here the brother and niece) for attorney’s fees paid to correct the harm. 755 ILCS 45/2-7(f). Here the Plaintiff’s attorneys were hired on a contingency basis, to be paid 1/3 of the recovery.
The trial court awarded 1/3 of the total value of the IRA as fees, plus costs. The Appellate Court affirmed, finding that while the existence of a contingency is only one factor to consider is determining a reasonable fee, here it was appropriate. One major factor was likely that the attorneys representing the Plaintiffs invested 134.5 hours in the case, putting their hourly rate slightly over $100.00 for a $15,000.00 fee.
Default Judgment by Owner Against Contractor Bars all Defenses by Owner to Subcontractor’s Lien Claims: Anekom, Inc. v. Estate of Demith, 2018 IL App (3d) 160554
A recent decision from the Third District Appellate Court addressed the danger of an owner entering judgment against a contractor while the claims of subcontractors are pending. In the Anekom case, an estate hired a contractor to demolish a home and rebuild another on the same lot. The project proceeded slowly, and for that reason the owner fired the contractor. Before the contractor was terminated, at least two subcontractors completed significant work including demolition and framing.
The contractor foreclosed its lien, claiming damages for the work completed. The unpaid subcontractors were also joined to the suit, as they had recorded liens against the home to protect their interest. Subcontractors then also filed to foreclose their liens. For whatever reason (insolvency?), the contractor failed to prosecute its lien claim, and the initial contractor’s case was dismissed for lack of action. The owner filed a counter-claim against the contractor and obtained a default judgment for $144,834.20. The owner’s judgment included damages for the amounts claimed by the sub-contractors in their lien claim. That fact ultimately doomed the owner in its contest with the sub-contractors.
Both sub-contractors filed motions for summary judgment on their claims to foreclose which were granted. That was the decision appealed by the Owner. In an unusual twist, the appellate court stated that while the judgment against the contractor was not initially the issue raised on appeal by the parties, it would be determinative in the case. The appellate court appears to have examined the record and raised the issue during oral argument, instructing the parties to file supplemental briefs.
Essentially, the court argued (and of course concluded) that because the owner obtained a judgment against the contractor which included the subcontractor’s demand, it could not contest the subcontractor’s liens. The court opted to not address the other issues raised by the owner on appeal. Their decision was based upon two different theories: claim preclusion and the election of remedies doctrine.
Even though the corporate contractor abandoned its claim and dissolved in 2014, the court found that allowing the owner to defend against the sub-contractor’s claims would impermissibly allow double recovery. If successful in fending off the sub-contractors, the owner could still collect the judgment. Where double recovery is implicated, a litigant will be bound by there decision to pursue their remedy of choice. Without direct evidence of insolvency, the court would not entertain the claim of the estate that the judgment could not be collected, even where the issue was first raised at oral argument.
The court further found that judicial estoppel precluded the estate from defending against the lien claim. Quite simply, the court held that because the owner acknowledged the amounts were owed when it entered judgment against the contractor, it would not be permitted to mount any defense to the sub-contractor’s lien claims. The substance of those defenses was not mentioned in the opinion, as the merits of the claims initially raised on appeal were not addressed by the court.
Given this holding, parties should be extremely careful when moving to enter judgment in any case where the source of damages could be used as an admission by opposing parties.
A Wife’s Deceit Allows Single Service Attempt to Satisfy Due Diligence Requirement: Publication Permitted to Give Owner Notice of Foreclosure of Residence, Neighborhood Lending Services, Inc. v. Griffin, 2018 IL App (1st) 162855 (March 15, 2018).
The First District recently agreed that a homeowner’s request to vacate a foreclosure judgment was properly denied. The homeowner argued that the bank did not duly attempt to find and serve him personally before publishing notice to move the foreclosure forward.
The lender attempted service only once at the residence of the owner. The process server was told when attempting service (by the owner’s wife) that the defendant did not live at the home. She also refused to provide any further information about the whereabouts of the owner. The lender’s process server attempted to find a different address by searching public records to no avail. Almost certainly these efforts were wasted, as the owner did in fact live at the residence where service was attempted. This fact was confirmed in the owner’s affidavit, filed in connection with his attempt to defeat the default judgment of foreclosure.
In Illinois, publication is the least satisfactory method of giving notice. Courts understand that publishing notice is often no notice at all. For that reason, a Plaintiff must make an honest and well-directed effort to find a defendant before service by publication will allow a court to act against the rights of a defendant. So, the central issue is what constitutes an honest effort, and what is an impermissibly casual, routine, or spiritless effort?
The Owner referenced a prior case where a lender published notice after speaking to a neighbor. The neighbor commented that “he had heard” that the person being served vacated the premises. This was held to be a rather spiritless effort in JPMorgan Chase Bank, National Ass’n v. Ivanov, 2014 IL App (1st) 133553. The Ivanov court held that the neighbor’s comment was not sufficient to allow service by publication. This comparison was summarily rejected by the Griffin court. The statement from the owner’s wife living at the residence was given more weight, and in fact served to satisfy entirely the duty of the bank to further investigate that address as a valid place of service.
The Owner also argued that the statement of his Wife in the process server’s affidavit was hearsay, and that he was entitled to an evidentiary hearing on his motion to vacate the judgment. This argument was also rejected. The Court held that because the relevance of the wife’s statement was its effect on the plaintiff, it was not hearsay.
It does not appear from the opinion that Wife filed an affidavit expressly denying her statement to the process server. The owner acknowledged that he lived at that address where service of process was attempted. Given the facially uncontroverted statement from wife, the Court held that the bank’s efforts were indeed a spirited effort. Publication was held to be sufficient to serve the owner, and the judgment of foreclosure was upheld.
Given this recent holding, plaintiffs and process servers would be wise to communicate similar statements from residents in their affidavits of service.
Bankruptcy Court Avoids Citation Lien/Turnover of Real Property Proceeds as Avoidable Preference, Despite Service of Citation to Discover Assets One Year Prior to Bankruptcy (In re: Karim, Northern District Bankruptcy Court, Adversary 17-00380, 3-9-18)
2018 WL 1230561 (Judge Thorne)
The limit of the Illinois citation lien was explored in a recent Chapter 11 Bankruptcy ruling in the Eastern Division of the Northern District Bankruptcy Court. A creditor obtained a judgment against two debtors in state court for $219,810.01 in December of 2015. The creditor then served debtors with a citation to discover assets in March of 2016. In December of 2016 the debtors sold real property and received a check in the sum of $45,799.06. The state court entered an order requiring the debtors to turn that check over to the judgment creditor on February 3rd of 2017. The debtors filed their bankruptcy March 3rd of 2017, less than 90 days after they received the check at closing.
If a “transfer” to a creditor occurs within 90 days of a bankruptcy filing, the trustee might be in a position to claw back the money for division among all creditors. The issue in Karim was whether the transfer occurred at the time the citation was served or at some later date.
A citation lien will attach to nonexempt personal property of the debtor at the time of service, and to any property obtained after the date of service while the citation is pending.
After some discussion of statutes establishing the date of transfer, the court focused on section 547(e)(2)(C) of the code. That section states that no transfer can be effective until a debtor has acquired rights in the property transferred. In this case, the court knew only that the debtors received a check on December 19, 2016. Because there was no evidence that debtors had any rights in the check prior to December 19, 2016, the court held that the transfer took place that day, within the 90-day preference period. No other defense to the finding of preferential transfer was made by the creditor. The Court avoided (reversed & abolished) the transfer of the check to creditor and the citation lien asserted by the creditor.
The court also discussed but declined to rule squarely on the issue of perfection of the lien on the check. The court mentioned that no lien could exist without property in existence, suggesting that perfection likely occurred on that same date: December 19, 2016. If other creditors were attempting to step into first position, the case might have addressed the issue in greater detail.
The case leaves open several questions, some of which are subtly referenced in the opinion itself. First, no evidence of the contract for the purchase of real estate was entered into evidence. Would the lien have attached to debtor’s interest in the contract at the time of signing? The court discussed that a legally enforceable right could be an existing interest in property. If a contract existed, it is possible the court would have held that the transfer occurred at the time of formation.
Furthermore, it seems that no judgment lien was recorded. Had the creditor taken that action immediately after entering judgment, the conflict might have been avoided entirely.
Bottom Line? If there is no evidence that a debtor acquired rights more than 90 days prior to filing bankruptcy, a long-standing citation may not be enough to avoid a preference action. In addition, the continuing lien imposed by a citation is useful but no substitute for a recorded lien when real property is available for collection.
Illinois Legislature Enacts Protections for Student Loan Debtors, Leaving Enforcement to the Department of Professional and Financial Regulation and the Attorney General: Student Loan Servicing Rights Act (110 ILCS 992)
The Attorney General has successfully championed additional protections for Illinois student loan debtors. The AG stated that borrowers were not being made aware of their repayment options, including income-driven plans and possible loan forgiveness in the case of disability.
The Student Loan Servicing Rights Act is scheduled to become effective December 31, 2018. The Act establishes a baseline of behavior required of entities receiving and applying payments for student loans. The Act imposes the requirement of a professional license to service student loans and grants the Department of Financial and Professional Regulation the authority to enforce the act. The Department can impose fines of up to $75,000.00 or act to revoke any license granted under the act for violations. The Act also creates a new position within the Attorney General’s office to work with borrowers and educate the public.
The act is being described as a borrower bill of rights but does not create a private cause of action for violations. The legislature has left enforcement to either the Attorney General (Consumer Fraud Act), or the Department of Financial and Professional Regulation. Any complaints should be directed to those offices.
In addition to general requirements that all communications from the servicer be accurate and truthful, servicers will also be required to abide by the following rules:
The act also requires personnel working for servicers to discuss discharge, forgiveness of the debt, or deferment (no interest) when a borrower is expressing difficulty making payments before automatically turning to a forbearance (the interest continues).
Servicers must provide methodical treatment of any complaint or request from a borrower and suspend any collection efforts or negative credit reporting until the dispute is resolved.[vi] They must conduct investigations and send written notice of any determination. They must also allow Borrowers to appeal any determination, and generally escalate a complaint up the chain of command.
[i] 110 ILCS 992/5-110(b)(c)
[ii] 110 ILCS 993/5-15(a)
[iii] 110 ILCS 993/5-15(b)
[iv] 110 ILCS 993/5-25
[v] 110 ILCS 993/5-55
[vi] 110 ILCS 993/5-65
Illinois Third District Appellate Court Holds that Disassociation of Member of Limited Liability Company Requires Substantial Shortcoming, or Facts Showing that Continued Association was Unreasonable.
(McManus v. Richards, 2018 IL App (3d) 170055)
The Third District Appellate Court issued an opinion March 2, 2018 regarding “cause” for the expulsion of a member of an Illinois limited liability company (LLC).
Two orthodontists signed an operating agreement in 2012. The agreement provided that buyer would purchase half of the practice from seller over a five-year term. In 2016 the buyer (now a 45% owner) was given notice by the seller (now a 55% owner) that he was terminating the agreement. The relevant provision of the operating agreement read as follows:
“In the event that (Seller) finds cause to involuntarily disassociate (Buyer) from the Company’s dental practice, (Buyer) shall give written notice…(and) shall repurchase all of (Buyer’s) membership interest at one hundred percent of the purchase price...either as a single payment, or quarterly over a period of three years.”
The Court strongly implicated that Seller was trying to recapture the business because of growth over the four-year term. Without question, the seller in 2012 felt that buying back the business in 2016 for the 2012 price was a bargain.
The seller argued that he could find “cause” for disassociation without restriction, given the authority granted him by the language above. The buyer argued that “cause” is a term of legal significance in the context of a business transaction, which required proof of malfeasance or at least more than a subjective reason for termination. Buyer prevailed, though only defeating summary judgment on appeal (remanded).
The Court held that allowing the Seller to repay Buyer over three years without objective cause was not only inequitable but “absurd.” The court relied upon two arguments in reaching the conclusion that “cause” as set forth in the LLC agreement required more than a subjective decision.
First, the Court held that an employer-employee relationship is analogous to that of two members of a limited liability company. Because “cause” in the context of terminating an employee requires a substantial shortcoming or reasonable reason for termination, the same should be expected of LLC member.
Secondly, the Court relied upon a section in the Limited Liability Company Act, which provides for Judicial Expulsion only upon a showing of wrongful conduct. The Court made no reference to a section in that statute which provides for dissociation pursuant to the terms of the written agreement.
Relying on these two sources of authority, the Court concluded that Seller must show that Buyer’s conduct made it unreasonable for the two to work together before disassociation could occur.
Bottom line: If an operating agreement is to allow for termination without a showing of unreasonable conduct, the language should clearly state that termination is permitted at will, with or without cause. Otherwise, equity and evidence will loom large over any decision to disassociate.
City of Chicago Crushes Security Interest: Northern District Bankruptcy Court Reclassifies Secured Claim as Unsecured in Second Chapter 13. Debtor and Creditor Fail to Pay for Parking Tickets…and the Collateral is Pulverized.
(In re: Tiara Hill, N.D. Illinois, Eastern Division, 17 BK 27598) (2-22-18).
After filing a Chapter 13 Bankruptcy, a debtor lost their car to the City of Chicago due to post-petition parking tickets. The vehicle was subject to a security interest. The lien holder was told by the debtor after repossession that their claim would be treated as secured despite the repossession. Both received notice of the impound, but neither the debtor or the lien-holder acted to recover the vehicle. The 2008 Chevrolet Impala was promptly crushed by the City. The destruction of vehicles in this manner is specifically permitted with 15 days’ notice by the Chicago Municipal Code. The Chapter 13 plan was later dismissed for failure to make plan payments.
The Debtor (after vehicular obliteration) filed a second Chapter 13 Petition and treated the lien-holder as an unsecured creditor. The Court agreed with this classification.
First, the Court held that any promise in the first Chapter 13 case to treat the claim as secured would not require the debtor to recover the vehicle. Further, that agreement would not extend to subsequent bankruptcy filings.
The Court also found that the debtor did not act in bad faith where the failure to recover the vehicle was solely due to the debtor’s financial situation. Given the superior financial means of the creditor, the creditor’s inaction was held to be the primary cause for the loss of collateral. The Court also summarily rejected any claim by the lender that it was entitled to “special classification,” and would be given equal treatment to other unsecured claims.
Given the ruling, creditors would be wise to recover any collateral facing destruction. If the City of Chicago is involved, sooner rather than later.
Chapter 13 Bankruptcy Allows Payment of Delinquent Taxes After Redemption Period Expires (In re: Robinson, Eastern Division, 577 B.R. 294 (December 2017)).
When considering redemption/repayment of property taxes, the Northern District has split twice in the last six months. Both involve debtors trying to pay delinquent taxes through a Chapter 13 Bankruptcy plan. The Debtor in need? A bankrupt on the verge of losing their property to a tax sale.
The first and larger split is whether a Debtor can save the property after the redemption period has run, but before a tax deed issues. The second (and hopefully less frequent) issue is whether the Debtor can file bankruptcy after 5:00 P.M. on the last day redemption and save the property. Obviously, if the redemption period running is irrelevant for purposes of paying the debt through the plan, the second issue is moot.
The Northern District Bankruptcy Court (Eastern Division) ruled in the Robinson case that a debtor can prevent the issuance of a tax deed, even when the redemption period has run when the Chapter 13 is filed. The Robinson Court cited the 7th Circuit case In re Lemont as authority for this holding.[i] Essentially, Robinson held that if a tax purchaser is to be treated as a secured claim (as stated in Lamont), there is no reason to treat the running of redemption as a watershed moment. The Debtor still owns the property, and the claim of the tax purchaser can be modified as any other secured claim. The Court concluded that because the tax purchaser could recoup his initial investment under state law, there was little prejudice to the purchaser.
In May (Jerklin) and September (Adger) of 2017 two Northern District Courts reached the opposite conclusion.[ii] Both also cited the Seventh Circuit Lemont Decision. The Jerklin and Adger Courts seemed to accept without debate that a debtor’s ability to pay the taxes through the Chapter 13 plan ends the day the redemption period expires. The language from Lemont is below, and the reader is encouraged to reach their own conclusion.
But what time of day you ask? The agreement of the Jerklin and Adger Courts ended there. The Judge in Adger seized upon the language in Lemont, which distinguishes between a debtor redeeming and a debtor treating the delinquent taxes as debt in a bankruptcy filing. Because the debtor is not redeeming, the Court held that the rules and standards governing electronic filing prevail over the state statute regarding timely redemption. For that reason, any time before midnight would be sufficient. The Judge in Jerklin simply relied upon the state statute, drawing the line at the time the county office closed.
Central point? The case should be filed before redemption expires (and before 5:00 P.M.) to avoid any argument. But it does seem that based upon the language in Lamont, debtors have a strong argument to save the property until the deed is signed.
[i] Lemont stated:
“His assertion (creditor seeking a deed) that the full redemption amount must be paid in a lump sum before the redemption deadline—i.e., that a proper redemption must be made—is mistaken. The plan is treating his secured claim, not formally redeeming the property… The expiration of the redemption period did not affect the plan's treatment of (the creditor’s) secured claim except that, if the debtors had failed to comply with the plan, then his equitable remedy would have survived and he could have sought an order to issue a deed. Accordingly, the expiration of the redemption period does not affect the validity of the plan or necessitate a modification of the automatic stay so long as the debtors comply with the plan. In Re Lemont, 740 F.3d 397 (7th Cir. 2014)
[ii] In re Demetrius Adger, 17-20163 (September 20, 2017); In re Harold L. Jerklin, 17-07999 (May 19, 2017).
Chapter 13 Student Loan Exception: Northern District Bankruptcy Court Allows Chapter 13 Student Loan DEBT to Exceed Limitations (In Re: Christopher v. Pratola, N.D. Illinois, Eastern Division, 578 B.R. 414 (2017)).
A debtor in the Northern District with $568,671 in unsecured debt was given a green light for his Chapter 13 plan, despite the Chapter 13 statutory limit of $394,725. The Oski’s share of the debt? Student loans to attend college and post-graduate school. The claim from the U.S. Department of Education for the loans totaled $447,103.99.[i]
The Court first considered whether the student loan debt was contingent or non-contingent. The debtor was participating in an “Income Based Repayment Plan,” or "IBR." This type of plan is offered by the Department of Education and allows debt forgiveness if 10% of a graduate’s discretionary income is paid for 25 years.[ii] The court found that because the debt existed when the plan was filed it was non-contingent. “It is the possibility of forgiveness that is contingent, not the debt itself.”
The Court then moved on to the larger question of whether the case must be dismissed because of the excessive unsecured debt. The Court acknowledged that the debtor was ineligible to file under Chapter 13 because of his towering unsecured debt, but then moved on to ask whether ineligibility is always cause for dismissal. The Court answered in the negative and declined to dismiss for several reasons.
First, the debt limit was intended by congress as a check on sole proprietors with large businesses. Congress wanted to stop commercial actors from evading a more creditor friendly Chapter 11 filing. Secondly, because the debtor’s Chapter 13 plan would give creditors at least partial payment and leave the student loans intact, it appears dismissal would not benefit the debtor, the creditors, or the estate. Finally, the court examined the dramatic rise in education costs compared to the relatively small increase in the debt limits since they were established. As a practical matter many students will now find themselves in excess of debt limits, and unable to afford the rigors of a Chapter 11. For that reason, the Court declined to dismiss as a matter of public policy.
The bottom line? If the only reason a debtor doesn’t qualify for a Chapter 13 filing is student loan debt, he might find himself in a domain between “eligible” and “dismissed.”
[i] The author feels it appropriate to thank his alma mater Northern Illinois University for providing such quality at an affordable price.
[ii] For more information, and for alternative debt forgiveness plans: https://studentloans.gov/myDirectLoan/index.action
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