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.
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