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.
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