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Banking Law Roundup

Sharp Thinking

No. 145 Perspectives on Developments in the Law from Sharp-Hundley, P.C. January 2018

Citation Respondents Can’t Lend

To Judgment Debtor’s Entities

By John T. Hundley, John@sharp-hundley.com, 618-242-0200

Financial institutions subject to citations to discover assets had best not enter into loan agreements
with entities affiliated with the judgment debtor until the citation proceedings have been resolved.

That’s the message of a majority of a panel of the Appellate Court in Chicago.
Writing in National Life Real Estate Holdings LLC v. Scarlato, 2017 IL App (1st)
161943, the majority said that “extending a loan to a judgment debtor after
having been served with a citation to discover assets runs contrary to [735
ILCS 5/]2-1402’s prohibition or allowing transfer or disposition of property
belonging to the judgment debtor.”

The majority made that holding even though (1) the loan was made to one of
the judgment debtor’s companies, not to the judgment debtor personally; (2) the
loan agreement wasn’t even applied for until four months after the citation was
served; and (3) the loan agreement prohibited payment of the proceeds to the
judgment debtor. Hundley

In a decision the correctness of which we doubt, the majority reasoned (a) that loan proceeds vest
in the borrower upon the making of the loan agreement and promissory note; (b) the judgment debtor
(an individual) signed the loan documents (making him personally liable for repayment); and (c) he
“arguably . . . could have used the loan proceeds for his own personal use or for payment to an entity
outside of the construction project” even though that would have violated the loan agreement.

Relying on such reasoning and the principle that the citation statute is to be “construed liberally,”
the majority said that “proceeds of the loan here constituted ‘property *** belonging to the
judgment debtor or to which he or she may be entitled or which may thereafter be acquired by
or become due to him or her’ such that the advance and disbursement of said proceeds
constitutes a violation.”

The majority vacated that trial court’s decision to the contrary and remanded the case to the trial
court to “exercise its discretion and determine whether to enter judgment” against the bank (emphasis
added). That directive seems contrary to the usual rule that a respondent has strict liability for releasing
funds subject to the citation’s freeze.

Leave to appeal has been denied by the Supreme Court.

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking shall
be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein constitute educational
material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal advice on your particular
situation, contact a Sharp-Hundley lawyer at 618-242-0200 or one of the addresses provided on page 2 of this newsletter.