Appellate Court Provides a Primer on Supplementary Proceedings Against Third Parties

In March 2018, the plaintiffs filed a motion for a conditional judgment against Esther and Teofil. The motion also requested that the couple “show cause why such Conditional Judgment should not be converted to a Final Judgment against each of them, jointly, severally and individually, as a result of their wrongful conduct” in converting assets or mismanaging 2XForm. Id. ¶ 10. The motion cited the judgment against 2XForm and further alleged that 2XForm submitted false contractor’s statements and fraudulently transferred assets to the plaintiffs’ detriment. Id. ¶ 11. Faced with this motion, the respondents relented and offered to produce Esther for examination. The plaintiffs declined the invitation. Id. ¶ 12. In their response to the motion, the respondents argued that the plaintiffs failed to allege that the Scortes possessed property belonging to 2XForm or that they wrongfully converted such property to third parties after they were served with the citations. Id. ¶ 13. They asserted that section 2-1402 of the Code of Civil Procedure does not provide for “the imposition of a personal conditional judgment against a third-party respondent who has never controlled or possessed any property of a judgment debtor after being served with a citation.” Id. They further argued that section 5/2-1402(c)(3) obligated the plaintiffs to file a separate petition to recover a corporate judgment debtor’s property from other parties, on behalf of the judgment debtor, for use by the plaintiffs. Id. The plaintiffs made no such filing.

The trial court granted the plaintiffs’ motion and entered conditional judgments against Esther and Teofil pursuant to sections 2-1402(c)(3) and (6). It based its ruling on Esther’s refusal to sit for an individual examination and Teofil’s failure to “fully and completely respond” to the citations. Id. ¶ 14. The court went further, however, and ruled that the plaintiffs had made a prima facie showing that Esther and Teofil were liable for converting the plaintiffs’ funds and causing 2XForm to fraudulently transfer its assets by falsely crediting other contractors for its work. Id. ¶ 15. Summons were issued for a hearing on the conditional judgments. When Esther and Teofil failed to appear, the court entered individual judgments against them for the full amount of the underlying judgment, plus costs. Id. The trial court subsequently denied a motion to reconsider. In its ruling, the court asserted that section 2-1402(k)(3) provided a basis for its judgments against the Scortes in their individual capacities. Id. ¶ 16.

On appeal, the main issue was one of statutory interpretation: whether the supplementary proceedings provisions in section 2-1402 authorized the trial court to enter the conditional judgments. Id. ¶ 18. The appellate panel reviewed the history and purpose behind section 2-1402, observing:

The legislature enacted section 2-1402 to provide an efficient and expeditious process for the discovery of a judgment debtor’s income and assets and to compel application of those assets to the payment of a judgment. [] These proceedings also allow plaintiffs to find any assets of the judgment debtor being held by third parties and apply those assets to satisfy the judgment.

Id. ¶ 19 (internal citations and footnote omitted). The court observed that section 2-1402 does not explicitly authorize trial courts to enter conditional judgments against third party respondents to citations to discover assets. Id. ¶ 20.

The plaintiffs argued that section 2-1402(k-3), which states that a court “may enter any order upon or judgment against the respondent cited that could be entered in any garnishment proceeding under Part 7 of Article XII of this Code,” implicitly authorized the trial court’s order. Id. ¶ 20. The appellate court rejected this argument. It found that conditional judgments in garnishment proceedings under 735 ILCS 5/12-706(a) are non-final. A garnishee who “appears and answers after being served with the summons . . . is not barred by the prior default and is entitled to further proceedings.” Id. ¶ 21 (citing Scalise v. Zarate, 303 Ill. App. 3d 718, 724 (1st Dist. 1999)). Subsection (k-3), although allowing courts to enter any order or judgment available under the garnishment statute, “does not grant the trial court broader powers than it would have in a garnishment proceeding.” Hayward, 2020 IL App (1st) 190476, ¶ 22. In this case, Esther and Teofil answered the citations. Regardless of the plaintiffs’ unhappiness with the answers provided, the Scortes were not in default under section 12-706(a). Id. ¶ 23.

Reliance on section 2-1402(k-3)’s reference to the garnishment statute was misplaced for another reason, as well. The appellate court noted that 735 ILCS 5/12-711(a) provides that judgment debtors and creditors “may contest the truth or sufficiency of the garnishee’s answer,” at which time the court must “proceed to try the issues.” Id. ¶ 24. The appellate court thus concluded that, absent an evidentiary hearing, “[t]he unambiguous language of the garnishment statute . . . does not authorize the trial court to enter a conditional judgment where a party appears and answers, but his answer is insufficient or incomplete.” Id. ¶ 25. Because it failed to “try” the plaintiffs’ objections to Esther and Teofil’s answers, the lower court “had no authority to enter the judgment pursuant to section 2-1402(k-3).” Id. The garnishment example thus failed.

The appellate court proceeded to address the trial court’s reliance on sections 2-402(c)(3) and (6), which allow for the recovery of identifiable assets of a judgment debtor held by third parties. Id. ¶¶ 26-27. This reliance, too, was inappropriate in light of the limited scope of evidence before the court. Neither provision authorizes the entry of the full underlying judgment against a third party without a finding that those funds were the converted assets of the judgment debtor or an amount owed to the judgment debtor by the third party. Here, the trial court merely concluded that the plaintiffs “presented a prima facie case that they are entitled to a [j]udgment for all proceeds . . . as a result of the conversion of embezzlement of Respondents.” Id. ¶ 27. This was inadequate and constituted plain error.

Next, the appellate court discussed section 2-1402(f)(1), which “prohibits a third party from transferring or disposing of, or interfering with, property belonging to the judgment debtor that is not exempt from enforcement of the underlying judgment” after issuance of a citation to discover assets. Id. ¶ 28. A citation creates a lien on all personal property belonging to a judgment debtor that is held by the third party. Id. Courts may enter judgment against a party violating the lien “in the amount of the unpaid portion of the judgment . . . or in the amount of the value of the property transferred, whichever is lesser.” Id. Here, the trial court found that 2XForm fraudulently transferred assets belonging to the plaintiffs by assigning “credit” for portions of the work to other contractors. Id. ¶ 29. Crucially, however, the facts showed that any such transfer took place over two years before issuance of the citations to discover assets. No lien was in place, so the transfers, if they occurred, did not violate section 2-1402(f)(1). Id.

Finally, the appellate court saw no evidence that Esther or Teofil actually possessed 2XForm’s assets. Id. ¶ 30. This goes to the fundamental purpose of a citation to discover assets: to determine whether “third parties possess ‘assets of the judgment debtor that should be applied to satisfy the judgment.’” Id. (quoting Schak v. Blom, 334 Ill. App. 3d 129, 133 (1st Dist. 2002)). Without such evidence, the trial court had no authority to enter judgments against them, and reversal was warranted. Hayward, 2020 IL App (1st) 190476, ¶ 35.

The appellate court was not unsympathetic to the plaintiff’s plight, however. It made clear that the lack of evidence—one way or another—as to whether Esther or Teofil held 2XForm’s assets may have been the result of the respondents’ unwillingness to fully comply with the citations. Id. ¶ 36. It suggested that, upon remand, the plaintiffs could file a separate petition to pierce 2XForm’s corporate veil or, if warranted, pursue contempt proceedings. Id. ¶¶ 35-36.

The plaintiffs and trial court were obviously frustrated by what they perceived to be incomplete answers and a lack of cooperation by the respondents. This frustration resulted in the premature entry of judgments against third-parties. Although supplementary proceedings involving third parties under section 2-1402 can be complicated, the Hayward decision serves as a reminder to courts and litigants alike of the perils of skipping steps in such proceedings.

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John Heil joined Heyl, Royster, Voelker & Allen, P.C. in 2007 after serving for eleven years with the Cook County State’s Attorney’s Office. John handles matters in the firm’s Peoria and Chicago offices. He focuses his practice on business and commercial litigation, complex civil rights litigation, the representation of insurance carriers in liability coverage disputes, and the defense of catastrophic tort claims. John is a Co-Chair of the firm’s Business and Commercial Litigation Practice Group and Chair of the Drone Law Practice Group. John can be reached at jheil@heylroyster.com.

Illinois Defense Counsel (IDC) is the premier association of attorneys in Illinois who devote a substantial portion their practice to the representation of business, corporate, insurance, professional, and other individual defendants in civil litigation. Statements or expression of opinions in this publication are those of the authors and not necessarily those of the association. IDC Defense Update, Volume 20, Number 2 © 2020. Illinois Defense Counsel. All Rights Reserved. This publication was generated by the IDC Civil Practice Committee – John P. Heil, Jr., Chair, Adam C. Carter, Vice Chair. Illinois Defense Counsel, PO Box 588, Rochester, IL 62563-0588, 217-498-2649, idc@iadtc.org.