National Life Real Estate Holdings, LLC v. Scarlato
2017 IL App (1st) 161943
| Ill. App. Ct. | 2017Background
- National Life obtained a $3.424M judgment against Ronald Scarlato and initiated supplementary proceedings, serving a third-party citation on International Bank of Chicago (IBC) on April 13, 2013, which restrained transfers of property belonging to Scarlato.
- Four months after service, on August 1, 2013, IBC made a $3.5M construction loan to Scarlato and two LLCs he managed; Scarlato signed the loan documents individually and as managing member of the LLCs.
- The loan agreement permitted IBC to disburse advances directly to contractors or escrow (and to pay joint accounts) and named Scarlato as the authorized person to request advances; IBC disbursed the full $3.5M (largely to contractors/escrow and payments to entities, not to Scarlato personally).
- National Life moved for entry of judgment against IBC for violating the citation’s restraining provision by advancing/disbursing loan proceeds after service; IBC argued the proceeds were not Scarlato’s property and alternatively asserted a setoff right.
- After evidentiary hearings, the trial court denied National Life’s motion, finding the funds were delivered to entities and not to Scarlato individually; the appellate court reviews de novo and vacated and remanded for the trial court to exercise discretion on punishment because it found a citation violation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loan proceeds advanced after service of a citation qualify as “property belonging to” the judgment debtor under 735 ILCS 5/2-1402(f)(1) | Loan proceeds are the debtor’s property once the borrower signs the note; the disbursement (even to third parties) violated the citation | Proceeds were earmarked, controlled by IBC, never delivered to Scarlato personally, and thus not property of Scarlato under §2-1402 | The court held loan proceeds constituted the debtor’s property and IBC violated the citation; remanded for trial court to decide whether to enter judgment/punish IBC |
| Whether IBC’s precautions and contractual disbursement controls negate that the proceeds were the debtor’s property | N/A (argued the funds were still the debtor’s property despite controls) | IBC: contractual restraints and direct-pay mechanics show debtor had no legal right to access funds, so creditor cannot reach them | Court rejected this defense, concluding debtor had sufficient entitlement/control (signatures, authority to request advances) to make proceeds his property |
| Whether IBC’s asserted setoff rights prevent entry of judgment against it | N/A | IBC: preexisting notes granted a right of setoff over borrower accounts | Court found IBC forfeited/waived setoff by failing to timely assert it in citation responses; even if asserted, the citation-created lien would have priority |
| Standard of review for statutory interpretation after evidentiary hearing | De novo review for legal question of statutory interpretation | IBC favored manifest-weight or abuse-of-discretion for factual findings | Court applied de novo review for the legal question whether proceeds are §2-1402 property |
Key Cases Cited
- Bank of Aspen v. Fox Cartage, Inc., 126 Ill. 2d 307 (1989) (purpose of restraining provision is to prevent frustration of supplementary proceedings)
- Schak v. Blom, 334 Ill. App. 3d 129 (2002) (burden on petitioner to show third party possesses debtor’s assets; §2-1402 construed liberally)
- United States v. Kristofic, 847 F.2d 1295 (7th Cir. 1988) (loan proceeds do not remain lender’s property; ordinarily become borrower’s property)
- One CW, LLC v. Cartridge World N. Am., LLC, 661 F. Supp. 2d 931 (N.D. Ill. 2009) (garnishee asserting setoff must still comply with duties of a garnishee; failure to exercise setoff timely may forfeit it)
- Morphet v. Morphet, 19 Ill. App. 2d 304 (1958) (asset rights are contingent and not garnishable until debtor exercises contractual options)
- Guillory v. Terra Int’l, Inc., 613 So. 2d 1084 (La. Ct. App. 1993) (crop-loan proceeds earmarked for a specific purpose were not garnishable because debtor lacked access to funds)