National Life Real Estate Holdings, LLC v. Scarlato

2017 IL App (1st) 161943

• Court: Appellate Court of Illinois
• Decided: July 24, 2017
• Docket: 1-16-1943
• Status: Unpublished

Opinion

FIRST DIVISION July 24, 2017 No. 1-16-1943 2017 IL App (1st) 161943

IN THE APPELLATE COURT OF ILLINOIS FIRST JUDICIAL DISTRICT

NATIONAL LIFE REAL ESTATE ) HOLDINGS, LLC, ) ) Appeal from the Plaintiff and Citation ) Circuit Court of Petitioner-Appellant ) Cook County. ) v. ) ) No. 10 CH 36838 RONALD SCARLATO, ) ) Honorable Defendant, ) Alexander White, ) Judge Presiding ) (International Bank of Chicago, Citation ) Respondent-Appellee). )

PRESIDING JUSTICE CONNORS delivered the judgment of the court, with opinion. Justice Harris concurred in the judgment and opinion. Justice Mikva dissented.

OPINION

¶1 Plaintiff, National Life Real Estate Holdings, LLC (National Life), appeals the trial

court’s ruling that denied its motion for entry of judgment against third-party citation respondent,

International Bank of Chicago (IBC), arguing that the court’s decision was improper where after

being served with a citation, IBC violated the restraining provision of the citation by extending a

loan to judgment debtor, Ronald S. Scarlato. National Life specifically asserts that the citation

was violated when IBC advanced and disbursed proceeds of the loan to third-parties on behalf of

Scarlato. IBC responds that the trial court was correct in denying the motion for entry of No. 1-16-1943

judgment because National Life has not and cannot establish that IBC ever held 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.” See 735 ILCS 5/2-1402(f)(1) (West 2012). We

reverse the trial court’s decision to deny National Life’s motion for entry of judgment.

¶2 I. BACKGROUND

¶3 This case stems from an approximately $3.5 million judgment entered against Scarlato

and the resulting supplementary proceeding in which National Life attempted to collect the

judgment amount by serving IBC, a bank that conducted business with Scarlato, with a third-

party citation to discover assets. Ultimately, National Life became aware that IBC had entered

into a loan agreement with Scarlato after being served with the citation and moved to enter

judgment against IBC as a result of its alleged violation of the citation, which prohibited the

transfer of any property belonging to Scarlato.

¶4 Prior to entering into the $3.5 million “Construction Loan Agreement” (agreement) and

promissory note (note) that form the basis of the dispute here, IBC held a $4 million note from

Scarlato and two limited liability corporations for which he was the managing member,

Bellwood Place, LLC (BP), and Scarlato Holdings Bellwood Place, LLC (SHBP), dated

September 19, 2008 (September 2008 note), and a $2.6 million note from Scarlato, BP, and

SHBP, dated October 19, 2012 (October 2012 note). Both of the notes contained a “right of

setoff” provision that stated:

“To the extent permitted by applicable law, Lender reserves a right of setoff in all

Borrower’s accounts with Lender (whether checking, savings, or some other account).

This includes all accounts Borrower holds jointly with someone else and all accounts

Borrower may open in the future. However, this does not include any IRA or Keogh

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accounts, or any trust accounts for which setoff would be prohibited by law. Borrower

authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums

owing on the indebtedness against any and all such accounts.”

The September 2008 note and the October 2012 note were both secured by second and third

position mortgages on the subject property, located at 110 North 25th Avenue in Melrose Park

(property). These mortgages were granted as collateral to IBC by BP and SHBP, the two owners

in fee simple of the property, with each having an undivided 50% ownership interest. The

property is a parcel of land that measures over 19.4 acres and is improved with a mixed-use

543,044 square-foot building. The first floor of the building is commercial retail and the second

floor is residential condominiums. As of August 1, 2013, IBC held a total debt of approximately

$14 million relating to the property. Also as of that date, the construction on the property was

only about halfway complete. An appraisal report dated February 13, 2013, valued the property,

as is, at $12,015,000, with the completed property valued at $16.2 million.

¶5 In November 2012, National Life obtained a judgment in the amount of $3,424,228.97

against Scarlato, Division Street Place, LLC, and Scarlato Holdings Division St. LLC, jointly

and severally. Thereafter, National Life began supplementary proceedings in an attempt to

collect the judgment amount. On April 12, 2013, National Life issued a third-party citation to

discover assets directed to IBC. The citation was served on IBC on April 13, 2013, and contained

the following prohibitive provision:

“[You are prohibited] from making or allowing any transfer or other disposition

of or interfering with, any property not exempt from execution or garnishment belonging

to the judgment debtor or to which the judgment debtor may be entitled or which may be

acquired by or become due to the judgment debtor and from paying over or otherwise

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disposing of any money not so exempt, which is due or becomes due to the judgment

debtor, until further order of court or termination of the proceedings. You are not

required to withhold the payment of any money beyond double the amount of the

judgment.”

IBC filed its initial response to the citation on May 7, 2013, and supplemented its response on

two subsequent occasions.

¶6 On August 1, 2013, nearly four months after IBC was served with National Life’s third-

party citation to discover assets, Scarlato, BP, and SHBP applied for a $3.5 million loan from

IBC and entered into the agreement. The agreement listed IBC as the lender, and Scarlato, BP,

and SHBP as the borrowers. Scarlato executed and signed the Agreement three times and in three

ways: individually, on behalf of himself, and in his capacity as the managing member of BP and

SHBP. Scarlato also executed and signed the Note in conjunction with the agreement on August

1, 2013, by signing three times and in the same three ways.

¶7 On August 1, 2013, in addition to the agreement and note, Scarlato, BP, and SHBP

entered into an assignment of construction contracts (assignment) that granted, transferred, and

assigned to IBC all of the borrowers’ present and future rights, title, and interest in and to the

construction contract with CMG Construction Management Group, Inc., the general contractor.

The assignment provided that IBC was not allowed to exercise any rights of Scarlato, BP, or

SHBP unless and until a default occurred. Scarlato executed and signed the assignment three

times and in three ways: individually, on behalf of himself, and in his capacity as the managing

member of BP and SHBP.

¶8 Per the terms of the agreement, the term “borrower” was to apply to Scarlato and the

LLCs, jointly and severally. Regarding who was authorized to request advances and authorize

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payments under the line of credit, the agreement only listed: “Ronald Scarlato, Managing

Member of Bellwood Place, LLC; Ronald Scarlato, Managing Member of Scarlato Holdings

Bellwood Place, LLC; and Ronald Scarlato, Individually.” In pertinent part, the agreement

further stated that,

“Application for Advances. Each application shall be stated on a standard AIA

payment request form or other form approved by Lender, executed by Borrower, and

supported by such evidence as Lender shall reasonably require. Borrower shall apply

only for disbursement with respect to work actually done by the General Contractor and

for materials and equipment actually incorporated into the Project. Each application for

an Advance shall be deemed a certification of Borrower that as of the date of such

application, all representations and warranties contained in the Agreement are true and

correct, and that Borrower is in compliance with all of the provisions of this Agreement.

Payments. At the sole option of Lender, Advances may be paid in the joint names

of Borrower and the General Contractor, subcontractor(s), or supplier(s) in payment of

sums due under the Construction Contract. At its sole option, Lender may directly pay

the General Contractor and any subcontractors or other parties the sums due under the

Constructions Contract. Borrower appoints Lender as its attorney-in-fact to make such

payments.”

¶9 On August 1, 2013, the borrowers requested a $3.5 million “advance” under the

agreement and instructed IBC to disburse and pay all the loan proceeds to Greater Illinois Title,

the construction escrow agent. Scarlato executed the disbursement request and authorization

three times and in three ways: individually, on behalf of himself, and in his capacity as the

managing member of BP and SHBP. From August 2013 to March 2014, IBC disbursed $3.5

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million pursuant to the agreement but not all proceeds went to Greater Illinois Title. On August

23, 2013, IBC credited $1,510,000 of the $3.5 million loan to an IBC account designated with

account No. 80063. Also on August 23, 2013, IBC issued the following loan cashier’s checks

from account No. 80063, payable from the proceeds of the $1,510,000 that was credited to the

loan: $565,000, payable to BP, $675,000, payable to ID Investment Capital, LLC, and $270,000,

payable to BP. Then, on November 18, 2013, IBC credited an additional $528,000 to the loan by

placing the proceeds into account No. 80063 and issued a loan cashier’s check in the amount of

$528,000 payable to Greater Illinois Title, which was drawn from account No. 80063 and

payable from the proceeds credited to the loan on that same date. Similarly, on March 26, 2014,

IBC credited an additional $1,462,000 to the loan by placing the proceeds into account No.

80063 and issued a loan cashier’s check in the amount of $1,462,000, payable to BP, drawn from

account No. 80063 and payable from the proceeds credited to the loan on that same date. The

loan cashier’s checks in the amounts of $565,000, $675,000, $528,000, and $1,462,000 total $3.5

million, which is the full amount of the loan. Out of the $3.5 million, $1.99 million was paid to

CMG, the general contractor.

¶ 10 On July 8, 2014, National Life filed a motion for entry of judgment against IBC for

allegedly violating the citation to discover assets that it was served on April 13, 2013, arguing

that IBC violated the prohibitive provision of the citation when it transferred $3.5 million in

assets belonging to Scarlato. Specifically, the motion stated that through supplemental responses

to the citation that were filed in February and April 2014, National Life learned that IBC loaned

Scarlato $3.5 million in connection with a construction loan and line of credit in August 2013

and that IBC subsequently disbursed, transferred, and paid the proceeds of this loan to at least

one third-party. The motion also argued that by serving the citation on IBC on April 13, 2013,

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National Life perfected a lien on all of Scarlato’s assets and monies in IBC’s control, and thus, a

judgment against IBC should be entered.

¶ 11 IBC filed its response on July 30, 2014, asserting that at no time did the August 1, 2013,

loan or its proceeds constitute 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,” as

required by section 2-1402(f)(1) of the Code of Civil Procedure (Code). 735 ILCS 5/2-1402(f)(1)

(West 2012). Additionally, IBC contended that it never transferred any assets of Scarlato or

otherwise violated its duties under the citation. In the alternative, IBC argued that even if the

court found that the August 1, 2013, loan or its proceeds constituted Scarlato’s property under

the Code, IBC had a right to set off the balances on the existent notes of Scarlato with such

property pursuant to the terms of the September 2008 note and October 2012 note, which

predated service of the citation, and pursuant to the terms of the note for the August 1, 2013,

loan. As support for its response, IBC attached, inter alia, the affidavit of IBC vice president

George Anderson. In his affidavit, Anderson averred that, “[t]he proceeds of the August 1, 2013

Loan were only used to pay monies due for completion of the building construction on the Real

Property, EB-5 1 licensing obligations or to protect the security interests of IBC in the Real

Property.” Anderson also stated that, “Scarlato, the individual[,] had no power or right to direct

the actions of Warren Tai or me with respect to disbursement or use of the August 1, 2013 Loan

proceeds.” Anderson stated that all payments charged to the August 1, 2013, loan were made by

IBC cashier’s checks or drawn from a BP checking account, on which he and Warren Tai were

the only signatories. Finally, Anderson attested that, “[a]t no time did Ronald Scarlato receive

1 Anderson also stated in his affidavit that “EB-5” referred to the Immigration Investment Program administered by the U.S. Citizenship and Immigration Services that was entered into by BP, SHBP, and Scarlato. Under the EB-5 program, foreign nationals receive conditional resident status in the United States in exchange for making a capital investment in the United States that will benefit the economy. 7 No. 1-16-1943

any of the proceeds of the August 1, 2013 Loan,” and “[a]t no time did the proceeds from the

August 1, 2013 Loan pass through an account owned or controlled by Ronald Scarlato.”

¶ 12 National Life replied on August 18, 2014, reemphasizing that the citation served upon

IBC on April 13, 2013, prohibited the transfer of any of Scarlato’s assets, and rearguing that the

loan proceeds were, in fact, Scarlato’s property because contrary to IBC’s assertion that it had

complete control over the proceeds, Scarlato had authority over them. Additionally, National

Life argued that IBC’s purported right to set-off is inapplicable, judgment against IBC would not

be inequitable, and National Life was also entitled to an award of attorney fees.

¶ 13 On December 16, 2014, the circuit court held an evidentiary hearing on National Life’s

motion for entry of judgment. IBC called its executive vice president, Warren Tai, to testify on

its behalf. Tai testified that in order to ensure the loan proceeds did not go to Scarlato, he would

review and authorize any disbursements before they were made. Prior to him, George Anderson,

who was no longer with the bank at the time of Tai’s testimony, would review the disbursements.

Tai also testified that there were two accounts in BP’s name to which loan proceeds were

disbursed. However, Scarlato was not a signatory on either account and did not have access to

the funds therein. IBC also called as a witness Scarlato, who testified that he never personally

received any of the proceeds of the $3.5 million loan. Scarlato also stated that he was not a party

to the construction contract with CMG. National Life relied on documentary evidence and did

not call any witnesses. At the end of the hearing, the court asked both sides to submit their own

proposed findings of facts, conclusions of law, and proposed judgments, which both parties

thereafter filed on February 5, 2015. The hearing continued on February 10, 2015, when the

parties made their closing arguments.

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¶ 14 On April 15, 2015, the circuit court entered a memorandum decision and order that

primarily adopted National Life’s proposed findings of fact. As to the first issue of whether

National Life’s motion should be granted, the court agreed with IBC, noting that although

Scarlato was a party to the agreement and note, which were both executed in conjunction with

the August 1, 2013, loan, “[t]he record does not show that the assets were assets of Scarlato

individually.” The court ultimately determined that:

“Scarlato, as a contracting party in the Construction Loan, is liable for the

amounts and was the individual with the authority to request amounts. However, the

checks clearly show the amounts were delivered to entities and not Scarlato individually.

The Court recognizes the frustration in this matter. However, the parties do have

remedies remaining. With that said, the court denies National’s motion for entry of

judgment against IBC.”

¶ 15 National Life filed its first notice of appeal on May 14, 2015. In National Life Real Estate

Holdings, LLC v. International Bank of Chicago, 2016 IL App (1st) 151446, ¶¶ 16, 18, we

dismissed the appeal, finding that we lacked jurisdiction because the trial court’s order that

denied National Life’s motion for entry of judgment was not final and appealable. On March 30,

2016, National Life brought a motion in the circuit court for a finding pursuant to Illinois

Supreme Court Rule 304(a) (eff. Mar. 8, 2016), IBC filed its response on May 24, 2016, and

National Life replied on June 7, 2016. On June 14, 2016, the circuit court entered an order

granting National Life’s motion and making a finding that, “[p]ursuant to Illinois Supreme Court

Rule 304(a), there is no just reason to delay enforcement or appeal or both, of this Court’s April

15, 2015 Order denying National Life Real Estate Holdings, LLC’s motion for entry of judgment

against International Bank of Chicago.” The citation directed to IBC remains pending.

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¶ 16 National Life filed its notice of the instant appeal on July 13, 2016.

¶ 17 II. ANALYSIS

¶ 18 National Life argues that the trial court erred in denying its motion for entry of judgment.

The parties disagree as to the applicable standard of review in this appeal. National Life argues

that because the facts are uncontroverted, the issue on appeal involves the trial court’s

application of the law to the facts, and this appeal involves a question of statutory interpretation,

our review should be de novo. See Quinlan v. Stouffe, 355 Ill. App. 3d 830, 836 (2005); Itasca

Bank & Trust Co. v. Thorleif Larsen & Son, Inc., 352 Ill. App. 3d 262, 265 (2004). Conversely,

IBC contends that a manifest weight of the evidence standard applies because de novo review is

only appropriate where the circuit court did not conduct an evidentiary hearing or make any

findings of fact, and here the court did both. See Dowling v. Chicago Options Associates, Inc.,

226 Ill. 2d 277, 285 (2007). Further, IBC asserts that to the extent National Life challenges the

trial court’s use of discretion, an abuse of discretion standard should apply. See Bank of America,

N.A. v. Freed, 2012 IL App (1st) 113718, ¶ 26.

¶ 19 In its reply, National Life asserts that when the issue involves a question of statutory

interpretation, even if the court held an evidentiary hearing, this court’s review is de novo. See

People v. Lesure, 408 Ill. App. 3d 12, 18 (2011). Specifically, the court in Lesure recognized

that, “[t]ypically, we would not reverse a determination made by the trial court following an

evidentiary hearing unless that determination were manifestly erroneous. [Citations.] However,

because petitioner raises a question of statutory interpretation, we review de novo. [Citation.]”

Id.

¶ 20 We believe that the primary issue before this court is whether the trial court properly

determined that IBC did not violate the restraining provision of the citation. However, in order to

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answer that question, we must first determine whether the proceeds of a loan are to be considered

“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. See 735 ILCS 5/2-1402(f)(1) (West 2012).

Whether IBC’s conduct amounts to a violation of the citation is a question of law and requires us

to engage in statutory interpretation. Thus, although the trial court conducted an evidentiary

hearing that normally necessitates a manifestly erroneous standard, our review is de novo.

Lesure, 408 Ill. App. 3d at 18.

¶ 21 We first look to the section of the Code that National Life claims that IBC violated.

Section 2-1402(f)(1), in its entirety, reads:

“The citation may prohibit the party to whom it is directed from making or

allowing any transfer or other disposition of, or interfering with, any property not exempt

from the enforcement of a judgment therefrom, a deduction order or garnishment,

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, and from paying over or otherwise

disposing of any moneys not so exempt which are due or to become due to the judgment

debtor, until the further order of the court or the termination of the proceeding, whichever

occurs first. The third party may not be obliged to withhold the payment of any moneys

beyond double the amount of the balance due sought to be enforced by the judgment

creditor. The court may punish any party who violates the restraining provision of a

citation as and for a contempt, or if the party is a third party may enter judgment against

him or her in the amount of the unpaid portion of the judgment and costs allowable under

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this Section, or in the amount of the value of the property transferred, whichever is

lesser.” (Emphasis added.) 735 ILCS 5/2-1402(f)(1) (West 2012).

¶ 22 As the foregoing italicized language of section 2-1402(f)(1) makes clear, a court may

exercise its discretion in determining whether to punish a third-party citation respondent that is

found to have violated the restraining provision of the citation. The third-party citation that was

served on IBC on April 13, 2013, contained language similar to section 2-1402(f)(1).

Specifically, the citation read:

“YOU ARE PROHIBITED from making or allowing any transfer or other

disposition of, or interfering with, any property not exempt from execution or

garnishment belonging to the judgment debtor or to which the judgment debtor may be

entitled or which may be acquired by or become due to the judgment debtor and from

paying over or otherwise disposing of any money not so exempt, which is due or

becomes due to the judgment debtor, until further order of court or termination of the

proceedings. You are not required to withhold the payment of any money beyond double

the amount of the judgment.” (Emphasis in original.)

“The purpose underlying the restraining provision of section 2-1402 is to provide ‘a means of

forestalling the judgment debtor or a third party from frustrating the supplementary proceedings

before the judgment creditor has had an opportunity to reach assets, *** in the possession of

[the] debtor or of a third party.’ ” Bank of Aspen v. Fox Cartage, Inc., 126 Ill. 2d 307, 314 (1989)

(quoting Kirchheimer Brothers Co. v. Jewelry Mine, Ltd., 100 Ill. App. 3d 360, 362 (1981)).

¶ 23 National Life argues that the language of the citation prohibited IBC from transferring,

disbursing, or otherwise disposing of Scarlato’s property. IBC responds that the loan proceeds at

issue were not Scarlato’s property. Thus, we must determine whether the loan proceeds did, in

12 No. 1-16-1943

fact, “belong” to Scarlato within the meaning of the Code, and thus whether IBC violated the

restraining provision of the citation when it entered into the agreement with Scarlato and the two

LLCs and subsequently disbursed the loan proceeds.

¶ 24 We find it pertinent to note that in support of its argument that the loan proceeds were

Scarlato’s property within the meaning of section 2-1402, National Life does not cite to any

Illinois case law. Instead, National Life points out the dearth of cases from Illinois and cites to

numerous federal and out-of-state cases to support its position. Primarily, National Life relies on

United States v. Kristofic, 847 F.2d 1295, 1295 (7th Cir. 1988), wherein the defendant was

convicted of converting $50,000, which was in the form of proceeds of a loan from the Small

Business Administration. The issue before the court was whether a person who misapplies the

proceeds of a federal government loan may be charged with conversion of United States

property. Id. The court ultimately reversed the defendant’s conviction, finding that the elements

of conversion were not present where the federal government did not retain a property interest in

the loan proceeds once the loan agreement was entered into. Id. at 1299. Specifically, the court

recognized that “[a]s a matter of basic principles, loan proceeds do not remain the property of the

lender,” and further acknowledged that “[u]ndertaking an obligation to repay and agreeing to

conditions contained in loan documents do not make a debtor a trustee for her creditor; the

creditor does not, by virtue of these conditions, remain in any degree the owner of the proceeds.”

Id. at 1296-97.

¶ 25 National Life also cites, inter alia, to two Washington cases, State v. Gillespie, 705 P.2d

808, 811 (Wash. Ct. App. 1985), and State v. Berman, 747 P.2d 492, 495 (Wash. Ct. App. 1987),

that support the proposition that title to loan proceeds made upon a promissory note pass to the

borrower upon the signing of the note. Similarly, National Life cites to another federal case, In re

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Southwestern Glass Co., 332 F.3d 513, 518 (8th Cir. 2003), wherein the court determined that

funds disbursed from a line of credit constitute property of the debtor and are therefore subject to

a garnishment claim.

¶ 26 In its response, IBC also fails to set forth any Illinois law that supports its position but

argues that the cases relied on by National Life lack precedential authority and are

distinguishable from the instant matter. Specifically, IBC contends that the loan transaction in

Kristofic was typical and the loan at issue here was not because IBC made certain that other than

signing the agreement and note, Scarlato had nothing to do with the disbursement of the loan

proceeds. Additionally, IBC points out that the two Washington cases relied on by National Life

are criminal in nature and involved claims of embezzlement.

¶ 27 Looking at the cases presented by National Life, we acknowledge that the “use of foreign

decisions as persuasive authority is appropriate where Illinois authority on point is lacking or

absent.” Rhone v. First American Title Insurance Co., 401 Ill. App. 3d 802, 812 (2010).

However, we do not believe that Illinois case law completely lacks insight that would help

answer the questions we face here. Thus, we decline to solely rely on the federal and foreign

cases set forth by the parties.

¶ 28 In addition to examining the cases cited by the parties and relied on by us in the majority,

we also find it important to differentiate the authority relied on by the dissent and the conclusions

drawn therefrom. The dissent relies heavily on Guillory v. Terra International, Inc., 613 So. 2d

1084, 1088 (La. Ct. App. 1993), wherein the court found that crop production loan proceeds

were not garnishable where “[t]he advances were earmarked for the particular purpose of

growing the present year’s crops.” However, it appears from the factual background presented in

that case that the crop production loan at issue was extended to the judgment debtor before the

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bank was served with the garnishment. Id. at 1086. We find that scenario at odds with the facts

before us where IBC extended an entirely new loan to Scarlato after being served with National

Life’s third-party citation. In Guillory, the terms of the crop production loan, namely the

provision that required the funds to be used solely for crop production-related purchases, was

already existent at the time the bank was served with the garnishment. Id. Conversely, in this

case, IBC and Scarlato did not draft the loan agreement prior to service of the citation. We

recognize that the loan at issue here is not the only loan extended to Scarlato by IBC. However,

we also find relevant the fact that the record does not contain evidence that the terms of the other

loans were similar to the terms that restricted Scarlato’s access to the funds. The fact that such

restrictive terms were only incorporated into the loan agreement after IBC was served with the

citation appears suspicious at best. In Guillory, that the parties were unaware of the garnishment

proceeding at the time they entered into the crop production loan agreement speaks volumes

regarding the parties’ intentions. We find the difference between this case and the Guillory case

to be crucial where one of our primary concerns is preventing parties from artfully drafting loan

agreements in order to avoid the reach of supplemental proceedings.

¶ 29 We similarly find Morphet v. Morphet, 19 Ill. App. 2d 304 (1958), another case relied on

by the dissent, to be inapplicable to the factual scenario here. The underlying case in Morphet

was a garnishment action between a former husband and wife wherein the wife filed a

garnishment, seeking to reach her ex-husband’s annuity benefit plan that was held by his

employer. Id. at 305-06. When the husband left his employment with the company through

which he was provided the annuity, he had two options: (1) cancel the annuity and accept the

then cash value or (2) accept an annual annuity to commence upon his retirement. Id. at 306.

However, the husband did not opt for either. Id. at 307. Thus, on appeal, the garnishee argued

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that the claim against it was contingent and, therefore, not subject to attachment. Id. at 306. The

court agreed with the garnishee and held “[u]ntil defendant exercises his option in the manner

prescribed by the [c]ontract, the garnishee’s liability to him for such cash value of his

contributions remains contingent.” Id. at 307.

¶ 30 The dissent relies on Morphet to support its proposition that “assets, like the ones at issue

here, that a debtor would have no legal right to access cannot be garnished by the debtor’s

creditor.” While we agree that a creditor does not have any rights greater than the debtor himself,

we simply disagree that such a proposition applies here. Simply put, we believe Scarlato did, in

fact, have a legal right to access the proceeds of the loan at issue here. Thus, we believe reliance

on Morphet, or cases of the like, is misplaced.

¶ 31 “Section 2-1402 provides a method by which a judgment creditor may begin

supplementary proceedings against a third party as a means of discovering assets belonging to

the judgment debtor that the third party may have in its possession.” Bank of Aspen, 126 Ill. 2d at

313. “The judgment creditor may commence the supplementary proceedings by requesting the

clerk of the circuit court to issue a citation to the third party who is thought to be in possession of

the judgment debtor’s property.” Id.

¶ 32 “Before a judgment creditor may proceed against a third party who is not the judgment

debtor, the record must contain some evidence that the third party possesses assets of the

judgment debtor.” Schak v. Blom, 334 Ill. App. 3d 129, 133 (2002). Further, “[t]he provisions of

section 2-1402 are to be liberally construed, and the burden lies with the petitioner to show that

the citation respondent possesses assets belonging to the judgment creditor.” Id. “[T]he only

relevant inquiries in supplementary proceedings are (1) whether the judgment debtor is in

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possession of assets that should be applied to satisfy the judgment or (2) whether a third party is

holding assets of the judgment debtor that should be applied to satisfy the judgment.” Id.

¶ 33 Here, our focus is on the second inquiry because IBC is a third-party citation respondent.

National argues that under section 2-1402 of the Code, the loan proceeds were Scarlato’s

property and subject to the citation. National Life asserts that the trial court was wrong and must

be reversed where the sole basis for its decision to deny the motion was that “the checks clearly

show the amounts were delivered to entities and not Scarlato individually.” National Life

contends that even though the loan proceeds were not disbursed to Scarlato, they still belonged to

him within the meaning of section 2-1402.

¶ 34 IBC responds that National Life’s position ignores that Scarlato was one of three

borrowers and that none of the loan proceeds were ever disbursed or distributed to him. Also,

IBC emphasizes that the agreement gave IBC the authority, as attorney-in-fact, to directly pay

contractors and subcontractors. IBC relies on the uncontroverted testimony of Tai and Scarlato,

arguing that there were pervasive controls and restrictions implemented in order to prevent

Scarlato from having access or control of the loan proceeds. As a result, IBC contends that the

mere fact that Scarlato, who is essentially a co-signer, agreed to become indebted for $3.5

million to IBC is insufficient to establish that the loan proceeds were his property under section

2-1402, especially where the loan proceeds were used to satisfy obligations of BP and SHBP and

not Scarlato.

¶ 35 We conclude that the 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. In examining section 2-1402 to determine whether the loan proceeds were Scarlato’s

17 No. 1-16-1943

“property,” we rely on the rules of statutory construction. “In construing a statute, our primary

objective is to ascertain and give effect to the legislature’s intent, which is best indicated by the

statute’s plain language.” Kauffman v. Wrenn, 2015 IL App (2d) 150285, ¶ 28. Thus, “[i]f the

statutory language is clear, we must apply it as written, without resorting to extrinsic aids of

statutory construction.” Id.

¶ 36 The provisions of section 2-1402 are to be construed liberally (Schak, 334 Ill. App. 3d at

133), and we believe that a liberal reading of the language of section 2-1402 shows the

legislature’s intent to broadly frame the scope of the “property” to which a citation should apply.

Specifically, we believe the language “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” is very

open-ended and can reasonably be interpreted to apply to a loan’s proceeds, even where here, the

funds were not disbursed to the judgment debtor. 735 ILCS 5/2-1401(f)(1) (West 2012). Even

though Scarlato did not receive the disbursements directly, he was a signatory on the agreement,

note, and assignment in his individual capacity. If the loan documents were only signed by the

LLCs, then there would not be a question as to whether the loan proceeds were Scarlato’s

property. Further, Scarlato, in his individual capacity, also signed the disbursement request and

authorization. We find that his signature on this request evidences his control over the loan

proceeds. Although the dissent labels Scarlato’s control as “limited” (infra ¶ 56), we believe it is

crucial that he had control nonetheless. We further believe that one who has control over loan

proceeds also has entitlement thereto. Here, at various times, the loan proceeds passed through

BP’s bank accounts. As a managing member of BP, Scarlato has rights to those accounts even if,

according to Anderson and Tai, he was not a signatory thereon. Additionally, both the note and

agreement listed Scarlato, both individually and as managing member of the two LLCs, as the

18 No. 1-16-1943

sole individual with authority to request advances, which is further evidence of his control over

the loan proceeds. Arguably, Scarlato could have used the loan proceeds for his own personal

use or for payment to an entity outside of the construction project. Of course, if Scarlato had

done so, IBC may have had a cause of action against him for violation of the terms of the loan

agreement. However, we believe that the issue of whether the restraining provision of a citation

was violated is best examined without the benefit of hindsight. Even though we now know that

the loan proceeds were only used to pay for construction project expenses, we still do not find

that merely because the loan agreement stated that Scarlato could not personally use the funds

signified that it was not possible for him to do so. It is clear from the record that IBC was well

aware of the third-party citation to discover assets and took precautions to ensure that the

proceeds of the loan were never placed into an account bearing Scarlato’s name. There was also

language in the agreement that allowed IBC, at its own option, to directly pay the general

contractors or subcontractors. However, this language does not remove Scarlato’s control over

the proceeds but rather gives IBC control over the proceeds as well.

¶ 37 We also find applicable the Seventh Circuit’s decision in Kristofic. Although that was a

criminal case involving the theft, embezzlement, or conversion of government property, we

believe the logic expressed therein is relevant here. The court in Kristofic explicitly recognized

that “[a]s a matter of basic principles, loan proceeds do not remain the property of the lender.”

Kristofic, 847 F.2d at 1296. Additionally, the court did not limit its analysis to the criminal

context when it stated, “[u]ndertaking an obligation to repay and agreeing to conditions

contained in loan documents do not make a debtor a trustee for her creditor; the creditor does

not, by virtue of these conditions, remain in any degree the owner of the proceeds.” Id. at 1297.

We believe that it is reasonable to presume that if loan proceeds do not remain the property of

19 No. 1-16-1943

the lender, then they must become the property of the debtor. Simply put, someone must be the

owner of the funds. We anticipate that IBC would argue that the loan proceeds are the property

of the lender until disbursed and become the property of the one who received the disbursement

(in this case, Greater Illinois Title Company, for example) upon receipt. However, this requires

us to accept the premise that a loan’s proceeds never become the property of the borrower unless

disbursed directly to the borrower. We find this nonsensical where a borrower is obligated to

repay the amount of the loan whether he or she directly received the disbursement or not. If a

borrower were not obligated as such, then it would be foreseeable that a borrower could argue

that they need not pay back a loan that never became their property.

¶ 38 IBC argues that the loan at bar is not typical like the loan in Kristofic. However, IBC fails

to cite to and we have not found any case law that stands for the proposition that whether a loan

is “typical” is dispositive of whether loan proceeds should be treated as a borrower’s property.

Thus, we do not find IBC’s refutation of the Kristofic case to be convincing.

¶ 39 As previously noted, it clear from the record, specifically Tai’s testimony, that IBC took

precautions to prevent the loan transaction at issue here from falling within the purview of the

citation that was served upon it. IBC does not dispute that it was served with the citation and

does not even contest that it was aware of the restraining provision of the citation. Rather, it sets

forth the steps it took to extend Scarlato a $3.5 million loan while also attempting to avoid

violating the restraining provision of the citation. “The purpose underlying the restraining

provision of section 2-1402 is to provide ‘a means of forestalling the judgment debtor or a third

party from frustrating the supplementary proceedings before the judgment creditor has had an

opportunity to reach assets, *** in the possession of [the] debtor or of a third party.’ ” Bank of

Aspen, 126 Ill. 2d at 314. To allow third-party citation respondents to engage in the evasive

20 No. 1-16-1943

conduct that IBC engaged in here would frustrate the purpose of the restraining provision of

section 2-1402. Although the dissent notes that there was no evidence that the restrictions on the

funds disbursed by IBC were imposed to disguise or divert funds that otherwise would have been

loaned for Scarlato’s personal use (infra ¶ 55), we disagree that such an inquiry is relevant.

Certainly, the legislature enacted 2-1402 so that judgment creditors would be able to reach a

judgment debtor’s assets that he or she did not personally hold. If judgment debtors, like

Scarlato, are able to enter into loan agreements with third-party lending institutions that merely

include language restricting the debtor’s ability to access the funds, while at the same time

allowing the debtor the authority to request disbursements, it would create an avenue by which

judgment debtors would be able to avoid the consequences of the judgment. We acknowledge

that Scarlato was one of three borrowers and he became jointly and severally liable for the

repayment of the loan. However, we do not find convincing IBC’s argument that none of the

loan proceeds were used to satisfy Scarlato’s obligations. As we have previously mentioned,

because National Life brought its motion for entry of judgment after all of the loan proceeds had

been disbursed, IBC has the benefit of hindsight. Due to the timing of the motion, we know that

none of the proceeds were directly distributed to Scarlato and we know that the agreement

explicitly stated that they were not to be. We emphasize that merely because the agreement

prohibited it and merely because no direct disbursement to Scarlato occurred does not signify

that the proceeds of the loan were not Scarlato’s property. We therefore find that extending a

loan to a judgment debtor after having been served with a citation to discover assets runs

contrary to section 2-1402’s prohibition on allowing transfer or disposition of property belonging

to the judgment debtor.

21 No. 1-16-1943

¶ 40 Further, we find that IBC violated the restraining provision of the citation when it

advanced and disbursed the proceeds of a $3.5 million on behalf of Scarlato. In its decision, the

trial court stated, “[t]he record does not show the assets were assets of Scarlato individually” but

it did not explicitly find that IBC did not violate the restraining provision of the citation.

However, it is clear from the trial court’s order that it impliedly found the citation was not

violated, which is contrary to our decision here. The dissent suggests that there was no basis for a

judgment against IBC. However, that is not the issue before us. We need merely determine

whether the trial court properly decided that the restraining provision of the citation was violated.

It is up to the trial court to exercise its discretion in determining whether to punish IBC for

violating the citation. Because the trial court did not find the citation was violated, it never

exercised its discretion in determining whether to punish IBC. See 735 ILCS 5/2-1402(f)(1)

(West 2012) (“[t]he court may punish any party who violates the restraining provision of a

citation as and for a contempt, or if the party is a third party may enter judgment against him or

her in the amount of the unpaid portion of the judgment and costs allowable under this Section,

or in the amount of the value of the property transferred, whichever is lesser”). We, therefore,

vacate the court’s April 15, 2015, order pursuant to our finding that IBC did, in fact, violate the

citation, and further order that this case be remanded to the trial court so that the trial court may

exercise its discretion and determine whether to enter judgment against IBC in light of our

decision.

¶ 41 In the alternative, IBC argues that even if the loan proceeds were found to be Scarlato’s

property, which they have been, then judgment should still not enter against it because of its right

to set-off. IBC points to the set-off provisions contained in both the September 2008 note and

October 2012 note, in which IBC reserved “a right of set[-]off in all Borrower’s accounts with

22 No. 1-16-1943

Lender (whether checking, savings, or some other account). This includes all accounts Borrower

holds jointly with someone else and all accounts Borrower may open in the future.” National

Life responds that a right of set-off does not apply to the loan or loan proceeds, because if IBC is

allowed to use the loan proceeds to set-off other indebtedness, then IBC would essentially be

increasing the balance and amount owed on the loan at issue in this appeal in order to decrease

the balance and amount owed on another loan. National Life argues even if set-off is applicable

here, it does not excuse IBC from complying with the citation. Regardless, National Life asserts

that IBC has waived its right to set-off. We agree.

¶ 42 Again finding a dearth of Illinois law on this subject, we look to One CW, LLC v.

Cartridge World North America, LLC, 661 F. Supp. 2d 931, 936 (N.D. Ill. 2009), in which the

court recognized that a citation respondent or garnishee who seeks to assert a right to set-off

“also must comply with the duties of a garnishee.” Here, we have found that IBC failed to

comply with the citation’s restraining provision and thus did not fulfill its duties, similar to the

respondent in One CW, LLC. However, we further find that until its response to National Life’s

motion for entry of judgment, IBC did not assert its right to set-off. Its original answer to the

citation did not contain any reference thereof and neither did any subsequent supplemental

answers. In One CW, LLC, the court stated that the garnishee “has claimed a right to set-off, but

has failed to take any steps to actually exercise this right.” Id. We find this case to be similar

where IBC failed to take any steps to assert its right to set-off outside of its response to the

motion for judgment, and so any right of set-off has been forfeited. Although the parties here and

the court in One CW, LLC, use the term “waiver,” we find that National Life actually forfeited its

set-off claim. “[W]aiver arises from an affirmative act, is consensual, and consists of an

intentional relinquishment of a known right.” (Internal quotation marks omitted.) Gallagher v.

23 No. 1-16-1943

Lenart, 226 Ill. 2d 208, 229 (2007). Conversely, forfeiture is the “failure to make the timely

assertion of the right.” (Internal quotation marks omitted.) Id. at 229-30. Here, National Life

failed to timely assert its purported right to set-off, thus forfeiture applies.

¶ 43 Further, even if we had not found the right to set-off was forfeited, we would still find it

inapplicable where “[t]he judgment or balance due on the judgment becomes a lien when a

citation is [properly] served” (735 ILCS 5/2-1402(m) (West 2012)). The service of the citation

on IBC predated any attempt to assert its right to set-off, and thus, the lien created by the citation

would take priority even if the right to set-off had not been forfeited.

¶ 44 III. CONCLUSION

¶ 45 Based on our foregoing finding that IBC violated the restraining provision of the citation,

we vacate the court’s April 15, 2015, order and remand for a hearing wherein the circuit court is

directed to exercise its discretion and determine whether to punish IBC under section 2-1402.

¶ 46 Order vacated and remanded with directions.

¶ 47 JUSTICE MIKVA, dissenting:

¶ 48 I respectfully disagree with the majority’s conclusion, supra ¶¶ 35, 40, that IBC violated

the restraining provision of the citation issued by National Life because loan proceeds disbursed

to third parties were “property *** belonging to [Mr. Scarlato]” (735 ILCS 5/2-1402(f)(1) (West

2012)). It was National Life’s burden, as judgment creditor, to establish this fact (Schak, 334 Ill.

App. 3d at 133), and I believe the circuit court correctly concluded that it failed to do so. The

cases relied on by the majority, standing for the proposition that loan proceeds generally belong

to the borrower and not to the lender (see, e.g., Kristofic, 847 F.2d at 1296-97), do not involve

24 No. 1-16-1943

proceeds like those at issue here, which were not under the unfettered control of the borrower,

but were instead earmarked for distribution to third parties for a very specific purpose. Although

Mr. Scarlato became indebted for the construction loan, the undisputed evidence established that

the loan proceeds could only be used for completion of the construction project. See supra

¶¶ 8, 11. The loan proceeds were simply not Scarlato’s property because, as the trial court noted,

they were never delivered to Scarlato and, as the facts make clear, the loan agreement did not

entitle him to use them for his own purposes.

¶ 49 It is a basic principle that “[a] judgment creditor in Illinois has no greater rights in an

asset than does the judgment debtor.” Pacific Reinsurance Management Corp. v. Fabe, 929 F.2d

1215, 1219 (7th Cir. 1991). Although this principle is most often applied in garnishment

proceedings (see, e.g., Bank of Homewood v. Gembella, 48 Ill. App. 2d 316, 319 (1964) (“In

garnishment proceedings the judgment creditor has no greater rights to any funds held by a third

party than has the judgment debtor. [Citation.] The claim asserted against the garnishee must be

one which the judgment debtor himself could have maintained.”)), it has also been applied in

citation proceedings.

¶ 50 In Bank of Homewood, for example, a judgment creditor appealing from an order entered

in a citation proceeding sought the balance of a loan due to a judgment debtor that was held by a

third-party lender. Id. at 317-18. The terms of the loan required the judgment debtor to meet

certain conditions before he could claim the full benefit of the loan, and this court concluded that

the judgment creditor, “being in no better position, [could] claim no greater rights thereto.” Id. at

319. See also For Your Ease Only, Inc. v. Calgon Carbon Corp., No. 02 C 7345, 2009 WL

3255317, at *2, *4 (N.D. Oct. 6, 2009) (holding in a citation proceeding that, where the

25 No. 1-16-1943

judgment debtors had no legal right to funds held in reserve to pay future commissions as they

became due, their judgment creditor “ha[d] no greater right to [those] funds”)

¶ 51 There is limited precedent in Illinois or elsewhere on the rights of creditors to reach funds

advanced by third-party lenders in a citation proceeding. However, section 2-1402 expressly

incorporates “the law relating to garnishment proceedings” for the resolution of disputes over

discovered assets (735 ILCS 5/2-1402(g) (West 2012)) in a citation proceeding. The statutorily

required language in a citation notice also mirrors that of an affidavit of garnishment (compare

735 ILCS 5/2-1402(b) (West 2012) (citation notice applies to “assets belonging to the judgment

debtor or in which the judgment debtor has an interest”), with 735 ILCS 5/12-701 (West 2012)

(affidavit of garnishment applies to “property belonging to the judgment debtor, or in which the

judgment debtor has an interest”)).

¶ 52 It is well-settled in garnishment proceedings that assets, like the ones at issue here, that a

debtor would have no legal right to access cannot be garnished by the debtor’s creditor. For

example, in Morphet v. Morphet, 19 Ill. App. 2d 304, 307 (1958), the court held that, until a

judgment debtor exercised his option in the manner prescribed by his contract with the garnishee,

the garnishee’s liability to him for the cash value of his contributions to an annuity remained

contingent and was not subject to garnishment. Cf. Baron v. Villareal, 100 Ill. App. 2d 366, 373

(1968) (holding insureds could not recover from their own insurer the amount of judgments

rendered in their favor against an uninsured motorist through garnishment proceedings because

“a claim asserted by a judgment creditor against a garnishee must be one which the judgment

debtor himself could have maintained”).

¶ 53 I find the Louisiana case Guillory v. Terra International, Inc., 613 So. 2d 1084, 1089-90

(La. Ct. App. 1993), particularly instructive. There, the court held that, although the proceeds of

26 No. 1-16-1943

a crop production loan were “placed to the credit of the borrower on the books of the bank,”

limitations providing that the proceeds only be used for provisions and supplies necessary for

that year’s crop “impose[d] a limitation upon the rights of [the borrower]’s creditors” as well,

who “[could not] acquire any greater right in the property of [the] debtor than the debtor himself

ha[d].” The court held that the crop production loan proceeds could therefore not be garnished.

Id. at 1090. The loan at issue here is strikingly similar to the loan at issue in Guillory, where the

advances were “earmarked for [a] particular purpose” and, thus, the debtor’s interest in the loan

“could not be subject to garnishment.” Id. at 1088.There the funds could only be used to plant

and harvest a specific crop, while here they could only be used to complete the construction of a

specific building. National Life, like the judgment creditor in Guillory, has no ability to disregard

the restrictions placed on the funds. Unlike the majority, I do not view this as an expansion of the

law but as a straightforward application of recognized principles governing the rights of

judgment creditors that they can have no greater right to the funds at issue than the debtor.

¶ 54 While I agree with the majority that section 2-1402 is to be liberally construed, since the

loan proceeds at issue here were not property belonging to Mr. Scarlato, there is no basis for the

judgment against IBC that National Life is seeking based on what National Life claims was a

violation of the citation. “If [a] third party possesses no assets of the judgment debtor, then the

court has no authority to enter any judgment against the third party in a supplementary

proceeding.” Ericksen v. Rush-Presbyterian-St. Luke’s Medical Center, 289 Ill. App. 3d 159,

166-67 (1997). See also Schak, 334 Ill. App. 3d at 133 (“[n]othing in the Code authorizes the

entry of a judgment at a supplementary proceeding against a third party who does not possess

assets of the judgment debtor”). See also 735 ILCS 5/2-1402(c) (West 2012) (giving courts

27 No. 1-16-1943

broad authority to enter appropriate orders or judgments “[w]hen assets or income of the

judgment debtor *** are discovered”).

¶ 55 Although I recognize that, as the majority cautions (supra ¶ 39), third-party citation

respondents and judgment debtors may be motivated to engage in “evasive conduct” designed to

frustrate the restraining provision of a citation, nothing in the record suggests to me that IBC did

so in this case. Indeed, in its motion for entry of a judgment against IBC, National Life stated

that it learned of the construction loan at least in part from information disclosed by IBC in the

supplemental proceedings. Likewise, nothing in the record suggests that the restrictions on the

funds disbursed by IBC under the construction loan were imposed to disguise or divert funds that

would otherwise have been loaned to Mr. Scarlato for his own personal use, rather than to ensure

that the funds were used for the legitimate purpose of completing a construction project for

which IBC had already loaned considerable funds. I disagree with the majority that, in disbursing

funds in this manner, IBC violated the citation.

¶ 56 In sum, I agree with the majority that loan proceeds are generally the property of the

borrower and not the lender. I also agree that a loan might be property of the debtor in a citation

proceeding—even where the loan proceeds are not paid directly to the debtor/borrower but

distributed to a third party—if the debtor/borrower had the legal right to obtain those funds.

Given the facts of this case, however, I respectfully disagree that these loan proceeds were

subject to the restraining provision of the citation issued by National Life. The limited control the

construction loan agreement granted to Mr. Scarlato to request disbursements to construction

contractors for completed work and his personal obligation to repay the loan to IBC did not

entitle him to the funds personally. If Mr. Scarlato had no legal right to access the funds, they

were not property “belonging to” him for purposes of section 2-1402 and IBC’s distribution of

28 No. 1-16-1943

those funds was not a violation of the citation. For these reasons, I would affirm the judgment of

the circuit court.