Wednesday, February 2, 2011

Equitable Theories of Recovery in Third Party Citations

[This is Part 2 of a four part series concerning advanced collection techniques. The introductory post can be found HERE.]

In Dexia, the plaintiff used equitable theories such as alter ego and constructive trusts to recover assets from third parties.  You will recall that the judgment was only against Mr. Rogan, but the court ordered trusts controlled by his children to turnover assets during the course of a third party citation.

The Rogan children argued that the court exceeded its authority when it ordered the turnover of assets. They argued that the equitable theories used against them do not fall within the scope of supplemental proceedings.  They argued that these claims should have been brought against them in new lawsuits.

The Court looked to Supreme Court Rule 277 and Section 2-1402 of the Code of Civil Procedure.  Rule 277(a) allows a judgment creditor to commence supplemental proceedings against a third party the judgment creditor believes has property of or is indebted to the judgment debtor.  Section 2-1402 allows the court to order that third party to deliver up those assets to satisfy the judgment. 

The Court found that the Rogan children's property rights had not been adjudicated in the third party citations.  The Court explained that plaintiff had not tried to hold the children's trusts directly liable for anything.  The plaintiff was only trying to recover assets of Mr. Rogan that were in the possession of the children's trusts.  Basically, the plaintiff alleged that the money still belonged to Mr. Rogan even though he had given it away.

The Court noted that the provisions of Section 2-1402 are to be liberally construed and the courts shall have broad powers to compel the application of discovered assets or income to satisfy a judgment.  The Court found that it was proper to use equitable theories of recover in supplementary proceedings to determine if third parties are holding assets of the debtor.  It would be different, however, if the plaintiff had sought to hold the third parties directly liable.

The Court examined the elements of alter ego and constructive trusts in a separate part of its opinion, so I wrote a separate post about them, which can be found HERE.

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