The opinion of the court was delivered by: BUCKLO
Plaintiff Lawyers Title Insurance Corporation ("Lawyers Title") has obtained a default judgment against one of the defendants, Dearborn Title Corporation ("Dearborn"). Lawyers Title has subsequently attempted to collect money from third parties who owe money to Dearborn in order to satisfy that judgment. Pursuant to FEDERAL RULE OF CIVIL PROCEDURE 69 (a), Lawyers Title served a Citation to Discover Assets on United Financial Mortgage Corporation ("UFMC"). Lawyers Title's motion for a turnover order followed, and both Lawyers Title and UFMC have now filed motions for summary judgment with respect to the turnover order. For the reasons explained below, UFMC's motion is denied, and Lawyers Title's motion is granted in part and denied in part.
Lawyers Title underwrites title insurance. It entered into an Agency Agreement with Dearborn, under which Dearborn would act as Lawyers Title's agent in issuing title insurance policies in Illinois. Dearborn also acted as a closing escrow agent pursuant to written closing escrow agreements with various mortgage lenders and their respective borrowers in connection with real estate transactions. As a closing escrow agent, Dearborn established an escrow account into which lenders would transfer the funds to be used to fund mortgages. Dearborn also received and held as a custody agent the documents and instruments evidencing the transactions. Before each closing, the lender would deliver the loan proceeds and closing documents to Dearborn with specific instructions for disbursing the money. Dearborn, acting as the mortgage lender's agent, held the money in trust until it was used to discharge all prior liens and encumbrances at the time of closing. Additionally, Dearborn implemented the execution and recordation of necessary documents necessary to complete the real estate transaction.
Eileen Rasulis was the President of Dearborn, and she did not run Dearborn well. According to Lawyers Title, Dearborn fraudulently mishandled money entrusted to it as an escrow agent, creating a shortfall in the escrow account exceeding $ 5,000,000. Lawyers Title has subsequently reimbursed people who lost the funds they entrusted to Dearborn. Lawyers Title then brought this suit against Dearborn, Rasulis, and other entities who allegedly had a hand in Dearborn's fraud, to recover the money it has had to pay for the insurance claims.
When Dearborn, which collapsed in May, 1994, failed to answer the complaint, Lawyers Title obtained a default judgment against it in excess of $ 5.9 million. Because Dearborn does not have assets to pay the judgment, Lawyers Title has tried to recover assets belonging to Dearborn from third parties. Many third parties have willingly complied, turning over to Lawyers Title money they had mistakenly received from Dearborn. UFMC, one of the lenders who used Dearborn as its closing escrow agent, has not been so cooperative, necessitating this litigation. Lawyers Title served a Citation to Discover Assets on UFMC, and found two Dearborn transactions with UFMC in which it appears that UFMC holds funds belonging to Dearborn.
First, Lawyers Title claims that UFMC owes Dearborn $ 87,800 pursuant to a refinancing loan procured by Jesus and Elizabeth Larios ("the Larios Money"). UFMC had committed to deliver to Dearborn $ 87,800 to be used to pay off the Larios' prior lenders and other creditors. UFMC admits that it never funded the refinance, however, and that it therefore owes Dearborn $ 87,800. Second, Lawyers Title points to a Dearborn check to UFMC made out for $ 565,649.26 which UFMC cashed in January, 1994 ("the Debt-Repayment Check"). UFMC concedes that this check does not relate to any particular transaction. UFMC's president, Joseph Khoshabe, testified that this check was issued in satisfaction of various debts that Dearborn had owed to UFMC.
In June, 1995, Lawyers Title had UFMC's bank freeze $ 565,649.26 in UFMC's bank account. Lawyers Title then filed a motion for a turnover order and these two motions for summary judgment regarding the turnover order and garnishment action followed.
Lawyers Title's Right to Recover
Illinois law governs this action. See FED. R. CIV. P. 69(a). Because Lawyers Title is a judgment creditor of Dearborn, under Illinois law, "if [Lawyers Title] can show [that UFMC] has property of ... [Dearborn], the court is empowered ... to compel [UFMC] to deliver up any assets so discovered or the value thereof, if those assets are held under circumstances in which [Dearborn] could recover them in an appropriate action." Bentley v. Glenn Shipley Enterprises, Inc., 248 Ill. App. 3d 647, 619 N.E.2d 816, 819, 189 Ill. Dec. 115 (4th Dist. 1993).
Illinois courts would not require that Dearborn have fraudulently transferred the assets to UFMC. Instead, "it is enough that [Dearborn] has the right to recover the assets from [UFMC]." Id.2
UFMC correctly notes that Lawyers Title bears the burden of proving that UFMC holds funds that Dearborn could recover. With respect to the Larios money, Lawyers Title has met this burden because UFMC concedes that it never funded the Larios transaction. UFMC still has not paid the Larios money to Dearborn (or Lawyers Title), however, because UFMC claims a right to set off its claims against Dearborn with that money. See 735 ILCS 5/12-708 (explaining garnishee's right to setoff).
Lawyers Title has also met its burden with respect to the Debt-Repayment Check for $ 565,649.26. UFMC admits that this check is not identified with any specific transaction between Dearborn and UFMC. In fact, UFMC admits that Dearborn did not give UFMC the check for any specific purpose. Khoshabe testified only that Dearborn issued the check as payment for several debts Dearborn owed to UFMC, and offered two examples.
First, Khoshabe testified that Dearborn owed UFMC $ 255,000 pursuant to an agreement whereby any time a Dearborn check to UFMC bounced, Dearborn would not only replace the check, but also pay damages in the full amount of the check. Khoshabe points to two checks, one for $ 190,000 and one for $ 65,000, which Dearborn bounced. UFMC says that Dearborn owed it $ 255,000 for these bounced checks (in addition to the $ 255,000 already paid to UFMC to replace the bounced checks). UFMC's answer, even if accepted as true, however, would not justify the Dearborn check for $ 565,649.26. Moreover, when asked in his deposition whether the $ 565,649.26 check included the $ 255,000 double payment penalty, Khoshabe answered "I don't know." (Khoshabe Dep. at 162-63). Thus although UFMC contends that Khoshabe's testimony supports its contention that the check included payments pursuant to this double-for-bounced-checks deal, it clearly does not.
Khoshabe also testified that the $ 565,649.26 check included reimbursement for a "facilities charge." UFMC says that Dearborn and UFMC had an agreement that Dearborn could conduct closings at UFMC offices. In exchange for that right, Dearborn agreed to pay UFMC $ 100 for each closing taking place at UFMC offices in which UFMC was not the lender, and $ 300 for each closing at a UFMC office in which UFMC was the lender. According to UFMC, as of the date of the $ 565,649.26 check, Dearborn owed it approximately $ 200,000 in facilities charges. Again, if I accept UFMC's contention as the truth, the $ 200,000 facilities charge tab still does not justify the $ 565,649.26 check. Even if I add the bounced check debt and the ...