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United States of America v. Capital Tax Corp.

May 31, 2012


The opinion of the court was delivered by: Magistrate Judge Young B. Kim


Before the court is the government's petition for rule to show cause why SunWest Mortgage Company, Inc. ("SunWest") and Defendant William Lerch should not be held in contempt for violating the citations to discover assets and this court's July 19, 2011 garnishment order. For the following reasons, the petition is denied:


On January 13, 2011, the government served a citation to discover assets on SunWest.

(R. 377.) SunWest responded by providing documents showing that it was paying Lerch $1,379.77 per month under a reverse mortgage loan agreement. (R. 433, June 29, 2012 Mem. Opinion and Ord. at 2-3.) On June 29, 2011, this court granted the government's motion for a garnishment order with respect to the $1,379.77 monthly payments. (Id. at 10.) The garnishment order states that SunWest must submit to the government the stream of $1,379.77 monthly payments it owed to Lerch. (R. 440.) The court further ordered SunWest to continue to submit the stream of these payments until the debt to the government was fully paid or "until SunWest no longer ha[d] custody, possession or control of property belonging to Lerch," or until subsequent order of the court. (Id.) In response, SunWest forwarded the February and March 2011 payments, totaling $2, 759.54, to the government. (R. 490, Govt.'s Pet. at 1.)

When the government inquired of SunWest regarding the deficiency in the amount turned over, SunWest explained that three months prior to the court's issuance of the garnishment order, Lerch had instructed SunWest to terminate the monthly payments to him.

(R. 490, Ex. B.) Under the relevant provisions of the reverse mortgage agreement, Lerch had three ways of borrowing money from SunWest: (1) monthly payments; (2) a line of credit without monthly payments; or (3) a line of credit with monthly payments. (R. 513-1, Loan Agreement at 2-3.) On March 11, 2011, without informing this court or the government, Lerch requested that SunWest stop his monthly payments and issue a line of credit instead. SunWest honored the request and converted the amount available for loan advances ($183,525.18) to a line of credit ("the conversion"). (R. 490, Ex. B.) SunWest, however, froze this line of credit because of this pending matter between the government and Lerch. (Id.)

The government petitions the court pursuant to Federal Rule of Civil Procedure 69 and Illinois Supreme Court Rule 277(h) for a rule to show cause. Pursuant to Rule 69,*fn1 this court must follow Illinois procedural rules to address the issues the government raises in its petition. According to Illinois Supreme Court Rule 277(h), "[a]ny person who fails to obey a citation, subpoena, or order or other direction of the court issued pursuant to any provision of this rule may be punished for contempt." The government claims in its petition that Lerch violated the citation to discover assets served on him when he requested the conversion and that SunWest violated the citation and the July 19, 2011 garnishment order when it honored Lerch's request and failed to turnover additional sums to the government. (R. 490 at 2.) The government, however, did not develop or identify any legal support for its arguments in its petition.

On March 7, 2012, the court held a motion hearing. The court expressed its opinion that the issue of whether Lerch and SunWest violated any citations or garnishment orders depended primarily on the ownership of the remaining balance of the reverse mortgage ($183,525.18). The government took the position that the court need not ask the question of who has the ownership interest in this balance because it argued that when Lerch directed SunWest to terminate the monthly stream of income, he altered the status quo, and thus violated the citation. The proper remedy for this violation, according to the government, is to order SunWest to restore the stream of income and then to submit those payments to the government until the balance is depleted. Lerch argued at the hearing that unless and until a monthly loan advance is paid out by SunWest, the funds available to him under the reverse mortgage contract are not his property, and therefore he does not own the balance available as a line of credit. He argued that to hold otherwise would amount to the court forcing Lerch to borrow money using his exempt real property as collateral.

At the motion hearing, the government requested time to file a more comprehensive memorandum of law in support of its petition. Lerch and SunWest likewise asked for time to oppose the petition in writing. The court granted the requests. Despite securing leave of court, the government chose not to file any memorandum of law in support of the assertions raised in its petition or the arguments it made at the motion hearing. Both Lerch and SunWest filed a response opposing the government's original petition. The government timely filed a reply on May 7, 2012.

A brief discussion of the government's reply brief is necessary before addressing the merits of its petition. In general, arguments raised and/or developed for the first time in reply briefs are considered waived and forfeited. Broaddus v. Shields, 665 F.3d 846, 854 (7th Cir. 2011); Harper v. Vigilant Ins. Co., 433 F.3d 521, 528 (7th Cir. 2005) (holding that failure to develop an argument until the filing of a reply brief constitutes waiver). In this case, despite having been given the chance to submit a brief supporting the arguments it made during the motion hearing, the government waited until its reply brief to develop its argument that both Lerch and SunWest were barred from implementing the conversion. (R. 514, Govt.'s Reply at 3-6.) Also, the government waited until its reply brief to argue that because Lerch failed to advise the court of the conversion prior to the court's issuance of the garnishment order, he should be barred under the doctrine of res judicata from raising the conversion as a way to avoid the garnishment order. (R. 514, Govt.'s Reply at 7-8.) Given that the government was aware of the relevant events when it filed its petition, this argument should have been raised in its opening brief. Reply briefs are for replying to the arguments and facts raised by the opposing parties and not for raising facts or arguments that could have been asserted in the opening brief. The government had two chances to raise and to develop its arguments-when it first filed its petition and when the court allowed it to supplement its petition with a supporting memorandum of law-but it failed to avail itself of those chances. As stated in its order of May 10, 2011, the court will not consider arguments raised for the first time in its reply brief. (R. 517.)


When a party files a petition or a motion for a rule to show cause, "the moving party is asking only for a preliminary order directing the alleged contemnor to show cause why the court should not find him in contempt." U.S. S.E.C. v. Hyatt, 621 F.3d 687, 696 (7th Cir. 2010) (emphasis in original). "The purpose of a [show-cause] motion is to persuade the court that there should be a hearing at which the factfinder will ultimately evaluate whether a finding of contempt is appropriate on the evidence presented." Sommerfield v. City of Chicago, 252 F.R.D. 407, 413 (N.D. Ill. 2008). The issue in this petition is not whether the court should hold Lerch and SunWest in contempt and impose sanctions, but whether the court should put them on notice that they may face sanctions if they fail to show good cause why they should not be held in contempt. The burden of establishing the appropriateness of a hearing is less demanding than that for establishing contempt, requiring only "a preliminary assessment that the facts presented implicate" that the alleged contemnors are in violation of court orders. Id. at 413-14 (quotation omitted). Although the mere insistence on a hearing "is never enough," what is required is merely a threshold factual showing made up of "sufficiently definite, specific, non-conjectural and detailed" allegations along with a material fact dispute that will affect the motion's outcome. Id. at 414.

In this case, the government failed to reach the required threshold. The government refers to the citations to discover assets and the July 19, 2011 garnishment order in its petition. The citations ...

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