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National Life Real Estate Holdings, LLC v. Scarlato

Court of Appeals of Illinois, First District, First Division

July 24, 2017

NATIONAL LIFE REAL ESTATE HOLDINGS, LLC, Plaintiff and Citation Petitioner-Appellant
v.
RONALD SCARLATO, Defendant, International Bank of Chicago, Citation Respondent-Appellee.

         Appeal from the Circuit Court of Cook County. No. 10 CH 36838 Honorable Alexander White, Judge Presiding

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

          OPINION

          CONNORS PRESIDING JUSTICE.

         ¶ 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 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 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 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 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 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, 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 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 ...


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