Opinion
20-2198
04-24-2024
YANCHENG SHANDA YUANFENG EQUITY INVESTMENT PARTNERSHIP, Plaintiff, v. KEVIN WAN, Defendant.
REPORT AND RECOMMENDATION
ERIC I. LONG UNITED STATES MAGISTRATE JUDGE
This case is before the Court on four motions by Plaintiff Yancheng Shanda Yuanfeng Equity Investment Partnership (“Plaintiff”). Plaintiff filed a Motion for Turnover and Garnishment Against meShare (#122), to which meShare, Inc. (“meShare”) filed a Response (#124) in opposition. Plaintiff filed a Motion for Turnover Against Wan Entities (#126), a Motion for Turnover Against Kevin Wan (#130), and a Motion for Turnover Against Lydia Feng (#132), to which Defendant Kevin Wan (“Defendant”), Lydia Feng, meShare, Smartz Inc. (“Smartz”), and Ep Surveillance Corporation (“EPS”) filed a Joint Response (#136) in opposition. With the Court's leave, Plaintiff filed a Reply (#145) to the Joint Response.
For the reasons discussed below, the Court recommends that the District Court GRANT in part and DENY in part Plaintiff's Motion for Turnover and Garnishment Against meShare (#122), Motion for Turnover Against Wan Entities (#126), Motion for Turnover Against Kevin Wan (#130), and Motion for Turnover Against Lydia Feng (#132).
I. Background
On May 20, 2019, Plaintiff filed a lawsuit in China against Defendant. A Chinese court entered judgment against Defendant and in favor of Plaintiff on December 20, 2019. On January 10, 2022, the District Court entered judgment against Defendant in the amount of $20,169,843.81. (See #28). A judgment balance of more than $20,000,000 remains outstanding.
Since the judgment, Plaintiff has issued citations to discover assets to Defendant, Lydia Feng (Defendant's wife), meShare, Smartz, Zmodo, and EPS, among others (#44-52, 59, 65, 83), which have been extended to September 1, 2024. (Text Order, March 4, 2024). Additionally, Plaintiff has deposed Defendant, Ms. Feng, and Charles Wineland (Defendant's attorney), who served as the deponent for meShare, Smartz, and EPS. (See #129, Exs. 1, 3, 8). meShare, Smartz, Zmodo, EptCo, and EPS are interrelated companies. Defendant is CEO of meShare, Smartz, and Zmodo, which is the parent company of EptCo. (#129, Ex. 1 at 14-15; #93, Ex. 3 at 10, 53). Defendant owns 22.7% of meShare, 22.69% of Smartz, and 30.7% of Zmodo. (#129, Exs. 5, 10, 11). Defendant's ownership interests in these companies are uncertificated, and the companies have no records showing his ownership interest. Mr. Wineland testified that Ms. Feng owns EPS. (#129, Ex. 3 at 26). EptCo filed for bankruptcy on September 23, 2019.
At the citation hearing, Defendant testified that “as an entrepreneur, I pretty much put every penny into my companies.” (#129, Ex. 1 at 38:3-5). He personally provided money to meShare, but testified that he did not expect meShare to repay him. (#129, Ex. 1 at 37:22-38:5, 41:1-9). While he could not recall the exact amount he provided to meShare, Defendant testified that he received $20,000 from meShare that may have been repayment for money he provided several years ago. (#129, Ex. 1 at 37). Mr. Wineland testified that Defendant “made a series of founding and pre-seed investments into” Smartz in the amount of around $76,000, for which he did not anticipate being reimbursed. (#129, Ex. 3 at 53-55, 179-180; Ex. 5). In 2021, Defendant also provided $245,000 to EPS, and EPS has paid Defendant back $45,000. (#129, Ex. 6).
Defendant and Ms. Feng own two properties jointly: their home and a rental property. (#129, Ex. 1 at 10-12). Their home is located at 2501 Prairie Ridge Pl, Champaign, Illinois (the “Home”). Their rental property is located at 1401 Interstate Drive, Champaign, Illinois (the “Rental Property”). Defendant testified that the Home has one mortgage and home equity loan totaling between $285,000 and $320,000. (#129, Ex. 1 at 10-11, 39). Defendant also testified that the Rental Property has one mortgage and home equity loan totaling approximately $1,200,000. (#129, Ex. 1 at 12). Defendant and Ms. Feng lease the Rental Property to meShare, which pays approximately $17,500 in monthly rent to Ms. Feng. (#129, Ex. 1 at 11-12; #129, Ex. 16).
Defendant testified that he earned an income of $14,583 per month from meShare. (#129, Ex. 1 at 6:15-16). Mr. Wineland testified that Defendant decided to suspend his salary in April of 2022 because he focused most of his work on Smartz and not meShare. (#129, Ex. 3 at 11-12). On July 18, 2022, meShare produced records showing that meShare began paying Defendant his salary again in May of 2022. (#129, Ex. 7).
On October 5, 2022, Plaintiff filed its original motions for turnover. On January 31, 2023, the Seventh Circuit vacated the judgment against Defendant and remanded the case for the Court to rule on the issue of subject matter jurisdiction. While the issue of subject matter jurisdiction was pending, the parties agreed that “Yancheng Shanda's efforts to collect against Wan shall be stayed until the Court makes a determination on subject matter jurisdiction. The citations to discover assets shall remain in effect during the period of the stay, and the outstanding motion for turnover shall remain pending during the period of the stay.” (#110 at 1). The Court ordered that “[t]he citations to discover assets shall remain in effect during the period of the stay, and the outstanding motion for turnover shall remain pending during the period of the stay.” (Text Order, March 23, 2023).
On September 15, the District Court adopted this Court's Report and Recommendation finding subject matter jurisdiction and reinstated the judgment against Defendant. (See #120, 134). The same day, the Court noted that Plaintiff's original motions for turnover had been pending for nearly one year and denied the pending motions with leave to refile with updated information and evidence as needed. (Text Order, September 15, 2023). Subsequently, Plaintiff filed the instant motions for turnover.
Plaintiff's Motion for Turnover and Garnishment Against meShare asks the Court to order meShare to remit to Plaintiff's counsel $97,400.85, to begin garnishing 15% of all wages paid to Defendant, and to remit such garnished wages to Plaintiff's counsel going forward.
Plaintiff's Motion for Turnover Against Wan Entities asks the Court to order turnover of cash from the following entities in the following amounts:
1. Assets of Defendant held by meShare for turnover:
a. Defendant's 22.73% ownership stake in MeShare.
b. Monthly rent payments paid on behalf of Defendant since the citation was issued in March 2022, in an amount of $367,500 as of December 1, 2023.
c. Unpaid rent still owed to Defendant that has not been paid, in an amount of $16,681.98 as of December 1, 2023.
d. An order that meShare pay all future rental payments on behalf of Defendant to Plaintiff in an amount of $18,571.14 per month.
e. Repayment of all loans made by Defendant to meShare.
2. Assets of Defendant held by Smartz for turnover:
a. Defendant's 22.69% ownership stake in Smartz.
b. Repayment of loans made by Defendant to Smartz in an amount of at least $76,000.
3. Assets of Defendant held by EPS:
a. Repayment of loans made by Defendant to EPS in an amount of at least $200,000.
As to Plaintiff's ownership stake in meShare and Smartz, Plaintiff asks the Court to order turnover of these properties in a method to which the parties agree if done within 14 days and otherwise to be delivered to the Champaign County Sheriff for public auction.
Plaintiff's Motion for Turnover Against Kevin Wan asks the Court to order Defendant to turn over Defendant's Home and Rental Property and Defendant's ownership in Zmodo. In addition, if the Court does not grant the order against meShare and Smartz, Plaintiff asks that the Court order Defendant to turn over his ownership in meShare and Smartz. Plaintiff asks the Court to order turnover in a method to which the parties agree if done so within 14 days and otherwise to be delivered to the Champaign County Sheriff for public auction.
Plaintiff's Motion for Turnover Against Lydia Feng asks the Court to order turnover of Defendant's following assets held by Ms. Feng:
1. Rental payments paid to Ms. Feng for rent on the Rental Property since the citation was issued in March 2022, in an amount of $183,750 as of December 1, 2023, representing 50% of all rental income Ms. Feng has received since receiving the citation.
2. 50% of all rental payments made to Ms. Feng on or after December 1, 2023, for rent on the Rental Property.
Alternatively, if the Court determines those rental payments by meShare were owed to Ms. Feng and not Defendant, Plaintiff asks that Ms. Feng pay Plaintiff 50% of the rent she collected on the property jointly owned by Defendant after being issued the citation that forbade her from distributing his property.
II. Legal Standard
“A supplementary proceeding is a post-judgment process designed to assist the judgment creditor in discovering assets to satisfy the judgment.” Lorillard Tobacco Co. v. Canstar (U.S.A.) Inc., 2006 WL 1444895, at *1 (N.D. Ill. May 16, 2006). Plaintiff initiated this supplementary proceeding under Federal Rule of Civil Procedure 69(a)(1), which provides that a supplementary proceeding “must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies.” Fed.R.Civ.P. 69(a). Because this Court is located in Illinois, the Illinois statute governing supplementary proceedings, 735 ILCS 5/2-1402, governs this supplementary proceeding.
Section 2-1402(a) allows a judgment creditor “to prosecute citations to discover assets for the purposes of examining the judgment debtor or any other person to discover assets or income of the debtor not exempt from the enforcement of the judgment, a deduction order or garnishment” and “compelling the application of non-exempt assets or income discovered toward the payment of the amount due under the judgment.” 735 ILCS 5/2-1402(a).
“Supplementary proceedings are initiated by the service of a citation to discover assets. “FM. Indus., Inc. v. Citicorp Credit Servs., Inc., 656 F.Supp.2d 795, 798 (N.D. Ill. 2009) (citing 735 ILCS 5/2-1402(a)). “The judgment becomes a lien on the judgment debtor's personal property once the citation is properly served upon a party.” Id. (citing 735 ILCS 5/2-1402(m)).
Section 2-1402(c) provides that when non-exempt assets are discovered, “the court may, by appropriate order or judgment”:
(1) Compel the judgment debtor to deliver up, to be applied in satisfaction of the judgment, in whole or in part, money, choses in action, property or effects in his or her possession or control, so discovered, capable of delivery and to which his or her title or right of possession is not substantially disputed.
(2) Compel the judgment debtor to pay to the judgment creditor or apply on the judgment, in installments, a portion of his or her income ...
(3) Compel any person cited, other than the judgment debtor, to deliver up any assets so discovered, to be applied in satisfaction of the judgment, in whole or in part, when those assets are held under such circumstances that in an action by the judgment debtor he or she could recover them in specie or obtain a judgment for the proceeds or value thereof as for conversion or embezzlement. A judgment creditor may recover a corporate judgment debtor's property on behalf of the judgment debtor for use of the judgment creditor by filing an appropriate petition within the citation proceedings.735 ILCS 5/2-1402(c)(1)-(3).
Thus, “Section 2-1402 allows a judgment creditor to conduct an examination of a judgment debtor or any third party who might hold the assets of the judgment debtor.” Pyshos v. Heart-Land Dev. Co., 630 N.E.2d 1054, 1057 (Ill.App.Ct. 1994). “Once the judgment creditor discovers assets in the hands of a third party, the judge may order a third party to deliver up those assets to satisfy that judgment.” Id.
“Section 2-1402 is to be construed liberally, not only providing for the discovery of a debtor's assets and income, but also vesting the courts with broad powers to compel the application of discovered assets or income to satisfy a judgment.” Air Auto Leasing Co., 697 N.E.2d 788, 791 (Ill.App.Ct. 1998). Further, “[w]hat constitutes an ‘asset belonging to the judgment debtor' is to be liberally construed,” and “ [a]n ‘asset belonging to the judgment debtor' includes a debt owed to that judgment debtor.” Door Properties, LLC v. Nahlawi, 188 N.E.3d 806, 811 (Ill.App.Ct. 2020). Moreover, in Illinois, “the procedure to be followed in supplemental proceedings ... [is] left largely to the judge's discretion.” Star Ins. Co. v. Risk Mktg. Grp. Inc., 561 F.3d 656, 662 (7th Cir. 2009).
For property subject to turnover, the Court may order delivery to the sheriff for auction or order another method of sale if it is more appropriate. Specifically, section 2-1402(e) provides:
(e) All property ordered to be delivered up shall, except as otherwise provided in this Section, be delivered to the sheriff to be collected by the sheriff or sold at public sale and the proceeds thereof applied towards the payment of costs and the satisfaction of the judgment. If the judgment debtor's property is of such a nature that it is not readily delivered up to the sheriff for public sale or if another method of sale is more appropriate to liquidate the property or enhance its value at sale, the court may order the sale of such property by the debtor, third party respondent, or by a selling agent other than the sheriff upon such terms as are just and equitable. The proceeds of sale, after deducting reasonable and necessary expenses, are to be turned over to the creditor and applied to the balance due on the judgment.
Section 2-1402(f)(1) permits “the citation to include a restraining provision[.]” Door Properties, 188 N.E.3d at 811. Specifically, “[t]he citation may prohibit the party to whom it is directed from making or allowing any transfer or other disposition of ... any 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 [the judgment debtor].” 735 ILCS 5/2-1402(f)(1). In other words, “the restraining provision requires the third party ‘to freeze assets' belonging to the judgment debtor that are in the third party's possession.” Door Properties, 188 N.E.3d at 811.
The restraining provision's purpose is to “to prevent the judgment debtor or third party from disposing of those assets before the judgment creditor can reach them.” Id. Consequently, “if the citation contains such a restraining provision, and the third-party respondent violates it by transferring or disposing of the assets, the court has options at its disposal . the court may enter judgment against that third party in the amount of the unpaid judgment, or the value of the property transferred, whichever is less .... The court may also cite the third party for contempt.”” Id. (citing 735 ILCS 5/2-1402 (f)(1)).
In sum, “the only relevant inquiries in supplementary proceedings are (1) whether the judgment debtor is in 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. The judgment creditor bears the burden to make such a showing. See Sullivan v. Alpine Irrigation. Co., 2011 WL 1575617, at *4 (N.D. Ill. Apr.25, 2011) (citing state cases). However, “[t]he debtor bears the burden of demonstrating that property is exempt from being applied to satisfy a judgment.” Wells Fargo Bank Minnesota, NA v. Envirobusiness, Inc., 22 N.E.3d 125, 129 (Ill.App.Ct. 2014). III. Analysis
Plaintiff argues the Court should compel turnover of Defendant's assets-namely, unpaid wages, company ownership interests, purported debts, rental payments, and real estate-to partially satisfy the outstanding judgment balance. Defendant does not dispute Plaintiff's ability to garnish 15% of his wages from September 15, 2023, going forward. Defendant argues, however, that all other assets are either exempt or encumbered by prior secured creditors. Rather than turn over assets for public auction, Defendant argues the Court should order a continuing lien on Defendant's personal assets.
A. Wages
Plaintiff argues the Court should order meShare to garnish 15% of Defendant's wages since Plaintiff filed a citation to discover assets of Defendant to meShare in March 15, 2022, going forward. Defendant argues the Court should limit Plaintiff's request to 15% of Defendant's wages per month from September 15, 2023, going forward.
On March 15, 2022, Plaintiff filed a citation to discover assets of Defendant to meShare requiring meShare, among other things, to garnish 15% of Defendant's wages. (See #49). On October 5, 2022, Plaintiff filed its original motions for turnover. In response, meShare stated as follows:
meShare does not object to 15% wage garnishment of Mr. Wan's salary, both paid and unpaid, commencing from the date the Citation to Discovery Assets was issued to meShare-March 15, 2022. (ECF Doc. No. 49.) Upon this Court's order, meShare will pay Yancheng $68,964, constituting 15% of Mr. Wan's salary from March 15 through October 15, 2022, withhold 15% of Mr. Wan's salary in the future, and direct wage garnishment payments to Yancheng pursuant to instructions provided by Yancheng's counsel.(#101 at 12).
By issuing the citation to meShare on March 15, 2022, Plaintiff initiated a supplementary proceeding between Plaintiff and meShare. See 735 ILCS 5/2-1402; Ill. Sup. Ct. R. 277; Society of Lloyd's v. Estate of McMurray, 274 F.3d 1133, 1136-37 (7th Cir. 2001). “A proceeding under this rule continues until terminated by motion of the judgment creditor, order of the court, or satisfaction of the judgment.” Ill. Sup. Ct. R. 277(f).
The Court previously ruled that the citations remained in effect, and the supplementary proceedings never terminated. Defendant argues the Seventh Circuit's order nullified the judgment against Defendant, that meShare had no obligation to withhold 15% of Defendant's salary after the judgment was vacated, and that any obligation meShare had began anew on September 15, 2023. However, none of the cases Defendant cites deal with supplementary proceedings or the effect of a temporarily vacated judgment on a supplementary proceeding. Thus, pursuant to the citation and 735 ILCS 5/2-1402(f)(1), meShare was prohibited from disposing any non-exempt property belonging to Defendant, including 15% of his wages, from March 15, 2022, going forward.
The parties previously agreed $68,964 constituted 15% of Defendant's salary from March 15 through October 15, 2022. According to Plaintiff, meShare's counsel confirmed that Defendant has continued to receive a salary of $14,583 per month between October 15, 2022, to the present. Accordingly, the Court recommends that the District Court order meShare to remit $68,964 to Plaintiff's counsel, turn over 15% of Defendant's salary since October 15, 2022, to Plaintiff's counsel, and begin to garnish 15% of all wages paid to Defendant and remit such garnished wages to Plaintiff's counsel going forward.
B. Ownership Interests
Plaintiff argues that the Court should order turnover of Defendant's ownership in meShare, Smartz, and Zmodo. Defendant argues the Court should deny Plaintiff's request because his ownership interests in the companies are encumbered, uncertificated, and without value if sold at public auction.
In Illinois, Article 8 of the Uniform Commercial Code (“UCC”) governs investment securities and the levy of stock. Wells Fargo Bank Minnesota, 22 N.E.3d at 133. The pertinent section, in relevant part, provides:
(b) The interest of a debtor in an uncertificated security may be reached by a creditor only by legal process upon the issuer at its chief executive office in the United States, except as otherwise provided in subsection (d).
(d) The interest of a debtor in . an uncertificated security registered in the name of a secured party, or a security entitlement maintained in the name of a secured party, may be reached by a creditor by legal process upon the secured party.
(e) A creditor whose debtor is the owner of a certificated security, uncertificated security, or security entitlement is entitled to aid from a court of competent jurisdiction, by injunction or otherwise, in reaching the certificated security, uncertificated security, or security entitlement or in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached by other legal process.810 ILCS 5/8-112.
EptCo filed for bankruptcy on September 23, 2019. (See Case No. 19-90927, C.D. Ill. Bkr. Ct., ECF Doc. 1). Defendant and Mr. Wineland testified that as part of EptCo's exit from bankruptcy, Defendant pledged all his assets by personal guarantee to EptCo's creditor, UPS Capital (“UPS”). (#129, Ex. 1 at 16-19, 23-25). Mr. Wineland testified that the initial loan agreement with UPS and EptCo was between $15 million and $25 million. (#129, Ex. 3 at 61-63). Around May 2020, EptCo had an outstanding principal balance of obligations totaling around $24 million, some of which EptCo has paid back. Id. at 64.
Defendant argues that he does not have a right of possession over his shares because they, as personal assets, are pledged to previous creditors. Defendant relies on the principle that “[g]enerally, a lien that is first in time has priority over subsequent liens against the same property.” Drs. Oxygen Serv., Inc. v. Cannon Mgmt. Grp., LLC, 92 N.E.3d 979, 988 (Ill.App.Ct. 2017). Defendant asserts that Plaintiff's lien is secondary to other creditors and that his shares are not assets that can be recovered in specie and delivered to the Sheriff for auction without violating his creditor obligations.
The Court must determine whether Defendant's personal guarantee constitutes a lien.“A lien is a hold or claim that one party has on the property of another for a debt.” Aames Cap. Corp. v. Interstate Bank of Oak Forest, 734 N.E.2d 493, 496 (Ill.App.Ct. 2000). “A lien that is first in time generally has priority and is entitled to prior satisfaction of the property it binds.” Aames Cap. Corp., 734 N.E.2d at 496.
Because Defendant has not produced the Agreement, it is unclear whether the contract is that of a guarantee or of suretyship. “A guarantor promises to pay a debt in the event the person primarily liable fails to pay." Bridge v. McHenry Truck Lines, Inc., 1998 WL 427611, at *4 (N.D. Ill. July 24, 1998). “A surety promises to satisfy the contractual obligations of another party." Id. In other words, “ [a] surety is primarily liable to a creditor," whereas “a guarantor incurs secondary liability for the debt of another." Anderson v. Rizza Chevrolet, Inc., 9 F.Supp.2d 908, 911 n.2 (N.D. Ill. 1998).
There are various types and classes of liens, such as a common-law lien which ordinarily is considered to be a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation; an equitable lien, which is a right recognized in equity, though not at law, to have property applied to the payment of a particular debt; and a statutory lien, which may be provided for by the legislature subject to constitutional limitations.Emps. Mut. Cas. Co., Subrogee of Clark-Maple Chevrolet Co. v. Trimon Elevator Co., 217 N.E.2d 391, 396 (Ill.App.Ct. 1966).
“Liens . can only be created by agreement or by statute.” FirstMerit Bank, N.A. v. McEnery, 168 N.E.3d 704, 708 (Ill.App.Ct. 2020). Defendant does not point to a statute to support a lien, but rather, points to the Agreement. “Although a lien may arise from a contract, a lien itself is not a contract, but an encumbrance on property as security for the payment of a debt.” 51 Am. Jur. 2d Liens § 4. It appears Defendant argues that an equitable lien arose from the Agreement.
“An equitable lien is the right to have property subjected to the payment of a claim. The essential elements of an equitable lien are a debt, duty, or obligation owing and a res to which that obligation fastens and which is identified or described with reasonable certainty.” Uptown Nat. Bank of Chicago v. Stramer, 578 N.E.2d 1165, 1167 (Ill.App.Ct. 1991) (citations omitted). “Equitable liens have been imposed where contracts manifested the intent that particular property or funds be security for debts wherever there has been a promise to convey or assign the property as security.” Nat. Bank of Chicago v. Stramer, 578 N.E.2d 1165, 1167 (Ill.App.Ct. 1991) (citations omitted). However, “if a contract expressly covered the entire subject matter and did not provide for a lien, a lien will not be inferred.” Uptown Nat. Bank of Chicago, 578 N.E.2d at 1167 (citations omitted).
While Defendant presents evidence that UPS may be a secured creditor of EptCo and that Defendant signed a personal guarantee, an equitable lien cannot be imposed under the Agreement because Defendant fails to present any evidence that the parties intended the shares to be security. Further, UPS was issued a citation (see #51), but has not appeared to contest any right it may have in the shares.
Even if UPS or any other creditor have a prior lien on the shares, the assets will be sold and the outstanding debt paid first. Under Illinois law,
If the goods or chattels sold to satisfy the judgment have been attached by another creditor ... or if before the payment of the residue, after the satisfaction of the judgment to the debtor, another attachment or judgment against the judgment debtor is delivered to the officer who made the sale, the proceeds of the sale shall be applied to the discharge of the several judgments in the order in which the respective attachments or judgments become a lien or are entitled by law to share, and the residue, if any, shall be returned to the debtor or his or her assigns.735 ILCS 5/12-169.
“The only relevant inquiries in a supplementary proceeding are (1) whether the judgment debtor possesses assets that should be applied to satisfy the judgment and (2) whether a third party is holding assets of the judgment debtor that should be applied to satisfy the judgment.” FirstMerit Bank, N.A, 168 N.E.3d at 709. Plaintiff has met its burden of showing that Defendant's shares should be applied to satisfy the judgment, and Defendant has failed to demonstrate that these shares are exempt from satisfying the judgment.
Defendant argues that disposing the shares will not preserve their value once the companies are divorced from Defendant's management and encumbered by priority liens. Thus, Defendant argues, the Court should deny Plaintiff's request, or alternatively, order a continuing lien on the shares, secondary to priority creditors, that will allow Defendant to continue pursuing business ventures that will make all parties whole.
The Court is unconvinced. Plaintiff has met its burden of showing that the shares should be delivered up and the proceeds applied towards satisfying the judgment. Defendant essentially argues the shares should not be sold at all. However, even if the property were not readily delivered up for public sale, section 2 - 1402(e) contemplates another method of sale, not no method of sale. See 735 ILCS §§ 5/2-1402(e) (“if another method of sale is more appropriate to liquidate the property or enhance its value at sale, the court may order the sale of such property by the debtor, third party respondent, or by a selling agent other than the sheriff upon such terms as are just and equitable.”) (emphasis added).
Accordingly, the Court recommends that the District Court order that meShare turn over Defendant's 22.73% stock of meShare, Smartz turn over Defendant's 22.69% stock of Smartz, and Defendant turn over his 30.7% stock of Zmodo. The Court recommends turnover in a method agreed by the parties within 14 days to maximize its value at sale. If the parties are unable to agree on a method for sale, the matter should be submitted to the Court to consider the competing methods. This order is intended to direct that Defendant's ownership in the identified companies be sold in a way that will maximize the value of that ownership interest, with the proceeds turned over to Plaintiff.
C. Purported Loans
Plaintiff argues that Defendant loaned money to meShare, Smartz, and EPS and that these companies must provide these owed debts to Plaintiff. Defendant argues that the money he provided to these companies were capital contributions, not loans, and that no debt exists to be transferred to Plaintiff.
The parties do not dispute that a debt a third party owes to a judgment debtor would be considered the judgment debtor's “property” or “asset.” Indeed, section 2-1402 applies not only to tangible property, but also to property “to which [the judgment debtor] may be entitled or which may thereafter be acquired by or become due to [the judgment debtor].” 735 ILCS 2-1402(f)(1). However, “[i]f the third party ... does not owe a legally enforceable debt to the judgment debtor then the judgment debtor has no right to recover anything from the third party - and thus neither would the judgment creditor ...." Door Properties, 188 N.E.3d at 815. The question, therefore, is whether meShare, Smartz, or EPS owe Defendant debts.
“[T]he essential difference between a creditor and a stockholder is that the latter intends to make an investment and take the risks of the venture, while the former seeks a definite obligation, payable in any event.” Arlington Park Jockey Club v. Sauber, 164 F.Supp. 576, 582 (N.D. Ill. 1958) (quoting Comm'r of Internal Revenue v. Meridian & Thirteenth Realty Co., 132 F.2d 182, 186 (7th Cir. 1942)). Further, “[c]ourts generally find ... payments to be capital contributions when no loan documents exist and interest is not actually paid, and courts find the converse to be true where a loan is properly documented and interest is paid.” Cent. States Se. & Sw. Areas Pension Fund v. Dizack, 2018 WL 1087640, at *4 (N.D. Ill. Feb. 28, 2018).
In determining whether the transfers Defendant provided to the companies were loans or capital contributions, Defendant urges the Court to follow the factors set out in Roth Steel Tube Co. v. Comm'r of Internal Revenue, 800 F.2d 625, 630 (6th Cir. 1986) (“The determination of whether advances to a corporation are loans or capital contributions depends on whether the objective facts establish an intention to create an unconditional obligation to repay the advances.”). Those factors are:
(1) the names given to the instruments, if any, evidencing the indebtedness (2) the presence or absence of a fixed maturity date and schedule of payments; (3) the presence or absence of a fixed rate of interest and interest payments; (4) the source of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest between the creditor and the stockholder; (7) the security, if any, for the advances; (8) the corporation's ability to obtain financing from outside lending institutions; (9) the extent to which the advances were subordinated to the claims of outside creditors; (10) the extent to which the advances were used to acquire capital assets; and (11) the presence or absence of a sinking fund to provide repayments.Id. “No one factor is controlling or decisive, and the court must look to the particular circumstances of each case.” Id.
While the Seventh Circuit has not explicitly adopted the Roth Steel factors, the case has been cited favorably in the Seventh Circuit. See Price v. Comm'r of Internal Revenue, 1998 WL 234520, at *2 (7th Cir. May 6, 1998) (unpublished decision); Frierdich v. Comm'r of Internal Revenue, 925 F.2d 180, 183 (7th Cir. 1991); Matter of Larson, 862 F.2d 112, 116-17 (7th Cir. 1988); see also Cent. States, 2018 WL 1087640, at *2 (noting that the Seventh Circuit and courts in this district have applied the Roth Steel factors). Thus, the Court will look to the factors to provide guidance.
One the one hand, many of the factors way in favor of Defendant. Defendant asserts that no documents exist evidencing any terms for repayment, interest rates, or security. Mr. Wineland testified that Defendant has “made a series of founding and preseed investments into” Smartz in the amount of around $76,000, for which he did not anticipate being reimbursed.
On the other hand, Defendant testified that he personally loaned money to meShare and has received $20,000 from meShare, which may have been repayment for his personal loan. (#129, Ex. 1 at 36-38). Smartz's accounting ledger reflects a total of $76,000 deposited from Defendant in 2021 (#129, Ex. 4), and Defendant testified that he “put every penny into [his] companies.” (#129, Ex. 1 at 37-38). Further, EPS's accounting ledger reflects a total of $245,000 received from Defendant in 2018 (#129, Ex. 6 at EPSS005) and contains three journal entries from 2021 reflecting $45,200 paid to Defendant as a “Loan Payback.” (#129, Ex. 6 at EPS0001).
The Court has insufficient information to resolve this dispute. As discussed in more detail in this Court's accompanying Order on Plaintiff's Renewed Motion to Compel, meShare, Smartz, and EPS are directed to provide to Plaintiff all documents relevant to assessing the factors set forth in Roth Steel. Thereafter, Plaintiff may renew its request for turnover as it relates to Defendant's purported loans. In the interim, the citations remain in full effect, and the companies shall make no payments to Defendant on these loans or contributions.
D. Rental Payments
Defendant and Ms. Feng lease the Rental Property to meShare, who pays monthly rent to Ms. Feng. (#129, Ex. 1 at 11-12; #129, Ex. 16). Plaintiff argues meShare should be required to pay Plaintiff all rental amounts since the March 2022 citation and make all such payments to Plaintiff going forward. Defendant argues that at most, Plaintiff may prospectively receive half of the rent profits after expenses are paid on the Rental Property.
At the citation hearing, Defendant testified that he and Ms. Feng own the Rental Property jointly and rent to meShare, which pays $17,500 monthly in rent. (#129, Ex. 1 at 11-12). Defendant testified that typically, the rental payments are directed to Ms. Feng but that she sometimes deposits that money into his account when he needs to make payments. (#129, Ex. 1 at 31). Defendant asserts that Ms. Feng pays the mortgage, taxes, and insurance on the property, which purportedly totals around $16,500 per month. (See #129, Ex. 19).
In August of 2016, Defendant signed a commercial lease agreement with EptCo to use the rental property, listing Defendant as the landlord and EptCo as the tenant. (See #129, Ex. 13). EptCo signed a sublease agreement with meShare in August of 2016 and in May 2018. (See #129, Exs. 14-15). In June 2019, Ms. Feng signed the most recent Commercial Lease Agreement with meShare, listing Ms. Feng as the landlord and meShare as the tenant. (#129, Ex. 16). The Agreement's terms state that meShare is to pay $17,500 per month for the first 24 months with an annual increase of 2% for each successive 12-month period. (#129, Ex. 16).
Plaintiff does not dispute that both Defendant and Ms. Feng own the Rental Property as joint tenants. “State law tells us what rights each joint tenant has to the rental payments.” United States v. Macchione, 309 Fed.Appx. 53, 56 (7th Cir. 2009). In Illinois, “all joint tenants enjoy all of the benefits of the lease, even if they did not sign it.” Id. (citing Booth v. Cebula, 166 N.E.2d 618, 621 (Ill.App.Ct. 1960)). “The right to receive rent is, of course, one of those benefits, and each joint tenant is entitled to an equal share of the proceeds.” Id. (citations omitted). Thus, Plaintiff is entitled to Defendant's one-half share of the net rental income, i.e., the rental payments less the cost of maintaining the Rental Property. See id. at 54, 56 (holding that half of the defendant's rental income belonged to the defendant's wife as a joint tenant and that the trial court therefore abused its discretion in ordering the defendant's wife to turn over the entire rental income to satisfy the judgment against the defendant).
Defendant argues Plaintiff is only entitled to any rent income prospectively. However, Plaintiff's citations to meShare and Ms. Feng, which were issued on March 14, 2022, contain the following restraining provision:
Pursuant to 735 ILCS 5/2-1402(f)(1), YOU ARE PROHIBITED 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. You are not required to withhold the payment of any money beyond double the amount of the judgment.(#46, 49).
As noted above, the restraining provision “requires the third party ‘to freeze assets' belonging to the judgment debtor that are in the third party's possession.” Door Properties, 188 N.E.3d at 811. After receiving the citation, meShare continued making rental payments to Ms. Feng and therefore violated the citation's restraining provision. Further, once she received her citation, Ms. Feng should have at least placed half of the net rental payments in escrow pending the outcome of these proceedings. See Macchione, 309 Fed.Appx. 53 at 54. Consequently, the Court may cite meShare and Ms. Feng for contempt or enter judgment against meShare and Ms. Feng “in the amount of the unpaid judgment, or the value of the property transferred, whichever is less.” Door Properties, 188 N.E.3d at 811 (citing 735 ILCS 5/2-1402(f)(1)). Here, the lesser amount is half the net rental income since the citations were issued on March 15, 2022.
The parties dispute the estimated net rental income. Defendant argues that half the estimated net income is $500 per month. Plaintiff argues that half the estimated net income is $1,510.65 per month. The Court agrees with Plaintiff that half the estimated net rental income is $1,510.65 per month.
Accordingly, because meShare paid the full rental income to Ms. Feng, the Court recommends that the District Court enter judgment against Ms. Feng in the amount of half the net rental income, i.e., $1,510.65 per month, since the citations were issued on March 15, 2022. If Ms. Feng is unable to pay this amount for any reason, Plaintiff may renew its request against meShare. The Court recommends that the District Court order that meShare pay half of all future net rental proceeds, i.e., $1,510.65 per month, to Plaintiff until the Rental Property is turned over, as discussed further below.
E. Real Estate
Plaintiff argues that Defendant should turn over both the Home and the Rental Property for sale and that the proceeds be used to pay off the outstanding mortgages with any remainder to be paid to Plaintiff. Defendant argues that the Home is exempt from turnover based on a tenancy by the entirety exemption and that Plaintiff's lien on the Rental Property is secondary to liens of creditors that predate it.
Under Illinois law, “[a]ll the ... real estate ... of every person against whom any judgment has been or shall be hereafter entered in any court, for any debt, damages, costs, or other sum of money, shall be liable to be sold upon such judgment.” 735 ILCS 5/12112. However,
[a]ny real property, any beneficial interest in a land trust . held in tenancy by the entirety shall not be liable to be sold upon judgment entered on or after October 1,
1990 against only one of the tenants, except if the property was transferred into tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor's ability to pay those debts as they become due.Id. A tenancy by the entirety is created when “a devise, conveyance, assignment, or transfer expressly declares that the devise or conveyance is made to tenants by the entirety ...." 765 ILCS 1005/1c. Here, the Home's deed expressly declares tenancy by the entirety. (See #136, Ex. 1).
Defendant argues that the Home cannot be sold because judgment was only entered against Defendant. Plaintiff, however, argues that Defendant waived this exemption because Defendant did not declare any personal exemption for the Home in his response to the citation or at the citation hearing and did not produce the deed until he responded to Plaintiff's original motions for turnover.
Plaintiff relies on Guess?, Inc. v. Chang, where the court concluded that while section 2-1402 “does not lay out a specific time limit for claiming exemptions,” the judgment debtor waived his right to claim a specific statutory exemption to a citation to discover assets. 912 F.Supp. 372, 379 (N.D. Ill. 1995). There, the defendant failed to assert any exemptions when the citations were served to him and did not claim exemptions until filing a motion roughly two months after the plaintiff had already obtained a turnover order and five months after receiving the citation. Id. at 375-76, 379.
Guess? is distinguishable from the instant case. While Defendant did not assert any exemption at the citation hearing, his actions were not as egregious as the defendant's lack of action in Guess?. Defendant asserts that he learned of this exemption by requesting a copy of the public record and that he did not have this knowledge at the citation hearing. Further, unlike in Guess?, Defendant raised the exemption before any turnover order, not after. Defendant, therefore, did not waive his right to assert any exemption. Because the Home is held in tenancy by the entirety, it is exempt from turnover.
As to the Rental Property, Defendant does not assert any exemptions and as discussed above, has failed to show that the lien is secondary to UPS or other such creditors. Accordingly, the Court recommends that the District Court order Defendant to turn over the Rental Property with the proceeds of the sale to first pay off the outstanding mortgage and with any remainder to be paid to Plaintiff. The Court recommends that the parties be given 14 days to agree on a procedure for how to dispose of the Rental Property, and if the parties cannot agree, that the deed to the Rental Property shall be delivered to the Sheriff of Champaign County for public auction. See 735 ILCS 5/2-1402(e).
IV. Conclusion
For the reasons discussed above, the Court recommends that the District Court GRANT in part and DENY in part Plaintiff's Motion for Turnover and Garnishment Against meShare (#122), Motion for Turnover Against Wan Entities (#126), Motion for Turnover Against Kevin Wan (#130), and Motion for Turnover Against Lydia Feng (#132). Specifically, the Court recommends as follows:
1. The Court recommends that meShare be ordered to remit $68,964 to Plaintiff's counsel, turn over 15% of Defendant's salary since October 15, 2022, to Plaintiff's counsel, garnish 15% of all wages paid to Defendant, and remit such garnished wages to Plaintiff's counsel going forward.
2. The Court recommends that meShare be ordered to turn over Defendant's 22.73% stock of meShare, Smartz turn over Defendant's 22.69% stock of Smartz, and Defendant turn over his 30.7% stock of Zmodo. The Court recommends turnover in a method agreed to by the parties if done so within 14 days, and if the parties cannot agree, that the parties shall submit to the Court their competing sale plans.
3. The Court recommends that judgment be entered against Ms. Feng in the amount of half the net rental income, i.e., $1,510.65 per month, since the citations were issued on March 14, 2022. The Court recommends that meShare be ordered to pay half of all future net rental proceeds, i.e., $1,510.65 per month, to Plaintiff until the Rental Property is turned over.
4. The Court recommends that Defendant be ordered to turn over the Rental Property and the proceeds of the sale to first pay off the outstanding
mortgage(s) with any remainder to be paid to Plaintiff. The Court recommends that the parties shall have 14 days to agree on a procedure for how to dispose of the Rental Property, and if the parties cannot agree, that the deed to the Rental Property shall be delivered to the Sheriff of Champaign County for public auction as required by statute.The parties are advised that any objection to this recommendation must be filed in writing with the clerk within fourteen (14) days after being served with a copy of this Report and Recommendation. See 28 U.S.C. § 636(b)(1). Failure to object will constitute a waiver of objections on appeal. Video Views, Inc. v. Studio 21, Ltd., 797 F.2d 538, 539 (7th Cir. 1986).