Cannell v. First State Bank of Bloomington
Filing
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OPINION entered by Judge Colin Stirling Bruce on 7/28/2014. The Order of the Bankruptcy Court entered on June 7, 2013, is affirmed. This case is terminated. See written opinion.(KMR, ilcd)
E-FILED
Monday, 28 July, 2014 01:23:55 PM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
URBANA DIVISION
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IN RE: JASON A. CANNELL,
Debtor.
_____________________________________
JASON A. CANNELL,
Appellant,
v.
FIRST STATE BANK OF
BLOOMINGTON,
Appellee.
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Case No. 13-CV-3226
OPINION
This is an appeal from an opinion entered by the United States Bankruptcy Court for the
Central District of Illinois (Bankruptcy Case No. 12-71705) brought pursuant to 28 U.S.C. §
158(a)(1). Following a careful review, this court affirms the opinion of the bankruptcy court.
FACTS
The Debtor, Jason A. Cannell, has been a practicing attorney in Bloomington, Illinois,
since 1992. In January 2009, the Debtor’s law firm, Cannell & Maulson, P.C., executed a
promissory note in the principal amount of $50,000 in favor of First State Bank of Bloomington
(Bank). The Debtor personally guaranteed the note. On October 19, 2010, the Bank sued the
Debtor and his law firm, to collect on the note. The Bank obtained a judgment on August 23,
2011, in the amount of $19,391.93 and costs.
Following the judgment, the Bank instituted supplementary proceedings in state court in
order to locate assets of the Debtor and Cannell & Maulson, P.C., that could be used to satisfy
the judgment. The Debtor was personally served with a citation to discover assets on September
14, 2011. The Bank also served third-party citations on PNC Bank, Busey Bank, and Heartland
Bank & Trust Co. because it believed that those entities may have been holding assets of the
Debtor or his law firm. A citation was also served on Cannell Law Firm, P.C., an entity the
Debtor had incorporated in January 2010. However, that citation was dismissed on June 5, 2012.
Each citation, including the one served on the Debtor, contained the following language:
“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 he may be entitled or which may be acquired by or
become due to him and from paying over or otherwise disposing of any money not so
exempt, which is due or becomes due to him, until the further order of court or
termination of the proceedings.”
On July 30, 2012, the Debtor filed a voluntary Chapter 7 bankruptcy case. The Bank filed
an adversary proceeding against the Debtor on November 5, 2012. The Bank’s complaint sought
to deny the Debtor’s discharge on the basis that the Debtor intended to hinder, delay, or defraud
the Bank by transferring or concealing his property within one year of filing.
At trial, The Debtor testified that he closed an individual bank account at Heartland Bank
& Trust Co. in September 2011, shortly after he was served with the citation from the Bank to
discover assets. According to the Debtor, he closed the account because he was concerned that it
would be frozen following a state court judgment in the Bank’s favor, thus preventing him from
making court-ordered child support payments to his ex-wife. The Debtor also testified that he
opened a joint bank account at Busey Bank with his fiancee, Tonya Howell, in January 2010.
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The joint bank account was closed in August 2011. The Debtor stated that he closed this account
because of his concern that it would be frozen. The Debtor worried that such action would
negatively impact his fiancee’s credit and that it would prevent him from making his child
support payments. Upon closing the joint bank account with his fiancee and the Heartland
account, the Debtor did not have any personal bank accounts until approximately one month after
he filed his Chapter 7 petition.
After his bank accounts were closed, the Debtor testified that he took cash and check
distributions from Cannell Law Firm, P.C. The Debtor would sign over his checks to his fiancee,
who would deposit them in her individual account at Heartland Bank & Trust. Her account had
been opened in September 2011, the month after she and the Debtor had closed their joint
account. According to account statements, the Debtor made the following transfers to his
fiancee’s personal account: $1500 on September 30, 2011; $1500 on November 8, 2011; $1500
on December 1, 2011; $3024.14 on January 5, 2012; $3000 on February 24, 2012; $3000 on
April 19, 2012; $3500 on May 31, 2012; and $1500 on July 25, 2012.
Both the Debtor and his fiancee testified that the transfers were made pursuant to an
agreement that they had with each other that the Debtor would contribute monthly to their joint
living expenses. According to their testimony, this arrangement began in January 2010, when the
couple first began living together. The evidence presented at trial reflected expenditures
consistent with the Debtor and his fiancee’s testimony that the transfers were used for ordinary
living expenses such as rent, utilities, and food. However, the Debtor acknowledged that he
never sought authority from the Illinois state court to make the transfers to his fiancee’s account,
despite the fact that he had been personally served with a citation to discover assets on
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September 14, 2011. The Cannell Law Firm, P.C. also never sought permission from the state
court to make transfers to the Debtor or his fiancee despite the fact that it was subject to a third
party citation to discover assets from April 25, 2012 through June 5, 2012.
The evidence also established that the Debtor failed to disclose the above transfers in his
Statement of Financial Affairs when he filed his voluntary Chapter 7 petition on July 30, 2012.
The Debtor’s Schedule I included the following statement: “Debtor and his fiancee have paid
their joint living expense from her bank account, since the Debtor was forced to close his bank
account due to outstanding judgments and IRS liens.” An Amended Statement of Financial
Affairs was filed by the Debtor on December 4, 2012. Among other things, the statement added
the following language: “Reg. Household expenses paid by fiancee.” The amount of the transfers
shown as having been made to his fiancee and the amount disclosed as still owing to her were
both listed as “$0.00.”
After hearing all of the evidence, the bankruptcy court issued an opinion on June 7, 2013.
The court noted that the Debtor conceded that he transferred property to his fiancee within one
year of the date of filing his Chapter 7 petition. Therefore, the only issue before the court was
whether the Debtor made the transfers with the intent to hinder, delay, or defraud a creditor. The
court concluded that the transfers were made with intent to hinder and delay a creditor.
In making its findings, the court noted that the transfers in question were generally for
ordinary living expenses. However, the evidence established that the transfers occurred after the
Debtor was served with a citation to discover assets which expressly prohibited him from
transferring his property. Based on the citation, as well as other facts in the record, the court
found that the Debtor made the transfers knowing that he was prohibited from doing so.
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In its opinion, the court stated that “[t]he fact that the Debtor, a licensed attorney, never
made any effort to seek approval of the proposed transfers and never sought to claim an
exemption for funds to pay living expenses is evidence of his intent to hinder and delay the
Bank.” The court went on to find that “the Debtor confirmed at trial that, by closing his account
and transferring money to an account only in Mrs. Cannell’s name, he was trying to avoid the
Bank’s collection efforts.” Therefore, the court came to the “inescapable conclusion” that the
transfer of funds “in violation of the citation was done with the express intent to hinder and delay
the collection efforts of the Bank.” Based on this conclusion, the court denied the Debtor’s
discharge. The Debtor appeals.
ANALYSIS
I. STANDARD OF REVIEW
When a party appeals a bankruptcy court’s order, the bankruptcy court’s conclusions of
law are reviewed under a de novo standard and its findings of fact are reviewed for clear error.
Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir. 2008).
II. DEBTOR’S APPEAL
In his Appeal, the Debtor has challenged the bankruptcy court’s decision to deny his
discharge pursuant to 11 U.S.C. §727(a)(2)(A). In order for the bankruptcy court to properly
deny a discharge under §727(a)(2)(A), the court must find that: (1) the debtor transferred his
property within one year before the date of the filing of the petition; (2) with the intent to hinder,
delay, or defraud a creditor. In re Kontrick, 295 F.3d 724, 736 (7th Cir. 2002). In this case, the
Bankruptcy Court found that the Debtor transferred money with the intent to hinder and delay a
creditor. In his Appeal, the Debtor does not challenge the fact that he transferred property.
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Instead, the Debtor’s only argument is that the court erred in finding that he made the transfers
with the intent to hinder and delay a creditor. Specifically, the Debtor’s appeal argues that:
1. The bankruptcy court erred in its conclusion that the subject transfers made by the
Debtor were in violation of the state court citation to discover assets.
2. The bankruptcy court erred in its conclusion that the Debtor’s failure to follow all of
the procedural requirements of the Illinois statutory provisions governing a citation to
discover assets should result in denial of his discharge pursuant to 11 U.S.C. §727(a)(2).
3. The bankruptcy court erred in its finding that the Debtor had knowledge of legal
restrictions on use of funds created by Illinois citation to discover assets law, simply by
the fact that the Debtor is an attorney.
4. The bankruptcy court erred in its conclusion that the subject transfers should result in
denial of his discharge pursuant to 11 U.S.C. §727(a)(2), as the citation lien fully
encumbered the funds that were transferred.
A. Exemption
As noted above, the only issue before the bankruptcy court was whether the transfer of
funds was done with the intent to hinder, delay, or defraud a creditor. In its written opinion, the
bankruptcy court concluded that the funds in question were for ordinary living expenses.
However, the court concluded that such expenses were not exempt from the citation to discover
assets in force at the time of the transfers. Because the Debtor was on notice that he could not
transfer non-exempt funds without court approval, his doing so was evidence of his intent to
hinder and delay the Bank’s collection efforts. The Debtor argues that funds for ordinary living
expenses were exempt and, therefore, the transfers did not violate the citation and could not be
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used by the court to show the Debtor’s intent to hinder or delay the Bank.
The citation against the Debtor expressly stated that the Debtor was prohibited from
transferring any property not exempt from the judgment. Section 2-1402(b)(1) of the Illinois
Code of Civil Procedure, which contains a list of assets exempt from a citation, does not include
an exemption for ordinary living expenses. 735 ILCS 5/2-1402(b)(1) (West 2012). However,
Illinois law provides a way in which a debtor can request a court order exempting certain assets.
Section 2-1402(b) requires that a prominent notice be sent to the citation respondent stating that
the judgment debtor has the right to assert statutory exemptions against certain income or assets
of the judgment debtor which may not be used to satisfy the judgment. 735 ILCS 5/2-1402(b)
(West 2012). Further, Section 2-1402(l) provides a procedure to be followed at a citation hearing
“at which the judgment debtor appears and seeks a declaration that certain of his or her income or
assets are exempt.” 735 ILCS 5/2-1402(l) (West 2012).
The bankruptcy court read the above statutes to mean that ordinary living expenses would
only be exempt from the citation if the Debtor made a claim to the state court. Because the
Debtor did not assert an exemption for the transfers made to his fiancee, the court found that the
funds were not exempt. The Debtor contests the court’s finding. He argues that ordinary living
expenses have been found to be exempt in other cases and his failure to follow a certain
procedure should not result in denial of his discharge. However, the cases cited by the debtor
contain factual distinctions and, more importantly, do not apply the laws of the State of Illinois.
See In re Ciotti, 448 B.R. 694 (Bankr.W.D.Pa. 2011); In re Oliver, 414 B.R. 361
(Bankr.E.D.Tenn. 2009); In re Nascarella, 492 B.R. 914 (Bankr.M.D.Fla. 2013).
After a careful review of the law governing citations in the State of Illinois, this court
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agrees with the bankruptcy court that the burden to assert an exemption for ordinary living
expenses is on the judgment debtor. See 735 ILCS 5/2-1402(b),(j),(l); In re Mayer, 388 B.R.
869, 873-74 (Bankr.N.D.Ill. 2008). Therefore, because the Debtor failed to affirmatively seek a
determination from the state court that the assets he transferred to his fiancee were exempt from
judgment, this court must conclude that those funds were not exempt under Illinois law. As
such, the bankruptcy court did not error when it concluded that the transfers were made in
violation of a pending citation; and its use of this fact to establish the Debtor’s intent to hinder
and delay a creditor was not erroneous.
B. Intent
The Debtor’s appeal comes down to an argument that the bankruptcy court erred in
finding that the Debtor had the requisite intent to hinder or delay the Bank in its attempts to
collect a judgment. At trial, evidence established that the Debtor made eight money transfers to
his fiancee, totaling $18,524.14, during a period when he was personally subject to a citation to
discover assets. The bankruptcy court made a factual finding that the Debtor transferred the
assets knowing that he was prohibited from doing so. The court also noted that the transfers to
the Debtor’s fiancee, in violation of a pending citation, established that the Debtor did intend to
hinder and delay the Bank’s collection efforts.
After a careful review of the evidence, this court does not find clear error in the
bankruptcy court’s factual conclusion that the Debtor transferred assets knowing that he was
prohibited from doing so. This court notes that there was sufficient evidence to find knowledge
based on the actions of the Debtor and not, as the Debtor argues, based simply on the fact that he
was an attorney. The evidence at trial, which included the Debtor’s own testimony that he closed
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his bank accounts to prevent his assets from being frozen, supports the bankruptcy court’s
finding that the Debtor had knowledge that his actions were prohibited and that he had the
requisite intent to hinder and delay the Bank’s efforts to collect on its judgment.
The record establishes that the Debtor transferred non-exempt assets to his fiancee at a
time when he knew he was prohibited from doing so based on a citation to discover assets. This
court is not persuaded by the Debtor’s argument that his questionable attempts to disclose the
transfers, after filing his bankruptcy petition, exonerate him from being found to have hindered or
delayed the Bank’s efforts to collect on its judgment. This court further declines the Debtor’s
invitation to reverse the bankruptcy court’s opinion based on a theory that §727(a)(2)(A) does not
apply where the transferred property was fully encumbered by a lien of the petitioning creditor.
Therefore, based on all of the evidence in the record, this court cannot say that the bankruptcy
court’s finding that the Debtor acted with the intent to hinder or delay the Bank was clear error.
The judgment of the bankruptcy court to deny the Debtor’s discharge pursuant to 11 U.S.C.
§727(a)(2)(A) is therefore affirmed.
IT IS THEREFORE ORDERED THAT:
(1) The Order of the Bankruptcy Court entered on June 7, 2013, is affirmed.
(2) This case is terminated.
ENTERED this 28th day of July, 2014
s/Colin S. Bruce
____________________________
COLIN S. BRUCE
U.S. DISTRICT JUDGE
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