Citation to Discover Assets Served on Judgment Debtor Creates Enforceable Lien

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February 5, 2013
Michael Cortina
SmithAmundsen Financial Services Alert

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On January 28, 2013, the United States Court of Appeals for the Seventh Circuit held that a citation to discover assets that has been served on a debtor acts as a lien against that debtor’s funds that are held in a bank account despite the fact that the bank was not served with a citation as well.

The long-term impact of this decision is not yet known, but it could have the effect of judgment creditors seeking to collect judgments by only serving citations on judgment debtors, rather than their respective financial institutions; but, it could also have just the opposite effect. This case clearly emphasizes how important it is for a creditor to act quickly when seeking satisfaction of a judgment. Creditors that act quickly are in a much better position compared to the other creditors who simply sit on their rights and attempt to collect at a later date.

The case, William N. Porayko v. Eugene Crane, Trustee, pitted William Porayko’s bankruptcy trustee against Travis Crowell, one of Porayko’s judgment creditors. The trustee, Crane, claimed the citation against Porayko did not create a lien against the funds in Porayko’s bank account because the citation was only served on Porayko individually, and not on the bank itself. Therefore, the trustee reasoned that no lien was created (and no “secured creditor” status was conferred on Crowell) since a lien needs to be served on the bank, and not the judgment debtor.

The United States Court of Appeals disagreed and specifically found that the Illinois law was clear and the service of a citation to discover assets on a judgment debtor creates a lien against all of the debtor’s non-exempt personal property, regardless of who may be in possession of such property.

This case is important because it clarifies whether a lien existed on the funds in a bank account when only the judgment debtor has been served with a citation. This issue has been a point of contention between banks and litigants, as well as passionately disputed, for years.

The judgment creditors are claiming the status of a “secured creditor” once they serve a citation on the judgment debtor, and by doing so, they are elevating themselves above the ranks of general unsecured creditors. Bankruptcy trustees, who work for the benefit of the unsecured creditors, often challenge the secured status of such judgment creditors. Elevation to “secured” status eliminates some or all assets that would have otherwise been available for the use of the unsecured creditors.

The important lesson to take away from the Porayko case is that it is harmful to the judgment creditor to "sleep" on its rights. If the creditor in this case had not taken action to collect a judgment, he would have been lumped-in with the other general, unsecured creditors and been paid mere pennies on the dollar.

However, since he acted quickly and served the citation on the judgment debtor, he became a secured creditor and was entitled to receive the entire $10,000.00 in the debtor’s bank account to partially satisfy his judgment.