April 23, 2013
The 7th Circuit’s recent decision, In re Porayko, No. 12-2777 (7th Cir. 2013), reminds us that the citation to discover assets remains a powerful weapon in the creditor’s arsenal. Porayko holds that service of a citation on the debtor creates a lien on his bank accounts under Illinois law.
A judgment creditor in Illinois may serve a citation to discover assets on either the judgment debtor or a third party who holds property of-or owes money to-the debtor. Service of a citation on the debtor automatically creates a lien on all of his nonexempt personal property, including bank accounts and other intangible assets. The lien thus attaches to everything for automobiles to shares of stock. The citation lien also reaches the debtor’s after acquired personal property, including money which becomes payable to the debtor after the citation is served.
Similarly, a citation served on a third party creates a lien on all non-exempt personal property of the debtor held or controlled by the third party and on any money due from the third party to the debtor. Once again, the lien extends to assets that the third party receives at any time after service until disposition of the citation.
Porayko reminds creditors that the value of a checking account is personal property of the debtor. So it is subject to a citation lien under Illinois law. The creditor in Porayko prevailed over the debtor’s trustee in bankruptcy, who sought to avoid a lien created when the creditor served a citation on the debtor’s bank. The citation served on the bank froze the account prior to bankruptcy. Since the lien arose during the preference period, the trustee claimed he could avoid the lien. But the creditor had also served a citation on the debtor outside the preference period. As Judge Easterbrook noted, the initial citation created a lien on all of the debtor’s personal property, including funds in his bank account. The trustee could not avoid this lien because it antedated the preference period. Thus, money remaining in the account when the debtor filed bankruptcy remained subject to a valid citation.
What about funds withdrawn from the account between the time the creditor served the citation on the debtor and time the bank was served? In Porayko, the debtor withdrew funds after he was served but before the bank was. The creditor’s lien on those funds lapsed; the bank was free to honor drafts on the account until the bank itself was served with a citation. So Porayko also illustrates the importance of serving the bank as soon as the account is discovered-otherwise, the bank will continue paying the judgment debtor’s checks, and the account may be depleted.
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