- May 4, 2020
On Friday, April 24, 2020, the Illinois Supreme Court issued an order that affects how banks and other financial institutions must respond to certain civil garnishment and collection proceedings in Illinois through the end of Governor Pritzker's Gubernatorial Disaster Proclamation (the "Supreme Court Order").
The Supreme Court Order essentially requires banks served with a non-wage garnishment summons or a third-party citation to discover assets to automatically release funds to the debtor, under certain circumstances. The Supreme Court Order follows an Executive Order issued by Governor Pritzker on April 14, 2020, which temporarily halted all new court collection and garnishment proceedings related to “consumer debt” for the duration of Illinois’s stay-at-home orders.
Though the Supreme Court Order expressly references Governor Pritzker’s earlier order, it is different in several important respects. For one, unlike Governor Pritzker’s order, the Supreme Court Order is not limited to “consumer debt” collection actions. The Supreme Court Order also only affects garnishments and citations served on “depository financial institutions” (i.e., banks).
The Supreme Court Order significantly changes how banks should treat garnishments and citations during the statewide lockdown. Typically, when a bank receives a garnishment summons or citation, the bank is required to “freeze” any assets that the bank is holding in the debtor’s bank account up to a certain amount. 735 ILCS 5/2-1402(f-1) & (m). This allows a creditor sufficient time to go to court to obtain an order directing the bank to turn over the funds to the creditor, while the debtor has an opportunity to object.
Under Illinois law, individuals who owe money based on a court judgment are entitled to declare certain property, including cash, exempt in an amount up to $4,000, which prevents the creditor from obtaining these funds through a court order. 735 ILCS 5/12-1001(b). This so-called “wild card exemption” provides individual debtors with a minimum source of capital to obtain basic necessities, and possibly a legal defense, during a collection action. However, the exemption is not automatic. Instead, the debtor is required to go to court to assert the exemption and must get a court order before frozen assets will be released back to the debtor.
This, of course, is problematic if courts are closed, as the debtor is unable to assert the exemption and gain access to otherwise exempt funds. Thus, the Supreme Court Order attempts to solve that issue by requiring banks to “automatically” release funds, up to $4,000, without waiting for a court order in many cases.
The Supreme Court Order is surely well-intended, particularly given the unprecedented circumstances presented by COVID-19 and the ensuing court closures. However, the new Supreme Court Order raises several issues that will require creditors, debtors and banks to make decisions that are not always free from doubt and risk. Improperly releasing frozen assets to a debtor could expose the bank to claims from the creditor for violating a citation or garnishment summons. Conversely, failing to release exempt funds could expose the bank to claims from the debtor, and even possibly a finding of contempt for failing to follow the new Supreme Court Order.
Until the Gubernational Disaster Proclamation and related Executive Orders are lifted, a bank that receives a citation to discover assets or garnishment summons in Illinois must carefully consider the following points:
- The Supreme Court Order only applies to garnishment summons or citations served after March 8, 2020 OR which had an original return date after March 8, 2020;
- The Supreme Court Order does not apply to wage garnishment proceedings or domestic support obligations, such as child support or maintenance;
- While the Supreme Court Order is not limited to “consumer debt” actions, it is limited to collection proceedings “arising out of a judgment that is exclusively against natural persons.” (emphasis added) The word “exclusively” suggests that the Supreme Court Order does not apply to judgments that are against both natural persons and a legal entity, such as a business. This may be the case in many commercial judgments, cases involving personal guarantees, or cases involving tort claims based on vicarious liability, where both natural persons and entities are found liable under the same judgment.
- The Supreme Court Order does not apply to funds kept in a “business account,” a term which is not defined therein. It is feasible that a natural person will maintain funds in a “business account,” or even be the holder of a “business account.” Thus, the bank will have to evaluate the nature of the account held by the debtor before releasing funds.
- The Supreme Court Order does not appear to account for situations where the debtor has already exercised all or a part of their wild card exemption earlier in the proceeding. Instead, it appears to require banks to release up to $4,000 automatically, irrespective of whether the wild card exemption has already been claimed by the debtor. In some circumstances, this effectively gives the debtor an additional exemption(s) that has not yet been authorized by the legislature.
- On its face, the Supreme Court Order applies to any property held by the bank, not just cash. This could pose an issue where a bank is holding other property, such as securities that are not readily marketable, or property in a safe deposit box, that cannot be easily released or liquidated.
- Paragraph 3 of the Supreme Court Order requires the bank to release any frozen funds, without court order, "in accordance with direction from counsel for the judgment creditor.” This Paragraph should be clarified by the Court, as it is susceptible to different interpretation, and is likely to cause confusion and delay. For one, it is unclear if this paragraph refers solely to the exempt funds that are to be released to the debtor (in which case, it seems problematic to require the bank to wait for direction from the creditor’s counsel, if there is one), or whether this paragraph was intended to allow a bank to release any non-exempt funds to the creditor without waiting for a turnover order. Given the due process concerns raised by the latter interpretation, it is doubtful that this is what the Court intended, so the Order should be clarified.
- The Supreme Court Order remains in effect for so long as the Governor Pritzker’s April 14, 2020 Executive Order remains in effect. In turn, that Executive Order will remain in effect until at least May 29, 2020, and possibly longer based on subsequent amendments.
- Most importantly, the Supreme Court Order fundamentally changes how banks must process citations and release funds. In a typical situation, a bank would freeze twice the amount of the judgment sought upon receipt of a citation to discover assets, file an answer identifying the assets held, wait to receive a turnover order (which could include a statement that the debtor has exercised their wild card exemption), turnover the funds to the creditor and release the hold.
- Now, banks must make $4,000 (or less) available to the debtor, while maintaining the hold on the account and the remainder of existing or new funds therein (if this is technologically possible);
- If a bank initially releases less than $4,000, the bank may be required to continuously monitor the account for additional deposits and release additional funds multiple times up to a total of $4,000;
- Banks may also be required to release $4,000 to multiple debtors who are joint account holders;
- All while having no judge to ask for clarification of any order or in any specific situation.
The bottom line is that, even on routine or low value matters, financial institutions should ensure that their garnishment departments are consulting with in-house or outside counsel before releasing funds or responding to garnishment summonses or citations. The Supreme Court should also clarify its Order to address these issues and provide a safe harbor for banks who act in good faith to comply.