In re Lapiana, Bankruptcy No. 81 B 7077

• Decision Date: 16 June 1983
• Docket Number: Adv. No. 81 A 3304.,Bankruptcy No. 81 B 7077
• Citation: 31 BR 738
• Parties: In re Vincent LAPIANA and Barbara Lapiana, Debtors. Vincent LAPIANA and Barbara Lapiana, Plaintiffs, v. FARMERS STATE BANK OF SOMONAUK, Bank of Hinsdale, J.D. Pierce Builders, Inc., Internal Revenue Service, Millard G. Lee, Richard Mayfield, Roy Raphbun and La Salle County Treasurer, Defendants. Millard G. LEE and Richard Mayfield, Cross-Claimants, v. J.D. PIERCE BUILDERS, INC., United States of America, Department of the Treasury, Internal Revenue Service, Vincent Lapiana and Barbara Lapiana, Cross-Respondents.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

31 B.R. 738 (1983)

In re Vincent LAPIANA and Barbara Lapiana, Debtors.

Vincent LAPIANA and Barbara Lapiana, Plaintiffs, v. FARMERS STATE BANK OF SOMONAUK, Bank of Hinsdale, J.D. Pierce Builders, Inc., Internal Revenue Service, Millard G. Lee, Richard Mayfield, Roy Raphbun and La Salle County Treasurer, Defendants.

Millard G. LEE and Richard Mayfield, Cross-Claimants, v. J.D. PIERCE BUILDERS, INC., United States of America, Department of the Treasury, Internal Revenue Service, Vincent Lapiana and Barbara Lapiana, Cross-Respondents.

Bankruptcy No. 81 B 7077, Adv. No. 81 A 3304.

United States Bankruptcy Court, N.D. Illinois, E.D.

June 16, 1983.

Joseph E. Cohen, Cohen & Cohen, Chicago, Ill., for debtors.

Lawrence M. Cooper, Chicago, Ill., for trustee.

Joel Nathan, Wheaton, Ill., for Millard G. Lee and Richard Mayfield.

Jim Wilkens, Tax Div., Dept. of Justice, Washington, D.C., for U.S.

ORDER

LAWRENCE FISHER, Bankruptcy Judge.

This matter coming on to be heard upon the Complaint of Debtors, VINCENT LAPIANA and BARBARA LAPIANA, for authority to sell certain property free and clear of liens, and upon the Answers thereto filed by FARMERS STATE BANK OF SOMONAUK, BANK OF HINSDALE, J.D. PIERCE BUILDERS, INC., and MILLARD G. LEE and RICHARD MAYFIELD ("Lee and Mayfield"), and upon the Crossclaim of Lee and Mayfield to determine priorities to proceeds of sale, and upon the Answers to said Crossclaim filed by J.D. PIERCE BUILDERS, INC., UNITED STATES OF AMERICA (the "United States"), and Debtors, and upon the Motion of Lee and Mayfield for Summary Judgment against Cross-respondents United States and Debtors, and upon the United States' Cross-Motion for Summary Judgment upon the Crossclaim of Lee and Mayfield, and The Court having examined the pleadings filed in this matter, and having received and examined the Stipulation of Facts and Genuineness of Documents executed and submitted by Lee and Mayfield, the United States, and Debtors, and later adopted by the Trustee, and having received and examined Memoranda of the parties in support of their respective positions, and having heard the arguments of counsel, and the Court being fully advised in the premises,

The Court Finds:

1. On or about August 19, 1980, a judgment by confession, in the amount of $497,392.60 plus costs, was entered in favor of Lee and Mayfield against Debtors and others in the Eighteenth Judicial Circuit Court, Du Page County, Illinois, Case No. 80 L 1101, entitled "Millard G. Lee and Richard J. Mayfield vs. Michael J. Hart, Dorothy L. Hart, Vincent LaPiana, Barbara LaPiana, H. Gene Wininger, and Marilyn J. Wininger".

2. On August 25, 1980, the United States made an assessment of Debtors' income tax liability for the year ended December 31, 1979 in the amount of $70,474.49.

3. Thereafter, on August 27, 1980, the Clerk of the Eighteenth Judicial Circuit, Du Page County, Illinois, issued in Case No. 80 L 1101 two citations to discover assets, one directed to Vincent LaPiana and the other to Barbara LaPiana. The citations were duly served upon Debtors on September 3, 1980.

4. On or about September 8, 1980, an order was entered in Case No. 80 L 1101, reciting in relevant part as follows:

". . .

It is hereby ordered and decreed;

. . . . .

2) That the defendants be and are hereby granted leave in accordance with Supreme Court Rule 276 to file their motion to open and/or set aside the judgment by confession entered on August 19, 1980 and/or August 18, 1980 . . .

3) That the aforemention sic judgment shall stand until further order of court and enforcement or/and any citations or supplemental proceedings shall be and are hereby stayed until further order of court.

4) That the Citation shall stand as a lien upon the assets of defendants until further order of court."

After a hearing, Debtors' motion to open the judgment by confession was allowed. The order opening the judgment was entered on November 26, 1980 and provides in relevant part as follows:

". . .

3. That the Plaintiffs shall have thirty (30) days to answer Defendants\' Affirmative Defense and Counter-Claim and to assert such other additional claims they have have sic against the Defendants.

4. That the judgment heretofore entered by confession shall stand as security.

5. That the Citation heretofore issued and served on Defendants shall be continued generally and shall continue to stand as a lien upon the assets of the Defendants.

6. That the parties undertake discovery to be completed within a reasonable time and, thereafter, this matter shall be set for trial on further motion and order."

5. On December 31, 1980, the United States filed with the Recorder of Deeds for Lake County, Illinois its Notice of Federal Tax Lien. Two days later, on January 2, 1981, the United States filed a similar notice with the Recorder of Deeds for La Salle County, Illinois.

6. Debtors filed their voluntary joint petition for relief under chapter 11 of the Bankruptcy Code on June 15, 1981. At the time of the filing of the petition, and at all times relevant herein, Debtors jointly held the beneficial interest in Bank of Naperville Trust No. 3461, dated December 8, 1978, an Illinois land trust (the "land trust") holding title to the real estate commonly known as 1586 Holiday Drive, Sandwich, Illinois. Said real estate is located in La Salle County, Illinois, and Debtors reside in Lake County, Illinois.

7. On October 5, 1981, Debtors filed the instant Complaint seeking authority to sell their beneficial interest in the land trust free and clear of liens and encumbrances, any valid liens to attach to the proceeds of sale. The Court granted the requested authority, and the property was sold for $200,000.00. Upon sale, the alleged liens of J.D. PIERCE BUILDERS, INC., the United States, and Lee and Mayfield attached to the proceeds.¹ Debtors also claim an interest therein.

8. On November 12, 1981, after the property had been sold, Lee and Mayfield filed their Crossclaim against J.D. PIERCE BUILDERS, INC., the United States², and Debtors. The Crossclaim seeks a determination that Lee and Mayfield hold a valid lien in the proceeds of sale, that the lien is prior to the interests of the United States, J.D. PIERCE BUILDERS, INC., and Debtors, and for an order directing turnover of the sale proceeds to Lee and Mayfield to the extent of their alleged lien. In the Motion for Summary Judgment on their Crossclaim, Lee and Mayfield seek a determination of priority only as against the United States and Debtors. The Cross-Motion for Summary Judgment filed by the United States prays for an order upholding the priority of the federal tax lien as against the interests of Lee and Mayfield.

9. After the filing of the Motions for Summary Judgment, Debtors' chapter 11 case was converted to a case under chapter 7 of the Bankruptcy Code. LAWRENCE COOPER was appointed Trustee, and he has succeeded to any non-exempt interest which Debtors may have had in the proceeds of sale.

10. As of this date, no portion of the alleged indebtedness to Lee and Mayfield or of Debtors' 1979 income tax liability has been satisfied.

The Court Concludes and Further Finds:

1. There is no genuine issue as to any fact material to the issues decided herein.

2. In determining the question of priority raised by the instant motions, the initial inquiry must be whether the judgment creditors, Lee and Mayfield, hold a lien upon the funds in controversy. Lee and Mayfield contend that the issuance and service of a citation to discover assets under § 73 of the Civil Practice Act, Ill.Rev.Stat. ch. 110, § 73³, creates a lien on personal property belonging to the judgment debtor.

Illinois law is not at all clear upon this issue. In the leading case of Levine v. Pascal, 94 Ill.App.2d 43, 236 N.E.2d 425 (1st Distr.1968), the defendants assigned their beneficial interest in a land trust to Palos State Bank as collateral for a loan. The bank never filed a financing statement to perfect its lien as then required by the Illinois Commercial Code. Several months after the making of the loan, a judgment was entered against the defendants in favor of one Levine, and Levine obtained the issuance of both a writ of execution and a citation to discover assets under § 73.

In the citation proceedings, the bank claimed it had priority over Levine in the defendants' beneficial interest in the land trust. The bank argued that such an interest constitutes intangible personal property and is not subject to a lien by a writ of execution.⁴ The Court responded as follows:

". . . As well as procuring a writ of execution, plaintiff initiated citation proceedings under section 73 of our Civil Practice Act. Having the status of judgment creditor, this remedy was available to plaintiff and sufficient to establish his claim to the beneficial interest of Land Trust No. 15222. Clearly, plaintiff became a lien creditor as defined in section 9-301(3) of the Commercial Code when the writ of execution was placed in the hands of the sheriff. . . . While it may be doubtful whether the plaintiff could effectively enforce his lien by means of the writ of execution, there is no doubt that he could do so through citation proceedings." (Emphasis added; citations omitted.)

Id. at 54-55, 236 N.E.2d 425.

As the emphasized language above indicates, the Levine court may have been drawing a distinction between creation of the lien (through delivery of the writ of execution to the sheriff) and its enforcement (through citation proceedings). However, two subsequent Illinois decisions, viz., Mid-West National Bank of Lake Forest v. Metcoff, 23 Ill.App.3d 607, 319 N.E.2d 336 (1974) and Bank of Broadway v. Goldblatt, 103 Ill.App.2d 243, 243 N.E.2d 501 (1968), ignored any such distinction. These cases interpret Levine as holding that a judgment creditor who institutes citation proceedings becomes a lien creditor within the purview of § 9-301(3) of the Illinois Commercial Code.

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