Q: Can a Citation to Discover Assets filed prior to a Bankruptcy
case have an affect on the resulting Bankruptcy estate?
A: You Bet It Can ...
In the 7th Circuit Case of In re Porayko, appealed from the Bankruptcy Court for the Northern District of Illinois, a Citation to Discover Assets was served on a year before the Debtor filed bankruptcy, while a 3rd Party Citation was served on his bank the month he filed. The creditor moved for relief from the Automatic Stay to seize the $10,000 in the Debtor's bank account and the Trustee objected on the basis that the initial citation had not created a lien, while the 3rd Party Citation was avoidable pursuant to 11 USC 547.
Citations to Discover Assets are addressed in Illinois Statutes, Section 5/2-1402. According to Sec. 1402(m) a Citation to Discover Assets creates a lien on all
"nonexempt personal property including money, choses in action and effects of judgment debtor" as well as "personal property belonging to the judgment debtor in the possession or control of the judgment debtor or which may thereafter be acquired or come due..."
Illinois cases support the concept that a checking account is personal property to which a lien may attach. See Chicago v. Air Auto Leasing Co., 297 Ill. App. 3d 873, 878 (1st Dist. 1998), a problem for the Trustee.
The Trustee in Porayko tried to distinguish Air Auto Leasing by pointing out that other Illinois Courts treated bank accounts as mere promises to pay rather than items of personal property that could be subject to a lien. The leading case of its kind, Citizens Bank of Maryland v. Strumpf, 515 US 16 (1995), dealt with whether a bank could offset a payment while the Debtor was in Bankruptcy. But the Porayko Court found the situation before it to be quite different, and concluded that the creditor's citation had created a secured interest in the checking account, so the relief from the Automatic Stay granted by the Bankruptcy Court was proper.
Surprisingly, this meant that under the proper circumstances the lien of a pre-filing creditor could trump the interest of a Bankruptcy Trustee: a notion that would appear to stand the law of insolvency on its head.
The takeaway from the Porayko case is that Debtors are wise to address debts before their creditors secure judgments that turn into liens. At a minimum, a Debtors ought to file soon enough so that creditors cannot perfect their judgment liens and trump the case Trustee.