In March 2011, Sign Builders, Inc. (“Sign Builders”) filed a breach of contract claim against SVI Themed Construction Solutions, Inc. (“SVI”) seeking to recover amounts allegedly due for merchandise and services it provided to SVI. SVI failed to answer or otherwise appear and a default judgment was entered against it. A separate prove-up hearing was then scheduled. When SVI failed to appear at the prove-up hearing, the court entered a judgment in favor of Sign Builders in the amount of $11,303, plus costs.
On November 20, 2013, Sign Builders issued a citation to discover assets against The Private Bank (the “Bank”) seeking information relating to any accounts or property held on behalf of SVI. On December 17, 2013, Allen Shapiro (“Shapiro”) and Tiptop Builders, Inc. (“Tiptop”, together with Shapiro, the “Petitioners”) filed a petition to intervene in the underlying action between Sign Builders and SVI alleging that the Petitioners held a “superior perfected” lien under the Uniform Commercial Code on all property owned by SVI and that they could be adversely affected by any disposition of such property.
On February 4, 2014, the court granted the petition to intervene. On February 25, 2014, the court entered an order referencing a proposed petition by Sign Builders for a turnover of all SVI assets held by the Bank. The order set a briefing schedule and mandated that Tiptop produce a copy of any loan, note or other evidence of SVI’s indebtedness to it and that, in the interim, all funds being held by the Bank remain frozen.
On March 8, 2011, the Petitioners filed their objection to the turnover of any funds held by the Bank again claiming that they maintained a superior perfected security interest on all property owned by SVI. The Petitioners attached a “Demand Line of Credit” note dated February 9, 2007 (the “Note”) executed by SVI and payable to Shapiro as nominee in the amount of $200,000 plus accrued interest. The Note was secured by an agreement (the “Security Agreement”) which assigned as collateral all of SVI’s assets, including “inventory, chattel paper, accounts, equipment and general intangibles” as further specified therein. The located of the collateral was identified at SVI’s address. The Petitioners also attached three (3) UCC financing statements, two of which were dated February 28, 2007 and the third dated December 7, 2011, identifying Shapiro as the secured creditor.
Finally, the Petitioners submitted an affidavit by Shapiro averring that the Petitioners maintained a superior perfected security interest in all property owned by SVI by virtue of the Note and that, as of March 17, 2014, SVI owed the Petitioners $268,053. The Note did not include any particular terms as to payment installments, but indicated that it would be payable upon demand by Shapiro. The Note also provided that (i) upon the occurrence of a failure to pay, the Lender (Shapiro) may proceed to foreclose any security agreement or mortgage or exercise any other rights and remedies available to Lender and (ii) no failure by the Lender to exercise any right, remedy or recourse shall be deemed a waiver or release of the same with any such waiver effected only through a written document executed by the Lender. With regard to the collateral, the Security Agreement (i) permitted SVI to retain the full right to use and possess it “until a default occurs” and (ii) granted Shapiro the right to foreclose upon the Security Agreement or invoke remedies as a secured party, but restricted that right to the event of default.
In response to the objection to turnover, Sign Builders did not challenge the Petitioners’ assertion that they held a superior and perfected lien on the assets in the Bank. Rather, Sign Builders’ argued that the Petitioners never declared SVI in default on the Note and had never otherwise exercised any of its rights to collect under the Note or the Security Agreement. Sign Builders further argued that the Petitioners’ objection to a turnover of SVI’s assets constituted an effort to impair the ability of Sign Builders to collect on its judgment while the Petitioners simultaneously sat dormant upon their own rights under their purported perfected security interest. The Petitioners contended that their forbearance in collecting SVI’s debt did not constitute a waiver of their rights under the Security Agreement since the Security Agreement vested the Petitioners with a continuing security interest in the collateral “without the need to satisfy any preconditions or prequalifications”. Accordingly, the Petitioners maintained that their choice to disregard a default by SVI was merely an effort to allow SVI a chance to improve its business to better pay off its debts.
On April 8, 2014, the trial court entered an order which, denied the Petitioners’ objection to a turnover of the funds held in the Bank and mandated that the Bank relinquish those funds to Sign Builders in satisfaction of the judgment. The Petitioners subsequently moved for reconsideration of that order arguing that the trial court erred in interpreting relevant case law (in particular, One CW, LLC v. Cartridge World North America, LLC (“One CW”). The Petitioners then appealed to the Appellate Court of Illinois (the “Court”). On its appeal, the Petitioners argued that the trial court erred in interpreting One CW. In One CW, a judgment creditor sought to satisfy a portion of its judgment against a third party by recovering money held in that party’s bank account at Signature Bank. However, Signature Bank claimed a priority interest in the account based on a previous loan. While not disputing that Signature Bank held a perfected, priority interest in the account, One CW argued that Signature’s own failure to exercise its rights in the security interest in the face of the judgment debtor’s default on the loan barred it from making any claim against the interest. The court agreed, holding that, because Signature Bank opted not to pursue its rights and remedies despite the judgment debtor’s default, the bank did not have a present right to the funds in the account.
The Petitioners argued on appeal that One CW was distinguishable from the present case because (1) unlike the bank in that case, the Petitioners did not have access to the funds in the Bank and could not freeze them and (2) the Security Agreement expressly provided that any waiver could only occur in writing by the Petitioners. Sign Builders responded arguing that the Petitioners had no perfected security interest in the Bank account in the first instance.
The Court agreed with Sign Builders and held that the security interest of the Petitioners in SVI’s assets was not perfected. Citing the Uniform Commercial Code (the “UCC”), the Court noted that once a judgment creditor serves the judgment debtor with a citation to discover assets, a judgment lien is perfected on those assets of the debtor which are not otherwise exempt under law. In general, however, a competing claim to those assets by a secured creditor will take priority over a lien creditor; provided that the lien creditor has perfected its lien. The Court noted that a secured creditor must obtain “control” over an account in order to perfect a security interest therein. Examining the facts at hand, the Court noted that the sole evidence of any secured interest by the Petitioners in SVI’s assets is the Note and the Security Agreement, neither of which contain a reference to an account with the Bank. Moreover, the Petitioners acknowledged that they did not have access to the account held at the Bank and did not even know of the account until being served with the citation to discover assets.
In light of the foregoing and failure by the Petitioners to take action to perfect its security interest in and to the account, the Court held that the Petitioners did not establish that they had a secured, perfected security interest in the funds held in the Bank. Accordingly, since the Petitioners did not have a perfected security interest and Sign Builders’ retained a judgment lien, Sign Builders’ was entitled to seek the funds held in the account at the Bank. The Court affirmed the trial court decision (Sign Builders, Inc. v. SVI Themed Construction Solutions, Inc., 2015 IL App (1st) 142212 (2015), 30 N.E.3d 475, 391 Ill.Dec. 205, 86 UCC Rep.Serv.2d 218 (2015)).