Society of Lloyd's v. Collins, Patrick ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 00-3034 & 00-3035
THE SOCIETY OF LLOYD’S,
Plaintiff-Appellant,
v.
PATRICK COLLINS,
Defendant-Appellee,
and
Kathleen Callahan,
Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 2651--Harry D. Leinenweber, Judge.
Argued January 26, 2001--Decided March 25, 2002
Before BAUER, MANION, and ROVNER, Circuit
Judges.
ROVNER, Circuit Judge. These appeals
arise from two rulings by the district
court quashing non-wage garnishments
served by The Society of Lloyd’s, a
foreign corporation that oversees the
London insurance market, against Patrick
J. Collins and Eugene Callahan, American
members of insurance syndicates that
Lloyd’s manages. Lloyd’s asserts district
court error but we affirm.
I. Background
Although Lloyd’s oversees the London
insurance market, the insurance is
written by its underwriting members. See
Soc’y of Lloyd’s v. Ashenden, 233 F.3d
473 (7th Cir. 2000). Because these
members, also known as "names," do not
have limited liability, their personal
assets are at risk if insured parties
were to obtain a judgment worth more than
the assets of the member that insured
them. In the late 1980s and early 1990s
the Lloyd’s-supervised members incurred
aggregate underwriting losses exceeding
$12 billion. Facing financial ruin,
Lloyd’s created a company in 1996 to
reinsure the risks underwritten by its
members. Lloyd’s financed this
reinsurance venture by levying a
mandatory assessment against its names.
Ninety-five percent of the names took
advantage of a discounted rate and
voluntarily paid this reinsurance
premium. In 1998 Lloyd’s obtained money
judgments in England against names who
refused to pay, including Collins, for
approximately $433,000, and Callahan, for
approximately $551,000.
Collins and Callahan, however, refused
to pay the money judgments. Consequently,
Lloyd’s initiated proceedings to collect
on the judgments by filing them in the
district court in Chicago and issuing
"citations" pursuant to the Illinois
Uniform Foreign Money-Judgments
Recognition Act, 735 ILCS 5/12-618-626.
The Act allows a judgment holder to
depose judgment debtors regarding their
assets; to impose a lien on those assets;
and to command the debtors to turn over
seizable assets to satisfy the judgments.
See Soc’y of Lloyd’s, 233 F.3d at 475-76;
Bank of Aspen v. Fox Cartage, Inc., 533
N.E.2d 1080, 1083 (Ill. 1989). The
district court upheld the validity of the
judgments against Collins and Callahan;
this court affirmed in November 2000, see
Soc’y of Lloyd’s, 233 F.3d 473.
While the above-described litigation was
pending, Lloyd’s issued garnishments to
execute the judgments against Collins and
Callahan. Lloyd’s caused a garnishment
summons and interrogatories to be served
on the Northwestern Mutual Life Insurance
Company ("Northwestern"), which answered
that it held nine life insurance policies
owned by Collins and valued at more than
$1 million. Collins then moved to declare
the policies exempt from garnishment on
the ground that his wife is the intended
beneficiary of the policies. Lloyd’s
responded that it was seeking only those
premium payments (totaling approximately
$120,000) paid since 1996, when the debt
arose. The district court, however,
declared that Lloyd’s could not garnish
Collins’s life insurance policies for the
value of those premiums because it did
not establish that Collins made the
premium payments with intent to defraud
or to convert nonexempt assets into
exempt assets.
Lloyd’s also caused a garnishment
summons to be served on the First
National Bank of LaGrange, where Callahan
had a joint checking account with his
wife, Kathleen. The bank answered that it
held over $12,000 in the account.
Kathleen then moved to release the funds
from the account. The district court
granted her motion, quashed the
garnishment, and released the funds. The
court concluded that Lloyd’s could not
garnish funds from the account because
they belonged to Kathleen.
II. Discussion
On appeal Lloyd’s argues that the court
erred by declaring Collins’s life
insurance premiums exempt from
garnishment and by concluding that the
funds in the Callahans’ joint checking
account really belonged to Kathleen and
not her husband, the judgment debtor. We
disagree.
A. Collins
Collins is a retired insurance agent for
Northwestern. Between 1966 and 1980 he
purchased nine life insurance policies
with his wife as the direct beneficiary.
Collins became a Lloyd’s name in 1988.
Lloyd’s is attempting to garnish a sum
equal to the insurance premiums paid by
Collins since 1996 (approximately $30,000
per year). Under Illinois law life
insurance policies may be garnished in
limited circumstances: (1) if purchased
with the intent of converting nonexempt
property into exempt property; or (2) if
purchased in fraud of creditors. 735 ILCS
5/12-1001. Lloyd’s contends that it is
entitled to garnish Collins’s premium
payments under either exception, but it
wrongly assumes that the statutory
provision applies in the first place.
Collins purchased the policies years
before his involvement with Lloyd’s and
therefore could not have purchased the
policies to avoid his obligations to
Lloyd’s. Consequently, the statutory
exceptions do not apply and Collins’s
premium payments are exempt from
garnishment under Illinois law.
But even if the statute did apply,
Lloyd’s would not prevail. With regard to
the first exception, Lloyd’s has not
demonstrated that Collins intended to
convert nonexempt property to exempt
property. Collins continued merely to pay
the premiums on long-standing policies
that predated his involvement with
Lloyd’s. Collins did not change his
behavior after the Lloyd’s judgment;
instead, he paid the premium to keep the
policies in force. Consequently, the
district court correctly concluded that
he lacked the requisite intent under the
Illinois garnishment exemption provision.
Nor did Collins’s continued payment of
the premiums constitute fraud. Lloyd’s
acknowledges that there is no evidence of
actual fraudulent intent, but
nevertheless argues that Collins’s
premium payments constituted "fraud in
law," a doctrine under which fraud may be
presumed from circumstances surrounding
the transactions. Under Illinois law
fraudulent intent may be presumed without
regard to actual intent or motives in two
instances: (1) where an insolvent debtor
pays premiums rather than the debt, see
Borin v. John Hancock Mut. Life Ins. Co.,
157 N.E.2d 673, 675 (Ill. App. 1959)
(emphasis added); or (2) where a debtor
makes a voluntary transfer without
consideration or for inadequate
consideration (particularly between
relatives) that hinders or delays the
rights of creditors, see Casey Nat’l Bank
v. Roan, 668 N.E.2d 608, 611 (Ill. App.
1996); Crawford County State Bank v.
Marine Am. Nat’l Bank, 556 N.E.2d 842,
856-57 (Ill. App. 1990); Montgomery Ward
& Co. v. Simmons, 261 N.E.2d 555, 556
(Ill. App. 1970).
Lloyd’s fails to demonstrate either
scenario. Collins is solvent, and he did
not transfer property for inadequate con
sideration--he and his family received
comprehensive life insurance coverage in
exchange for the premium payments.
Lloyd’s would like to extend Illinois
precedent to mean that any payment which
hinders or delays the rights of creditors
amounts to fraud. Such an approach,
however, ignores the facts in those cases
that gave rise to the implication of
fraud, i.e., insolvency, or giving away
property for nothing or next to nothing.
See Casey, 668 N.E.2d at 611; Crawford
County, 556 N.E.2d at 857; Montgomery
Ward, 261 N.E.2d at 555-56; Borin, 157
N.E.2d at 675. The factors identified
under Illinois law that suggest fraud are
missing here. Lloyd’s argues that fraud
may be presumed whenever a debtor’s
movement of assets frustrates a
creditor’s efforts to collect. But the
broad "hindrance and delay" standard
advocated by Lloyd’s would give creditors
unfettered license to challenge a wide
range of debtor transactions without
regard to the nature of the transactions
and the circumstances surrounding them--
an approach inconsistent with the
exemption statute’s goal of protecting
the subsistence of debtors and their
families. See Gen. Fin. Corp. v. Rainer,
155 N.E.2d 833, 835 (Ill. App. 1959).
Accordingly, we agree with the district
court’s decision to declare the policies
exempt from garnishment.
B. Callahan
Lloyd’s garnishment action against
Callahan is a closer call. After Lloyd’s
caused the garnishment summons to be
served, Callahan’s bank answered that it
held over $12,000 in the joint checking
account that he held with Kathleen.
Because the money was in a joint account,
Lloyd’s established a prima facie case
that the money in the account belonged to
the debtor. See Leaf v. McGowan, 141
N.E.2d 67, 71 (Ill. App. 1957). As a
result, the burden is on Kathleen to
prove what portion of the account
belonged to her. See id. She met that
burden by demonstrating that all of the
money in the account came from rent
payments from property she owned with her
son. Lloyd’s argues that it can recover
because Eugene had use of the funds in
the account. Indeed, had Eugene used the
funds for his own personal debts, Lloyd’s
might be entitled to the money. But the
evidence indicates that the funds were
used either by Kathleen herself ($9,000
used to pay taxes and redecorate their
home), or by Eugene to pay joint bills.
The strongest evidence in Lloyd’s favor
is that Eugene paid an American Express
bill with a check written on that account
to pay for personal purchases. But
Kathleen was also on the credit card
account and therefore jointly obligated
to pay that bill. As a result, we cannot
attribute that payment to Eugene
exclusively. And it matters not that
Eugene benefitted from payment of the
taxes, bills, and household expenses--the
issue is whether the source and use of
the funds support the district court’s
finding that they belonged to Kathleen.
Because the record supports the court’s
finding that the funds belonged to
Kathleen, we conclude that the court
properly granted her motion to release
the funds.
AFFIRMED.