Seventh Circuit Affirms Use of a Powerful Tool for Judgment Creditors in ‘Rare’ Cases

by Lesley Anne Hawes July/August 2011
When defendants Pethinaidu and Parameswari Veluchamy defaulted on their obligations to Bank of America in June 2009, the bank sued in federal district court for breach of contract, obtained judgment against the defendants 18 months later and began aggressively pursuing post-judgment enforcement remedies. What follows is a rare case eventually upheld in the Seventh Circuit Court of Appeals.

The Court of Appeals for the Seventh Circuit recently issued a decision of interest to creditors that hold money judgments. The court of appeals upheld a decision of the United States District Court of the Northern District of Illinois in which the district court ordered the temporary seizure of the passports of the defendants/judgment debtors in connection with the enforcement of a judgment against them by Bank of America. While the case may be, as the court indicated, a “rare case” where the power to seize the passports could be exercised, the case confirms this powerful tool is available when the facts warrant. The decision was issued June 16, 2011 in Bank of America, N.A. v. Veluchamy, Dkt. Nos. 11-1704 and 11-1705, 2011 WL 2417102 (7th Cir. June 16, 2011) and will be published.

Background Facts
The defendants Pethinaidu and Parameswari Veluchamy (judgment debtors) defaulted on their obligations to Bank of America in June 2009. At the time of the default, the judgment debtors owed the bank approximately $39 million. Bank of America sued in federal district court for breach of contract and obtained judgment against the defendants in December 2010.

The bank began aggressively pursuing post-judgment enforcement remedies. The bank sought post-judgment asset discovery from the judgment debtors, who refused to provide substantive responses and instead asserted their Fifth Amendment privilege against self-incrimination in response to the bank’s discovery. The bank also sought discovery from third parties, including financial institutions. Information obtained by the bank from the third-party discovery indicated that the judgment debtors had transferred approximately $20 million from their domestic bank accounts to their bank account in India after they defaulted on their debt obligations to Bank of America.

Armed with this evidence of an apparent fraudulent transfer of the judgment debtors’ assets overseas, the bank filed an emergency motion with the district court seeking an order compelling the judgment debtors to repatriate the funds they transferred to India for seizure and application toward the judgment and to order the judgment debtors to turn over their passports to the district court temporarily until the funds had been repatriated. The district court ordered the judgment debtors to turnover the funds sent overseas or to explain their reasons for not doing so. The district court further found that the judgment debtors represented a flight risk under the circumstances and ordered that the judgment debtors’ passports should be temporarily held by the court until they complied with the asset turnover/production order. The judgment debtors appealed the order requiring them to relinquish their passports.

The Ruling & the Weapon Added to the Judgment Creditor’s Arsenal
The appeal raised a number of procedural and legal issues addressed by the Seventh Circuit. First, the court addressed whether the district court’s order was appealable, since the post-judgment enforcement proceedings were continuing in the court below. The court held the issue of the seizure of the passports was properly appealable under the collateral order doctrine of Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (1946) and could be determined.

Having found that the court of appeals had jurisdiction to consider the appeal under the collateral order doctrine, the court addressed the merits of the district court’s ruling and specifically whether the district court had the power to order temporary seizure of the passports in a civil post-judgment enforcement proceeding. Noting that under Federal Rule of Civil Procedure 69 and other authority the district court’s judgment enforcement powers are determined by state law, in this case the law of Illinois, the Seventh Circuit analyzed Illinois state post-judgment collection law and the broad power of the court under that body of law to order parties and non-parties to turn over information as well as funds in their possession. The court noted that the powers of the court to issue turnover orders had been broadly construed in Illinois based on applicable Illinois state court decisions.

The Seventh Circuit then asserted, “We think the power to order a party to produce funds includes the power to exercise some minimal control over the party subject to that order — but only when doing so is necessary to protect the court’s ability to enforce the underlying order and prevent the loss of assets. [Citations.] Whether such controls are necessary will depend upon the circumstance of the case, but it will be a rare case where any extraordinary steps are needed.” Bank of America v. Veluchamy, 2011 WL 417102 (emphasis added).

Based on the facts presented, which the court noted were largely undisputed in the court below, the Seventh Circuit held the district court had the power to seize the judgment debtors’ passports in connection with the district court’s exercise of its power to compel. The judgment debtors also challenged the lower court’s ruling on the grounds that the district court failed to enter written findings to support the orders for turnover of the funds and the passports and further that their right to due process was denied by the district court’s manner and timing of proceeding since the matter was heard on an emergency basis. The court of appeals rejected the contention that the minimal findings made by the district court were inadequate to support the decision. The court also rejected the due process challenge, finding that the judgment debtors failed to identify the claim of lack of due process in their statement of issues on appeal and submitted only “perfunctory and incomplete” briefing on the due process issue, thereby waiving their right to a determination on the merits of that claim on appeal. The court therefore affirmed the ruling of the lower court.

What Makes This Case Rare?
The power to seize passports of judgment debtors and limit their freedom of movement outside the United States in the context of an ordinary civil case for breach of contract on its face seems extraordinary. And while the district court relied on the broad state law powers granted to a court to enforce judgments by ordering the turnover of information and funds for seizure and application to the debt, the fact that this “ordinary” breach of debt obligation collection action was brought in the federal district court, with jurisdiction apparently based on diversity of citizenship of the parties, is unusual.

But the most important and perhaps “rare” facts were that Bank of America was able to quickly obtain through post-judgment discovery essentially uncontroverted facts that the judgment debtors had moved extensive cash assets overseas after they defaulted on their debt to the bank with apparent intent to deliberately place the assets outside the reach of the bank and the United States court system. The large dollar amount at stake in the action allowed the bank to pursue an aggressive, multi-faceted post-judgment investigation to develop the facts that demonstrated the transfer of the funds and the judgment debtors’ continuing control over the assets overseas based on evidence they were moved to an account in India under their control. While it is not unusual for a judgment creditor to learn that a judgment debtor’s assets have mysteriously disappeared when it tries to enforce the judgment, it is unusual to locate detailed evidence of when and where the assets were transferred overseas and of the judgment debtor’s apparent ability to repatriate the assets, which justified the district court’s order temporarily seizing the passports as a means of enforcing its funds turnover and production order.


Lesley Anne HawesLesley Anne Hawes, a partner in the Los Angeles office of McKenna Long & Aldridge, LLP, specializes in the representation of secured and unsecured creditors in bankruptcy proceedings and in the representation of federal equity receivers appointed in civil enforcement actions by federal agencies such as the Federal Trade Commission and Securities and Exchange Commission. Hawes is a regular contributor to the Monitor and other legal journals, and she has lectured for the National Business Institute and other organizations. She graduated Order of the Coif from University of Southern California law school and earned her undergraduate degree in political science magna cum laude from University of Southern California.

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