the district court grants the Bank’s Motion, the court should
limit the amount of recovery to a specific dollar amount.

The Court agrees that the Bank should not be permitted to
collect the accounts receivable in excess of the amount due and
owing to it from the Debtor. Therefore, the Court recommends
that the district court grant the Bank’s Motion, but limit its
recovery to $444,102.02 of the outstanding accounts receivable.
F. Common Fund Doctrine

Finally, the Pension Fund argues that the Illinois Common
Fund Doctrine prevents the Bank from asserting its claim against
the Debtor’s accounts receivable. The Court disagrees. The
Tllinois Common Fund doctrine provides that attorneys who
generate a fund are entitled to be paid from that fund prior to
the disbursement of those funds to beneficiaries. See Blackburn
v. Sundstrand Corp., 115 F.3d 493, 494 (7% Cir. 1997). “The
common fund doctrine rests upon the perception that persons who
obtain the benefit of a lawsuit without contributing to its costs
are unjustly enriched.” Bishop v. Burgard, 198 I11.2da 495, 509
764 N.E.2d 24, 33 (2002) (emphasis added) (citing Boeing Co v.
Van Gemert, 444 U.S. 472, 478 (1980)).

In this case, the Bank is not obtaining a “benefit” from the
Pension Fund’s lawsuit against the debtor. The Bank is not a
member of the class - ie, the beneficiaries of the Pension Fund -

who will benefit from the Pension Fund's successful suit against

13


presumably be used to satisfy the agreed judgment, the Pension
Fund served citations upon James McHugh Development, Chicago
Carpet World, Craig Greenwood, Johnathan K. Moyer, Triad
Construction Services, Wright Construction Services, George
Sollitt Construction, Sollitt Construction Company, Ledcor
Industries, The Edge construction Company, Gunderson
Construction, Inc., Edge Construction, The Drew Company, Capital
Construction Group, Alden-Bennett Construction co., Alter Design
Builders, Inc. and “Oxford Bands” (sic).

In the interim, the Debtor defaulted on the Bank’s loan,
leaving an unpaid balance of $417,991.14, plus interest and fees.
On February 26, 2003, the Bank filed an adverse claim in this
action, seeking to present its claim of entitlement to the
Debtor’s accounts receivable to cover the defaulted loan amount
of $417,991.14, plus interest and late fees. The Bank is seeking
to recoup these funds from the Debtor’s various account debtors
that have outstanding balances owing to the Debtor. Not
surprisingly, the Pension fund seeks to rely upon these same
account receivables to satisfy its judgment. Judge Holderman
referred the Bank’s Motion to this Court on March 24, 2003.

DISCUSSION

The issue before the Court is whether the Bank’s security

interest has priority over the Pension Fund’s judgment lien with

regard to the Debtor’s accounts receivable.


B. The Bank’s Motion Is Properly Before the Court
Federal Rule of Civil Procedure 69 (a) permits federal
courts to hold supplemental proceedings to enforce judgments in
accordance with the practice and procedure of the state where the
district court is sitting. Fed. R. Civ. P. 69(a). Illinois law
provides as follows:
If it appears that any property, chose in action, credit or
effect discovered, or any interest therein, is claimed by
any person other than the judgment debtor, the court shall,
as in garnishment proceedings, permit or require the
claimant to appear and maintain his or her right. The
rights of the person cited (other than the judgment debtor)
and the rights of any adverse claimant shall be asserted and
determined pursuant to the law relating to garnishment
proceedings.
735 ILCS 5/2-1402(e) (West 2003). See also, Schwartz v. Yo-
Whip, Inc., NO. 92 C 2586, 1994 WL 201024, at *3 (N.D. Ill. May
18, 1994) (“This provision plainly entitled lien holders to
assert their rights before a turnover order is entered.”)
Illinois law permits any third party with an interest in the
assets at issue to appear and be heard on their claim.
Michaelson v. Schor, No. 95 C 6573, 1997 WL 282929, at *3 (N.D.
Ill. May 16, 1997) (citing Resolution Trust Corp v. Ruggiero, 994
F.2d 1221, 1226 (7th Cir. 1993)). “The procedure is left largely
to the judge’s discretion, and the proceedings are meant to be
swift, cheap, and informal.” Id.

Illinois law does not require the Bank to formally join this

lawsuit in order for it to be heard on its claim to the assets in


Alter a Final Waiver of Mechanics Lien.” In addition, the
Pension Fund argues, the Bank has not yet presented sufficient
evidence demonstrating its entitlement to the proceeds, or even
verified the exact amount of the debt it is owed. Finally, the
Pension Fund contends that the Illinois common fund doctrine
prevents the Bank from recovering from the accounts receivable
before the Pension Fund’s attorneys are paid their fees.

The Court will first address the black letter law regarding
security interests - which the Pension Fund neglects to do ~ and
then discuss the Pension Funds’s arguments asking the Court to
ignore that law.

A. Priority of Secured Interests

The law unequivocally shows that the Bank’s security
interest trumps Plaintiff's lien. In order for a security
interest to be created in favor of the creditor, the following
requirements must be met: (1) the creditor must give value to the
debtor; (2)the debtor must have or acquire rights in the
collateral; (3) the creditor and the debtor must agree that a
security interest shall attach to the collateral; and (4) either
the collateral must be in the possession of the creditor or there
must be a written security agreement signed by the debtor that
contains a description of the collateral. Metro. Life Ins. Co.
v. Am. Nat’l Bank & Trust Co., 682 N.E.2d 72, 76 (Ill. App. Ct.

1997); 810 Inn. Comp. Star. 5/9-203 (2002).


The Bank insists that it does; because it perfected its security
interest long before the Pension Fund received its judgment, the
Bank argues, black letter security law dictates that its security
interest is superior to the Bank’s judgment lien.

In its Response to the Bank’s Motion to Enforce its Adverse
Claim, the Pension Fund has not cited a single case or statute to
contradict the Bank’s well-supported position regarding the
Uniform Commercial Code (“UCC”) and the law of perfection.
Instead, the Pension Fund claims that the Bank's Motion should be
denied for six primary reasons. First, the Pension Fund claims
that this Court does not have the authority to entertain the
Bank’s Motion. Next, the Pension Fund insinuates that the timing
of the Bank's loans were suspicious and casts doubt upon whether
the Bank exercised due diligence in loaning the Debtor the sums
in question. The Pension Fund then insists - without relying on
any authority whatsoever- that permitting the Bank's security
interest to take priority over its judgment lien would be
contrary to the purposes of ERISA, the Trustees’ fiduciary
duties, and the equitable interests of the carpenters who labored
for these health insurance and retirement benefits.

The Pension Fund then argues that the Bank’s Motion is
premature, because Alter Designs, one of the many companies owing
the Debtor monies, contends that the amounts that it admits it

owes to the Debtor “will not be due until Tessio delivers to


appropriate UCC statement has already been filed - once the
debtor completes the work and is entitled to collect payment for
that work, See D&A Partners v. United States of America, No.
CV-96-1234-ST, 1997 WL 328010, at *4 (D. Or. Mar. 12, 1997) (“The
account receivable came into existence when Precision earned
monies due under the subcontractor agreement by performing work
on the project. Thus, the ‘property’ was ‘fixed’ by the time
Precision completed its performance on the project.”)

The Bank filed a UCC financing statement on July 10, 2002,
prior to the September 25, 2002 agreed judgment in favor of the
Pension Fund, and prior to Pension Fund’s filing of its Citations
to Discover the Debtor’s Assets on October 25, 2002. In
addition, the Bank argues ~- and the Pension Fund does not deny -
that the Debtor obviously became entitled to receive any future
accounts receivable prior to the entry of the judgment lien in
September of 2002, because the Debtor ceased all operations in
July of 2002. Thus, the Bank’s security interest in any accounts
receivable, due either before or after the UCC statement was
filed on July 12, 2002, was perfected prior to the entry of
judgment against the Debtor in September of 20023. Therefore,
the Bank’s perfected security interest is superior to the Pension

Fund’s judgment lien against the Debtor.

3 Notably, the Pension Fund does not even attempt to
dispute the Bank’s claim that the Bank’s security interest was
perfected prior to its lien.


te

‘Minute Order Form(06/97)
United States District Court, Northern District of Illinois
Name of Assigned Judge Sitting Judge if Other
or Magistrate Judge James F, Holderman than Assigned Judge Arlander Keys
CASE NUMBER 02 C 4987 DATE 6/3/2003
CASE Chicago District Council Carpenters vs. Tessio Construction
TITLE
[in the following box (a) indicate the party filing the motion, e.¢., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
(@)) o Filed motion of [ use listing in “Motion” box above.]
(2) Oo Brief in support of motion due
3) a Answer brief to motion due . Reply to answer brief due.
(4) Qa Ruling/Hearing on set for at
(5) o Status hearing{held/continued to] [set for/re-set for] on set for at
(6) o Pretrial conference[held/continued to) {set for/re-set for] on set for at :
(7) qa Trial[set for/re-set for] on at
(8) a [Bench/Jury trial] [Hearing] held/continued to at
(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) OlLocal Rule 41.1 CFRCP41{a)(1) OI FRCP41(a)(2).

ao =o [Other docket entry] Report and Recommendation submitted to Judge Holderman. It is

recommended that adverse claimant Oxford Bank & Trust’s Motion to Enforce an Adverse Claim [#17]

be granted. Al] matters relating to the referral of this action having been resolved, the case is returned

to the assigned judge. “He—
(il) [For further detail see order attached to the original minute order.]

No notices required, advised in open court.
3

No notices required. bomber of notices

AUN 0 4 2000

date dosketed

a | Notices mailed by judge’s staff.

Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form.

dockesing deputy initials

| Copy to judge/magistrate judge. 1ynod dele ‘sn -_
courtroom 42 | Hd t- nar iat) date mailed notice

FT/ deputy’s 2
initials
Fone .
itr lerk’s ICE mailing deputy initials:



obligations to the beneficiaries of their Fund has any bearing on
the issue at hand.

Finally, the Court is not unsympathetic to the plight of
the beneficiaries who may be impacted by the enforcement of the
Bank’s perfected security interest. However, as the Bank points
out, the equities are not clearly in the Pension Fund’s favor; it
is debatable whether the Bank’s financing or the carpenters’ work
played a more significant role in contributing to the creation of
the accounts receivable. More importantly, the certainty
provided to businesses by the UCC enables commercial enterprises
to analyze risk and make business decisions with a certain degree
of predictability. The Court is not inclined to abandon this
well-established system of relative reliability created by the
ucc, simply because it might work a hardship on the Pension
Fund’s beneficiaries in this case.
E. The Bank’s Adverse Claim is Not Premature

Next, the Pension Fund asserts that the Bank’s Motion is
premature, because: 1) at least one of the companies owing the
Debtor money has not received the necessary final waiver; and 2)
the Bank has not presented sufficient evidence demonstrating that
it is entitled to a sum equal to or in excess of the balance of
the Debtor’s accounts receivables.

With regard to the first prong of the Pension Fund’s

xipeness argument, the Court agrees with the Bank that the

11



question; the law only requires the Bank to appear. The Pension
Fund’s argument that the Court is without authority to entertain
the Bank’s Motion because the Bank is not a party in this case is
without merit.

Cc. The Bank’s Alleged Lack Of Due Diligence Has No Bearing On
the Issue of Priority

The Pension Fund then insinuates that it was improper for
the Bank to extend credit to the Debtor in the spring and/or
summer of 2002. However, the Pension Fund has not presented any
evidence in support of this assertion. More importantly, the
Pension Fund has not cited to any authority suggesting that this
“fact” would have bearing on the Court’s analysis.

D. The Pension Fund’s Equitable Arguments

The Pension Fund passionately argues that permitting the
Bank’s security interest to trump its judgment lien would be
contrary to ERISA and the Trustees’ fiduciary duties, and would
be terribly unfair to the carpenters who worked for the Debtor.
Notably, ERISA is devoid of any provisions that would authorize
this Court to disregard the Bank’s perfected security interest,
in favor of the Pension Fund’s judicially-created lien. Nor does
the UCC suggest that its provisions should apply less stringently
in an effort to alleviate harsh consequences when ERISA is merely
implicated. Further, the Court fails to see - and the Pension

Fund does not articulate -- how the Fund Trustees’ fiduciary

10



In this case, the Bank has established that it has a
security interest against the accounts receivables of the Debtor.
First, the Bank has given value to the Debtor by lending it
funds. Second, the Debtor has rights in the accounts
receivables, because the payments due are for services already
performed by the Debtor prior to it ceasing operations. Finally,
the Debtor and the Bank entered into a Security Agreement, which
describes the collateral covered under the Security Agreement,
and includes “[aJ1ll...Accounts....”

However, the law is clear that in order to have priority
over other creditors, attachment of a security interest alone is
insufficient. See, U.C.C. § 9-308. Instead, the party who first
perfects its security interest has the superior right in the
collateral. Internal Revenue Serv. v. McDermott, 507 U.S. 447,
449 (1993); U.C.C. § 9-322. Perfection of account receivables
only occurs when the financing statement is filed and the
security interest has attached. Slodov v. U.S. 436 U.S. 238, 257
n.22 (1978) (also noting that a perfected security interest is
superior to a judgment lien.)

However, a security interest in after-acquired property is
not generally perfected when the financing statement is filed,
but, rather, when the debtor acquires that property. McDermott,
507 U.S. at 449-51. Specifically, a security interest in after-

acquired accounts receivable is perfected - assuming the


future accounts receivables’. In July 2002, the Debtor ceased
operations and closed its business.

Although the Bank may have been unaware of the Debtor’s
failing financial health, the Pension Fund was acutely aware of
the problem. In March 2002, the Debtor ceased filing its
contribution reports and making its payments to the Pension Fund,
on behalf of the carpenters it employed. On July 15, 2002, the
Pension Fund filed suit against the Debtor, seeking to recover
the Debtor’s owed contributions, as well as its reasonable
attorneys’ fees and costs, pursuant to the terms of its
Collective Bargaining and Trust Agreements, Section 502 of the
Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §
1132 (West 2003), and Section 301 of the Taft-Hartley Act, 29
U.S.C. § 185 (West 2003). The case was assigned to Judge James
FE. Holderman.

On September 25, 2002, an Agreed Judgment was entered
against the Debtor in favor of the Pension Fund in the amount of
$192,672.83, thereby terminating the case. On October 25, 2002,
the Pension Fund filed its Citations to Discover the Debtor’s
Assets, seeking to claim the monies awarded to it. In an attempt

to discover monies owed to the Debtor, which could then

2 This Report & Recommendation later distinguishes between

perfecting accounts receivable that the Debtor was entitled to at
the time the UCC statement was filed, and future accounts
receivable, which would not be perfected until the Debtor was
entitled to be paid on those accounts.

3


the Debtor, nor is it a subrogee of a beneficiary of the Pension
Fund.

To the contrary, the basis of the Bank’s recovery is
entirely independent of the agreed judgment obtained by the
Pension Fund; the Bank’s recovery is based upon the Debtor’s
default, the loan agreement with the Debtor, and the Bank’s
perfected security agreement. Illinois courts have not extended
the Common Fund Doctrine in the manner suggested by the Pension
Fund, and this Court declines to recommend such an extension of

Illinois law in this case.

14


BACKGROUND FACTS

The Debtor is a defunct construction company, which has

employed numerous skilled trade
through the years. To fund its

payroll, the Debtor relied upon

commercial lending institutions.

Debtor entered into their first
periodically reviewed the terms

balance to reflect the Debtor’s

workers, including carpenters,
various construction projects and
construction loans from

In 1998, the Bank and the
loan agreement. The Bank
of the loan, and adjusted the

needs and financial status.

As collateral for the loan, the Bank took a security

interest in,

accounts receivable. On August

first Uniform Commercial Code (“UCC”)

security interest in the Debtor’

the Bank reduced the commercial

among other things, the Debtor’s existing and future

17, 2000, the Bank filed its
statement, perfecting its
s collateral. In dune of 2002,

loan amount from $1,000,000 to

$700,000, but the Bank insists that it was unaware of any

financial problems that the Debtor may have been experiencing.

The Bank filed a second UCC statement! on July 10, 2002, again

perfecting its security interest in the Debtor’s existing and

1 Specifically, the Security Agreement describes the
collateral as all “Inventory, Chattel Paper, Accounts, Equipment

and General Intangibles.”

See Bank’s Mot.,

Ex, A. The UCcc

financing statement describes the collateral exactly as it is
described in the Security Agreement, but further includes the
language “whether any of the foregoing is owned now or later
acquired.” See Bank’s Mot. Ex. A, B.

5
2


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

CHICAGO DISTRICT COUNCIL OF
CARPENTERS PENSION FUND
Plaintiff,

Case No. 02 C 4987

Judge James F, Holderman
Vv.

TESSIO CONSTRUCTION CO.,
Magistrate Judge
Arlander Keys

Defendant.

TO: THE HONORABLE JAMES F. HOLDERMAN
UNITED STATES DISTRICT COURT JUDGE

REPORT AND RECOMMENDATION

Currently before this Court is adverse claimant Oxford Bank
& Trust’s (the “Bank”) Motion to Enforce an Adverse Claim.
Plaintiff, Chicago District Council of Carpenters Pension Fund
(the “Pension Fund”), and Defendant, Tessio Construction, Inc.
(the “Debtor”), entered into an Agreed Judgment to recover
contributions that the Debtor owed to the Pension Fund. The
Pension Fund sought to satisfy the Agreed Judgment with the
proceeds from the Debtor’s accounts receivable. The Bank
subsequently appeared in this action, contending that, as the
Debtor’s sole secured creditor, it alone is entitled to the
Debtor’s accounts receivable. For the reasons set forth below,

the Court recommends granting the Bank’s Motion.

“Os



Debtor’s failure to supply one of the many cited general
contractors with sworn statements and waivers does not render the
Bank’s claim premature. Neither the general contractor nor the
Pension Fund deny that the work in question was performed or that
the amounts are due, and there is no indication that the Debtor
cannot or will not produce these documents. Rather, the
contractor merely objects to releasing the sums until it receives
the customary waivers. The delay in forwarding these documents
to Alter Designs does not render the Bank’s claim of entitlement
to the Debtor’s accounts receivable premature. See generally,
D&A Partners, 1997 WL 328010, at *4 (a security interest in
accounts receivable is perfected when a subcontractor performs
work on the project.)

After the Pension Fund complained about the Bank’s lack of
supporting documentation, the Court advised the Bank to bolster
its claim with evidence of the default and the amount due and
owing. The Bank attached supporting affidavits to its Reply
Brief, which detailed the facts leading up to the default, and
identified the elements of the entire amount due, totaling
$444,102.02, The Court then offered the Pension Fund the
opportunity to respond to that evidence. The Pension Fund did

not directly respond to the evidence, but instead asked that, if

4 This amount consists of $417,991.14 of the principal

outstanding balance; $11,649.54 of Interest Accrued; $1,315.57 in
late charges and $13,145.76 in attorneys’ fees and costs.

12


Conclusion
For the foregoing reasons, this Court finds that the Bank’s
perfected security interest is superior to the Pension Fund’s
Agreed Judgment, and that the Pension Fund’s arguments for
ignoring the superiority of the Bank’s security interest are
without merit. Therefore, the Court recommends that the district

court grant the Bank’s Motion.

DATED: June 3, 2003 RESPECTFULLY SUBMITTED:

(ens a=

ARLANDER KEYS SSD
United States Magistrate Judge

Counsel have ten days from the date of service to file objections
to this Report and Recommendation with the Honorable James F.
Holderman. See FED. R. Civ. P. 72 (b); 28 U.S.C. § 636 (b) (1).
Failure to object constitutes a waiver of the right to appeal.
Egert v. Connecticut Gen. Life Ins. Co., 900 F.2d 1032, 1039 (7th
Cir. 1990).

15