UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

UNITED STATES OF AMERICA, )

) 04 CV 4138

Plaintiff, )

)

v. ) Magistrate Judge Young B. Kim

)

CAPITAL TAX CORP., et al., )

) May 31, 2012

Defendants. )

MEMORANDUM OPINION and ORDER

Before the court is the government’s petition for rule to show cause why SunWest

Mortgage Company, Inc. (“SunWest”) and Defendant William Lerch should not be held in

contempt for violating the citations to discover assets and this court’s July 19, 2011

garnishment order. For the following reasons, the petition is denied:

Background

On January 13, 2011, the government served a citation to discover assets on SunWest.

(R. 377.) SunWest responded by providing documents showing that it was paying Lerch

$1,379.77 per month under a reverse mortgage loan agreement. (R. 433,June 29, 2012 Mem.

Opinion and Ord. at 2-3.) On June 29, 2011, this court granted the government’s motion for

a garnishment order with respect to the $1,379.77 monthly payments. (Id. at 10.) The

garnishment order states that SunWest must submit to the government the stream of

$1,379.77 monthly payments it owed to Lerch. (R. 440.) The court further ordered SunWest

to continue to submit the stream of these payments until the debt to the government was fully

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paid or “until SunWest no longer ha[d] custody, possession or control of property belonging

to Lerch,” or until subsequent order of the court. (Id.) In response, SunWest forwarded the

February and March 2011 payments, totaling $2, 759.54, to the government. (R. 490, Govt.’s

Pet. at 1.)

When the government inquired of SunWest regarding the deficiency in the amount

turned over, SunWest explained that three months prior to the court’s issuance of the

garnishment order, Lerch had instructed SunWest to terminate the monthly payments to him.

(R. 490, Ex. B.) Under the relevant provisions of the reverse mortgage agreement, Lerch had

three ways of borrowing money from SunWest: (1) monthly payments; (2) a line of credit

without monthly payments; or (3) a line of credit with monthly payments. (R. 513-1, Loan

Agreement at 2-3.) On March 11, 2011, without informing this court or the government,

Lerch requested that SunWest stop his monthly payments and issue a line of credit instead.

SunWest honored the request and converted the amount available for loan advances

($183,525.18) to a line of credit (“the conversion”). (R. 490, Ex. B.) SunWest, however,

froze this line of credit because of this pending matter between the government and Lerch.

(Id.)

The government petitions the court pursuant to Federal Rule of Civil Procedure 69

and Illinois Supreme Court Rule 277(h) for a rule to show cause. Pursuant to Rule 69, this

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Rule 69(a)(1) states that:

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A money judgment is enforced by a writ of execution, unless the court directs

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court must follow Illinois procedural rules to address the issues the government raises in its

petition. According to Illinois Supreme Court Rule 277(h), “[a]ny person who fails to obey

a citation, subpoena, or order or other direction of the court issued pursuant to any provision

of this rule may be punished for contempt.” The government claims in its petition that Lerch

violated the citation to discover assets served on him when he requested the conversion and

that SunWest violated the citation and the July 19, 2011 garnishment order when it honored

Lerch’s request and failed to turnover additional sums to the government. (R. 490 at 2.) The

government, however, did not develop or identify any legal support for its arguments in its

petition.

On March 7, 2012, the court held a motion hearing. The court expressed its opinion

that the issue of whether Lerch and SunWest violated any citations or garnishment orders

depended primarily on the ownership of the remaining balance of the reverse mortgage

($183,525.18). The government took the position that the court need not ask the question of

who has the ownership interest in this balance because it argued that when Lerch directed

SunWest to terminate the monthly stream of income, he altered the status quo, and thus

violated the citation. The proper remedy for this violation, according to the government, is

to order SunWest to restore the stream of income and then to submit those payments to the

otherwise. The procedure on execution—and in proceedings supplementary to

and in aid of judgment or execution—must accord with the procedure of the

state where the court is located, but a federal statute governs to the extent it

applies.

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government until the balance is depleted. Lerch argued at the hearing that unless and until

a monthly loan advance is paid out by SunWest, the funds available to him under the reverse

mortgage contract are not his property, and therefore he does not own the balance available

as a line of credit. He argued that to hold otherwise would amount to the court forcing Lerch

to borrow money using his exempt real property as collateral.

At the motion hearing, the government requested time to file a more comprehensive

memorandum of law in support of its petition. Lerch and SunWest likewise asked for time

to oppose the petition in writing. The court granted the requests. Despite securing leave of

court, the government chose not to file any memorandum of law in support of the assertions

raised in its petition or the arguments it made at the motion hearing. Both Lerch and

SunWest filed a response opposing the government’s original petition. The government

timely filed a reply on May 7, 2012.

A brief discussion of the government’s reply brief is necessary before addressing the

merits of its petition. In general, arguments raised and/or developed for the first time in reply

briefs are considered waived and forfeited. Broaddus v. Shields, 665 F.3d 846, 854 (7th Cir.

2011); Harper v. Vigilant Ins. Co., 433 F.3d 521, 528 (7th Cir. 2005) (holding that failure

to develop an argument until the filing of a reply brief constitutes waiver). In this case,

despite having been given the chance to submit a brief supporting the arguments it made

during the motion hearing, the government waited until its reply brief to develop its argument

that both Lerch and SunWest were barred from implementing the conversion. (R. 514,

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Govt.’s Reply at 3-6.) Also, the government waited until its reply brief to argue that because

Lerch failed to advise the court of the conversion prior to the court’s issuance of the

garnishment order, he should be barred under the doctrine of res judicata from raising the

conversion as a way to avoid the garnishment order. (R. 514, Govt.’s Reply at 7-8.) Given

that the government was aware of the relevant events when it filed its petition, this argument

should have been raised in its opening brief. Reply briefs are for replying to the arguments

and facts raised by the opposing parties and not for raising facts or arguments that could have

been asserted in the opening brief. The government had two chances to raise and to develop

its arguments—when it first filed its petition and when the court allowed it to supplement its

petition with a supporting memorandum of law—but it failed to avail itself of those chances.

As stated in its order of May 10, 2011, the court will not consider arguments raised for the

first time in its reply brief. (R. 517.)

Analysis

When a party files a petition or a motion for a rule to show cause, “the moving party

is asking only for a preliminary order directing the alleged contemnor to show cause why the

court should not find him in contempt.” U.S. S.E.C. v. Hyatt, 621 F.3d 687, 696 (7th Cir.

2010) (emphasis in original). “The purpose of a [show-cause] motion is to persuade the court

that there should be a hearing at which the factfinder will ultimately evaluate whether a

finding of contempt is appropriate on the evidence presented.” Sommerfield v. City of

Chicago, 252 F.R.D. 407, 413 (N.D. Ill. 2008). The issue in this petition is not whether the

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court should hold Lerch and SunWest in contempt and impose sanctions, but whether the

court should put them on notice that they may face sanctions if they fail to show good cause

why they should not be held in contempt. The burden of establishing the appropriateness of

a hearing is less demanding than that for establishing contempt, requiring only “a preliminary

assessment that the facts presented implicate” that the alleged contemnors are in violation

of court orders. Id. at 413-14 (quotation omitted). Although the mere insistence on a hearing

“is never enough,” what is required is merely a threshold factual showing made up of

“sufficiently definite, specific, non-conjectural and detailed” allegations along with a

material fact dispute that will affect the motion’s outcome. Id. at 414.

In this case, the government failed to reach the required threshold. The government

refers to the citations to discover assets and the July 19, 2011 garnishment order in its

petition. The citations served upon Lerch and SunWest state in relevant part that:

YOU ARE PROHIBITED from making or allowing any transfer or other

disposition of, or interfering with, any property not exempt from execution or

garnishment belonging to you, the judgment debtor, and from paying over or

otherwise disposing of any money not so exempt, which is due or becomes due

to you, the judgment debtor, until further order of court or termination of the

proceedings. You are required to withhold the payment or transfer of any

money or other property no more than twice the amount of the unsatisfied

judgment.

(R. 377, Citation Served on SunWest; R. 455, Citation Served on Lerch (emphasis in

original).) And the garnishment order directs SunWest to “submit to the [government] the

stream of $1,379.77 monthly payments it owes [Lerch] which represents Lerch’s nonexempt

interest in those funds.” (R. 440.) The record shows that in March 2011—after the service

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of the citations but before the entry of the garnishment order—Lerch requested the

conversion. (R. 490, Ex. B.) SunWest honored the request by terminating the $1,379.77

monthly loan advances to Lerch and by creating a line of credit in the amount of

$183,525.18. (Id.) The government asserts that by stopping the loan advances, Lerch and

SunWest essentially disposed of and interfered with non-exempt property in violation of the

citations. The government further asserts that by failing to submit the loan advances to the

government, SunWest violated the garnishment order. (R. 490 at 2-3.)

In response, Lerch raisesthree arguments why his conversion request does not put him

in violation of the citation to discover assets. First, he argues that he did not interfere,

transfer, or otherwise dispose of non-exempt property that belongs to him or is due to him

because the funds that are available for him to borrow are not funds that belong to him.

(R. 513, Lerch’s Resp. at 3.) Second, Lerch submits that SunWest was not obligated to make

monthly loan advances unless he continued to borrow money. Third, Lerch argues that if the

funds available for borrowing are deemed funds that belong to him, these funds are exempt

under Florida’s homestead exemption. (R. 513, Lerch’s Resp. at 5.) Because the court is

persuaded by the first two arguments, it need not address the third.

The government points out in its petition that Lerch never disclosed to the government

or to the court that he had effectuated the conversion when the court was addressing the issue

of whether a garnishment order should be issued as to the monthly loan advances. (R. 490

at 2.) But this point is neither here nor there. The issues in the government’s May 13, 2012

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motion for a garnishment order against SunWest centered around the monthly loan advances

and not the total value of the funds available for borrowing under the loan agreement. The

government did not seek to have SunWest turnover the entire balance of the reverse

mortgage. As the court commented during the motion hearing, the court expected Lerch to

terminate the loan advances as a result of its ruling, which skewered his incentive to continue

to borrow money under the reverse mortgage. The court also noted in its order dated July 22,

2011, that the court’s ruling granting the garnishment order against SunWest did not force

Lerch to “continue to borrow” money from SunWest. (R. 448.)

While the government claims that Lerch was prohibited from exercising his

contractual right to stop borrowing money from SunWest, it fails to provide any legalsupport

for this proposition. Even the Supreme Court decision the government belatedly cited in its

reply brief, Drye v. United States, 528 U.S. 49 (1999), fails to support the government’s

position. In Drye, the petitioner became entitled to his deceased mother’s estate worth about

$233,000 in 1994. Id. at 52-53. At that time, the petitioner owed the federal government

$325,000 in back taxes, and the government had valid tax liens against the petitioner’s

“property and rights to property.” Id. at 53. To prevent the assets from going to the

government, six months after he had been appointed the administrator of the estate, the

petitioner disclaimed his interests in the estate. Id. By doing so, the estate passed to the

petitioner’s daughter who then created a family trust funded by the proceeds of the estate.

Id. The petitioner was then made one of the beneficiaries of this family trust. Id. at 53-54.

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Under the applicable state law, the assets of this trust were shielded from creditors seeking

to satisfy any debts of the beneficiaries. Id. at 54. The government placed a tax lien on the

assets of the trust anyway and sought to seize the assets to satisfy the petitioner’s back taxes.

Id. The trial court sided with the government that the assets were subject to seizure and the

United States Court of Appeals for the Eighth Circuit affirmed. Id.

In reviewing the Eighth Circuit’s decision to affirm, the Drye Court considered the

question of whether the petitioner’s right to disclaim his interest in his mother’s estate was

itself property or a right to property. Id. at 60-61. The Drye Court concluded that it was,

because the petitioner exercised control over the assets of the estate when he disclaimed his

interests. Id. The court noted that it was “beyond debate” that the petitioner “had, at his

mother’s death, a valuable, transferrable, legally protected right to the property at issue.” Id.

at 60. The Drye Court explained that the petitioner exercised control over the assets because

by exercising his right to disclaim his interests, he exercised his power to channel the value

of the assets to “a known other”—his daughter. Id. at 61.

Here, the circumstances are different. At no point did Lerch have control over the

funds in the account at SunWest. Under the preexisting reverse mortgage agreement, Lerch

had agreed to borrow $183,525.18 from SunWest over time in one of three ways. Originally,

he chose monthly payments. But when he switched gears in March 2011 and opted for a line

of credit, he did not “exercise control” over the pot of money the way the petitioner did in

Drye. Rather, he changed the method by which he would borrow money controlled by

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SunWest. He did not channel the funds to anyone particular or create a situation that would

permit him to withdraw or borrow money without triggering the garnishment order. The

balance remains with SunWest and SunWest is free to do what it wishes with the funds, as

long as its actions do not violate the demands of the citation or the orders of this court.

Under Drye, Lerch’s contractual right to stop borrowing money does not constitute

“property” or “rights to property.” Having resolved the government’s assertions against

Lerch in Lerch’s favor, there is no need to address the assertions against SunWest.

Conclusion

For the foregoing reasons, the government’s petition for a rule to show cause is

denied.

ENTER:

_________________________________

Young B. Kim

United States Magistrate Judge

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