MorrisAnderson

Pia Thompson, Gould & Ratner, LLP

What is a Sovereign Citizen?
By way of background, on the chance you are not familiar with the Sovereign Citizen Movement, I will explain it. Originally begun in the 1970s and fully developed by the 1980s it is a loosely organized collection of groups and individuals who are anti-government extremists who believe that even though they live in the United States, they are separate or "sovereign" from the United States. They believe that they don't have to answer to any government authority, including courts, taxing entities, motor vehicle departments or law enforcement. This last bit creates some contradictions in sovereign citizen behavior because one of their favorite tactics is the filing of liens against those entities and individuals seeking to collect a debt from them.

How it works is this, despite their being sovereign and not recognizing the currency of the United States disgruntled obligors have been attempting to evade obligations or otherwise retaliate against creditors by filing astronomical liens against banks, attorneys, and government employees. Not surprisingly, these attempts have been unsuccessful.*  But as we all know in the legal and distressed fields, just because someone will not prevail does not mean that it wont cause problems getting to your closing date or that you wont incur fees and costs in order to get the liens and other nonsense filed by the Sovereign Citizen cleaned up in your chain of title.

The rationale is as follows and there are many helpful web sites to walk you through the becoming sovereign process including http://discharge-debt.com and http://www.famguardian.org. Some of the supposed advantages of becoming sovereign and one that is most relevant to us in the turn around community is the ability to discharge one's debts by bonds. Despite a rejection of all things government and contractual there is an abiding love for the Uniform Commercial Code in the Sovereign community. One of the touted benefits of being a Sovereign is the ability to use Section 3-603(b) to pay off all debts. Paying off one's debts with bonds cannot be refused, the argument goes, because a debt tendered and refused is a debt discharge to the amount of tender. If the creditor refuses the tender, the Sovereign can "turn them in" to the US Treasury for sedition against the US.

You may be familiar with the Sovereign Citizen movement as it did make an appearance in the Chicago based Giordano's pizza chain bankruptcy proceeding. The owners of the debtor, became involved with Marshall Home a notorious Sovereign Citizen and Home filed a $150 million lien against the debtor's assets. The rationale behind filing the lien was for Home to be a priority secured creditor who would then be able to control the business and return it to the Apostolous absent any debt. In affidavits the owners, Mr. and Mrs. Apostolou, stated that they were American Freemen who did not recognize United States currency. Perhaps debtor's counsel had no inkling of these proclivities, because days later debtor's counsel moved to withdraw, citing "irreconcilable differences. Judge Squires who presided over the case, appointed a trustee to oversee the business. Mr. Apostolou was later enjoined from setting foot at the debtor's places of business. As will be discussed later, Sovereign Citizens have a tendency to lash out at individuals who operate with the American legal system to enforce contracts and laws against obligors. In this vein in the Giordano's case there were reports that calls were made to the sheriff in order to have the Chapter 11 trustee arrested. It is conduct like this against involving professional in restructuring cases that prompts this article.

Why, as a turnaround professional, do you care about Sovereign Citizens?
The fact that this movement exists is relevant to the turnaround professional in two ways. (1) If you are faced with one of these people as perhaps the most recent owner of the business prior to bankruptcy and/or the appointment of a trustee you may be faced with trying to sell assets that are encumbered by outrageous liens and other similar clouds on title. (2) If you have one of these people involved even tangentially in one of your deals you face exposure of having this Sovereign Citizen place liens against your home and take other steps against you personally. The question then becomes what can you do about the cost and expense of freeing yourself from these burdens?

Your Deal & The Sovereign Citizen
While the liens filed by Sovereign Citizens can create a cloud on title of the assets you are seeking to sell or purchase (depending on your position on the deal), there are three ways to get around the cloud. The first and easiest is to have Chicago Title insure over the cloud. In my experience with respect to real estate, Chicago Title has been willing to provide title insurance with the Sovereign Citizen liens in place. I surmise that its rationale for doing so lies in the fact that it is near impossible to imagine a scenario where such a lien will be upheld so the risk to the title insurer is slim to none.

A second way (and necessary when the liens attach to assets other than real estate), is to have this action happen in a state that has already revised Article 9 of the UCC and prohibited such conduct. There is such a bill pending in Illinois, Senate Bill 1692 (the full text may be found at http://tinyurl.com/75s2ddc). In addition to criminalizing bogus lien filings and imposing steep statutory fines, it would create a mechanism whereby a victim may have such fraudulent liens removed simply and inexpensively by providing an affidavit explaining that the financing statement is fraudulent. The law, if enacted, will also provide civil remedies including the recovery of damages, and the award of fees and expenses and punitive damages. The recovery of fees and damages is positive, but probably rather unlikely. If one were to realize such a judgment one would most surely be in a position of having to garnish wages, bank accounts or other assets. One does not envision Sovereign Citizens paying judgments voluntarily. The real advantage of a statute like this is the ability to avoid option three discussed below. While only a handful of states have adopted this key revision to Article 9 and we can hope here in Illinois that Senate Bill 1692 will be enacted into law soon.

The final way to deal with this situation and close the deal with a buyer that will not close with the Sovereign Citizen liens in the chain of title is to initiate a quiet title action. Depending on the parties involved in addition to a common law quiet title action, you may be able to avail yourself of the remedies provided by the federal Declaratory Judgment Act, 28 U.S.C. § 2201, et seq In the event that your Sovereign Citizen saboteur has filed a maritime lien, 46 U.S.C. § 31343(c)(2) provides a right of action to parties aggrieved by an improperly filed maritime lien, and arguably 46 U.S.C. § 31309 provides a civil penalty of up to $10,000 against the fraudulent maritime lien filer. The cause of action brought against the Sovereign Citizen should seek (a) a judgment permanently enjoining the defendant from directly or indirectly claiming an interest in the property by way of further lien filings or otherwise; (b) a declaratory judgment declaring that the defendant's encumbrance is of no force and effect; (c) a judgment ordering defendant's encumbrance be cancelled, removing the cloud cast on title by defendant's adverse claim and quieting title to the property; and (d) reasonable attorneys fees, expenses of litigation and costs of suit. One should also note that pursuant to Federal Rule of Civil Procedure 65(a)(2) the movant may seek to have the court consolidate the preliminary injunction hearing with the trail on the merits. This can significantly speed up the proceedings and therefore possibly reduce fees and expenses related to the litigation.

You, as a private citizen, and the Sovereign Citizen
Here is the problem. Sovereign Citizen's are reckless and lash out at anyone who pursues them. This includes agents and hired professionals. There are several reported decisions of criminal sentences imposed against the filers of fraudulent liens, when they file such liens against federal employees or agents of the federal government.**  You as a turnaround professional are not a federal employee. Unless there is a statute in your jurisdiction similar to Illinois Senate Bill1692 discussed above, you are on your own to clear any fraudulent lien off of your residence, for example.

Is this something you should address in your engagement letter? The problem with this is that you do not necessarily know that you are dealing with a Sovereign Citizen in advance. While many members of the movement are true believers, there are many that one must believe are nothing other than opportunists, viewing this strategy as yet another tactic in avoiding debts and holding on to their company. So to provide for this at the outset of an engagement is next to impossible. Also, you are most likely dealing with a troubled business, what is the value of any sort of indemnity from them in any event? The issue will then be whether your employer will handle any expenses incurred in clearing your personal assets of improper liens that were put on solely as a result of your professional activities.

In the matters in which I have been personally involved that included Sovereign Citizens and the recent Giordano's bankruptcy case, Judges do not suffer Sovereign Citizen nonsense. While they need to deal with pleadings as filed and the filing of a lien is not done with court approval, once a matter involving Sovereign Citizens is properly brought before a court, chances are better than even that the court will side with you and will attempt to help you out quickly. This of course does not mean that it will be free or that judges have authority to award fees and costs. As a practical matter, if you are "lucky" enough to get involved in litigation with a Sovereign Citizen who participates in the litigation (rather, unlikely) you should explore seeking some sort of sanctions for any pleading filed that defends the initially filed fraudulent liens. Otherwise you should find out from your employer whether it will assist you in the event your are personally harmed by working on an engagement that involves a Sovereign Citizen. If the answer from your employer is no, you should strongly consider withdrawing from the engagement as soon as any Sovereign Citizen issues arise unless you have a high degree of confidence that you will be able to extricate your property from any such fraudulently filed liens with minimum time and expense.

* See United States v. Davenport, 2011 WL 1155191 (E.D. Wash. March 29, 2011) (denying defendant's motion to dismiss a criminal indictment alleging that the defendant had filed a $5 billion "maritime" lien against federal government employees) Leitner v. LaHood, 2010 WL 2539698 (W.D.N.Y. June 18, 2010) (sua sponte motion denying with prejudice a $48 billion "maritime" lien filed against federal government employees because they were "fantastic, delusional and incredible"); Chrystal v. Huntington Nat'l Bank, 2010 WL 1965870 (M.D. Fla. May 17, 2010) ( striking a "Sovereign Cit6izen/Tax Protestor's" $2 trillion "maritime" lien filed against a creditor bank); In re Stage Door Development, Inc., 2009 B.R. 238500 (Bankr. M.D. Ala. July 31, 2009) (recommending that the district court void a series of $17.6 billion "maritime" liens and UCC financing statements that the debtor had filed against its creditor bank, the bankruptcy trustee, and the purchase of certain assets of the debtor, which filings were "invalid, illegal and wholly without support or merit.").

** See http://www.justice.gov/briefing-room.html for press releases regarding sentences imposed on violators, specifically Sept. 20, 2011 (FL) and June 7, 2011 (CA) for a couple of examples.

Pia Thompson is a Partner at Gould & Ratner, LLP in Chicago. She practices in the areas of commercial restructuring, bankruptcy and creditors’ rights and litigation. Pia works on behalf of both lenders and borrowers on workouts and also represents companies in the reorganization and sale of their businesses. Pia has been recognized as an Illinois SuperLawyer in 2010 and in 2011, an honor conferred on only 5 percent of Illinois lawyers, and was named one of the 40 Illinois Attorneys Under Forty to Watch by the Chicago Daily Law Bulletin in 2005. Pia has also been named an Illinois Leading Lawyer for 2011 in the areas of Commercial Litigation, Creditor’s Rights/Commercial Collections and Secured Transactions by the Leading Lawyers Network. Pia earned her Bachelor’s degree, cum laude, in Economics and Political Science from Wellesley College and her Juris Doctor from the University of Michigan Law School. Pia’s professional affiliations include membership in the International Women’s Insolvency and Restructuring Confederation, the Turnaround Management Association, the American Bankruptcy Institute and the Coalition of Women’s Initiatives in Law Firms.