Contempt For Violating Charging Order In Brockley Or Not?

If a member of an LLC or partnership is a judgment debtor, their curiosity could be topic to a charging order that locations a lien on the curiosity and requires that each one distributions be redirected to the creditor. If the LLC or partnership fails to adjust to the charging order, then the LLC or partnership and the non-debtor members could be held in contempt for failing to adjust to the charging order. However what if the debtor not held the curiosity on the time the charging order was granted? Can these different events nonetheless be held in contempt for violating the charging order?

In 2004, Mark and Annesse Brockley bought actual property to Allen Rosenfeld and John McGill. The acquisition value was $2 million and seller-financed: Rosenfeld and McGill promised to make month-to-month funds to the Brockleys for 20 years. If there was a default, the complete quantity due accelerated after 30 days.

McGill quitclaimed his curiosity within the property to Rosenfeld, who in 2007 ― and with the permission of the Brockmans ― assigned his deed to a South Dakota entity referred to as GG&E LLC. At the moment, GG&E had three members: Merrill Ellis, Ronald Gutman and Clarence Griffin. In return, Ellis, Gutman and Griffin every agree to ensure the quantity owed to the Brockmans. Later, in 2010, GG&E formally modified its title to G Squared LLC.

The Brockmans stopped receiving funds from G Squared (once more, the previous GG&E) in 2014, and thus sued G Squared, Ellis, Gutman and Griffen for the stability due.

In the meantime, in 2011, Griffen and one other fellow, Michael Trucano, created one other South Dakota firm referred to as NMD Enterprise LLC to accumulate a resort and on line casino in Deadwood, South Dakota, and with Griffen and Trucano every holding a 50% possession in NMD Enterprise. The 12 months after the Brockmans sued him, Griffen transferred his 50% curiosity in NMD Enterprise to himself and his spouse, Kimberly Griffen, as tenants by everything. At the moment, the Giffens had been domiciled in Florida, and Trucano ― who had consented to the project as the opposite member of NMD Enterprise ― apparently lived in Nevada. The date of those transfers was March 30, 2015.

Simply two weeks after these transfers, on April 15, 2015, the Brockleys had been granted partial abstract judgment of their favor in opposition to all of G Squared, Ellis, Gutman, and Griffin.

Subsequent, on June 6, 2015, Trucano transferred his personal 50% curiosity in NMD Enterprise to the Trucano Belief, a belief wherein he and his spouse had been trustees.

We now skip ahead about 20 months to February 3, 2017. On this date, the courtroom granted the Brockleys’ software for a charging order in opposition to Griffen’s curiosity in NMD Enterprise, which required NMD Enterprise to make any distributions funds owed to Griffen to the Brockleys instantly as a substitute. Be aware, importantly, that this was nearly two years after Griffen had transferred away his curiosity to the tenancy by the entireties with Kimberly,

Skipping forward nearly precisely one other two years, to February 4, 2019, we discover that NMD Enterprise modified its title to Hickoks Resort & Suites LLC, and later that 12 months agreed to promote the Deadwood resort and on line casino to a purchaser.

Recall that Hickoks (previously NMD Enterprise) was now owned 50% by the Trucano Belief and that Michael Trucano was not a judgment debtor to the Brockleys. The opposite 50% of Hickoks was owed by Griffen and his spouse as tenants by the entireties. In July of 2020, Hickocks and the Trucano Belief entered right into a redemption deal whereby upon the shut of the sale of the resort and on line casino, Hickoks would mainly redeem (purchase out) the 50% curiosity owned by the Trucano Belief for 50% of the sale value of the resort and on line casino, and in addition that Trucano would stop to have any additional relationship with Hickoks. In different phrases, after the sale of the resort and on line casino, Trucano would take his 50% and go away, leaving Griffen and his spouse proudly owning 100% of Hickok as tenants by the entireties.

And now the inevitable plot twist: Shortly earlier than the sale was consummated, Clarence Griffen handed away on December 14, 2020. This left Kimberly Griffen because the 50% member of Hickoks with Trucano who owned the opposite 50%.

The sale of the resort and on line casino had been set for December 29, 2020. Curiously, the attorneys for the Kimberly Griffen tried to get Trucano to open a brand new Florida checking account for Hickoks to absorb the proceeds of the sale. Trucano refused, and as a substitute informed the closing agent (Dakota Title) to easily deposit 50% of the proceeds in Hickoks present checking account in Deadwood. That is what occurred, whereupon Trucano took his 50% reduce from the sale of the resort and on line casino into his belief for the redemption of his 50% curiosity in Hickok and severed himself from the corporate.

This left Griffen and his spouse Kimberly holding the opposite 50% of the sale proceeds inside Hickok, which LLC they now owned 100%. Quickly thereafter, an lawyer named Haven Caught instructed Dakota Title to wire-transfer the opposite 50% of the sale proceeds to a brand new account for Hickok at First House Financial institution in Florida, and Dakota Title did as instructed. Hickoks then distributed these funds to Kimberly.

Studying of all this, in April of 2021, the Brockleys introduced a movement asking {that a} movement to point out trigger be issued why the next individuals shouldn’t be held in contempt for not complying with the 2017 charging order: Hickoks, Griffen’s Property, Kimberly Griffen, Trucano and the Trucano Belief. The courtroom held hearings over October and December of 2021. On account of these hearings, the courtroom held that no person needs to be held in contempt. The Brockleys then appealed to the South Dakota Supreme Court docket, resulting in the opinion that I shall subsequent describe in Brockley v. Ellis, 2023 WL 6303748 (S.D., Sept. 27, 2023).

The salient subject was clearly whether or not the 2017 charging order had been violated within the first place or, extra particularly, whether or not the a part of the charging order requiring that distribution owed to Griffen be re-directed to the Brockleys as a substitute. Very merely, if the charging order had not been violated, then there may very well be no contempt.

The best points had been these involving Trucano and the Trucano Belief. Primarily, the Brockleys argued that by taking all of his personal cash out by the redemption deal, Trucano successfully made a de facto distribution to Griffen as a result of Griffen ended up with 100% of Hickoks. The courtroom dismissed this argument by mentioning that whereas Trucano was nonetheless a member of Hickoks, no cash was distributed to Griffen within the distributional sense, i.e., cash popping out of Hickoks. As a substitute, the cash solely left Hickoks later after Trucano had disassociated himself from Hickoks. So, Trucano did nothing unsuitable, didn’t violate the charging order, and there have been no grounds in any respect to carry him in contempt.

The difficulty involving Hickoks and Kimberly Griffen had been tougher. The courtroom summarized the state of affairs this fashion:

“After the redemption of the Trucano membership, Kimberly was the one remaining member as a result of Clarence had handed away earlier than the sale. As a part of the closing, the remaining proceeds from the sale of the resort and on line casino had been deposited into Hickoks’ account in Florida. Though it isn’t fully clear from the file the way it occurred, it’s undisputed that Hickoks finally distributed these proceeds to Kimberly. Whether or not this distribution violated the charging order will depend on whether or not it constituted a distribution of an quantity owed to Clarence. The circuit courtroom decided that, upon his loss of life, Clarence’s membership curiosity handed as a matter of regulation to Kimberly because the surviving tenant by everything. Consequently, the circuit courtroom concluded that Hickoks’ subsequent distribution to Kimberly didn’t violate the charging order.”

The Brockleys made two arguments in opposition to this holding. The primary argument was that the Griffens couldn’t personal the Hickoks curiosity in tenancy by the entireties within the first place given that South Dakota doesn’t enable for property to owned that means. The second argument was that Clarence Griffen’s project of his curiosity to the tenancy by the entireties had not been property achieved.

A digression is required right here. Of us often personal property of their particular person capacities, however property could be owned in quite a few different methods. As right here, property could be owned in a enterprise entity corresponding to an LLC (or an organization or partnership). Property will also be owned in a belief, as with Trucano’s curiosity. After which property could be owned by what quantities to a relationship, corresponding to by tenancy by the entireties in some states, and group property in others. The place issues get bizarre is a sort of property possession is allowed by one state, however disallowed by one other; this occurs on a regular basis with tenancy by the entireties and group property, and the courts make use of varied evaluation to find out the end result. Right here, South Dakota regulation didn’t enable the curiosity in Hickoks to be owned in tenancy by the entireties, however Florida regulation (the place the Griffens had been domiciled) did enable Hickoks to be owned in tenancy by the entireties. So, between South Dakota and Florida regulation, who wins?

Right here, the South Dakota Supreme Court docket neither ran the ball nor handed the ball, however as a substitute it punted. Which is to say that the courtroom discovered it pointless to find out the end result of the battle between South Dakota regulation and Florida regulation. The explanation goes to contempt regulation: To be held in contempt, Kimberly needed to know that she was violating South Dakota regulation, both appearing for herself or appearing for Hickoks. Due to the battle between South Dakota regulation and Florida regulation, Kimberly couldn’t have identified for contempt function that she was violating South Dakota regulation, and thus it was pointless to find out whether or not there was a violation. In different phrases, for an individual to be held in contempt, that particular person needed to know what they had been required to do or not, and Kimberly (and subsequently Hickoks, since she was its supervisor) couldn’t have identified that what she was doing violated the charging order due to the confusion between South Dakota and Florida regulation. The identical evaluation was mainly efficient for the tenancy by the entireties subject as properly.

The Brockleys’ final argument was that Clarence Griffen couldn’t correctly assign his curiosity in Hickoks as a result of it violated the South Dakota statutes and guidelines set out by the South Dakota Gaming Fee insofar because the project was by no means permitted by the Gaming Fee. The Court docket famous, nevertheless, that solely the Gaming Fee might increase that problem, so the Brockleys had been out of luck there too.

The Court docket made a ultimate level that was the nail within the coffin, being that Clarence Griffen had already transferred away his curiosity in Hickock earlier than the Brockleys obtained their charging order, i.e., the charging order lien hooked up to nothing as a result of by that point Clarence held little interest in his personal title.

ANALYSIS

That is an fascinating opinion not due to what occurred, however due to what didn’t occur. To elucidate this, let’s arrange the information a bit in another way with out altering them.

About two weeks earlier than abstract judgment was entered in opposition to him, Griffen transferred his 50% curiosity in Hickoks to a tenancy by the entireties along with his spouse Kimberly. The switch was with out consideration. The Brockleys didn’t uncover this switch, however as a substitute simply presumed that Griffen nonetheless owned the 50% curiosity in Hickoks and sought a charging order in opposition to that curiosity. Griffen didn’t hassle to appropriate the Brockleys, however let the charging order be entered in opposition to him though by this time he had little interest in Hickoks to be charged.

Later, Hickoks liquidated its major asset and redeemed out the opposite 50% member (Trucano), after which the stability of the cash was distributed to the survivor (Clarence having died) of the tenancy by the entireties, being Kimberly. When the Brockleys moved for contempt for violating the charging order, no person was held in contempt as a result of no person had executed something unsuitable in relation to the charging order, a lot much less knew that they had been doing one thing unsuitable in relation to the charging order as required by contempt regulation.

Below these identical information, simply said differently, it’s clear that the movement for contempt was a loser from the outset. So, if Clarence owed the Brockleys the cash (he did), and at one level at the least he held the 50% curiosity in Hickoks in his personal title (he did), then why weren’t the Brockleys capable of get better?

The reply is that the Brockleys had been capable of get better, however of their strategy of implementing the judgment they missed one thing very essential. That one thing associated to how the curiosity went from Griffen to the tenancy by the entireties. When Griffen transferred his 50% curiosity in Hickoks to the tenancy by the entireties, as a right, that was very in all probability a voidable transaction (or what was referred to as a fraudulent switch). Hindsight being 20/20, what the Brockleys ought to have executed was to first put aside Griffen’s switch of the 50% curiosity in Hickoks as a voidable transaction, after which (or concurrently) obtained a charging order in opposition to that curiosity. The curiosity would then be held by Griffen individually, the charging order would create a lien in opposition to the curiosity, and that lien would persist even after Griffen’s loss of life. Thus, when cash was lastly distributed from Hickoks, the charging order lien and order would have picked it up.

Be aware that when the Brockleys moved for a charging order and presumably asserted that Griffen nonetheless held the curiosity in Hickoks, he was beneath no obligation to appropriate them. The true query is why the Brockleys failed to select up Griffen’s switch to the tenancy by the entireties previous to their charging order movement. The opinion would not state, and we are able to solely speculate ― which after all could be very harmful. Nonetheless, it makes little sense that the Brockleys might then go some years with out discovering out about this switch. Presumably, there have been common debtor examinations of Griffen each earlier than and after the charging order, and in any respect levels anyone might have inquired whether or not Griffen nonetheless owned the 50% Hickok’s curiosity. However we simply do not know.

One thing else that’s vital is that this: Even when Griffen had by no means transferred away his 50% curiosity in Hickoks, the Brockleys had no option to power a distribution from Hickoks of the cash from the sale of the resort and on line casino. What might have ended up occurring was a state of affairs the place the cash was trapped in Hickoks and neither the Brockleys or Kimberly might get it. Presumably, at this level there would have been a settlement the place each events walked away about equally sad, however at the least the Brockleys would have gotten one thing for his or her efforts. In fact, that standoff did not occur both beneath these information, however it’s fascinating to theorize about.

At any price, the lesson right here is an outdated one: Goal earlier than you shoot. Or, extra technically said, a creditor searching for a charging order had higher totally set up that the debtor actually does maintain the curiosity to be charged, or all the trouble will probably be for nought.

As right here.