Category: Remedies

LLC Stopped From Selling Member’s Residence In Violation of Prior Charging Order – Utah Federal Court

Q: Can A Court Stop An LLC That Pays the Monthly Mortgage of One of Its Members From Selling that Member’s Home Where A Charging Order Has Issued Against the LLC to Enforce a Money Judgment Against the LLC Member?

A: Yes.

Q2: How So?

A2: By selling the member’s property and paying off the member’s mortgage with the sale proceeds, the LLC is effectively “paying the member” to the exclusion of the plaintiff judgment creditor.

Source: Earthgrains Baking Companies, Inc. v. Sycamore Family Bakery, Inc., et al, USDC Utah 2015 (https://casetext.com/case/earthgrains-baking-cos-v-sycamore-family-bakery-inc-3)

In this case, the plaintiff won a multi-million dollar money judgment against a corporate and individual defendant in a trademark dispute.  The plaintiff then secured a charging order against a LLC of which the individual defendant was a 48% member.  When the LLC failed to respond to the charging order, the plaintiff moved for an order of contempt against the LLC and sought to stop the LLC from selling the defendant’s home.

The court granted the contempt motion.  First, the court found that it had jurisdiction over the LLC.  The LLC argued that Utah lacked jurisdiction over it since the LLC was formed in Nevada.  The LLC claimed that under the “internal affairs” doctrine, the state of the LLC’s formation – Nevada – governs legal matters concerning the LLC.

Disagreeing, the court noted that a LLC’s internal affairs are limited only to “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”  The internal affairs doctrine does not apply to claims of third party creditors.  Here, since the plaintiff was a creditor of the LLC’s member, this was not a dispute between LLC and member.  As a result, the internal affairs rule didn’t apply and the Utah court had jurisdiction over the LLC since a LLC member lived in Utah.  (See Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998)).

The Charging Order required the LLC to pay any distribution that would normally go to the member directly to the plaintiff until the money judgment was satisfied.  The Charging Order specifically mentions transfers characterized or designated as payment for defendant’s “loans,” among other things.

The LLC was making monthly mortgage payments on the member’s home and listed the home for sale in the amount of $4M.  Plaintiff wanted to prevent the sale since there was a prior $2M mortgage on the home.

In blocking the sale, the court found that if the LLC sold the member’s home and paid off the member’s mortgage lender with the proceeds, this would violate the Charging Order since it would constitute an indirect payment to the member.  The court deemed any payoff of the member’s mortgage a “distribution” (a direct or indirect transfer of money or property from LLC to member) under the Utah’s LLC Act. (Utah Code Ann. § 48-2c-102(5)(a)).

Since the Charging Order provided that any loan payments involving the member were to be paid to the plaintiff until the judgment is satisfied, the court found that to allow the LLC to sell the property and disburse the proceeds to a third party (the lender) would harm the plaintiff in its ability to satisfy the judgment.

Afterwords:

An interesting case that discusses the intricacies of charging orders and the thorny questions that arise when trying to figure out where to sue an LLC that has contacts in several states.  The case portrays a court willing to give an expansive interpretation of what constitutes an indirect distribution from an LLC to its member. 

Earthgrains also reflects a court endeavoring to protect a creditor’s judgment rights where an LLC and its member appear to be engaging in misdirection (if not outright deception) in order to elude the creditor.

[A special thanks to attorney and Forbes contributor Jay Adkisson for alerting me to this case (http://www.forbes.com/sites/jayadkisson/)]

 

Federal Court Gives Illinois Primer on Personal Property Torts

The plaintiff in Peco Pallet, Inc. v. Northwest Pallet Supply Co., 2016 WL 5405107 sued a recycling company under various theories after their once harmonious business relationship imploded.

The plaintiff, a wooden pallet manufacturer, instituted a program where it offered to pay pallet recyclers like defendant a specific amount per returned pallet.  When the plaintiff announced it was going to cut the per-pallet payment rate, the defendant recycler balked and refused to return several thousand of plaintiff’s pallets.  The plaintiff sued and the defendant filed counterclaims.

In partially dismissing and sustaining the parties’ various claims, the Court offers a useful refresher on both some common and uncommon legal theories that apply to personal property.

Replevin and Detinue

The Illinois replevin statute, 735 ILCS 5/19-101, allows a plaintiff to try to recover goods wrongfully detained by a defendant.  The statute employs a two-step process involving an initial hearing and a subsequent trial.

Once a replevin suit is filed, the court holds a hearing to determine whether to issue a replevin order.  If at the hearing the plaintiff shows he most likely has a superior right to possession of the disputed property and is likely to prevail at trial, the court enters an order of replevin which requires the defendant release the plaintiff’s property pending the trial.  If the plaintiff later wins at trial, he can recover money damages attributable to the defendant’s wrongful detention of the property.

Closely related to replevin, a detinue claim also seeks the recovery of personal property and damages for its wrongful detention.  Unlike replevin however, there is no preliminary hearing in a detinue case pending final judgment.  Possession remains with the defendant until final judgment.

Since the purpose of the replevin and detinue remedies is the return of personal property, where a defendant returns plaintiff its property, the claims are moot.  Here, since the defendant returned the 17,000 pallets that were subjects of the replevin suit, the Court found that the replevin and detinue claims pertaining to the returned pallets were moot.

The court did allow, however, plaintiff to go forward on its detinue claim for damages related to defendant’s failure to account for some 30,000 pallets.

Conversion

A conversion plaintiff must prove (1) a right to property at issue, (2) an absolute and unconditional right to immediate possession of the property, (3) a demand for possession, and (4) that defendant wrongfully and without authorization, assumed control, dominion or ownership over the property.

The essence of conversion is wrongful deprivation, not wrongful acquisition.  This means that even where a defendant initially possesses property lawfully, if that possession later becomes unauthorized, the plaintiff will have a conversion claim.

Here, the plaintiff alleged that it owned the pallets, that it demanded their return and defendant’s refusal to return them.  These allegations were sufficient to plead a cause of action for conversion.

 

Negligence

The Court also sustained the plaintiff’s negligence claim against the motion to dismiss.  In Illinois, a negligence action arising from a bailment requires allegations of (1) an express or implied agreement to create a bailment, (2) delivery of property to the bailee in good condition, (3) bailee’s acceptance of the property, and (4) bailee’s failure to return the property or its returning the property in damaged condition.

The plaintiff sufficiently alleged an implied bailment – that defendant accepted the pallets and failed to return some of the pallets while returning others in a compromised state.  These allegations were enough for the negligence count to survive.

Promissory Estoppel

The Court found that the defendant sufficiently pled an alternative promissory estoppel counterclaim.  Promissory estoppel applies where defendant makes a promise that the plaintiff relies on to its detriment.  The pleading elements of promissory estoppel are (1) an unambiguous promise, (2) plaintiff’s reliance on the promise, (3) plaintiff’s reliance was expected and foreseeable by defendant, (4) plaintiff relied on the promise to its detriment.

A promissory estoppel claim can’t co-exist with a breach of express contract claim: it only applies where there is no contractual consideration.  Here, the defendant/counter-plaintiff alleged there was no express contract.  Instead, it claimed that plaintiff’s promise to pay anyone who returned the pallets motivated defendant to return thousands of them.  The court viewed these allegations as factual enough for a colorable promissory estoppel claim.

Tortious Interference with Contract and Business Expectancy

The court dismissed the defendant’s tortious interference counterclaims.  Each tort requires a plaintiff to point to defendant’s conduct directed at a third party that results in a breach of a contract.  Here, the defendant’s counterclaim focused on plaintiff’s own actions in unilaterally raising prices and altering terms of its earlier pallet return program.  Since defendant didn’t allege any conduct by the plaintiff aimed at a third party (someone other than counter-claimant, e.g.), the tortious interference claims failed.

Take-aways:

1/ Conversion action can be based on defendant’s possession that was initially lawful but that later becomes wrongful;

2/ A Promissory estoppel claim can provide a viable fall-back remedy when there is no express contract;

3/ Tortious interference claim must allege defendant’s conduct directed toward a third party (someone other than plaintiff);

4/Where personal property is wrongfully detained and ultimately returned, the property owner can still have valid detinue claim for damages.

Paralegal Fees Can Be Tacked On to Attorney Fees Sanctions Award – IL First Dist.

Aside from its trenchant discussion of the constructive fraud rule in mechanics lien litigation, the Illinois First District in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 clarified that a paralegal’s time and services can be added to a claim for attorneys’ fees as a sanction against a losing party who files false pleadings.

In an earlier post, I discussed how the lien claimant in this case lost its lien foreclosure suit for misstating the completion of work date and inflating the monetary value of work and materials it affixed to the subject site.  The property owner and a lender defendant filed a fee petition and sanctions motion, respectively.

Examining the lender’s motion for Rule 137 sanctions, the Court stated some black-letter rules that govern fee petitions:

  • Under Rule 137, a party can recover attorneys’ fees incurred as a result of a sanctionable pleading or paper (one filed without an objectively reasonable legal basis);
  • Typically, “overhead” expenses aren’t compensable in a fee motion.  The theory is that overhead costs are already built into an attorneys’ hourly rate;
  •   Overhead includes telephone charges, in-house delivery charges, photocopying, check processing, and in-house paralegal and secretarial services;
  • However, when a paralegal performs a specialized legal task that would normally be performed by an attorney, the paralegal’s fees are recoverable since those services would not be considered overhead.

The Court found that the lender’s paralegals performed myriad services that would normally be done by an attorney – namely, researching the title history of the subject property and preparing a memorandum summarizing the title history.  By contrast, a paralegal’s general administrative tasks were disallowed by the court and could not be sought in the sanctions motion.

Afterwords:

When preparing a fee petition, the prevailing party should also include paralegal time and services; especially if they involve researching real estate land records and summarizing a title history.  While the line separating legal services (which are recoverable) and administrative or overhead expenses (which aren’t) is blurry, Father & Sons stands for the proposition that a fee petition or Rule 137 sanctions motion can be augmented by paralegal fees where the paralegal performs specialized work that contains an element of legal analysis.