Seventh Circuit Files: Court Voids LLC Member’s Attempt to Pre-empt LLC’s Suit Against That Member

In Carhart v. Carhart – Halaska International, LLC, (http://law.justia.com/cases/federal/appellate-courts/ca7/14-2968/14-2968-2015-06-08.html) the plaintiff LLC member tried to shield himself from a lawsuit filed against him by the LLC by (1) taking an assignment of a third-party’s claim against the LLC; (2) getting and then registering a default judgment against the LLC; (3) seizing the LLC’s lone asset: its lawsuit against the plaintiff; and (4) buying the lawsuit for $10K.  This four-step progression allowed the plaintiff to extinguish the LLC’s claim against him.

Plaintiff was co-owner of the defendant LLC.  After a third-party sued the LLC in Minnesota Federal court (the “Minnesota Federal Case”), Plaintiff paid the third-party $150,000 for an assignment of that case.  Plaintiff then obtained a $240K default judgment against the LLC.

Meanwhile, the LLC, through its other owner, sued the plaintiff in Wisconsin State Court (the “Wisconsin State Case”) for breach of fiduciary duty in connection with plaintiff’s alleged plundering of the LLC.  While the Wisconsin State Case was pending, Plaintiff registered the Minnesota judgment against the LLC in Wisconsin Federal court.

Plaintiff, now a judgment creditor of the LLC, filed suit in Wisconsin Federal Court (the “Wisconsin Federal Case”) to execute on the $240K judgment against the LLC.  The Wisconsin District Court allowed the plaintiff to seize the LLC’s lone asset – the Wisconsin State Case (the LLC’s breach of fiduciary duty claim against plaintiff) – for $10,000.  This immunized the plaintiff from liability in the Wisconsin State Case as there was no longer a claim for the LLC to pursue against the plaintiff.  The LLC appealed.

The Seventh Circuit voided the sale of the Wisconsin State Case finding the sale price disproportionately low.

Under Wisconsin law, a chose in action is normally considered intangible property that can be assigned and seized to satisfy a judgment.  However, the amount paid for a chose in action must not be so low as to shock the conscience of the court.

In this case, the court branded the plaintiff a “troll of sorts”: it noted the plaintiff buying the LLC’s claim (the Wisconsin State Case) at a steep discount: the defendant paid $150,000 for an assignment of a third-party claim against the LLC and then paid only $10,000 for the LLC’s breach of fiduciary duty claim against plaintiff.

The court found that under Wisconsin law, the $10,000 the plaintiff paid for the LLC’s claim against him was conscience-shockingly low compared to the dollar value of the LLC’s claim.  The plaintiff did not purchase the LLC’s lawsuit in good faith.  The Seventh Circuit reversed the District Court’s validation of plaintiff’s $10K purchase so the LLC could pursue its breach of fiduciary duty claim against the plaintiff in the Wisconsin State Case.

Take-aways:

This seems like the right result.  The court guarded against a litigant essentially buying his way out of a lawsuit (at least it had the appearance of this) by paying a mere fraction of what the suit was possibly worth.  

The case serves as an example of a court looking beneath the surface of a what looks like a routine judgment enforcement tool (seizing assets of a judgment debtor) and adjusting the equities between the parties.  By voiding the sale, the LLC will now have an opportunity to pursue its breach of fiduciary duty claim against the plaintiff in state court. 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.