Tag: jurisdiction

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/)]

 

Ill. Wage Payment and Collection Act Doesn’t Apply to NY and Cal. Corps. With Only Random Ill. Contacts

As worker mobility increases and employees working in one state and living in another almost an afterthought, questions of court jurisdiction over intrastate workplace relationships come to the fore.  Another issue triggered by a geographically nimble workforce is whether a non-resident can invoke the protections of another state’s laws.

Illinois provides a powerful remedial scheme for employees who are stiffed by their employers in the form of the Wage Payment and Collection Act, 820 ILCS 115/1 (“Wage Act”).  See (here).  The Wage Act allows an employee to sue an employer for unpaid wages, bonuses or commissions where an employer breaches a written or oral employment contract.

The focal point of Cohan v. Medline Industries, Inc., 2016 WL 1086514 (N.D.Ill. 2016) is whether non-residents of Illinois can invoke the Wage Act against an Illinois-based employer for unpaid sales commissions.  The plaintiffs there, New York and California residents, sued their Illinois employer, for breach of various employment contract commission schedules involving the sale of medical devices.

The Northern District of Illinois held that the salespeople plaintiffs could not sue under Illinois’ Wage Act where their in-person contacts with Illinois were scarce.  The plaintiffs only entered Illinois for a few days a year as part of their employer’s mandatory sales training protocol.  All of the plaintiffs’ sales work was performed in their respective home states.

Highlights from the Court’s opinion include:

  •  The Wage Act doesn’t have “extraterritorial reach;” It’s purpose is to protect Illinois employees from being shorted compensation by their employers;
  • The Wage Act does protect non-Illinois residents who perform work in Illinois for an Illinois employer;
  • A plaintiff must perform “sufficient” work in Illinois to merit Wage Act protection;
  • There is no mechanical test to decide what is considered “sufficient” Illinois work to trigger the Wage Act protections;
  • The Wage Act only applies where there is an agreement – however informal – between an employer and employee;
  • The agreement required to trigger the Wage Act’s application doesn’t have to be formal or in writing. So long as there is a meeting of the minds, the Court will enforce the agreement;
  • The Wage Act does not cover employee claims to compensation outside of a written or oral agreement

Based on the plaintiffs’ episodic (at best) contacts with Illinois, the Court found that the Wage Act didn’t cover the plaintiffs’ unpaid commission claims.
Substantively, the Court found the Wage Act inapplicable as there was nothing in the various written employment agreements that supported the plaintiff’s damage calculations.  The plaintiffs’ relationship with the Illinois employer was set forth in multiple contracts that contained elaborate commission schedules.  Since the plaintiff’s claims sought damages beyond the scope of the written schedules, the Wage Act didn’t govern.
Take-aways:

1/ The Illinois Wage Act will apply to a non-resident of Illinois if he/she performs a sufficient quantum of work in Illinois;

2/ Scattered contacts with Illinois that are unrelated to a plaintiff’s job are not sufficient enough to qualify for a viable Wage Act lawsuit;

3/ While an agreement supporting a Wage Act claim doesn’t have to be in writing, there must be some agreement – no matter how unstructured or loose – for a plaintiff to have standing to sue for a Wage Act violation.