Sandhills of Nebraska
Judges usually don’t do things unless asked by one of the parties. Every once in a while, however, a judge will conclude that something needs to be done in a case that no one is asking for. This is known as a sua sponte action, which roughly translates as “by itself.” The action the court takes can be very small, like resetting a hearing, but it can also be something very important — and when it does it’s usually very bad for at least one of the parties.
A company called CRABAR/GBF, Inc. (Crabar), won a judgment against Wright Printing in the amount of $1 million and against Mark Wright personally in the amount of $1.75 million. The judgment was filed in the U.S. District Court for the District of Nebraska. Wright (and possibly Wright Printing) appealed the decision on the merits. Meanwhile, Crabar decided to enforce its decision pending Wright’s appeal.
It is important to know that simply filing an appeal does not prevent a judgment creditor from attempting to enforce a judgment while an appeal of that judgment is pending. If a debtor wants to prevent the creditor from enforcing the judgment, the debtor must post an appeal bond (sometimes called supersede bond) in an amount sufficient to pay the judgment, interest accruing on appeal, costs of appeal, etc. Such recourse bonds are sold by insurance companies that require the debtor to post sufficient collateral to make sure the insurance company is held whole in the event the debtor loses the case and the insurance company must pay for the bond. Taking out this security is often not easy for debtors, as we will see in relation to the aforementioned Mark Wright.
Wright owned interests in two Nebraska LLCs, 121 Court, LLC and 11616 “I” Street, LLC. Crabar petitioned the court to assign Wright’s interest in these two LLCs. Wright objected to the charging order and subsequently he and Wright Printing jointly sought a stay of execution without having to post an appeal bond. Wright and Wright Printing argued that Wright intended to sell some of the property owned by 121 Court, LLC, to raise funds for the appeal, and the charging order sought by Crabar would effectively prevent Wright from raising those funds. Resolution of these issues leads to the US District Court’s Memorandum and Order CRABAR/GBF, Inc. v. Wright2023 WL 8110737 (D.Neb. Nov. 22, 2023), discussed below.
The court first noted that the key factor in determining whether to grant a stay of enforcement of a judgment is whether the debtor has available funds to pay the judgment. Here, the court was doubtful that even if 121 Court, LLC were to sell a property in which Wright would get the cash much less in time for the lien to be posted—considering that the other members of 121 Court, LLC, would they had to distribute the proceeds of the Wright sale and that was also uncertain. The biggest takeaway, however, was that several months had passed since the judgment was issued, and Wright offered no explanation as to why he had not already tried to sell the property from 121 Court, LLC and get cash out of the entity. In other words, it appeared to the court that Wright was deliberately delaying things. Under these circumstances, the court denied the stay of execution.
We now come to Wright’s objection to Carbar’s application for a charging order against Wright’s interest in the two LLCs. Since the US District Court was located in Nebraska, Nebraska law applied to the charging order application. Like most other states, entry of a charging order is discretionary, and here Wright argued that the court should exercise its discretion not to enter the charging order in order to obtain the security necessary to obtain bail appeal.
And this is exactly where things start to go south for Wright in a hurry, because the court noted that:
“Crabar represents—and has brought the evidence to prove—that Mark Wright is actively concealing his assets to prevent Crabar’s judgment from being collected. [] Such evidence demonstrates that the charging order is appropriate. [] In fact, such evidence suggests that additional measures may be warranted to ensure that Crabar can collect its judgment. [] Federal law allows the Court to appoint a receiver in cases like this, “in accordance with historical practice in the federal courts or a local rule.” []”
The court then noted that the appointment of a receiver is an extraordinary remedy available only in extreme situations and that the court should first inquire whether there were less drastic remedies available and whether the appointment of a receiver would end up doing more harm than good. good. However, the court held that:
“The present situation meets the criteria of an ‘extreme case.’ Crabar presented evidence that there is a high “likelihood that fraudulent conduct has occurred” and that there is an “imminent risk that the property will be concealed, lost or diminished in value.” [] Crabar has evidence that Mark Wright violated the Uniform Voidable Transactions Act, []. And a negotiation “may be necessary when a judgment debtor uses an LLC … to protect assets and income from creditors by keeping the assets unavailable or otherwise inaccessible.” [] That seems to be exactly what Mark Wright is doing here. []”
While the court did not immediately appoint a receiver, the court effectively invited Crabar to request the appointment of a receiver and encouraged the parties to discuss a mutually agreeable receiver to be appointed to the case. Meanwhile, the court overruled the Wrights’ objections to Crabar’s charging order application, which was subsequently granted.
ANALYSIS
This is a situation where a debtor’s objection to the creditor’s remedy (the charging order) not only failed, but made things worse for the debtor. If Wright had not objected to the charging order, then the court would not have considered whatever evidence Krabar presented to the court and the court would not have begun to consider a receiver. The lesson here for debtors is not to simply oppose everything a creditor tries to do, but simply to let the creditor have whatever remedies the court is going to grant anyway.
It is true that charging orders are a discretionary remedy for the court, unlike things like levies and garnishments which are not discretionary but are naturally available to creditors. The first sentence of section 503(a) of the Uniform Limited Liability Company Act provides that “
“Upon application of a member’s judgment creditor or assignee, the court may issue an order charging against the assignable interest of the judgment debtor the unsatisfied amount of the judgment.”
The use of the term may indicates that the subject is discretionary rather than mandatory. However, the cases where courts have refused to exercise their discretion to issue a charging order are few and far between. Courts typically refuse to enter a charging order when the creditor has not proven that the debtor has an interest in the LLC or partnership whose interest is being charged. Other cases where charge orders are rejected are much rarer. Note that a good argument can be made (and I often make it in editorial committees) that a charging order should be mandatory rather than discretionary, and I can’t say I’ve ever heard a compelling argument to the contrary.
The point is that Wright’s chances of successfully challenging the charging order were slim. His application for a stay of execution so that he could raise collateral to post an appeal bond was also very low. If a debtor does not want to have their assets taken and sold while they appeal, the usual course is to obtain the aforementioned appeal bond. If the debtor does not have enough assets to post as collateral for an appeal bond for the full amount of the judgment, the debtor — after showing the court his limited resources — can request a reduction of the bond. However, if a debtor is going to make such a request, the debtor should do so immediately and not be confused for a few months as Wright did here, or the court will wonder (as here) why the debtor did not take immediate action. Which means that if a debtor is going to round up collateral for an appeal bond, the debtor had better start the morning after the verdict (or judgment of liability) is returned and not get confused.
So what are Wright’s options now? If the court is going to appoint a receiver anyway, and it certainly looks like this judge will, it’s at least theoretically possible that Wright could ask the judge to order the receiver to help facilitate the sale of property from to 121 Court, LLC, with the intention of using any proceeds thereafter to Wright to post an appeal bond. I’ve never heard of this being done, but then again I’ve never researched it and it’s in the realm of possibility. Crabar probably won’t want to wait to be paid for her decision and will object, but the judge could consider the possibility that Wright will win his appeal, in which case Crabar will be paid (including interest). with the appeal bond. Alternatively, Wright could ask the judge to order the receiver to simply keep whatever money is collected pending his appeal. this is also within the realm of possibility.
The court does not specify what Wright did after the crisis, but it sounds very bad. What Wright should note here is that some states have a doctrine of attenuation which holds that if a party seeking to appeal has committed postjudgment misconduct, then the appellate court may dismiss the appeal on equitable grounds — this amounts to a “don’t come to the Court of Appeals with dirty hands” theory. Otherwise, the Court of Appeals through judicial review will prohibit a party from appealing and concealing assets at the same time. I don’t know about Nebraska law, but probably Crabar’s counsel will look into it.
All this shows that it is very difficult to represent a debtor in subsequent proceedings, and especially when the debtor is also trying to appeal on the merits. There are many issues, including whether to object to any relief sought by the creditor, and generally staying out of court, as the longer the process continues after the judgment, the more upset the judge will usually be with the debtor for wasting the court’s time (unless the creditor is totally incompetent, in which case the court can turn to the creditor just as easily).
We probably haven’t heard the end of this case, so stay tuned.
