Textron Financial Corporation v. Gallegos

Filing 56

ORDER denying without prejudice Textron's #40 Motion for Order to Charge Gallegos' Membership Interest. Signed by Judge Larry Alan Burns on 10/7/15. (kas)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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TEXTRON FINANCIAL CORPORATION,

CASE NO. 15cv1678-LAB (DHB)

Plaintiff,

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vs.
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ORDER DENYING TEXTRON'S
MOTION TO CHARGE GALLEGOS'
MEMBERSHIP INTEREST

MICHAEL S. GALLEGOS,
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Defendant.
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Textron obtained a $21,921,165.45 judgment against Gallegos in the U.S. District

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Court for the District of Rhode Island, but has only collected $10,484.99. (Docket nos. 40-1

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and 40-6.) Its assignee, SPE LO Holdings, seeks a charging order against Gallegos' interest

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in two entities: Pacific Pearl Hotels, LLC and Pacific Pearl Hotel Management, LLC. (Docket

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no. 40.) SPE LO relies on California Secretary of State documents to establish Gallegos'

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interest in the LLCs. (Docket nos. 40-2, 40-3, and 40-4.) Gallegos' name is listed on line 9

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of the Secretary of State documents, which require the "name . . . of any manager . . . , or

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if none have been appointed or elected, . . . the name . . . of each member." (Docket nos.

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40-2 and 40-3.) His name is also listed on line 15, where he's identified as the "manager"

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of both LLCs. SPE LO served the motion by mail on Gallegos and the LLCs. (Docket nos.

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40-9 and 41.)

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Gallegos opposes the motion, arguing: (1) the Secretary of State records aren't

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admissible; (2) Textron failed to serve the LLCs; and (3) Textron hasn't shown that he is a
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member of the LLCs. (Docket no. 47.) He doesn't contend that the Secretary of State

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records are inaccurate. Nor does he deny that he's a member of the LLCs. He just argues

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that SPE LO hasn't proved it.

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Admissibility of Secretary of State Records

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The Secretary of State filings are matters of public record whose accuracy cannot be

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reasonably disputed. Potocki v. Wells Fargo Bank, NA, 2014 WL 2949286, at *1 n.1 (E.D.

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Cal. June 30, 2014). The Court takes judicial notice of them.

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Sufficiency of Service

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When there's a money judgment against an LLC member personally, but not against

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the LLC, the member's interest may be reached by a charging order. Cal. Code of Civ. P.

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§ 708.310. A charging order is a lien on the member's distributional interest. 51 Am. Jur.

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2d Limited Liability Companies § 23.

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distributions to which the member would otherwise be entitled; it doesn't entitle the creditor

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to participate in the LLC's management or exercise the rights of a member. Cal. Corp. Code

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§§ 17701.02(aa), 17705.02, and 17705.03. It thereby "protect[s] other members of an LLC

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from being forced to involuntarily share governance responsibilities with someone they did

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not choose, or from being forced to accept a creditor of another member as a co-manager."

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In re First Prot., Inc., 440 B.R. 821, 829–30 (B.A.P. 9th Cir. 2010).

It only allows the judgment creditor to receive

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Because the other LLC members are protected, a judgment creditor can obtain a

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charging order under § 17705.03(a) without serving the LLC or making it a party. See Bank

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of Am., NA v. Freed, 983 N.E.2d 509, 522 (Dec. 28, 2012) ("[C]harging orders on

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distributional interests do not affect the rights or interests of the LLC to the degree necessary

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to require that it be made a party. . . . It would be impractical and unnecessarily costly to

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require a lender seeking charging orders to serve all of the entities in which a borrower has

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an interest."). But, to obtain a lien on a judgment debtor's interest in an LLC before the court

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issues a charging order, the judgment creditor must serve a notice of motion for charging

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order on (1) the debtor and (2) the LLC or all of its members. Cal. Code of Civ. P. §

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708.320(a). Service by mail is sufficient to satisfy § 708.320(a); personal service isn't
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required. See, e,g., Choice Hotels Int'l, Inc. v. Penta Denver LLC, No. 3:13-mc-80249, 2014

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WL 458069, at *4 (N.D. Cal. Jan. 27, 2014); see also id. at Docket no. 8. Textron adequately

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served Gallegos and the LLCs.

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Gallegos' Interest in the Pacific Pearl Entities

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Entry of a charging order requires "substantial evidence" that the debtor is a partner

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or member of the entity. See Ribero v. Callaway, 87 Cal. App. 2d 135, 139 (1948); Cf.

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Regions Bank v. Alverne Associates, LLC, 456 S.W.3d 52, 58 (Mo. Ct. App. 2014).

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"Substantial evidence" means "such relevant evidence as a reasonable mind might accept

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as adequate to support a conclusion." Braewood Convalescent Hosp. v. Workers' Comp.

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Appeals Bd., 34 Cal. 3d 159, 164 (1983). It has been found where the debtor's interest was

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evidenced by a certificate of limited copartnership, Ribero v. Callaway, 87 Cal. App. 2d at

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137, and by previous declarations of the debtor and his partner, Safeco Ins. Co. of Am. v.

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Raisch Co., 2013 U.S. Dist. LEXIS 39658, *2 (N.D. Cal March 20, 2013).

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Here, the Secretary of State documents establish that Gallegos is a manager of the

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LLCs. But, an LLC can be managed by a non-member. Cal. Corp. Code §§ 17701.02 and

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17704.07. While Gallegos' name is listed on line 9 of the Secretary of State documents,

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where the LLCs could have listed a member if no manager had been appointed, line 15

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establishes that a manager was appointed. Thus, the Secretary of State documents don't

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prove Gallegos' membership interest in the LLCs, and SPE LO offers no other evidence that

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Gallegos is a member. While they argue that he is a member in their motion, "statements

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made in briefs are not evidence"—let alone substantial evidence. In re Heritage Bond Litig.,

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2004 WL 1970058, at *4 (C.D. Cal. July 23, 2004).

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Conclusion

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SPE LO's motion for a charging order is DENIED WITHOUT PREJUDICE. It may

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bring the motion again once it has substantial evidence of Gallegos' membership interest in

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///

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///

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///
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the LLCs. To avoid the possibility that Gallegos has avoided entry of a charging order by

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playing coy, the Court authorizes SPE LO to pursue postjudgment discovery to determine

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whether Gallegos is, in fact, a member of the LLCs.

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IT IS SO ORDERED.
DATED: October 7, 2015

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HONORABLE LARRY ALAN BURNS
United States District Judge

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