Medbox Incorporated v. Kaplan et al

Filing 166

ORDER (1) Granting Plaintiff's 152 Motion to Quash Writ for Garnishment and Return Notis Global's Funds and (2) Denying Without Prejudice Interested Party Redwood Management, LLC's 159 Motion for Determination of Priority of Redwood's Perfected Security Interest to the Bedrick Funds. Signed by District Judge Matthew F. Leitman. (HMon)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
NOTIS GLOBAL, INC.,
Plaintiff/Counter-Defendant,

Case No. 13-cv-14775
(consolidated with Case No.
14-11749)

v.
DARRYL B. KAPLAN et al.,

Hon. Matthew F. Leitman

Defendants/Counter-Plaintiffs.
__________________________________________________________________/
ORDER (1) GRANTING PLAINTIFF’S MOTION TO QUASH WRIT FOR
GARNISHMENT AND RETURN NOTIS GLOBAL’S FUNDS (ECF #152)
AND (2) DENYING WITHOUT PREJUDICE INTERESTED PARTY
REDWOOD MANAGEMENT, LLC’S MOTION FOR DETERMINATION
OF PRIORITY OF REDWOOD’S PERFECTED SECURITY INTEREST
TO THE BEDRICK FUNDS (ECF #159)
I
On August 25, 2017, Defendants/Counter-Plaintiffs Darryl B. Kaplan,
Claudio Tartaglia, Eric Kovan (collectively, the “Kaplan Parties”) obtained a
consent judgment (the “Consent Judgment”) in this action against Plaintiff/CounterDefendant Notis Global Inc. (“Notis”) for $937,500. (See Consent J., ECF #114.)
The Kaplan Parties then commenced efforts to collect on the Consent Judgment.
In February 2018, the Kaplan Parties learned that Notis’ former CEO Bruce
Bedrick, an Arizona resident, was required to pay Notis $333,000 under a settlement
Bedrick had reached with the United States Securities Exchange Commission (the
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“Bedrick Funds”). The Kaplan Parties believed that the Bedrick Funds would be
available to satisfy the Consent Judgment, in part, once Bedrick paid the funds to
Notis. But the Kaplan Parties then learned that, as they describe it, Notis was
attempting to impede their ability to obtain the Bedrick Funds. Specifically, the
Kaplan Parties were informed that Notis allegedly asked Bedrick to pay the Bedrick
Funds to an entity related to Notis – against which the Kaplan Parties had no
judgment and no right to collect – rather than Notis. (See ECF #135 at Pg. ID 260809.)
The Kaplan Parties then stepped up their efforts to collect the Bedrick Funds.
First, they applied to the Clerk of this Court for a writ of garnishment to be issued to
Bedrick, and on February 14, 2018, the Clerk issued a writ of garnishment directed
to Bedrick (the “Garnishment”). (See ECF #147.) Second, on February 16, 2018,
they filed an emergency motion for a temporary restraining order and preliminary
injunction against Notis. (See id.)

In the motion, they asked the Court to enjoin

Notis from disseminating or distributing the Bedrick Funds in the event that Notis
received the funds. (See id. at Pg. ID 2606.)
The Court held a hearing on the emergency motion on February 21, 2018.
Counsel for Notis appeared at the hearing and explained that they had just been
retained “two hours ago” and had not had a sufficient opportunity to investigate the
issues raised in the emergency motion. (Feb. 21, 2018, Hearing Tr., ECF #154 at Pg.

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ID 2799, 2815-16.) Counsel for an interested party named Redwood Management,
LLC (“Redwood”) also appeared at the hearing. Redwood claims that it has a
security interest in all of Notis’ assets, including the Bedrick Funds, and it claimed
that it would thus have a higher priority than the Kaplan Parties to those funds.
Redwood accordingly asked the Court not to direct payment of the funds to the
Kaplan Parties. At the hearing, counsel for Redwood explained that, like Notis’
attorneys, he had been retained immediately prior to the hearing and that he had not
had a full opportunity to prepare for the hearing. (See id. at Pg. ID 2802.)
At the conclusion of the hearing, the parties reached an agreement to resolve
the emergency motion, and they memorialized the agreement in a stipulated order.
The order created a process through which the Bedrick Funds would be paid into the
Court (either directly by Bedrick in response to the Garnishment or by Notis if it
received the funds from Bedrick), and the order also established a framework
through which the parties would litigate (1) any challenges to the Garnishment and
(2) disputes over priority to the Bedrick Funds. In its entirety, the stipulated order
provided as follows:
STIPULATED ORDER ON
DEFENDANTS/COUNTER-PLAINTIFFS’
EMERGENCY EX-PARTE MOTION TO REOPEN
THE CASE AND FOR A TEMPORARY
RESTRAINING ORDER AND PRELIMINARY
INJUNCTION

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Having considered Defendants/Counter-Plaintiffs’ ExParte Motion to Reopen the Case and for a Temporary
Restraining Order and Preliminary Injunction, and the
Court being otherwise fully advised in the premises after
hearing argument by the parties;
IT IS HEREBY ORDERED that if Bruce Bedrick pays
Three Hundred Thirty Thousand and 00/100 dollars
($330,000.00) (the “Funds”) to this Court, that payment
will satisfy any obligations he may have pursuant to the
garnishment issued on February 14, 2018 in this action by
Defendants/Counter-Plaintiffs, Darryl Kaplan, Claudio
Tartaglia and Eric Kovan. None of the Parties, as that term
is defined below, is waiving any objection to the
garnishment and the Court makes no finding regarding the
validity of the garnishment.
IT IS FURTHER ORDERED that the Funds will be
deposited with the Court and deposited into an interestbearing account pursuant to F.R.C.P. 67 and 28 U.S.C.
2041 et seq. Any accumulated interest on the Funds will
be considered part of the Funds.
IT IS FURTHER ORDERED that Notis Global, Inc. f/k/a
Medbox
Incorporated
(“Notis”)
or
Redwood
Management, LLC shall have thirty (30) days from the
date it receives notice from the Court of the Court’s receipt
of the Funds to file any claim or motion it has concerning
any rights or interest in the Funds. In addition, Notis shall
have thirty (30) days from the date of entry of this Order
to object to the validity of the garnishment.
IT IS FURTHER ORDERED, that if Notis Global, Inc.
f/k/a Medbox Incorporated, Darryl Kaplan, Claudio
Tartaglia, Eric Kovan, Redwood Management, LLC or
Rock Acquisition Corp. (collectively, the “Parties”)
receives all or any part of the Funds prior to it being
deposited with the Court, the foregoing listed individuals
and companies will deliver the Funds to the Court
forthwith.
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IT IS FURTHER ORDERED that Defendants/CounterPlaintiffs, Darryl Kaplan, Claudio Tartaglia and Eric
Kovan will serve a copy of this Order on Bruce Bedrick.
The rights of the Parties named in this Order concerning
the Funds are hereby preserved as provided herein.
IT IS SO ORDERED.
(Stip. Order, ECF #143.)
On February 25, 2018, Bedrick was served with the Garnishment in Arizona,
and at that time he signed an acknowledgment of service. (See ECF #155.)

But

Bedrick did not appear in this action. Nor did he abide by the terms of the
Garnishment. For instance, he did not comply with the provision of the Garnishment
that required him to file a Garnishee Disclosure with the Clerk of the Court. Nor did
he make any payment to the Kaplan Parties (as the Garnishment directed him to do
in the event that he was indebted to Notis).
Instead, on March 14, 2018, Bedrick paid the Bedrick Funds to Notis.
Pursuant to the Stipulated Order, Notis then deposited $330,000 with the Court.
On March 23, 2018, Notis filed a motion seeking to quash the Garnishment
and asking the Court to return the funds that Notis had deposited with the Court
pursuant to the earlier stipulated order. (See Mot. to Quash, ECF #152.) Notis argues
that the Garnishment was invalid because the Court lacked personal jurisdiction over

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Bedrick at the time the Clerk of the Court issued the Garnishment. (See id.)
Redwood joined that motion. (See ECF #153.)
On April 23, 2018, Redwood filed a Motion for Determination of Priority of
Redwood’s Perfected Security Interest to the Bedrick Funds. (See Mot. for
Determination, ECF #159.) Redwood contends that it, rather than the Kaplan
Parties, is entitled to the funds held by the Court. (See id.) The Court held a hearing
on both motions on July 18, 2018.
II
The Court first turns to Notis’ argument that the Garnishment was invalid.
A
Enforcement of a district court judgment “must accord with the procedure of
the state where the court is located, but a federal statute governs to the extent it
applies.” Fed. R. Civ. P. 69(a)(1). The Consent Judgment thus must be enforced in
accordance with Michigan procedure unless a federal statute applies. A Michigan
statute authorizes courts to issue writs of garnishment to those persons or entities
who, among other things, are obligated to make payments to a judgment debtor. See
Mich. Comp. Laws § 600.4011(1)(b). But under the statute, a Michigan court may
only issue a writ of garnishment to an obligor “if the obligor is subject to the judicial
jurisdiction of the state.” Id.

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B
Notis argues that the Garnishment was invalid because Bedrick was not
subject to personal jurisdiction in Michigan when the Court issued the Garnishment.
Before turning to that argument, the Court must address the Kaplan Parties’
argument that Notis lacks standing to object to the Garnishment on the ground that
Bedrick was not subject to personal jurisdiction. (Resp. to Mot. to Quash, ECF #156
at Pg. ID 2847-48.)
The Court concludes that Notis does have standing to raise the lack of personal
jurisdiction objection to the Garnishment. First, the Michigan Court Rules clearly
contemplate that, as a general matter, a judgment debtor (like Notis) may object to a
writ of garnishment. See Mich. Ct. R. 3.101(E)(5) (providing that the writ must
inform a defendant (defined as a judgment debtor) that the property or debt will be
applied to satisfy the garnishment “unless the defendant files objections within 14
days after the service of the writ”). Second, the Michigan Court Rules specify that
a permissible objection to a garnishment is that it “was not properly issued or is
otherwise invalid.” Mich. Ct. R. 3.101(K)(2)(f). Notis’ objection to the Garnishment
fits squarely within this category of authorized objections. Notis contends that the
Garnishment is “invalid” because (1) Bedrick was not subject to personal
jurisdiction here when the Clerk of the Court issued the Garnishment and (2) the

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Court thus lacked the power to issue the Garnishment. For these reasons, the Court
concludes that Notis had standing to raise its objection to the Garnishment.
The Court sustains Notis’ objection to the Garnishment on the ground that the
Court lacked personal jurisdiction over Bedrick when the Clerk of the Court issued
the Garnishment. The Kaplan Parties have failed to show that, at the time the
Garnishment was issued, Bedrick had taken any steps that would have subjected him
to personal jurisdiction in Michigan. For instance, the Kaplan Parties have not even
attempted to show that Bedrick has continuous meaningful contacts with this State
such that he was subject to general jurisdiction here, nor have they attempted to
demonstrate that Bedrick had sufficient “minimum contacts” with Michigan such
that he was subject to limited personal jurisdiction here in connection with the
Garnishment.
Instead of attempting to demonstrate that Bedrick was subject to personal
jurisdiction in Michigan based upon his contacts with this State, the Kaplan Parties
argue that Bedrick consented to personal jurisdiction here. In support of that
argument, the Kaplan Parties cite a sworn Declaration signed by Bedrick on July 17,
2018, in which he states: “I did not oppose the jurisdiction of the Court over me
related to the Garnishment and consent to the jurisdiction of the Court solely related
to the Garnishment.” (Decl. of Bruce Bedrick at ¶4, ECF #164 at Pg. ID 3290.)

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Bedrick’s Declaration does not show he was subject to personal jurisdiction
in Michigan on the basis of consent when the Clerk of the Court issued the
Garnishment. First, while a party may submit to personal jurisdiction in a forum by
“explicit consent,” J. McIntyre Mach., Ltd. v. Nicastro, 564 U.S. 873, 880 (2011)
(plurality opinion), Bedrick’s statement that he “did not oppose jurisdiction” when
the Clerk issued the Garnishment falls far short of a showing that he affirmatively
and “explicit[ly]” consented to personal jurisdiction at that time. Second, to the
extent Bedrick now explicitly consents to personal jurisdiction in this State, that
consent has come too late. The governing Michigan statute authorizes a court to
issue a garnishment to a person or entity who “is subject” to personal jurisdiction at
the time the garnishment is sought. Bedrick’s statement on July 17, 2018 that he
now “consent[s] to jurisdiction” does not establish that he was subject to personal
jurisdiction in this State at the time the Clerk of the Court issued the Garnishment.
Moreover, Bedrick gave his consent after he had satisfied his obligation to Notis
under his agreement with the S.E.C. – i.e., after the Garnishment effectively became
a nullity.
In short, the Kaplan Parties have not met their burden of showing that the
Court had personal jurisdiction over Bedrick when the Garnishment was issued.1

1

Generally, the party seeking to invoke the personal jurisdiction of the Court has at
least an initial burden of showing a court’s personal jurisdiction over the individual

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Therefore, the Court did not have the power to issue the Garnishment, and the
Garnishment was thus invalid.

Accordingly, Notis’ motion to quash the

Garnishment is GRANTED.
III
Absent the invalid Garnishment, the Court would be holding the $330,000
deposited by Notis. Having quashed the Garnishment, the Court sees no basis on
which it may exercise authority over those funds or determine who has priority to
them. The Court will therefore direct the Clerk of the Court to return the funds on
deposit to Notis. Thereafter, the Kaplan Parties may pursue appropriate collection
activities directed toward the funds, and Redwood may seek to assert its allegedlysuperior interest to the funds.
IV
For the reasons explained above, IT IS HEREBY ORDERED THAT:
1. Notis’ Motion to Quash Writ for Garnishment and Return Notis Global’s
Funds is GRANTED; and

to be brought into court. Cf. Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883,
887 (6th Cir. 2002) (noting that the plaintiff has the burden of establishing the district
court’s personal jurisdiction in response to a motion to dismiss pursuant to Rule
12(b)(2) of the Federal Rules of Civil Procedure); Jeffrey v. Rapid Am. Corp., 529
N.W.2d 644, 648 (Mich. 1995) (noting that, on motion for summary disposition
pursuant to Mich. Ct. R. 2.116(C)(1), “the plaintiff bears the burden of establishing
jurisdiction over the defendant”).
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2. Redwood’s Motion for Determination of Priority of Redwood’s Perfected
Security Interest to the Bedrick Funds is DENIED WITHOUT
PREJUDICE based upon the Court’s determination that, at this time and
under these circumstances (i.e., the fact that the funds are on deposit here as
the result of an invalid garnishment), the Court may not properly determine
any party’s priority to the funds on deposit with the Court. Nothing in this
order should be construed to preclude Redwood from asserting its interest in
the funds in any manner or any other forum.
IT IS FURTHER ORDERED THAT the Clerk of the Court shall return to
Notis the funds deposited with the Court pursuant to the Court’s order dated
February 23, 2018. Notis shall provide the Clerk with the information necessary to
complete the return of the funds.
IT IS SO ORDERED.
s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE
Dated: August 6, 2018

I hereby certify that a copy of the foregoing document was served upon the
parties and/or counsel of record on August 6, 2018, by electronic means and/or
ordinary mail.
s/Holly A. Monda
Case Manager
[phone]

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