Morgan Stanley Smith Barney LLC et al v. Johnson et al
Filing
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MEMORANDUM AND ORDER: IT IS HEREBY ORDERED that: 1. Plaintiffs' Motions to Appoint Receiver and for Charging Order 21 57 are GRANTED in part, and DENIED without prejudice; 2. A Charging Order is ENTERED pursuant to Minn. Stat. Section 322C. 0503 against Johnson's transferable LLC interests for the unsatisfied amount of the judgment; and 3. Timothy G. Becker of Lighthouse Management Group, Inc., is APPOINTED to serve as a receiver of Johnson's LLC and non-LLC property and assets. (Written Opinion) Signed by The Hon. Paul A. Magnuson on 9/27/2018. (LLM)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Morgan Stanley Smith Barney LLC,
and Morgan Stanley Smith Barney
FA Notes Holdings LLC,
Civ. No. 17-1101 (PAM/TNL)
Plaintiffs,
v.
MEMORANDUM AND ORDER
Christopher Johnson,
Defendant.
This matter is before the Court on Plaintiffs’ Motions to Appoint Receiver and for
a Charging Order. For the following reasons, the Motions are granted in part and denied
in part.
BACKGROUND
After a Financial Industry Regulatory Authority (“FINRA”) arbitration found
Defendant Chris Johnson liable for $1,502,000 in compensatory damages to Plaintiff
Morgan Stanley Smith Barney and related entities (collectively, “Morgan Stanley”),
Morgan Stanley brought this lawsuit seeking to confirm the arbitration award. The Court
granted Morgan Stanley’s unopposed motion to confirm in August 2017. (Docket No. 19.)
The Clerk thereafter entered judgment against Johnson in the amount of the arbitration
award. (Docket No. 20.)
Morgan Stanley now asks the Court to appoint a receiver to enforce the judgment.
In its initial Motion, Morgan Stanley asked that the receiver take over the operations of
several limited liability companies (“LLCs”) that Johnson owns, including some with
substantial real-estate holdings. (Docket No. 21.) After Johnson opposed the Motion,
arguing that Minnesota law requires a charging order to effectuate any relief against the
LLCs, Morgan Stanley filed a new Motion, this time seeking both a receiver and a charging
order. (Docket No. 57.) According to Morgan Stanley, in the year since the entry of
judgment, Johnson has refused to cooperate with discovery and its collection efforts have
yielded less than $3,000. Morgan Stanley asks for a receiver to examine the LLCs’
distributions or other payments to Johnson and to direct the LLCs to pay Morgan Stanley
instead of Johnson. It also seeks an order foreclosing on Johnson’s equity interests in the
LLCs.
Johnson contends that he is now cooperating with discovery and that the
appointment of a receiver is not warranted. He concedes, however, that a charging order
is appropriate “against the transferable interests of [Johnson] in the LLCs, by which the
LLCs must pay to Plaintiffs any distribution that otherwise would be paid to [Johnson].”
(Def.’s Opp’n Mem. (Docket No. 63) at 7.) But according to Morgan Stanley, Johnson
does not receive any “distributions” from his LLCs.
Rather, he receives “interest
payments” on loans he ostensibly made to the LLCs; in 2017, for example, the LLCs paid
Johnson more than $200,000 in such interest payments. Thus, Morgan Stanley argues that
a charging order likely will not yield any payments to Morgan Stanley, and foreclosure of
Johnson’s equity interest is the only way to ensure that Morgan Stanley can collect on the
judgment.
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DISCUSSION
A.
Minn. Stat. § 322C.0503
Minnesota’s LLC statute provides a mechanism for an LLC member’s judgment
creditor to receive that member’s distributions from the LLC. Minn. Stat. § 322C.0503,
subd. 1. This mechanism is called a “charging order,” which “requires the limited liability
company to pay over to the person to which the charging order was issued any distribution
that would otherwise be paid to the judgment debtor.” Id. As noted, Johnson does not
dispute the entry of a charging order here.
The statute also provides a means to effectuate charging orders, including
“appointing a receiver of the distributions subject to the charging order, with the power to
make all inquiries the judgment debtor might have made.” Id., subd. 2. And if the
judgment creditor shows that “distributions under a charging order will not pay the
judgment debt within a reasonable time, the court may foreclose the lien and order the sale
of the transferable interest.” Id., subd. 3. The statute “provides the exclusive remedy by
which a person seeking to enforce a judgment against a member or transferee may . . .
satisfy the judgment from the judgment debtor’s transferable interest.” Id., subd. 7.
The Court has the discretion whether to appoint a receiver or to foreclose on
Johnson’s interest in the LLCs. After considering the parties’ arguments, the Court is
convinced that a receiver is warranted. A receiver can evaluate the LLCs’ payment
arrangements with Johnson and can determine whether the arrangements are a subterfuge
for avoiding Johnson’s debt to Morgan Stanley. However, foreclosure is not appropriate
at this stage. While there is little authority as to what constitutes a “reasonable time” under
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the statute for the purposes of foreclosing the debtor’s interests, the passage of one year is,
in the Court’s view, insufficient in this case to warrant such drastic relief. If, however, the
receiver uncovers evidence that Johnson is hiding funds to avoid paying the judgment or
is otherwise unsuccessful in securing payments toward the judgment, Morgan Stanley may
renew its request for a foreclosure.
B.
Receiver over Non-LLC Property
In its initial Motion, Morgan Stanley asked for the appointment of a receiver over
all of Johnson’s non-LLC property and assets. A court may appoint a receiver to protect a
judgment creditor’s interest in property.
12C Wright & Miller, Federal Practice &
Procedure § 2983. Johnson has the duty to “assist and cooperate fully with the receiver”
and to “deliver to the receiver all of the receivership property in [Johnson]’s possession,
custody, or control.” Minn. Stat. § 576.31(1)-(2). Johnson must also “supply to the
receiver information as requested relating to the administration of the receivership and the
receivership property.” Id. § 576.31(3).
The propriety of appointing a receiver over Johnson’s non-LLC property and assets
is governed by “federal law and federal equitable principles.” Aviation Supply Corp. v.
R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993). A receiver should be
appointed “only in cases of clear necessity to protect a plaintiff’s interest in the property.”
Midwest Sav. Ass’n v. Riversbend Assocs. P’ship, 724 F. Supp. 661, 662 (D. Minn. 1989)
(Devitt, J.). The appointment of a receiver as an “extraordinary equitable remedy.” Beal
Bank USA v. Crown Bank, No. 11-3220, 2012 WL 4328392, at *1 (D. Minn. Jun. 12,
2012) (Noel, M.J.).
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Although there is no precise formula for determining when a receiver may
be appointed, courts generally consider the following factors to warrant
appointment of a receiver: a valid claim by the party seeking the
appointment; the probability that fraudulent conduct has occurred or will
occur to frustrate that claim; imminent danger that property will be
concealed, lost, or diminished in value; inadequacy of legal remedies; lack
of a less drastic equitable remedy; and likelihood that appointing the receiver
will do more good than harm.
Id. (citing Aviation Supply, 999 F.2d at 316-17).
Three of these factors are clearly met here: Morgan Stanley has a valid claim, its
attempts to secure payment through conventional means have been largely unsuccessful,
and a receiver would do more good than harm. A receiver can undoubtedly investigate and
determine what assets Johnson possesses, whether in the LLCs or otherwise, that are
available to satisfy the substantial judgment. Johnson argues that a receiver is appropriate
only in cases of fraudulent concealment, but while fraudulent concealment is a
circumstance that often leads to the appointment of a receiver, it is but one factor that the
Court may consider.
See Fed. Practice & Procedure § 2983 (discussing situations
warranting appointment of a receiver).
After considering the relevant factors, the Court is convinced that appointment of a
receiver over Johnson’s non-LLC property is also warranted. That receiver shall have the
power to make any inquiry Johnson would have the right to make of the LLCs and to
conduct a full accounting of the LLCs’ financial transactions since January 1, 2015, and
shall have all the powers of receivers under Minnesota law. The receiver shall examine
Johnson’s assets, and the Court expects Johnson to cooperate fully with the receiver’s
examination. When the examination is complete, the receiver shall report the results to the
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Court, and shall make a recommendation on the assets’ liquidation to ensure the payment
of the amounts Johnson owes Morgan Stanley. The receiver shall be compensated at his
usual rate as set forth in Timothy G. Becker’s Affidavit (Docket No. 72), with such
compensation paid out of the assets the receiver recovers in this matter.
Finally, Minnesota law requires that the receiver post a bond “in the sum, nature,
and with the conditions that the court shall order in its discretion . . . .” Minn. Stat.
§ 576.27. The receiver appointed below shall post a bond of $250,000 with the Court
within 14 days of the date of this Order.
CONCLUSION
Accordingly, IT IS HEREBY ORDERED that:
1.
Plaintiffs’ Motions to Appoint Receiver and for Charging Order (Docket
Nos. 21, 57) are GRANTED in part and DENIED without prejudice in
part as set forth above;
2.
A charging order is ENTERED pursuant to Minn. Stat. § 322C.0503 against
Johnson’s transferable LLC interests for the unsatisfied amount of the
judgment; and
3.
Timothy G. Becker of Lighthouse Management Group, Inc., is
APPOINTED to serve as receiver over Johnson’s LLC and non-LLC
property and assets.
Dated: September 27, 2018
s/ Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge
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