Mountain Dudes v. Split Rock et al

Filing 209

ORDER ADOPTING REPORT AND RECOMMENDATIONS ; granting 178 Motion for Supplemental Proceedings ; adopting Report and Recommendations re 189 Report and Recommendations ; denying 202 Motion to Quash. Signed by Judge Clark Waddoups on 09/27/2013. (asp)

IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF UTAH, CENTRAL DIVISION

MOUNTAIN DUDES, LLC, a Missouri
limited liability company,

ORDER ADOPTING REPORT AND
RECOMMENDATIONS

Plaintiff,
vs.

Case No. 2:08-cv-00940

SPLIT ROCK, INC., a Utah corporation, et
al.,

District Judge Clark Waddoups
Magistrate Judge Dustin B. Pead

Defendants.

Before the court is Magistrate Judge Dustin B. Pead’s Report and Recommendation (Dkt.
No. 189) on Plaintiff’s Motion for Supplemental Orders in Supplemental Proceedings (Dkt. No.
178). In reviewing the Report and Recommendation under a 28 U.S.C. § 636(b)(1)(B) referral,
the court “shall make a de novo determination of those portions of the report or specified
proposed findings or recommendations to which objection is made.” For the reasons stated
herein, the magistrate judge’s Report and Recommendation on the Motion for Supplemental
Orders in Supplemental Proceedings is approved and adopted, and the motion hereby
GRANTED.
ANALYSIS
I.

Plaintiff’s Motion for Supplemental Orders

Plaintiff Mountain Dudes, LLC, moves the court to enter supplemental orders in
supplemental proceedings to require Defendant Split Rock, Inc. and eleven other individuals and
entities (“nonparties”) to answer questions and produce documents related to transactions with,

and the property and assets of Defendant Split Rock, Inc. The named nonparties are: (1) Split
Rock Interior; (2) Split Rock Design; (3) Split Rock at Entrada Real Estate Company (Landea
Realty); (4) Split Rock Development Group; (5) Split Rock Development; (6) Split Rock
Construction; (7) Split Rock Holdings; (8) Ren G. Boyce and the Ren Boyce Family Limited
Partnership; (9) Bart Smith and the Bartley Smith Family Limited Partnership; (10) Kent L.
Bylund and the Bylund Family Limited Partnership; and (11) Joseph L. Platt and the Joseph L.
and Susan A. Platt Family Protection Limited Partnership. Plaintiff also requests the court to
prohibit the nonparties from transferring any assets which may be subject to the judgment of the
court which was entered against Defendant Split Rock on November 28, 2012. The motion is
based on the premise that Plaintiff has been unable to collect any of the $1,175,507.98 owed it
by Defendant, and Plaintiff now seeks additional discovery to aid in its collection efforts. Report
and Recommendation (Dkt. No. 178). Both the order to answer questions and produce
documents, and the order to refrain from disposing of property are proper.
A.

Order to Answer Questions and Produce Documents

Under Fed. R. Civ. P. 69(a)(2) a judgment creditor “may obtain discovery from any
person” including, but not limited to the judgment debtor, as provided in either the federal rules
or the procedure of the state wherein the court is located. Fed. R. Civ. P. 69(a)(2) (emphasis
added). DUCivR 69-1(a) provides that “[a]ny party having a final judgment on which execution
may issue may make a motion to have the judgment debtor or other person in possession of, or
having information relating to, property or other assets that may be subject to execution or
distraint appear in court and answer concerning such property or assets.” DUCivR 69-1(a)
(emphasis added). Additionally, the moving party “may request that the debtor or other person
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be ordered to refrain from alienation or disposition of the property or assets in any way
detrimental to the moving party’s interest. DUCivR 69-1(a).
The rules governing discovery “are to be accorded a broad and liberal treatment.”
Hickman v. Taylor, 329 U.S. 495, 507 (1947). This is true whether the discovery is part of pretrial or post-judgment proceedings. Credit Lyonnais, S.A. v. SGC Intern., Inc., 160 F.3d 428, 430
(8th Cir. 1998). The purpose of post-judgment discovery is “to learn information relevant to the
existence or transfer of the judgment debtor’s assets.” British Intern. Ins. Co., Ltd. v. Seguros La
Rupublica, S.A., 200 F.R.D. 586, 589 (W.D. Tex. 2000). Thus, when supplemental proceedings
are “an attempt to discover assets by which to satisfy its judgment, plaintiff is entitled to a very
thorough examination of the judgment debtor.” Caisson Corp. v. County West Bldg. Corp., 62
F.R.D. 331, 335 (E.D.Pa. 1974.) This thorough examination includes third parties. Indeed, “there
is no doubt that third parties can be examined in relation to the financial affairs” of a judgment
debtor. Caisson Corp. 62 F.R.D. at 335. Whether third parties may be required to disclose
information about their own assets is a separate question.
While disclosure concerning the assets of a nonparty is “not generally contemplated” by
the federal rules, courts have permitted such discovery “upon a somewhat heightened showing of
necessity and relevance - i.e., at least some demonstration of concealed or fraudulent transfers or
alterego relationship with the judgment debtor.” Uniden Corp. Of America v. Duce Trading Co.,
Ltd., 1993 WL 286102 (W.D.N.Y. July 19, 1993) (Unpublished.) This “somewhat heightened”
standard does not require an actual finding of alterego or fraud. Rather, discovery has been
permitted against a nonparty “where the relationship between the judgment debtor and the nonparty is sufficient to raise a reasonable doubt about the bona fides of the transfer of assets
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between them.” Magnaleasing Inc. v. Staten Island Mall, 76 F.R.D. 559, 562 (D.C.N.Y. 1977)
(Judgment debtor obtained discovery against a nonparty when the same individuals controlled
both the judgment debtor and the third party.) See also, Falicia v. Advanced Tenant Servs., Inc.,
235 F.R.D. 5, 9 (D.D.C. 2006) (A creditor could obtain discovery from nonparty business run by
debtor’s relatives because relationship raised “a colorable suspicion” that the nonparty was a
“mere extension” of a debtor’s “business operations”); Thus, in order to successfully move for
discovery against a nonparty the movant need not prove conclusively that the nonparty is an
extension of the judgment debtor, but need only present evidence sufficient to raise legitimate
questions about the relationship between the judgment debtor and the nonparty, and
consequently, transactions between the two. Finally, when such questions have been raised,
discovery against nonparties is especially unobjectionable where the requests are relevant to the
judgment and limited in time. British Intern. Ins. Co., Ltd. v. Seguros La Rupublica, S.A., 200
F.R.D. 586, 590 (W.D. Tex. 2000) (Request for records from nonparties regarding transfers of
assets between judgment debtor and 12 other entities was proper considering the four-year time
period for which records were sought.)
Plaintiff has presented evidence of the relationship between Defendant and the
“nonparties” sufficient to raise legitimate questions about the transfer of assets between them.
Defendant Split Rock, Inc. was comprised of shareholders Platt, Bylund, Smith, Boyce and
Larson. Defendant Split Rock, Inc.’s Objection (Dkt. No. 190). On June 24, 2009, just one week
after Plaintiff filed its motion for summary judgment, Defendant Split Rock, Inc. transferred
$2,700,000.00 worth of assets in the form of its name and certain “build rights” to Split Rock
Holdings. Defendant Split Rock, Inc.’s Objection (Dkt. No. 190). The only consideration was an
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unsecured promissory note. Split Rock Holdings was at the time comprised of family limited
partnerships of four of the five shareholders in Split Rock, Inc. - Platt, Bylund, Smith, and
Boyce. Motion for Supplemental Orders in Supplemental Proceedings (Dkt. No. 178, Ex.12).
Sometime after the transfer, Platt, Bylund, Smith, Boyce and their respective family partnerships
or trusts were parties to an agreement creating a “relationship” to provide for “the continued
development of real estate under the [build rights] and for the continued sharing of responsibility
and benefit of said [build rights] between the principals through their respective companies.”
Motion for Supplemental Orders in Supplemental Proceedings (Dkt. 178, Ex.12, ¶1.a). On top of
this, the “old” Split Rock, the “new” Split Rock, Split Rock at Entrada Real Estate, Split Rock
Design, and Split Rock Construction all have or have had the same street address and attorney.
Motion for Supplemental Orders in Supplemental Proceedings (Dkt. No. 178, Ex.12).
As in Magnaleasing and Falicia, the individual overlap and close familial relationships
between the controlling parties gives rise to suspicion about the bona fides of the transfer of
assets between them. The fact that the principals of Split Rock, Inc. remained involved in the
operations and holdings of the “new” Split Rock, and arranged to derive continued benefits
therefrom, and that several of the nonparties share or have shared a common address and
attorney with Defendant further heightens those suspicions. Additionally, as the magistrate judge
noted, the timing of the transfer of assets between these entities is suspect. Report and
Recommendation (Dkt. No. 189, p. 5). Taken together, this evidence gives rise to legitimate
questions about not only this transfer, but the existence of other possible transfers between the
Defendant and nonparties – questions which can only be answered through additional discovery.

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Defendant and nonparties (“objecting parties”) have both filed objections to the Report
and Recommendation. Objections to Report and Recommendation (Dkt. Nos. 190-200). As all
their objections are nearly identical, they will be considered together. Objecting parties object
that the magistrate judge’s findings were not supported by the evidence. Objection to Report and
Recommendation (Dkt. No. 190). However, as noted above, the evidence presented is more than
sufficient to meet the applicable standard. Therefore, it is not unreasonable to suspect that
Defendant may have transferred assets which might be subject to judgment to the nonparties and
additional discovery is the only way to know for certain whether such transfers occurred.
Furthermore, the fact that the transfer was disclosed and that Defendant received value for the
assets does little to dispel the cloud of reasonable suspicion which hangs over the relationship
between the parties and the timing of the transaction. This is true, particularly when the value
received was in the form of an unsecured promissory note. The objecting parties offer no
evidence that any payments on the note were ever made to Split Rock, Inc. by any of the
purchasing parties notwithstanding the fact that payments are now being made to a creditor who
has executed on the note. Objection to Report and Recommendation (Dkt. No. 190).
Objecting parties also object that because the court granted summary judgment on the
issue of alterego in earlier proceedings, any assets transferred to the nonparties cannot be subject
to judgment and the nonparties are not subject to discovery. This objection is both disingenuous
and misses the point. It is true enough that the court granted partial summary judgment on some
issues in favor of Defendants, including on the issue of alterego. Memorandum Decision and
Order (Dkt. No. 136). But that determination was as to liability for the original breach of
contract; it was only granted after this court held that Defendant Split Rock was liable for the
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breach, and that the only outstanding issue was the amount of damages. Order (Dkt. No. 60),
Motion for Summary Judgment (Dkt. No. 88), Memorandum Decision and Order (Dkt. No. 136.)
Whether nonparties are Split Rock’s alterego for purposes of contract liability is not the same
issue as whether nonparties are Split Rock’s alterego for purposes of engaging in fraudulent
transfers of assets subject to judgment. But all of that is beside the point. Plaintiff is not seeking
a declaration that the assets at issue are, in fact, subject to judgment. Rather, Plaintiff seeks
supplemental proceedings to help it determine what assets, if any, might be available to aid in
collecting on its judgment. The determination as to whether such assets are subject to judgment
can only be made after the existence of Defendant’s assets and the extent of any transfers are
known.
Lastly, objecting parties argue that Plaintiff is engaging in an overly broad “fishing
expedition” and imply that the court is endorsing such a practice. Again, this objection is highly
disingenuous. A closer examination of the record makes clear that the magistrate judge was not
endorsing the practice of fishing expeditions, but refuting it when he asserted it was the role of
the court to “determine the length of the pole and the length of the line.” Judgment Creditor’s
Memorandum in Response to Objections (Dkt. No. 206). This statement makes clear that the
magistrate judge was concerned with the scope and breadth of discovery and wanted to ensure
discovery was limited to specific relevant matters. Objecting parties are also disingenuous when
they assert that Plaintiff is seeking “(a) All organizational documents; (c) All bank statements;
(d) All financial statements, including income profit and loss statements; (f) All federal and state
tax returns; (g) All assets; etc. from numersous third parties that were owners of Split Rock, Inc.
or that are affiliated in any way with owners of Split Rock, Inc.” Objection to Report and
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Recommendation (Dkt. No. 190). If this is what Plaintiff was seeking it truly would be an overly
broad fishing expedition. The objecting parties, however, have conveniently omitted the limiting
language which precedes the quoted list for each request. That language reads: “Any and all
documents which refer to, relate to or are evidence of [nonparties’ transactions with Defendant] .
. . from June 2009 through the present, including for each.” Motion for Supplemental Orders in
Supplemental Proceedings (Dkt. No. 178). Thus, Plaintiff is not requesting the broad swath of
information Defendant would have the court believe. Instead, Plaintiff asks only for documents
relating to transactions with Defendant, from a specific four-year period immediately following
the transaction which gave rise to their initial suspicion. As in British Intern. Ins. Co., the subject
matter of the requested discovery was limited and the time period was limited to only four years.
Thus, the requested discovery is not overly broad. Further, the proposed orders include a
provision for a mutually agreed protective order which helps alleviate any privacy concerns.
Therefore, Defendant’s objection to the breadth of discovery fails.
B.

Order to Refrain from Disposing of Property

DuCivR 69-1 provides that a moving party may request that “the debtor or other person”
may be ordered to refrain from alienation or disposition of “property or assets in any way
detrimental to the moving party’s interest.” DUCivR 69-1(a) (emphasis added). This rule clearly
contemplates the jurisdiction and authority of the court to restrain the actions of individuals and
entities other than the original parties to the underlying judgment.
Under the well-settled principle of ancillary jurisdiction, a federal court has the inherent
power to enforce its own judgments. Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934); see also
28 U.S.C. § 1367. This jurisdiction includes a “broad range of supplementary proceedings
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involving third parties.” Peacock v. Thomas, 516 U.S. 349, 356 (1996). The ability to exercise
jurisdiction over new or nonparties in supplemental proceedings has been expressly recognized
“so long as it is necessary to reach assets of the judgment debtor under the control of the third
party in order to satisfy the original judgment and thereby guarantee its eventual executability.”
U.S.I. Properties Corp. v. M.D. Construction Co., 230 F.3d 489, 497 (1st Cir. 2000). Thus, a
court may prohibit a nonparty from transferring assets it received from a judgment debtor and
which may be subject to judgment in order to preserve a creditor’s access to them. Gambone v.
Lite Rock Drywall, 288 Fed. Appx. 9 (3d Cir. 2008)
In Gambone, the district court’s order prohibiting the transfer of patents held by a
nonparty was upheld as an exercise of ancillary jurisdiction. The circuit court reasoned that
because the patents were received from a judgment debtor in suspicious and allegedly fraudulent
transactions and the plaintiff was not seeking to impose liability on the nonparty only to preserve
access to assets which may be subject to judgment, the district court’s order was valid.
Gambone, 288 Fed. Appx. at 12. Here, Plaintiff has asked the court to issue a similar order. As
noted, supra, Plaintiff has presented evidence which raises questions about the bona fides of the
transfer of assets between the debtor and nonparties. Plaintiff is not asking the court to impose
liability on the nonparties, but only to “preserve access” to assets which may be subject to its
valid judgment. Nonparties received notice of the proposed orders through their common
attorney. Certificate of Service (Dkt. No. 179). They had the opportunity to object and did, in
fact, object to the magistrate judge’s report and recommendations. Objection to Report and
Recommendation (Dkt. No. 190) Thus, it is within the ancillary jurisdiction of the court to grant

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Plaintiff’s motion and order the nonparties to refrain from alienating or disposing of any assets
received from Defendant which may be subject to judgment.
Objecting parties object to the magistrate judge’s recommendation on the grounds that it
fails to meet the requirements for a preliminary injunction, as set forth in Penzoil Co. v. Texaco,
Inc., (citation omitted). Objection to Report and Recommendation (Dkt. No. 190). However,
Plaintiff does not seek a preliminary injunction akin to that sought in Penzoil. There, the plaintiff
was seeking a preliminary injunction to prevent a merger pending a final determination of
whether that merger violated a federal statute. Here, a final decision in the form of a valid
judgment has already been entered. Memorandum Decision and Order of Default (Dkt. No. 164),
Default Judgment (Dkt. No 165). Plaintiff merely seeks to prevent Defendant and nonparties
from transferring assets subject to that judgment until the judgment has been satisfied in accord
with its rights under the rules of this district. This court has already ordered Defendant to refrain
from transferring assets subject to the judgment. Order in Supplemental Proceedings (Dkt. No.
170). Plaintiff has presented evidence which is sufficient to suggest that Defendant may have
earlier transferred assets to the nonparties which may be subject to judgment. To allow
nonparties to transfer assets that may be subject to judgment and that Defendant could not
transfer if it still possessed, would be extremely detrimental to Plaintiff’s interest, would
circumvent the court’s existing order and would defeat the purpose of DUCivR 69-1.
Furthermore, as established, supra, the granting of an order prohibiting such transfers is well
within the court’s ancillary jurisdiction.

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II.

Conclusion

For the reasons stated herein, the magistrate judge’s Report and Recommendation is
APPROVED AND ADOPTED by the court and Plaintiff’s Motion for Supplemental Orders in
Supplemental Proceedings (Dkt. No. 178) is GRANTED. The objecting parties objections are
overruled and the Motion to Quash are DENIED. Objections to Report and Recommendation
(Dkt. Nos. 191-199, 202).
SO ORDERED this 27th day of September, 2013.
BY THE COURT:

____________________________________
Clark Waddoups
United States District Judge

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