If a member of an LLC or partnership is a judgment debtor, their interest can be subject to a charging order that places a lien on the interest and requires that all distributions be redirected to the creditor. If the LLC or partnership fails to comply with the charging order, then the LLC or partnership and the non-debtor members can be held in contempt for failing to comply with the charging order. But what if the debtor no longer held the interest at the time the charging order was granted? Can these other parties still be held in contempt for violating the charging order?
In 2004, Mark and Annesse Brockley sold real estate to Allen Rosenfeld and John McGill. The purchase price was $2 million and seller-financed: Rosenfeld and McGill promised to make monthly payments to the Brockleys for 20 years. If there was a default, the entire amount due accelerated after 30 days.
McGill quitclaimed his interest in the property to Rosenfeld, who in 2007 ― and with the permission of the Brockmans ― assigned his deed to a South Dakota entity called GG&E LLC. At that time, GG&E had three members: Merrill Ellis, Ronald Gutman and Clarence Griffin. In return, Ellis, Gutman and Griffin each agree to guarantee the amount owed to the Brockmans. Later, in 2010, GG&E formally changed its name to G Squared LLC.
The Brockmans stopped receiving payments from G Squared (again, the former GG&E) in 2014, and thus sued G Squared, Ellis, Gutman and Griffen for the balance due.
Meanwhile, in 2011, Griffen and another fellow, Michael Trucano, created another South Dakota company called NMD Venture LLC to acquire a hotel and casino in Deadwood, South Dakota, and with Griffen and Trucano each holding a 50% ownership in NMD Venture. The year after the Brockmans sued him, Griffen transferred his 50% interest in NMD Venture to himself and his wife, Kimberly Griffen, as tenants by the entirety. At this time, the Giffens were domiciled in Florida, and Trucano ― who had consented to the assignment as the other member of NMD Venture ― apparently lived in Nevada. The date of these transfers was March 30, 2015.
Just two weeks after these transfers, on April 15, 2015, the Brockleys were granted partial summary judgment in their favor against all of G Squared, Ellis, Gutman, and Griffin.
Next, on June 6, 2015, Trucano transferred his own 50% interest in NMD Venture to the Trucano Trust, a trust in which he and his wife were trustees.
We now skip forward about 20 months to February 3, 2017. On this date, the court granted the Brockleys’ application for a charging order against Griffen’s interest in NMD Venture, which required NMD Venture to make any distributions payments owed to Griffen to the Brockleys directly instead. Note, importantly, that this was almost two years after Griffen had transferred away his interest to the tenancy by the entireties with Kimberly,
Skipping ahead almost exactly another two years, to February 4, 2019, we find that NMD Venture changed its name to Hickoks Hotel & Suites LLC, and later that year agreed to sell the Deadwood hotel and casino to a buyer.
Recall that Hickoks (formerly NMD Venture) was now owned 50% by the Trucano Trust and that Michael Trucano was not a judgment debtor to the Brockleys. The other 50% of Hickoks was owed by Griffen and his wife as tenants by the entireties. In July of 2020, Hickocks and the Trucano Trust entered into a redemption deal whereby upon the close of the sale of the hotel and casino, Hickoks would basically redeem (buy out) the 50% interest owned by the Trucano Trust for 50% of the sale price of the hotel and casino, and also that Trucano would cease to have any further relationship with Hickoks. In other words, after the sale of the hotel and casino, Trucano would take his 50% and go away, leaving Griffen and his wife owning 100% of Hickok as tenants by the entireties.
And now the inevitable plot twist: Shortly before the sale was consummated, Clarence Griffen passed away on December 14, 2020. This left Kimberly Griffen as the 50% member of Hickoks with Trucano who owned the other 50%.
The sale of the hotel and casino were set for December 29, 2020. Curiously, the attorneys for the Kimberly Griffen tried to get Trucano to open a new Florida bank account for Hickoks to take in the proceeds of the sale. Trucano refused, and instead told the closing agent (Dakota Title) to simply deposit 50% of the proceeds in Hickoks existing bank account in Deadwood. This is what happened, whereupon Trucano took his 50% cut from the sale of the hotel and casino into his trust for the redemption of his 50% interest in Hickok and severed himself from the company.
This left Griffen and his wife Kimberly holding the other 50% of the sale proceeds inside Hickok, which LLC they now owned 100%. Soon thereafter, an attorney named Haven Stuck instructed Dakota Title to wire-transfer the other 50% of the sale proceeds to a new account for Hickok at First Home Bank in Florida, and Dakota Title did as instructed. Hickoks then distributed these funds to Kimberly.
Learning of all this, in April of 2021, the Brockleys brought a motion asking that a motion to show cause be issued why the following persons should not be held in contempt for not complying with the 2017 charging order: Hickoks, Griffen’s Estate, Kimberly Griffen, Trucano and the Trucano Trust. The court held hearings over October and December of 2021. As a result of these hearings, the court held that nobody should be held in contempt. The Brockleys then appealed to the South Dakota Supreme Court, leading to the opinion that I shall next describe in Brockley v. Ellis, 2023 WL 6303748 (S.D., Sept. 27, 2023).
The salient issue was obviously whether the 2017 charging order had been violated in the first place or, more specifically, whether the part of the charging order requiring that distribution owed to Griffen be re-directed to the Brockleys instead. Very simply, if the charging order had not been violated, then there could be no contempt.
The easiest issues were those involving Trucano and the Trucano Trust. Essentially, the Brockleys argued that by taking all of his own money out through the redemption deal, Trucano effectively made a de facto distribution to Griffen because Griffen ended up with 100% of Hickoks. The court dismissed this argument by pointing out that while Trucano was still a member of Hickoks, no money was distributed to Griffen in the distributional sense, i.e., money coming out of Hickoks. Instead, the money only left Hickoks later after Trucano had disassociated himself from Hickoks. So, Trucano did nothing wrong, did not violate the charging order, and there were no grounds at all to hold him in contempt.
The issue involving Hickoks and Kimberly Griffen were more difficult. The court summarized the situation this way:
“After the redemption of the Trucano membership, Kimberly was the only remaining member because Clarence had passed away before the sale. As part of the closing, the remaining proceeds from the sale of the hotel and casino were deposited into Hickoks’ account in Florida. Although it is not entirely clear from the record how it occurred, it is undisputed that Hickoks ultimately distributed those proceeds to Kimberly. Whether this distribution violated the charging order depends on whether it constituted a distribution of an amount owed to Clarence. The circuit court determined that, upon his death, Clarence’s membership interest passed as a matter of law to Kimberly as the surviving tenant by the entirety. Consequently, the circuit court concluded that Hickoks’ subsequent distribution to Kimberly did not violate the charging order.”
The Brockleys made two arguments against this holding. The first argument was that the Griffens could not own the Hickoks interest in tenancy by the entireties in the first place for the reason that South Dakota does not allow for property to owned that way. The second argument was that Clarence Griffen’s assignment of his interest to the tenancy by the entireties had not been property accomplished.
A digression is required here. Folks usually own property in their individual capacities, but property can be owned in numerous other ways. As here, property can be owned in a business entity such as an LLC (or a corporation or partnership). Property can also be owned in a trust, as with Trucano’s interest. And then property can be owned by what amounts to a relationship, such as by tenancy by the entireties in some states, and community property in others. Where things get weird is a type of property ownership is allowed by one state, but disallowed by another; this happens all the time with tenancy by the entireties and community property, and the courts employ various analysis to determine the outcome. Here, South Dakota law did not allow the interest in Hickoks to be owned in tenancy by the entireties, but Florida law (where the Griffens were domiciled) did allow Hickoks to be owned in tenancy by the entireties. So, between South Dakota and Florida law, who wins?
Here, the South Dakota Supreme Court neither ran the ball nor passed the ball, but instead it punted. Which is to say that the court found it unnecessary to determine the outcome of the conflict between South Dakota law and Florida law. The reason goes to contempt law: To be held in contempt, Kimberly had to know that she was violating South Dakota law, either acting for herself or acting for Hickoks. Because of the conflict between South Dakota law and Florida law, Kimberly could not have known for contempt purpose that she was violating South Dakota law, and thus it was unnecessary to determine whether there was a violation. In other words, for a person to be held in contempt, that person had to know what they were required to do or not, and Kimberly (and therefore Hickoks, since she was its manager) could not have known that what she was doing violated the charging order because of the confusion between South Dakota and Florida law. The same analysis was basically effective for the tenancy by the entireties issue as well.
The Brockleys’ last argument was that Clarence Griffen could not properly assign his interest in Hickoks because it violated the South Dakota statutes and rules set out by the South Dakota Gaming Commission insofar as the assignment was never approved by the Gaming Commission. The Court noted, however, that only the Gaming Commission could raise that challenge, so the Brockleys were out of luck there too.
The Court made a final point that was the nail in the coffin, being that Clarence Griffen had already transferred away his interest in Hickock before the Brockleys obtained their charging order, i.e., the charging order lien attached to nothing because by that time Clarence held no interest in his own name.
ANALYSIS
This is an interesting opinion not because of what happened, but because of what did not happen. To explain this, let’s organize the facts a little differently without changing them.
About two weeks before summary judgment was entered against him, Griffen transferred his 50% interest in Hickoks to a tenancy by the entireties with his wife Kimberly. The transfer was without consideration. The Brockleys did not discover this transfer, but instead just presumed that Griffen still owned the 50% interest in Hickoks and sought a charging order against that interest. Griffen did not bother to correct the Brockleys, but let the charging order be entered against him although by this time he had no interest in Hickoks to be charged.
Later, Hickoks liquidated its primary asset and redeemed out the other 50% member (Trucano), and then the balance of the money was distributed to the survivor (Clarence having died) of the tenancy by the entireties, being Kimberly. When the Brockleys moved for contempt for violating the charging order, nobody was held in contempt because nobody had done anything wrong in relation to the charging order, much less knew that they were doing something wrong in relation to the charging order as required by contempt law.
Under these same facts, just stated in a different way, it is clear that the motion for contempt was a loser from the outset. So, if Clarence owed the Brockleys the money (he did), and at one point at least he held the 50% interest in Hickoks in his own name (he did), then why weren’t the Brockleys able to recover?
The answer is that the Brockleys were able to recover, but in their process of enforcing the judgment they missed something very critical. That something related to how the interest went from Griffen to the tenancy by the entireties. When Griffen transferred his 50% interest in Hickoks to the tenancy by the entireties, without any consideration, that was very probably a voidable transaction (or what used to be called a fraudulent transfer). Hindsight being 20/20, what the Brockleys should have done was to first set aside Griffen’s transfer of the 50% interest in Hickoks as a voidable transaction, and then (or concurrently) obtained a charging order against that interest. The interest would then be held by Griffen individually, the charging order would create a lien against the interest, and that lien would persist even after Griffen’s death. Thus, when money was finally distributed from Hickoks, the charging order lien and order would have picked it up.
Note that when the Brockleys moved for a charging order and presumably asserted that Griffen still held the interest in Hickoks, he was under no obligation to correct them. The real question is why the Brockleys failed to pick up Griffen’s transfer to the tenancy by the entireties prior to their charging order motion. The opinion doesn’t state, and we can only speculate ― which of course is very dangerous. However, it makes little sense that the Brockleys could then go some years without finding out about this transfer. Presumably, there were regular debtor examinations of Griffen both before and after the charging order, and at all stages somebody could have inquired whether Griffen still owned the 50% Hickok’s interest. But we just don’t know.
Something else that is important is this: Even if Griffen had never transferred away his 50% interest in Hickoks, the Brockleys had no way to force a distribution from Hickoks of the money from the sale of the hotel and casino. What could have ended up happening was a situation where the money was trapped in Hickoks and neither the Brockleys or Kimberly could get it. Presumably, at this point there would have been a settlement where both parties walked away about equally unhappy, but at least the Brockleys would have gotten something for their efforts. Of course, that standoff didn’t happen either under these facts, but it is interesting to theorize about.
At any rate, the lesson here is an old one: Aim before you shoot. Or, more technically stated, a creditor seeking a charging order had better fully establish that the debtor really does hold the interest to be charged, or all the effort will be for nought.
As here.
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