When do courts allow a trust to be pierced as an alter ego?

Posted by McCullough

One way to attack an irrevocable trust is to prove that the trust is the alter ego of the grantor because the trust is operated in a manner so that it has no separate existence from the grantor. Some courts describe this as the grantor “exercising such control that the trust has become a mere instrumentality of the owner.” In re Vebeliunas, 332 F.3d 85 (2nd Cir. 2003).

In WILSHIRE CREDIT CORPORATION v. KARLIN, 988 F.Supp. 570 (1997), Allan and Mary Rozinsky established an irrevocable trust for their children and transferred their home to the trust. The Rozinskys paid rent equal to the amount of the mortgage, insurance, and monthly expenses. For a time, the trust also owned a beach home that the Rozinskys rented from the trust. The trustees were close friends and relatives who admitted that most of their decisions were made at the direction of the Rozinskys.

After a time, the Rozinskys became unable to make the rent payments and they issued promissory notes to the trust in the amount of the delinquent rent, although no payments were made on the promissory notes. The court held that under Maryland law, alter-ego will only apply where necessary to prevent fraud, and because no fraudulent transfer had occurred, the creditors could not reach the trust assets despite the control exerted by the settlors.

In UNITED STATES v. EVSEROFF, No. 00-CV-06029 (E.D.N.Y. April 30, 2012), Jacob Evseroff established an irrevocable trust and transferred his primary residence to it after having received notice of a tax deficiency of over $700,000. A series of family friends served as the trustees of the trust. Evseroff did not pay rent to the trust for the privilege of living in the residence, but he did pay the mortgage and expenses as he had when he owned the home. The trust never assumed the mortgage and it was never listed on the flood or fire insurance on the home.

The court held that a plaintiff may pierce the veil of a trust, under the laws of New York, if the plaintiff can show that “(1) the owner exercised such control that the corporation has become a mere instrumentality of the owner, who is the real actor; (2) the owner used this control to commit a fraud or ‘other wrong’; and (3) the fraud or wrong results in an unjust loss or injury to the plaintiff.” Because the transfers to the trust were found to be fraudulent, and because the facts indicated that Evseroff had dominated the trust, the court allowed the government to collect against the assets of the trust.

Lessons learned from these cases: (1) don’t wait until you have a liability problem to transfer assets to an asset protection trust, (2) appoint a trustee who will take control of the trust, and (3) don’t allow a person other than the trustee to control or dominate the trustee or engage in transactions with the trust on terms that are not commercially reasonable in an arms-length transaction.

Wilshire Credit v. Karlin – Irrevocable Trust Protects Home Despite Partial Rent Payments

Posted by McCullough

988 F.Supp. 570 (1997)

WILSHIRE CREDIT CORPORATION, Plaintiff,
v.
Stanley KARLIN, et al., Defendants.

No. Civ.A. AW 96-943.

United States District Court, D. Maryland, Southern Division.

December 8, 1997.

571*571 William A. Isaacson, Washington, DC, for Wilshire Credit Corp.

Yale L. Goldberg, Bethesda, MD, M. Michael Cramer, Benjamin A. Klopman, Rockville, MD, for Stanley Karlin, Robert Dawson.

MEMORANDUM OPINION

WILLIAMS, District Judge.

Presently before the Court are cross-motions for summary judgment. In ruling on the motions, the Court has considered the briefs of the parties, the arguments of counsel at a hearing in open court, and the entire record.

572*572 II

Allan and Mary Rozansky (hereinafter sometimes “the Rozanskys”, and “the settlors”) established a trust for the benefit of their two minor children on July 21, 1982. The children, and any other future lineal descendants of the Rozanskys, are the sole beneficiaries of the trust. The trustees are Stanley Karlin, a former neighbor of the Rozanskys, and Robert Dawson, Mary Rozansky’s brother. The trust vests the trustees with discretion to distribute funds for the benefit of the beneficiaries during the life-time of the settlors.[1] Upon the death of the settlors, the trust is to be distributed equally among the beneficiaries so long as they are at least 25 years old. Because the trustees hold legal title and the beneficiaries hold equitable title to the trust, the Rozanskys have no remaining legally recognizable property interest. The trust is irrevocable, and cannot be modified in any fashion by either settlor.

When the trust was created, its sole asset was the home of the Rozanskys. The Rozanskys retained a life estate, but transferred the remainder interest to the trust. In 1992, the trust purchased the Rozanskys life estate for $50,000. Thus, the trust owns a complete interest in the home (subject to its mortgage). The settlors are tenants of the trust, and pay “rent” which covers the cost of the monthly mortgage, insurance, and other related expenses. The trustee Karlin, who authorized the transaction, concedes that the decision to purchase the life estate was made at the direction of the Rozanskys. No alternative investments were considered and no one other than the Rozanskys was consulted respecting the prudence of the investment. In setting the rent to be paid by the settlors, Karlin never took into account any factor other than the fact that the payment would equal the monthly mortgage.

In 1994, the trust acquired a $695,000 beach home in Delaware which the Rozanskys used for vacations. Karlin, the trustee who authorized the purchase, again did so at the request of the settlors. Karlin had never seen the home before the transaction. The trust also purchased furniture for the beach home for $20,000. Because the trust did not have cash assets, the purchase was financed by refinancing the mortgage on the existing home. The Rozanskys’ rent payments were increased to match the increased mortgage payments. These actions were all taken at the direction of the settlors.

In 1995, the beach home was sold. This action was taken because Karlin was told by the Rozanskys that they could not afford to pay the rent on the two homes. The Rozanskys themselves found the realtor and handled the sale of the beach home; the trustees never spoke with the realtor. The beach house was finally sold for approximately the same price as its initial purchase, excluding realtor fees and other closing costs. After the sale, the trust held a cash balance of approximately $144,000.

Since the sale of the beach home, the Rozanskys have defaulted on rental payments owed to the trust. The Rozanskys have executed promissory notes to the trust. However, the notes provided no date of repayment, and thus far no repayment has been made. The trust has dissipated the $144,000 in cash making mortgage payments. Thus, the trust has accumulated no investment or cash assets for the benefit of the children. The only money the trust has ever paid for the support of the children was a summer camp bill of less than one thousand dollars. According to the trustees, at no time has any of the property belonging to the trust been disbursed to the Rozanskys. According to Trustee Karlin, major decisions regarding the management of the trust property were made with the benefit of independent professional advice. The trustees admit that certain of the acts taken on behalf of the trust were undertaken at the direction of the settlors. While the trustees appear to have acted at times at the direction of the Rozanskys, the Plaintiff makes no allegation that the Rozanskys’ conveyances of the property held by the trust were fraudulent.

Plaintiff, the successor in interest to a creditor of the Rozanskys, secured a stipulated 573*573 judgment against them on July 16, 1990, in the amount of approximately $1.7 million.

III

The parties have filed cross-motions for summary judgment. Summary judgment is appropriate where there is no genuine dispute of material fact and when the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). The evidence of the non movant is to be believed and all justifiable inferences drawn in his favor, but a party cannot create a genuine dispute of material fact through mere speculation or compilation of inferences. Runnebaum v. NationsBank of Md., N.A., 123 F.3d 156, 164 (4th Cir.1997) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513-14, 91 L.Ed.2d 202 (1986); Beale v. Hardy, 769 F.2d 213, 214 (4th Cir.1985))

In this action, Plaintiff seeks to recover the assets of the trust as satisfaction of the debt of the Rozanskys. The defendant trust moves for summary judgment, arguing simply that a creditor of the settlors of the trust has no valid claim to the res of the trust. Plaintiff has filed a cross-motion for summary judgment, arguing that because the uncontradicted evidence clearly shows that the Rozanskys have so dominated the trust that it is effectively their “alter ego,” this Court should equitably disregard the trust and treat its assets as those of the Rozanskys.

The Plaintiff’s argument is as follows: “Under Maryland law, where an entity is a mere `creature’ of another party, the entity may be treated as the alter ego of the dominating party.” In support of this position, Plaintiff cites three cases that conclude, essentially, that courts will equitably disregard a corporate form where such disregard is necessary to prevent fraud or to enforce a “paramount equity.” Colandrea v. Colandrea, 42 Md.App. 421, 428, 401 A.2d 480 (1979) (tort claim for fraud may be had against sole shareholder of corporation); Bart Arconti & Sons v. Ames-Ennis, 275 Md. 295, 312, 340 A.2d 225 (1975) (corporate entity may be disregarded to prevent fraud).

Under Maryland law, the question of whether a party exerts sufficient “dominion” and “control” over a corporation to warrant the conclusion that the corporation is a “mere instrumentality” of another turns on the facts of the particular case. As one court explained, “(T)he corporate entity is disregarded … wherein it is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation. The control necessary to invoke what is sometimes called the `instrumentality rule’ is not mere majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal.” Dixon v. Process Corporation, 38 Md.App. 644, 653, 382 A.2d 893 (1978). The Plaintiff here argues that, because the trust operated exclusively at the command of the Rozanskys, it must be concluded that the trust was so dominated and controlled by the settlors that it was nothing more than the settlors’ instrumentality.

However, Plaintiff cites no Maryland case, and the Court’s research has revealed no Maryland authority, supporting the application of this corporate “alter ego” principle to a trust. The Plaintiff does point to several federal cases where courts have applied the corporate “alter ego” doctrine to trusts. In William L. Comer Family Equity Trust v. U.S., 732 F.Supp. 755 (E.D.Mich.1990), aff’d., 966 F.2d 1455 (6th Cir.1992), the court acknowledged that it had “uncovered no precedent analyzing the `alter ego’ theory of property ownership in the context of a trust,” but reasoned that “cases involving corporate entities provide appropriate guidance.” Id. at 759. The court went on to explain that “where a corporation is a mere agent or instrumentality of its shareholders or a device to avoid legal obligations, the corporate entity can be ignored.” Id. By parity of logic, where a trust “is a mere agent or 574*574 instrumentality” of another party, the trust may similarly be disregarded. Id. Other federal courts have accepted the view that the corporate “alter ego” doctrine may be applied to trusts. E.g., F.P.P. Enterprises v. U.S., 830 F.2d 114, 118 (8th Cir.1987); Loving Saviour Church v. U.S., 728 F.2d 1085, 1086 (8th Cir.1984); U.S. v. Boucher, 735 F.Supp. 987, 988 (D.Col.1990).

The cases make clear, however, that whether a court is to equitably exercise the “alter ego” doctrine as to a particular entity must be determined in accordance with the law of the forum state. See Loving Saviour Church, 728 F.2d at 1086 (applying South Dakota law); Comer Trust, 732 F.Supp. at 759 (applying Michigan law).

The scant authority pertinent to the inquiry appears to suggest that, under Maryland law, a settlor’s access to the trust res will not defeat an otherwise valid trust. In United States v. Baldwin, 283 Md. 586, 391 A.2d 844 (1978), the government sought to impose a tax lien on the assets of a trust established by the settlor before he incurred his tax liability. The trust was irrevocable, but the settlor maintained the right to receive the income from the investments and other personalty of the trust during his lifetime. While the trustee was a third party bank, the settlor maintained the right to name himself as trustee. The Court concluded that “the settlor of an irrevocable trust, reserving to himself only the right to receive, during his lifetime, the income from the investments and other personalty of the trust does not have such an estate in the corpus thereof as constitutes `property and rights to property’ under Maryland law,” and thus the lien could not be attached. Id. at 595-596, 391 A.2d 844.

This seems to be the consistent rule of Maryland law. In Mercantile Trust Co. v. Bergdorf & Goodman, 167 Md. 158, 173 A. 31 (1934), the court explained that “[w]ith the ownership of the corpus in the [beneficiary] remaindermen, even though possession may be delayed or defeated by the will of the donor, there being no evidence of fraud in the inception of the trust, and none in the instrument creating it, the corpus cannot be attached to satisfy the creditors of the settlor.” Id. at 166, 173 A. 31. Similarly, after reviewing the relevant precedent, the U.S. Claims Court found “no assumption by the Maryland courts that the wife may be deemed merely the husband’s alter ego for purposes of insulating property from a settlor’s creditors in a non-fraudulent conveyance transaction.” Estate of German v. U.S., 7 Cl.Ct. 641, 645 (1985), citing Watterson v. Edgerly, 40 Md.App. 230, 388 A.2d 934 (1978). Likewise, in the present case the Rozanskys retain no ownership interest in the corpus of the trust benefitting their children and there is no allegation of fraud in the establishment of the trust;[2] accordingly, it is logical to conclude that, under Maryland law, the trust res is beyond the reach of the Rozanskys’ creditors.

Further, even assuming that the “alter ego” doctrine were applicable to properly established trusts in Maryland, the Plaintiff has not offered an adequate basis for invoking “alter ego” principles here. Again, there is no allegation of any fraud on the part of the Rozanskys in conveying the property to the trust; Plaintiff merely contends that the Rozanskys should not be able to evade their legal obligations through a trust device that they dominate and control. Concededly, this argument finds support in the out-of-state authority referred to by Plaintiff. “[W]here [a] corporation is a mere agent or instrumentality of its shareholders or a device to avoid legal obligations, the corporate entity may be ignored.” Comer Trust, 732 F.Supp. at 759. The Maryland courts, however, have adopted a somewhat different view of the “alter ego” doctrine.

In Arconti, the Maryland Court of Appeals acknowledged that “although the courts will, in a proper case, disregard the corporate entity,” it appears that such a “proper case” may only be found “where it is necessary to prevent fraud or enforce a paramount equity.” Arconti, 275 Md. at 310, 340 A.2d 225. 575*575 Notably, the Arconti court specifically overruled a lower court’s determination that the “alter ego” doctrine may be applied “in order to prevent evasion of legal obligations.” Id. at 311-312, 340 A.2d 225. Thus, in Arconti, even though three corporations commingled equipment, operated from a single place of business, permitted one corporation to become dormant as the two other corporations improved, and made personal loans and transferred insurance policies to the principals, the “alter ego” doctrine could not be applied to hold the dominant corporations and principals liable for the obligations of the indebted corporation because there was no showing of fraud.

Similarly, even assuming the general applicability of the “alter ego” doctrine to trusts in Maryland, there can be no application of the doctrine in this case. There has been no showing of fraud here. While Plaintiff generally avers that the Rozanskys have “fraudulently shelter[ed] assets from their creditors,” there has been no contention that the property held by the trust was fraudulently conveyed. While it is true that a settlor cannot place assets in trust for the settlor’s own benefit in order to frustrate his or her own creditors, in absence of a fraudulent conveyance of the property, the property becomes an asset of the trust when conveyed; non-beneficiary settlors no longer have assets to shield. Inasmuch as the only “fraudulent” conduct of the Rozanskys is the domination of the trust while failing to honor legal obligations, this does not warrant the application of the “alter ego” doctrine under Maryland law. Arconti, 275 Md. at 311-312, 340 A.2d 225.[3] Indeed, even in the out-of-state cases relied upon by the Plaintiff, in every instance the “alter ego” doctrine was applied in concert with an allegation of a fraudulent conveyance. See, e.g., F.P.P. Enterprises, 830 F.2d at 118 (affirming conclusion that “the trusts were shams and fraudulent conveyances”); Loving Saviour Church, 728 F.2d at 1086 (applying “alter ego” as an alternative to conclusion that “the property transfers to the church were a sham”); Boucher, 735 F.Supp. at 988 (government argues alternatively that “the trusts are void as fraudulent conveyances, or that the trusts are the settlor’s alter egos”); Comer Family Trust, 732 F.Supp. at 760 (relying on “indicia of improper transfers” in applying “alter ego” doctrine).

It is apparently true that the trustees have at times acted at the behest of the Rozanskys, though they are under no legal obligation to do so.[4] Nonetheless, to the extent that the trust was properly created and the property properly transferred to it, the Court must conclude that the trust res is now beyond the reach of the Rozanskys’ creditors, notwithstanding Plaintiff’s prayer for equitable application of the “alter ego” doctrine. Further, even assuming “alter ego” principles apply to trusts in Maryland, Plaintiff here points to no fraudulent conduct other than the fact that the Rozanskys have “controlled” the trust while failing to pay their debts. It seems clear that under Maryland law, the evasion of legal obligations does not warrant the invocation the of “alter ego” doctrine. Accordingly, Plaintiff has no legal claim to the assets of the trust.

576*576 IV

For the reasons set forth, the Defendants’ motion for summary judgment must be granted, and Plaintiff’s cross-motion for summary judgment must be denied.

[1] The trust document also vests the trustees with the power to “mortgage, lease, … [or] borrow on … any and all of the funds and properties of the Trust.”

[2] It is interesting to note that the conveyance into the trust of the Rozanskys’ life estate interest in the property occurred in 1992, two years after the judgment was entered. Nonetheless, Plaintiff makes no allegation that this subsequent conveyance was fraudulent.

[3] It is true that “alter ego” principles may be invoked to “enforce a paramount equity” as well as to prevent fraud. However, the enforcement of “a paramount equity” rationale appears to be of limited application in Maryland. See Travel Committee v. Pan Am., 91 Md.App. 123, 158, 603 A.2d 1301 (1992) (“Notwithstanding its hint that enforcing a paramount equity might suffice as a reason for piercing the corporate veil, the Court of Appeals to date has not elaborated upon the meaning of the phrase or applied it in any case of which we are aware”). In any event, the Court concludes that principles of fundamental equity and fairness do not compel the invalidation of a trust for the benefit of minor children, in favor of creditors of the settlor, simply because the trust’s third-party trustees may have been less than diligent in the discharge of their duties.

[4] Indeed, the trustees do so at their own peril. It is black letter law that the trustees of a trust owe a duty of loyalty to the beneficiaries of the trust. “Even if a trustee has no personal stake in a transaction, the duty of loyalty bars him from acting in the interest of third parties at the expense of the beneficiaries.” Trustees of Employees Retirement System of Baltimore v. Baltimore, 317 Md. 72, 109, 562 A.2d 720 (1989). It does not appear, however, that a creditor of the settlor has standing to bring a claim of breach of fiduciary duty against the trustees. See Parish v. Md. & Va. Milk Producers, 261 Md. 618, 277 A.2d 19 (1971) (suggesting that a “fiduciary relationship” is necessary to give “former members the right to maintain this action”).

Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997)

Posted by McCullough

Shurley Shurley v. Texas Commerce Bank, 115 F. 3d 333 (5th Cir 1997) Bankr. L. Rep. P 77,423, 11 Tex.Bankr.Ct.Rep. 259 In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. Billy R. SHURLEY and Jane Bryant Shurley, Appellants, v. TEXAS COMMERCE BANK–AUSTIN, N.A. and Texas Commerce Bank–San Angelo, N.A., Appellees. In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. Billy R. SHURLEY and Jane Bryant Shurley, Appellants, v. TEXAS COMMERCE BANK–SAN ANGELO, N.A., Texas Commerce Bank–Austin, N.A. and Dennis Elam, Trustee, Appellees. In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. William H. ARMSTRONG, II, Appellant, v. TEXAS COMMERCE BANK–SAN ANGELO, N.A., Dennis Elam, Trustee, and Texas Commerce Bank–Austin, Appellees. Nos. 96-50137, 96-50138. United States Court of Appeals, Fifth Circuit. June 20, 1997. John P. Higgins, Michael Lee Rush, Higgins & Rush, Dallas, TX, for Shurley Appellants. Eric Jay Taube, Hohmann, Werner & Taube, Austin, TX, Mitchell Dodd Savrick, Hohmann, Werner & Taube, Austin, TX, for Texas Commerce Bank–Austin. Stanley M. Johanson, University Of Texas Law, Austin, TX, Henry H. McCreight, Jr., Houston, TX, for Texas Commerce Bank–San Angelo in No. 96-50137. Michael A. Wren, McGinnis, Lochridge & Kilgore, Austin, TX, Shannon H. Ratliff, Austin, TX, Scott Davis Moore, Joseph & Moore, Austin, TX, for William H. Armstrong. John Lloyd Hopwood, Houston, TX, Stanley M. Johanson, Austin, TX, Henry H. McCreight, Jr., Houston, TX, for Texas Commerce Bank–San Angelo in No. 96-50138. Michael G. Kelly, The McMahon Law Firm, Odessa, TX, for Trustee. James Alfred Carter, W. Truett Smith, Smith, Carter, Rose, Finley & Griffis, San Angelo, TX, for amicus curiae. Appeals from the United States District Court for the Western District of Texas. Before REAVLEY, JOLLY and BENAVIDES, Circuit Judges. REAVLEY, Circuit Judge: 1 The question here is to what extent the assets of a spendthrift trust settled by a bankruptcy debtor and others are included in the debtor’s bankruptcy estate. The bankruptcy and district courts held that the entirety of the debtor’s interest in the trust is property of the bankruptcy estate. We limit the estate to the property contributed to the trust by the debtor. BACKGROUND 2 In 1965 M.D. Bryant, Ethel Bryant, Anne Bryant Ridge, and Jane Bryant Shurley created a trust under Texas law. M.D. and Ethel Bryant were husband and wife. Anne Bryant Ridge and Jane Bryant Shurley are their daughters. The trust is known as the “M.D. Bryant Family Trust” or the “Bryant Family Trust.” 3 The parents and daughters contributed real property to the trust. The property consisted of ranches owned by the family, including one owned by Shurley. Shurley contributed approximately 11,000 acres of raw land from the south of a west Texas ranch (her contribution herein the “Marfa ranch”).1 The trust agreement states that the property contributed by the parents “represents two-thirds (2/3) of the total value of all of said real property to be contributed and that the value of that portion of said real property to be contributed by [the two daughters] each represents (1/6) of the total value of all of said real property to be contributed.” 4 The trust agreement provided that additional property could be added to the trust at a later date. According to Shurley the vast bulk of the corpus of the trust came through pourover provisions in the parents’ wills, which were executed at the same time the trust agreement was executed. She claims that the Marfa ranch represents only two percent of the value of the total assets of the trust. The parents died in 1967 and 1971. 5 Under the trust agreement, while the parents were alive, two-thirds of the income generated by the trust was distributed to the parents and one-sixth of the income was distributed to each of the daughters. Upon the death of one parent, the income was distributed equally among the living parent and the daughters. Upon the death of the second parent, the two daughters each received half of the income if both were living at the time. The agreement has provisions for the children and other descendants of the daughters to receive income from the trust and distribution of its assets upon final termination of the trust. 6 In 1992, Shurley and her husband filed for bankruptcy under Chapter 7 of the Bankruptcy Code. Since Shurley’s parents were deceased at the time, she and her sister each had a one-half interest in the income from the trust. The Marfa ranch was still held by the trust. Two bank creditors and the bankruptcy trustee brought an adversary action, seeking a declaratory judgment that Shurley’s interest in the trust was property of the bankruptcy estate. After a trial, the bankruptcy court entered a judgment declaring that Shurley’s “entire interest in the [trust], being an undivided 50 percent interest in the principal assets and income of the [trust], is property of the Chapter 7 bankruptcy estate.” In its memorandum opinion it enjoined the trustee of the trust “from disbursing any beneficial interest previously held by Mrs. Shurley to anyone other than” the bankruptcy trustee.2 Shurley and the trustee of the trust3 appealed to the district court, which affirmed. This appeal followed. DISCUSSION 7 We review the bankruptcy court’s factual findings under the clearly erroneous standard, and we review its legal conclusions de novo.4 8 Under section 541 of the Bankruptcy Code5 a bankruptcy estate is created at the commencement of the bankruptcy case. Section 541(a)(1) states that “[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case” is included in the estate. Subsection (c)(2) states the exclusion relevant here: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” 9 Section 541(c)(2) excludes “spendthrift trusts” from the bankruptcy estate if such a trust protects the beneficiary from creditors under applicable state law.6 “In general, a spendthrift trust is one in which the right of the beneficiary to future payments of income or capital cannot be voluntarily transferred by the beneficiary or reached by his or her creditors.”7 10 The Bryant Family Trust agreement vests in the trustee authority over the trust assets. Among other powers vested in the trustee, the agreement provides: 11 The trustee (and his successors) shall have full power and authority: to manage, handle, invest, reinvest, sell for cash or credit, or for part cash and part credit, convey, exchange, hold, dispose of, lease for any period of time, whether or not longer than the life of the trust, improve, repair, maintain, work, develop, operate, use, mortgage, or pledge all or any part of the funds…. The trustee shall have full power to determine the manner in which expenses are to be borne and in which receipts are to be credited as between principal and income, and also to determine what shall constitute income or net income and what shall constitute corpus and principal…. [B]eneficiaries shall have no right or power to transfer, assign, convey, sell or encumber said trust estate and interest therein, legal or equitable, during the existence of these trusts. 12 The agreement expressly provides that trust assets cannot be reached by creditors of the beneficiaries.8 13 By vesting control of the trust in the trustee, denying the beneficiaries control over the trust, and denying creditors of the beneficiaries access to trust assets, the trust agreement qualifies as a spendthrift trust under Texas law. For two reasons, however, the bankruptcy court concluded that the trust assets are not beyond the reach of creditors under state law. The first reason, which we reject in part, is that spendthrift trust protection under state law does not extend to a trust settled by the beneficiary herself. The second reason, which we reject, is that Shurley exercised sufficient control over the trust to make the assets subject to her creditors. 14 A. The Self-Settlor Rule and its Consequences 15 The bankruptcy court’s principal reason for holding that Shurley’s interest in the trust is property of the bankruptcy estate is that she was one of the original settlors of the trust. We have recognized that a beneficiary’s interest in a spendthrift trust is not subject to claims of creditors under Texas law “[u]nless the settlor creates the trust and makes himself beneficiary.”9 The rationale for this “self-settlor” rule is obvious enough: a debtor should not be able to escape claims of his creditors by himself setting up a spendthrift trust and naming himself as beneficiary. Such a maneuver allows the debtor, in the words of appellees, to “have his cake and eat it too.” As one Texas court has explained:Public policy does not countenance devices by which one frees his own property from liability for his debts or restricts his power of alienation of it; and it is accordingly universally recognized that one cannot settle upon himself a spendthrift or other protective trust, or purchase such a trust from another, which will be effective to protect either the income or the corpus against the claims of his creditors, or to free it from his own power of alienation. The rule applies in respect of both present and future creditors and irrespective of any fraudulent intent in the settlement or purchase of a trust.10 16 The novel issue presented here is whether the entirety of a beneficiary’s interest in a spendthrift trust is subject to creditors’ claims where the trust is only partially self-funded by the beneficiary. There is no compelling Texas authority on this issue, but we conclude that on these facts Texas courts would surely hold that the partially self-funded spendthrift trust is only partially subject to creditors’ claims. 17 Allowing creditors to reach only the self-settled portion of the trust is consistent with the other long-standing rule of Texas law that a settlor should be allowed to create a spendthrift trust that shields trust assets from the beneficiary’s creditors. “Spendthrift trusts have long been held valid by Texas courts.”11 The bankruptcy court’s ruling ignores the wishes of Shurley’s parents, the primary settlors of the trust, and the state’s policy of respecting their expectations. “Spendthrift trusts are not sustained out of consideration for the beneficiary. Their justification is found in the right of the donor to control his bounty and secure its application according to his pleasure.”12 Allowing creditors to reach only that portion of the trust contributed by Shurley would further the policy of allowing her parents to create a spendthrift trust for the benefit of Shurley that is protected from her creditors, while giving effect to the exception for self-settled trusts. At least one court from another jurisdiction agrees with this this approach,13 and we believe that Texas courts would do the same. Accordingly we hold that the property which Shurley herself contributed to the trust–the Marfa ranch–is not protected from creditors under state law and is therefore property of the bankruptcy estate, but that all other assets of the trust are not property of the estate.14 18 We so hold despite Shurley’s “power of appointment” granted by the trust agreement. Under the agreement each sister has a right to allocate assets of the trust to specified beneficiaries. The agreement states that the sisters “shall each have a special power of appointment over an adjusted one-half (1/2) of the trust assets, to appoint such adjusted one-half (1/2) of the assets of said trust to and among their children and lineal descendants…. Neither [daughter] can appoint assets to herself, her creditors, her estate, or the creditors of her estate.” If a daughter does not exercise her power of appointment, the trust agreement provides that her interest shall be distributed in equal shares “to her children and lineal descendants, and to the lineal descendants of a deceased child, per stirpes.” Shurley represents on appeal that she has not exercised her special power of appointment because she is content with the trust’s distribution provisions for her descendants. 19 This power of appointment does not alter our conclusion that the Marfa ranch is property of the bankruptcy estate. The Bankruptcy Code expressly excludes such a power of appointment from the bankruptcy estate, since section 541(b)(1) provides that property of the estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” However, while the power of appointment to others does not become property of the estate under § 541(b)(1), the property which became part of the bankruptcy estate under the Code upon the commencement of the bankruptcy case now belongs to that estate and is controlled by the bankruptcy trustee. Regardless of how Shurley might indicate that trust assets should be divided upon her death, the Marfa ranch now belongs to the bankruptcy estate, and her designation of beneficiaries is irrelevant. The bankruptcy estate will be divided among creditors according to the Code, regardless of Shirley’s appointment of assets under the trust agreement. 20 The exercise of the power of appointment under the trust agreement is analogous to a will, and has no more effect on the property of the bankruptcy estate and creditor priorities than a garden-variety will of the debtor. With an ordinary will, the heirs only receive the stipulated items of the property that were owned by the testator. Stated more simply, a testator can only give away that which was hers. Here, the Marfa ranch no longer belongs to Shurley; it is property of the bankruptcy estate. 21 Shurley argues that she only has a life estate in the Marfa ranch and other trust assets in the form of an equitable interest in the income from the trust assets during her life, and that creditors therefore cannot reach the corpus of the trust even if it is self-settled. She is correct that absent distributions of corpus at the discretion of the trustee or a premature termination of the trust (discussed below), the trust agreement only provides her with an income interest in the trust assets, with the remainder going to other beneficiaries. Shurley cites authority that even when a settlor creates a trust for herself, creditors can only reach trust assets to the extent of the settlor’s interest.15 22 The issue here–whether the creditors can reach only Shurley’s income from the Marfa ranch or the ranch itself–does not turn on whether the Shurley’s interest in the trust is “equitable,” since the Bankruptcy Code defines property of the bankruptcy estate to include “all legal or equitable interests of the debtor in property.”16 Resolution of this question turns on whether creditors can reach the trust corpus under state law, regardless of how the interest is characterized. 23 We conclude that under Texas law creditors can reach not only Shurley’s income from the Marfa ranch but the ranch itself, in light of Bank of Dallas v. Republic National Bank of Dallas.17 In Bank of Dallas, the debtor settled a trust with spendthrift language for the benefit of herself and her children. The debtor was to receive the net income of the trust during her lifetime, with the remainder going to her children or other beneficiaries named in her will. The trust agreement further provided that “[w]henever the trustee determines that the income of the Settlor from all sources known to the trustee is not sufficient for her reasonable support, comfort, and health and for reasonable support and education of Settlor’s descendants, the trustee may in its discretion pay to, or use for the benefit of, Settlor or one or more of Settlor’s descendants so much of the principal as the trustee determined to be required for those purposes.” 24 The court held that “where a settlor creates a trust for his own benefit, and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust by garnishment.”18 It further held that income from the trust was subject to creditor claims, and that “the interest of [the debtor] in the trust is such that the corpus may be reached by her creditors.”19 25 The court considered the Restatement (Second) of Trusts § 156 (1959), which provides: 26 (1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest. 27 (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit. 28 The court also looked to comment e of this section, which states that “[w]here by the terms of the trust a trustee is to pay the settlor or apply for his benefit as much of the income or principal as the trustee may in his discretion determine, his transferee or creditors can reach the maximum amount which the trustee could pay to him or apply for his benefit.” Applying these rules the court held that the creditor could reach the corpus of the trust, even though the debtor only had a life interest in the trust. 29 By this reasoning the creditors are able to reach the self-settled asset of the trust in our case, namely the Marfa ranch. The trust agreement states that “[i]f the trustee determines that the net income of said trust is insufficient to maintain and support any of the beneficiaries of said trust or their children and lineal descendants in their accustomed manner of living, taking into account, however, such beneficiary’s income from all other sources, the trustee may use so much of the corpus of said trust as the trustee sees fit to make up such deficiency.” This language is even broader than the language of the trust agreement in Bank of Dallas, since in our case the trustee can make grants of trust corpus to support the beneficiaries’ or their descendants’ “accustomed manner of living,” while in Bank of Dallas the trustee was limited to making such distributions to support the beneficiary’s “reasonable support, comfort, and health” and the reasonable support and education her descendants. If anything, the former term grants even more discretion to the trustee than the latter. Accordingly we conclude that the creditors in our case can reach the corpus of the trust under Texas law as to that property–the Marfa ranch–contributed by Shurley to the trust, and that the ranch is therefore property of the estate. 30 The court in Bank of Dallas also quoted comment c to § 156, which states that “[i]f the settlor reserves for his own benefit not only a life interest but also a general power to appoint the remainder by deed or will or by deed only or by will alone, the creditors can reach the principal of the trust as well as the income.” In Bank of Dallas the debtor apparently had a general power to appoint the remaining trust assets by will, while in our case Shurley and her sister have a special power of appointment, meaning that the trust document limits the choice of recipients of appointed assets to the sisters’ descendants. We do not see this factual distinction as significant. Comment c was only one of three comments to § 156 (comments c, d, and e) quoted by the court in Bank of Dallas, and § 156 itself, as we read it, states than any self-settled support or discretionary trust is subject to creditor claims up to “the maximum amount which the trustee under the terms of the trust could pay to” the beneficiary. We cannot fathom why the court would have reached a different result if the debtor had had a special rather than a general power of appointment. Before even mentioning the Restatement, the court stated without qualification that, under Texas law, “where a settlor creates a trust for his own benefit, and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust by garnishment.”20 31 A similar result was reached in State v. Nashville Trust Co.21 The debtor was the beneficiary of a spendthrift trust holding real estate. The debtor built a mansion on the property. The court held that the debtor had self-settled the trust to the extent of the improvements he had made, and that the property was therefore subject to the creditor’s claim to the extent of the debtor’s improvements. The debtor argued that even if he “can be held to have contributed to the trust property, enhanced its value, and to that extent created a spendthrift trust for his own benefit, only his interest in such enhancement, i.e. his life estate in such enhancement, may be subjected and that the remainder interest of his children … may not be subjected for any debt of his.”22 The court rejected this argument, reasoning that the debtor’s children “could only be donees or volunteers and could take no benefits under such transfer as against his creditors. So we think the chancellor did not err against defendants in decreeing that the [creditor] had a right to subject the land for the amount by which its value had been enhanced by reason of the improvements.”23 The court held that the creditor was entitled to a lien on the trust property for the value of the debtor’s improvements, and that the creditor was “entitled to a sale of the land, if necessary, to enforce the lien.”24 32 Shurley argues that creditors cannot reach the corpus of the trust because of our decisions in In re Goff, 706 F.2d 574 (5th Cir.1983) (Goff I), and In re Goff, 812 F.2d 931 (5th Cir.1987) (Goff II ). In Goff I we held that the debtor’s Keogh plan, a pension trust under the ERISA statute,25 was not a spendthrift trust excluded from the bankruptcy estate under Bankruptcy Code § 541(c)(2) because it was self-funded. We stated that “[t]he general rule is well established that if a settlor creates a trust for his own benefit and inserts a ‘spendthrift’ clause, restraining alienation or assignment, it is void as far as creditors are concerned and they can reach the settlor’s interest in the trust.”26 33 In Goff II, a creditor claimed that its recorded judgment against the debtor gave it a statutory lien against the property held in the pension trust, and that it therefore had a secured bankruptcy claim. The bankruptcy trustee argued that the claim was unsecured. We held that the claim was unsecured, because under Texas law a judgment lien only attaches to real property in which the debtor has legal title, and the debtor only had equitable title to the real property in the trust. We stated that “[t]he trust remains valid; only the spendthrift clause is void, allowing creditors to reach the property held in trust by garnishment.”27 Goff II did not, as appellants argue, hold that creditors cannot reach the corpus of a self-funded trust with an invalid spendthrift clause. It held only that a judgment lien against the debtor did not create a secured claim against the assets of the trust. We have cited Goff II for the proposition that “[a] creditor can reach the trust assets” of a trust funded by the debtor-beneficiary.28 As with the Bryant Family Trust, the trust in question (1) contained a spendthrift clause, (2) provided the debtor with a life interest in the income, with the remainder going to other beneficiaries, and (3) provided that the trustee could invade the corpus of the trust for the debtor’s support, maintenance and welfare. 34 Shurley points out that when she made the original contribution of the Marfa ranch to the trust, it was subject to a note and lien. She argues that this lien should affect our analysis, but we disagree. There is no dispute that Shurley was the owner of the ranch when she conveyed it to the trust, even if it was encumbered with a lien. The note and lien may have affected the value of the property at the time the trust was funded, but they did not affect ownership of the property. When determining the property of the estate, the Bankruptcy Code looks to the debtor’s property “as of the commencement of the case.”29 It makes no more sense to look to the value of the ranch at the time of the creation of the trust than in does to look to the value of any other property of the debtor on the date of acquisition. If the debtor owns stock, bonds, real estate or other property, the original value or cost basis of those assets is irrelevant to the bankruptcy matter of defining the estate. Accordingly a lien on the ranch at the time of the trust’s creation does not alter our conclusion that the ranch is property of the bankruptcy estate. The ranch might have appreciated or depreciated in value for any number of reasons since 1965, including the balance on the note, but it is still property of the bankruptcy estate. 35 Shurley argues that there was no proof by appellees that she had any equity in the ranch at the time of creation of the trust, reasoning that she could not be a self-settlor if the property she contributed was worthless. Assuming that Shurley is legally correct–that a settlor’s contribution to a trust of real property in which she had no equity at the time of the trust’s creation does not fall within the self-settlor rule–the bankruptcy court found that she had equity in the property at the time of the creation of the trust in 1965.30 This fact finding is not clearly erroneous. Shurley purchased the ranch from her parents in 1950 for $131,366.64 and assumed a $50,000 balance on the note.31 The balance on the note was only $23,000 when the property was conveyed to the trust.32 Moreover, in the trust agreement itself, Shurley as a signatory represented that “the value of that portion of said real property to be contributed by [Shurley and her sister] each represents (1/6) of the total value of all of said real property to be contributed.” This declaration is an admission by Shurley that the property she contributed had some value, exceeding the balance on the note, since the trust assumed the note. B. Beneficiary Control 36 The bankruptcy court concluded that “[e]ither substantial control or self-settlement may operate to invalidate protective trust provisions.”33 It found that Shurley exercised too much control over the trust to qualify as the beneficiary of a spendthrift trust. We find none of the reasons given persuasive.34 37 First, the court found that “Mrs. Shurley, in conjunction with her father during his life, had the power to revoke, alter, or amend the Trust document, or distribute the Trust assets back to the settlors.”35 We disagree. The agreement provides that “M.D. Bryant (the father) with the concurrence of either Settlor Anne Bryant Ridge or Settlor Jane Bryant Shurley, shall have the right at any time during his lifetime to revoke, alter and amend said trust and distribute the assets of said trust to the Settlors in the same proportion as the original contributions by each of said Settlor, taking into account any adjustment under paragraph (b).” The power to revoke or amend the trust was vested in the father, not the daughters. Shurley had no authority to alter the trust. She only had the authority to prevent her father from doing so, and only if she and her sister vetoed the change. At most therefore she and her sister in combination had the power to ensure the perpetuation of the trust. Further, this power lapsed upon the death of the father in 1967. We find no authority that such a limited power rendered the trust subject of creditor claims against the beneficiaries. 38 Second, the bankruptcy court noted that the agreement provided that Shurley had the right to petition three “special trustees” for the partial or complete termination of the trust. The agreement provides for the appointment of certain named special trustees, including a state judge, after the death of the parents. It states that “[u]pon application made by either daughter … or both, showing that termination would best serve the intended purpose of the trust, such Special Trustees shall in their sole and absolute discretion have the power and authority by unanimous consent to terminate in whole or in part and from time to time the trust or trusts established hereunder.” Again, this provision does not vest in Shurley the power to terminate or alter the trust. It only authorizes her to request such a change from special trustees, who have “in their sole and absolute discretion” the authority to alter the trust. Even absent such a provision, Shurley, like all Texas trust beneficiaries, had a statutory right to seek judicial modification or termination of the trust if “compliance with the terms of the trust would defeat or substantially impair the accomplishment of the purposes of the trust.”36 No court has ever held that such a statutory right renders a spendthrift trust subject to creditor claims. 39 Third, the bankruptcy court noted Shurley’s special power of appointment. This provision merely gave the daughters the authority to allocate trust assets to their descendants. It grants no authority to the daughters to allocate assets to themselves. As explained above, the Bankruptcy Code expressly excludes such a power of appointment from the bankruptcy estate. Section 541(b)(1) of the Code provides that property of the estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” 40 Aside from the terms of the trust agreement, the bankruptcy court found that Shurley had exercised de facto control over the trust. The court found: 41 Outside the Trust document, the Shurleys also manipulated Trust assets and governed the initial Trustee, Bryant Williams. The Shurleys were regularly able to obtain unrestricted corpus distributions and loans. While the Trust provides for such distributions, the liberality and circumstances under which they were requested and granted suggested a domination by M.D. Bryant, Mrs. Shurley and Mrs. Watkins of Mr. Williams. Only recently had any corpus distribution request been denied, and only recently had the successor Trustee, Mr. Armstrong, started to make only “loans,” to the exclusion of corpus distributions. Indeed, in the early days of the Trust, the initial Trustee, on behalf of the Trust, executed promissory notes as a comaker for the Shurleys. Part of the malleability of Bryant Williams may have arisen either from his fear of being replaced for failing to abide by the wishes of Mrs. Shurley and Mrs. Watkins, or from his close relationship with the family. While M.D. Bryant, the Shurleys and the Watkines may not have held all of the puppet strings to Mr. Williams, they held enough of them to exert the control necessary to defeat the Trust’s protective attributes.37 42 Shurley strongly denies that the evidence at trial supported these findings, arguing for example that there is no evidence that the first trustee ever made a single distribution of trust corpus or a single loan to Shurley or any other beneficiary. Appellees argue that in addition to the above-quoted findings, Shurley, among other things, “used the Trust income to induce extensions of credit to herself and her husband,” and “engaged in ‘trustee shopping’ to help further her control of the trust assets.”Even if these findings are taken as undisputed, they do not establish control by the daughters over the trust assets sufficient to make the trust subject to their creditors. The fact that the trustees liberally bestowed trust assets on the daughters, by itself, does not establish de facto control by the daughters over the affairs of the estate. The daughters were after all two of the principal beneficiaries of the trust, and distributions of the wealth of the the trust to the daughters is entirely consistent with its apparent purpose. The agreement provides that the trustee was not limited to distributing income generated from the corpus of the trust. As discussed above, it expressly authorized the trustee to make distributions from the trust corpus “[i]f the trustee determines that the net income of said trust is insufficient to maintain and support any of the beneficiaries of said trust or their children and lineal descendants in their accustomed manner of living….” It also expressly authorized the trustee to “loan money to … and otherwise deal with any and all persons” including “the beneficiaries of this trust.” 43 As one Texas decision has explained in denying a creditor’s claim against assets held by a spendthrift trust: 44 the purpose of such a trust is not defeated by the fact that the trustee is authorized in his discretion to apply a part of the corpus of the fund to the use of the beneficiary in accordance with the terms of the trust. Neither is the purpose of such trust defeated by the fact that the trustee is authorized or even required to turn the entire trust fund or property over to the beneficiary absolutely at some fixed time in the future.38 45 Appellees did not establish that loans or grants from the trust to the daughters, on their face consistent with the purpose and language of the trust, amounted to de facto control of the trust by the daughters. Further, the fact that the beneficiary of a spendthrift trust may have behaved as a spendthrift only shows the prescience of the settlors, and should not defeat the protective features of the trust. Appellees’ focus on the behavior of Shurley as beneficiary is misplaced, since as explained above, spendthrift trusts are not shielded from creditors “out of consideration for the beneficiary. Their justification is found in the right of the donor to control his bounty and secure its application according to his pleasure.”39 C. Whether the Trust Is an Annuity 46 By separate appeal Shurley argues that the bankruptcy court erred in denying her summary judgment motion urging that her interest in the trust is an “annuity” exempt from creditors under Texas law. 47 Under Texas law and Bankruptcy Code § 522, Texas debtors may elect either state or federal exemptions from creditors.40 Shurley’s claims that her interest in the trust is an annuity exempt from creditors under Tex. Ins. Code Ann. art. 21.22 (Vernon Supp.1997), which provides an exemption for “all money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance or annuity contract issued by a life, health or accident insurance company, including mutual and fraternal insurance, or under any plan or program of annuities and benefits in use by an employer or individual.” The emphasized language was added by a 1993 amendment to the statute, after Shurley filed for bankruptcy. 48 This argument fails for two reasons. First, her interest in the trust was not issued by an insurance company or employer, so the only conceivable claim of exemption is that her interest is part of a “plan or program of annuities and benefits in use by an … individual.” The reference to an individual was added to the statute after the bankruptcy filing. In determining exemptions we must apply the law in effect at the time the debtor entered bankruptcy.41 Although Texas exemption laws are liberally construed,42 the exemption Shurley claims simply did not exist at the commencement of her bankruptcy case. We cannot agree with Shurley that the 1993 amendment merely “clarified” legislative intent insofar as it added a reference to non-employer annuities that are not issued by insurance companies.43 The statute plainly did not apply to such annuities prior to the amendment. 49 Second, we do not believe that Shurley’s trust interest can be characterized as an annuity in any event. One Texas court has described an annuity as a “a form of investment which pays periodically during the life of the annuitant or during a term fixed by contract rather than on the occurrence of a future contingency.”44 We have cited this same definition with approval.45 While all annuities do not make payments in fixed, predetermined amounts,46 we do not believe that the term extends to a trust where future payments are highly contingent on the future circumstances of the beneficiaries. The trust agreement provides that the trustee “may” make distributions of trust corpus if he determines that such distributions are needed to “maintain and support any of the beneficiaries or their children or lineal descendants in their accustomed manner of living.” Any such good faith determination by the trustee is “final and binding on all interested parties.” Such distributions were in fact made. By design, such distributions are tied to contingencies unknown at the time of the creation of the trust, and are not consistent with the concept that an annuity makes payments without regard to “the occurrence of a future contingency.”47 In addition, under terms of the trust agreement discussed above, payments to Shurley were contingent on (1) the death of her parents, since her interest increased on the death of one parent and increased again on the death of the second parent, (2) whether the father, with the consent of either sister, chose to terminate the trust, and (3) whether the special trustees terminated the trust. 50 Further, Shurley’s argument simply proves too much, since if her interest in the trust is an annuity, then all beneficiaries of self-settled trusts could make the same argument, as long as the trust agreement called for periodic payments to the settlor for life or a fixed term. We cannot accept that the Texas legislature intended this result, which would reject the universally recognized rule, and one codified by Texas statute, that a settlor cannot create his own spendthrift trust and shield its assets from creditors. If the legislature had intended this result, it would have repealed Tex. Prop.Code Ann. § 112.035(d), which provides that “[i]f the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.” CONCLUSION 51 In summary, we conclude that the Marfa ranch and income generated therefrom is property of the estate.48 The judgment is reversed and the case is remanded for further proceedings consistent with this opinion. 52 REVERSED and REMANDED. 1 The briefs indicate that the “Marfa Ranch” also refers to a larger tract of land out of which came the acreage Shurley contributed to the trust. In this opinion the “Marfa ranch” means only that acreage owned by Shurley and conveyed to the trust in 1965, together with any mineral interests she may have owned and conveyed to the trust 2 In re Shurley, 171 B.R. 769, 789 (Bankr.W.D.Tex.1994) 3 For convenience, appellants Shurley and the trustee of the trust are sometimes collectively referred to as Shurley 4 In re Herby’s Foods, Inc., 2 F.3d 128, 130-31 (5th Cir.1993) 5 11 U.S.C. § 541 6 Patterson v. Shumate, 504 U.S. 753, 762, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992) (noting legislative history that § 541(c)(2) “continues over the exclusion from property of the estate of the debtor’s interest in a spendthrift trust to the extent the trust is protected from creditors under applicable State law.”); In re Moody, 837 F.2d 719, 722-23 (5th Cir.1988) (“A beneficiary’s interest in a spendthrift trust is excluded from his bankruptcy estate by 11 U.S.C. § 541(c)(2), if state law and the trust so provide.”) 7 Id. at 723 8 The agreement states: “The interest of the beneficiaries in the trust estate and the increase and proceeds thereof, both legal and equitable, so long as the same are held in trust, shall not be subject in any manner to any indebtedness, judgment, judicial process, creditors’ bills, attachment, garnishment, execution, receivership, charge, levy, seizure or encumbrance, of or against said beneficiaries; nor shall the interest of the beneficiaries in said trust be in any manner reduced or affected by any transfer, assignment, conveyance, sale, encumbrance, act, omission or mishap, voluntary or involuntary, anticipatory or otherwise of said beneficiaries….” 9 Id. at 723. See also Daniels v. Pecan Valley Ranch, Inc., 831 S.W.2d 372, 378 (Tex.App.–San Antonio 1992, writ denied) (“In Texas, a settlor cannot create a spendthrift trust for his own benefit and have the trust insulated from the rights of creditors.”); Tex. Prop.Code Ann. § 112.035(d) (“If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.”) 10 Glass v. Carpenter, 330 S.W.2d 530, 533 (Tex.Civ.App.–San Antonio 1959, writ ref’d n.r.e.) 11 Moody, 837 F.2d at 723 12 Hines v. Sands, 312 S.W.2d 275, 279 (Tex.Civ.App.–Fort Worth 1958, no writ) 13 In re Johannes Trust, 191 Mich.App. 514, 479 N.W.2d 25, 29 (1991) (“[The self-settlor’s] creditors can reach the assets of the trust and compel payment in the maximum amount that would be in the trustee’s discretion with respect to that portion of the assets that came from [the self-settlor], but not with respect to any portion of the trust that came from other individuals, particularly petitioner.”) 14 We note that the Marfa ranch was still held by the trust when Shurley commenced her bankruptcy case. If the ranch had been sold, prior to the bankruptcy filing, this case would be more complicated. We would still hold that some portion of Shurley’s interest in the trust was self-settled and therefore property of the estate, but would have to engage in a further analysis of (1) how to value the self-settled portion of the trust, through tracing of assets or some other method of calculating Shurley’s proportionate contribution to the trust relative to the other settlors’ contributions, and (2) who should have the burden of proof on this issue 15 E.g., Fordyce v. Fordyce, 80 Misc.2d 909, 365 N.Y.S.2d 323, 328 (N.Y.Sup.Ct.1974) (“Even in the case of a self-settled trust, creditors can only reach the interest the settlor retained for himself.”) 16 11 U.S.C. § 541(a)(1) 17 540 S.W.2d 499 (Tex.Civ.App.–Waco 1976, writ ref’d n.r.e.) 18 Id. at 501 19 Id. at 501-02 20 Bank of Dallas, 540 S.W.2d at 501 21 28 Tenn.App. 388, 190 S.W.2d 785 (1944) 22 Id. 190 S.W.2d at 791 23 Id. at 792 24 Id. at 799 25 29 U.S.C. §§ 1001 et seq 26 Goff I, 706 F.2d at 587. The principal holding of the case–that a qualified ERISA pension plan is not excluded from the bankruptcy estate because the federal ERISA statute is not “applicable nonbankruptcy law” under Bankruptcy Code § 541(c)(2)–was expressly overruled in Patterson, 504 U.S. at 757 n. 1, 112 S.Ct. at 2246 n. 1 (citing Goff I ) 27 Goff II, 812 F.2d at 933 28 In re Latham, 823 F.2d 108, 111 (5th Cir.1987) 29 11 U.S.C. § 541(a)(1) 30 Shurley, 171 B.R. at 778-79 n. 5 31 Shurley paid only $200 down for the ranch, and executed 25 separate promissory notes to her parents, which were annually forgiven by the parents 32 The note was subsequently paid off by the trust 33 Shurley, 171 B.R. at 782 34 We assume without deciding that the court was legally correct in concluding that “substantial control” can render a spendthrift or other protective trust subject to creditor claims. We note however that we do not believe that appellees have cited any Texas authority for this proposition 35 Id. at 783 36 Tex. Prop.Code Ann. § 112.054 (Vernon 1995) 37 Shurley, 171 B.R. at 783 38 Adams v. Williams, 112 Tex. 469, 248 S.W. 673, 679 (1923) 39 Hines v. Sands 312 S.W.2d 275, 279 (Tex.Civ.App.–Fort Worth 1958, no writ) 40 In re Walden, 12 F.3d 445, 448 (5th Cir.1994) 41 Walden, 12 F.3d at 449 n. 7. In so holding, Walden was interpreting the same state statute at issue here, Insurance Code art. 21.22 42 Id. at 448 43 We assume without deciding that Shurley is correct that an annuity under the current statute can be issued by an entity other than an insurance company. But see art. 21.22(6) (“For purposes of regulation under this code, an annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal company, or under any plan or program of annuities or benefits in use by an employer or individual, shall be considered a policy or contract on insurance.”). Texas, like all states, comprehensively regulates insurers and insurance policies 44 Steves & Sons, Inc. v. House of Doors, Inc., 749 S.W.2d 172, 175 (Tex.App.–San Antonio 1988, writ denied) (quoting In re Howerton, 21 B.R. 621 (Bankr.N.D.Tex.1982)) 45 In re Young, 806 F.2d 1303, 1306 (5th Cir.1987) (quoting Howerton ) 46 With a variable annuity, “payments to the purchaser vary with investment performance.” NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 254, 115 S.Ct. 810, 812, 130 L.Ed.2d 740 (1995) 47 Steves & Sons, 749 S.W.2d at 175 48 Income from the ranch belongs to the estate because the Bankruptcy Code defines property of the estate to include “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” 11 U.S.C. § 541(a)(6)

In re Jane McLean Brown – 11th Circuit Discusses Asset Protection of Non-Self-Settled Trusts

Posted by McCullough

IN RE: Jane McLean BROWN

IN RE: Jane McLean BROWN, Debtor. Deborah Menotte, Plaintiff-Appellant, v. Jane McLean Brown, Defendant-Appellee.

No. 01-16211.

— August 28, 2002 Before EDMONDSON, Chief Judge, and BLACK and COX, Circuit Judges.

Morris Gary Miller,Adorno & Zeder, P.A., West Palm Beach, FL, for Plaintiff-Appellant.David Lloyd Merrill, Cohen, Conway, Copeland, Copeland, Paiva & Merrill, P.A., Fort Pierce, FL, for Plaintiff-Appellee.

This case involves a Chapter 7 bankruptcy debtor seeking to exclude her interest in a trust from the bankruptcy estate. The trust, which was created by the debtor prior to insolvency, was established to provide income to the debtor for her lifetime with the remainder ultimately being given to several charities. Based on the presence of a spendthrift clause prohibiting assignment or alienation, the debtor contends her interest in the trust is exempt from her bankruptcy estate. Alternatively, the debtor contends her interest is exempt because the trust qualifies as a support trust. Having created the trust for her own benefit, however, the debtor cannot shield her interest in the trust from her creditors. This interest, consisting of a yearly income stream from the trust assets, is not exempt from the debtor’s bankruptcy estate. The corpus of the trust, however, is not likewise subject to the claims of the debtor’s creditors.

I. BACKGROUND

A. Establishment of the Trust

Appellee Jane McLean Brown (Appellee), the debtor in the bankruptcy case giving rise to this appeal, suffers from chronic alcoholism. In 1993, her mother died, leaving her an inheritance of approximately $250,000. In order to protect the inheritance from her own improvidence, Appellee decided to place the money into an irrevocable trust which would pay her a monthly income for life. On August 11, 1993, Appellee executed the trust agreement, entitled Irrevocable Charitable Remainder Unitrust Agreement (ICRUA).

Under the ICRUA, Appellee is entitled to receive an annual amount equal to 7% of the net worth of the trust, valued as of the first day of each taxable year. The payments are due in monthly installments. Appellee, who is unemployed, lives off of the monthly payments flowing from the ICRUA. Appellee is the only beneficiary currently entitled to receive income payments under the trust.

As a trust beneficiary, Appellee’s only rights are to receive the 7% income payments. Although Appellee also serves as trustee, her powers are generally limited to directing investment decisions. She does not have the discretion to invade the trust corpus or to alter the amount of payments made to the trust beneficiaries. Furthermore, Appellee is prohibited from assigning or otherwise alienating her interest in the trust by virtue of a “spendthrift” clause contained into the ICRUA:

To the extent permitted by law, no beneficiary shall have any power to dispose of or to charge by way of anticipation any interest given to her, and all sums payable to any beneficiary shall be free and clear of her debts, contracts, dispositions and anticipations, and shall not be taken or reached by any legal or equitable process in satisfaction thereof.

See Article IV of the ICRUA.

Upon Appellee’s death, the 7% yearly trust income payments will be made to her daughter for life.¹ At the daughter’s death, the corpus of the trust will pass to four charities listed in the ICRUA. Although the ICRUA expressly reserves Appellee’s right to designate substitute or additional charitable beneficiaries by testamentary instruction, the right of redesignation is limited to substituting or adding other charities meeting certain Internal Revenue Code qualifications.²

B. Chapter 7 Bankruptcy

On February 4, 1999, Appellee filed a voluntary petition for Chapter 7 bankruptcy. Appellant Deborah Menotte (Appellant) was appointed as the Chapter 7 trustee. In her bankruptcy petition, Appellee listed secured and unsecured claims totaling $110,023.53. Although Appellee acknowledged her interest in the ICRUA, no value for the interest was included as part of her asset calculation.³ Rather, Appellee claimed her interest in the trust was exempt from the bankruptcy estate. Appellant objected, arguing self-funded trusts are not insulated from the claims of creditors.

On July 26, 2000, the bankruptcy court overruled Appellant’s objection to the claimed exemption. Based on the presence of the spendthrift clause, the bankruptcy court concluded Appellee’s interest in the trust could not be attached by her creditors. As an additional ground for exemption, the bankruptcy court indicated the trust also qualified as a support trust, which is a type of trust established to provide for a beneficiary’s needs. The bankruptcy court rejected Appellee’s alternative argument that her interest in the trust constituted an exempt annuity.

On November 8, 2001, Appellant filed an appeal to the United States District Court for the Southern District of Florida. On appeal, Appellant argued the bankruptcy court erred in finding the ICRUA was exempt from the bankruptcy estate as either a spendthrift trust or a support trust. The district court affirmed in part, finding the ICRUA was exempt from the bankruptcy estate based on its spendthrift provision. Although it did not need to reach the bankruptcy court’s other ground for exemption, the district court indicated the trust likely would not qualify as a support trust because the ICRUA provided for payment of a fixed sum to Appellee each year regardless of the amount needed for her support. Having not been raised on appeal, the issue of whether the trust qualified as an exempt annuity was not addressed by the district court.⁴ This appeal followed.

II. STANDARD OF REVIEW

In bankruptcy appeals, legal determinations of the bankruptcy court and the district court are subject to de novo review. Bush v. JLJ, Inc. (In re JLJ, Inc.), 988 F.2d 1112, 1116 (11th Cir.1993).

III. DISCUSSION

An estate in bankruptcy consists of all interests in property possessed by the debtor at the time of her bankruptcy filing. 11 U.S.C. § 541(a)(1) (1994). Where there is a restriction on transfer of the debtor’s interests under applicable non-bankruptcy law, however, such restriction remains effective even in bankruptcy. 11 U.S.C. § 541(c)(2). As a result, spendthrift and support trusts are excluded from a debtor’s bankruptcy estate to the extent they are protected from creditors under applicable state law.⁵ The state law applicable in this case is the law of the State of Florida. We will examine in turn whether the ICRUA qualifies as either a spendthrift trust or a support trust under Florida law.

A. The ICRUA as a Spendthrift Trust

In Florida, trusts containing valid spendthrift provisions are protected from the reach of creditors, so long as the beneficiaries cannot exercise dominion over the trust assets. See generally Waterbury v. Munn, 159 Fla. 754, 32 So.2d 603, 605 (Fla.1947) (en banc) (recognizing the validity of spendthrift trusts); Croom v. Ocala Plumbing & Elec. Co., 62 Fla. 460, 57 So. 243, 244-45 (Fla.1911) (holding creditors could reach trust property, despite presence of spendthrift clause, where the beneficiaries possessed absolute control over the property). Where a trust is self-funded by a beneficiary, however, there is an issue as to whether the trust’s spendthrift provision is valid as against creditors of the settlor-beneficiary. We conclude it is not, and the beneficiary’s interest is subject to alienation by her creditors.

1. Validity of the ICRUA’s Spendthrift Provision as Against Appellee’s Creditors

Spendthrift trusts are defined under Florida law as “those trusts that are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection.” Croom, 57 So. at 244 (emphasis added); see also Waterbury, 32 So.2d at 605 (“A spendthrift trust is one that is created with the view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self protection.”).

As impliedly recognized by the definition of spendthrift trusts set forth in Croom, Florida law will not protect assets contained within a spendthrift trust to the extent the settlor creates the trust for her own benefit, rather than for the benefit of another.⁶ See In re Witlin, 640 F.2d 661, 663 (5th Cir. Unit B 1981) (holding, under Florida law on spendthrift trusts, debtor’s interest in his Keogh plan was not exempt from his bankruptcy estate where the debtor was both the beneficiary and the settlor of the plan); ⁷ In re Wheat, 149 B.R. 1003, 1004-05 (Bankr.S.D.Fla.1992) (holding, under Florida law on spendthrift trusts, debtor’s deferred compensation plan was not exempt from his bankruptcy estate where it was self-funded); In re Williams, 118 B.R. 812, 815 (Bankr.N.D.Fla.1990) (holding, under Florida law on spendthrift trusts, debtor’s interests in his employer’s thrift plan was not exempt from his bankruptcy estate where it was self-settled); John G. Grimsley, Florida Law of Trusts § 15-5(b) (4th ed. 1993) (“A settlor cannot create for himself a spendthrift trust to avoid creditors.”); 55A Fla. Jur.2d Trusts § 78 (2000) ( “The trustee and the sole beneficiary cannot be one in the same under spendthrift trust law. A settlor cannot create a spendthrift trust for his or her own benefit.”).

This limitation comports with the common law of trusts.⁸ See, e.g., Restatement (Second) of Trusts § 156(1) (1959) (“Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.”); George Gleason Bogert & George Taylor Bogert, Trusts & Trustees § 223 (rev.2d ed. 1992) (“If a settlor creates a trust for his own benefit and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust.”); Erwin N. Griswold, Spendthrift Trusts § 474 (1936) (“A spendthrift trust created by a person for his own benefit is invalid against creditors.”); II Austin Wakeman Scott, The Law of Trusts § 114 (3d ed. 1967) (“It is to be noticed that the beneficial interest reserved to the settlor is for some purposes treated differently from a beneficial interest created in a third person. Thus, although a beneficial interest created in a third person may be inalienable by him and not subject to the claims of his creditors, a beneficial interest reserved to the settlor himself can be alienated by him or reached by his creditors even though it is otherwise provided by the terms of the trust.”). Self-settled trusts may be reached by creditors, even if the settlor was solvent at the time of the trust’s creation and no fraud was intended. See Scott, supra, at § 156 (“It is immaterial that in creating the trust the settlor did not intend to defraud his creditors. It is immaterial that he was solvent at the time of the creation of the trust. It is against public policy to permit a man to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it.”).

In this case, Appellee is a beneficiary of a self-settled spendthrift trust. In 1993, Appellee inherited $250,000 from her mother. To protect the inheritance from her own squandering, Appellee established a charitable trust under which she retained the right to receive a 7% income for life. Appellee purportedly was not insolvent at the time the trust was established; nor is there evidence Appellee intended to defraud her creditors. Nevertheless, Appellee is both the settlor and a beneficiary of the trust. Consequently, the spendthrift clause contained in the trust is ineffective as against Appellee’s creditors.⁹

2. Interest Reachable by Appellee’s Creditors

When a settlor creates a trust for her own benefit and inserts a spendthrift clause, the entire spendthrift clause is void as to her creditors. See Bogert § 223 (“The entire spendthrift clause, both as to voluntary and involuntary alienation, is void. The creditors can reach the settlor-beneficiary’s interest.”). In the absence of a valid spendthrift provision, a beneficiary’s interest in a trust is a property right which is liable for the beneficiary’s debts to the same extent as her legal interests. See generally Grimsley § 8-3 (“Where the beneficiary’s equitable interest is vested in him without restraint on alienation, the interest is transferable by him and subject to claims of his creditors.”); Bogert § 193 (“If the trust is active the creditor of the beneficiary can subject the latter’s interest in the trust to the satisfaction of the debt, either in law or equity, unless a statute or a valid spendthrift provision prevents this result.”).

As with any other property right, a trust beneficiary’s right to receive income for life is an interest which may be alienated or subject to attachment by her creditors. See generally Blair v. Comm’r of Internal Revenue, 300 U.S. 5, 13-14, 57 S.Ct. 330, 333-34, 81 L.Ed. 465 (1937) (holding that in absence of a valid restraint on alienation, the interest of a trust beneficiary to income for life was present property which could be assigned to others); Bradshaw v. Am. Advent Christian Home & Orphanage, 145 Fla. 270, 199 So. 329, 332-33 (Fla.1940) (holding that in absence of a restraint on alienation, income stream granted to orphanage as trust beneficiary was subject to the claims of the orphanages’ creditors).

Where the only interest a settlor has retained for herself under a trust is the right to income for life, it is solely this interest which her creditors can reach.¹⁰ See II Scott § 156 (“Where the only interest which the settlor has created for himself under the trust is a right to the income for life or for some other period, it is this interest alone which his creditors can reach, unless the creation of the trust was a disposition in fraud of his creditors.”); see also In re Goff, 812 F.2d 931, 933 (5th Cir.1987) (indicating creditors of settlors-beneficiaries were limited to attaching whatever interest the settlors retained under the trust and, therefore, could not obtain a lien on real property conveyed into the trust because settlors’ interest was equitable rather than legal); Bogert § 223 (“If the settlor creates a trust for the settlor for life, with a restraint on voluntary or involuntary alienation of his interest, and with a remainder interest in others at his death, his creditors can reach his life interest but not the remainder, unless he has also reserved a general power of appointment.”); Griswold § 475 (indicating creditors could reach a settlor’s life interest, but not the remainder if vested in another).¹¹ As illustrated in the Restatement (Second) of Trusts:

A transfers property to B in trust to pay the income to A for life and to pay the principal on A’s death to C. By the terms of the trust it is provided that A’s interest under the trust cannot be transferred or reached by his creditors. A can transfer his interest; his creditors can reach his interest.

Restatement (Second) of Trusts § 156 cmt. a, illus. 1.

This result makes sense. Although the spendthrift provision of a trust is void as against a settlor-beneficiary’s creditors, the trust itself remains valid. See, e.g., In re Goff, 812 F.2d at 933 (holding spendthrift provision was void as against creditors based on self-settlement, but trust itself was valid); Liberty Nat. Bank v. Hicks, 173 F.2d 631, 634-35 (D.C.Cir.1948) (holding settlor-beneficiary was bound by terms of trust, even though its spendthrift provision was ineffective as against his creditors); see also 76 Am.Jur.2d Trusts § 128 (1992) (“[W]here there is a provision in the terms of the trust imposing restraint on the transfer by a beneficiary of his interest and the provision is illegal, the provision fails, but the whole trust does not fail, since provisions like this can ordinarily be separated from other provisions without defeating the purpose of the settlor in creating the trust.”). Thus, although a settlor-beneficiary’s creditors are not bound by a trust’s spendthrift clause, the assets subject to attachment are circumscribed by the trust agreement.

By establishing an irrevocable trust in favor of another, a settlor, in effect, gives her assets to the third party as a gift. Once conveyed, the assets no longer belong to the settlor and are no more subject to the claims of her creditors than if the settlor had directly transferred title to the third party. Where the settlor retains a right to income payments, however, there is a limited interest created in favor of the settlor. It is this limited interest, and not the entire trust assets, which may be attached by the settlor’s creditors:

Life interest in settlor with remainder over to a named or designated person. The settlor may reserve to himself only the income from the property transferred during his life and may by the transfer give a vested remainder after his death to some named person or persons. This situation arises in the following typical case: A conveys property to T on trust to pay the income to A during A’s life, with restraints against anticipation, assignment, and the rights of creditors, and with a further provision that on the death of A the property shall be conveyed to B. Such a conveyance creates in B a present vested remainder, and if the transfer is not a fraudulent conveyance, the interest of B can not, of course, be reached for A’s debts. The remainder may be to a class, as to the children of the settlor. It may likewise be contingent until the death of the settlor. In any of these cases, if the settlor has reserved no power over the remainder, and the transfer is not fraudulent, the conveyance of the remainder constitutes a present gift and is just as much beyond the reach of creditors as any other completed gift.

Griswold § 475.

In this case, Appellee transferred assets of $250,000 into a charitable trust. The transfer was irrevocable, and the charities listed in the trust became vested in the corpus of the trust, subject only to divestment through redesignation of other charitable remaindermen. Appellee retained no rights to the trust principle. In establishing the ICRUA, however, Appellee granted herself an interest in the trust in the form of a right to receive 7% income from the trust for life. As a result, Appellee’s income stream is subject to the reach of her creditors.¹² The corpus of the trust, having irrevocably been conveyed to the trust for the benefit of others, is not likewise subject to the claims of her creditors.

B. The ICRUA as a Support Trust

In addition to claiming the ICRUA’s spendthrift provision is effective against her creditors, Appellee asserts the trust is exempt from her bankruptcy estate as a support trust. “A support trust is one where the trustee is directed to pay to the beneficiary only so much income or principal, or both, as is necessary for the beneficiary’s support and education.” In re McLoughlin, 507 F.2d 177, 185 (5th Cir.1975). Support trusts, by their nature, are non-transferrable. Id.; see also Bogert § 229 (“If a trustee is directed to pay or apply trust income or principal for the benefit of a named person, but only to the extent necessary to support him, and only when the disbursements will accomplish support, the nature of the interest of the beneficiary makes it not transferable and not subject to the claims of creditors.”).

As an initial matter, the structure of the ICRUA is not in the form of a support trust. Nowhere in the ICRUA is there a mention of payments by the trustee for the support of Appellee. Although the monthly income payments are used by Appellee for her own support, the ICRUA does not limit disbursements to that effect. Rather, the trustee is merely obligated to pay 7% of the value of the trust to Appellee each year. The trustee may not pay Appellee more than the 7% income if her needs exceed that amount; likewise, the trustee may not limit payments to less than the 7% income. Appellee is entitled to the income payments regardless of need and may dispose of the funds as she chooses. The ICRUA, therefore, does not constitute a support trust.

Even if the ICRUA qualified as a support trust, Appellee’s interest in the trust would not be shielded from her creditors. As with the ICRUA’s spendthrift provision, a support trust created by a settlor for her own benefit is ineffective as against her creditors. See Restatement (Second) of Trusts § 156(2) (“Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.”); II Scott § 156.1 (“The policy which prevents a person from creating a spendthrift trust for his own benefit also prevents his creating a trust under which his creditors are precluded from reaching the income or principal which is to be applied for his support.”).

IV. CONCLUSION

When establishing the ICRUA, Appellee made an irrevocable charitable gift of the trust corpus. By including the right to receive income payments for life, Appellee retained a portion of the assets for herself. Whatever interest Appellee retained is her own property, subject to the claims of her creditors. Accordingly, Appellee’s right to an income stream is not exempt from her bankruptcy estate and may be reached by her creditors. The corpus of the trust, however, may not be reached by Appellee’s creditors.

AFFIRMED IN PART and REVERSED IN PART.

FOOTNOTES

1. The income payments to Appellee’s daughter will be due under the ICRUA as long as the daughter survives Appellee, unless Appellee revokes and terminates the interest of the daughter through testamentary instruction. If the daughter’s interest is revoked and terminated, the ICRUA will treat the daughter as having predeceased Appellee.

2. The ICRUA states any charity serving as a beneficiary under the trust must qualify as an organization described in 26 U.S.C. §§ 170(b)(1)(A), 170(c), 2055(a), 2522(a) (1994).

3. Appellee’s interest in the ICRUA was assigned a value of “0.00.”

4. On appeal to this Court, Appellee argues the ICRUA is exempt from her bankruptcy estate as an annuity. This issue, however, was not raised before the district court; nor was it raised by Appellant as an issue on appeal to this Court. Whether the ICRUA qualifies as an exempt annuity, therefore, is not properly before the Court. See generally Depree v. Thomas, 946 F.2d 784, 793 (11th Cir.1991) (“We have long held that an issue not raised in the district court and raised for the first time in an appeal will not be considered by this court.”).

5. See Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490 (11th Cir.1985) (stating the term “applicable nonbankruptcy law” in 11 U.S.C. § 541(c)(2) refers to state spendthrift trust law), abrogated on other grounds by Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992); see also Rep. of the Comm’n on the Bankr.Laws of the U.S., H.R. Doc. No. 93-137, at 193 (1973) (discussing recommendations to change the bankruptcy laws to include spendthrift trusts within a debtor’s bankruptcy estate).

6. This principle is not unique to Florida law. See, e.g., John Hancock Mut. Life Ins. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1166-67 (9th Cir.1990) (stating Oregon and Massachusetts laws hold a “settlor cannot create a spendthrift trust for his own benefit”); Herrin v. Jordan (In re Jordan), 914 F.2d 197, 199-200 (9th Cir.1990) (applying Washington law and holding trust funded by beneficiary’s personal injury settlement was not excludable from his bankruptcy estate as a valid spendthrift trust); Dzikowski v. Edmonds (In re Cameron), 223 B.R. 20, 24 (Bankr.S.D.Fla.1998) (“It is axiomatic that under New York Law, self-settled trusts are void against both present and future creditors and a debtor may not avoid his creditors, or future creditors, by placing his property in trust for his own benefit.”); In re Spenlinhauer, 182 B.R. 361, 364-65 (Bankr.D.Me.1995) (applying Maine law and holding settlor-beneficiary’s interest in trust was not protected from creditors), aff’d, 101 F.3d 106 (1st Cir.1996); Jensen v. Hall (In re Hall), 22 B.R. 942, 944 (Bankr.M.D.Fla.1982) (applying Ohio law and holding creditors could reach settlor-beneficiary’s interest in spendthrift trust); Speed v. Speed, 263 Ga. 166, 430 S.E.2d 348, 349 (Ga.1993) (applying Georgia law, and holding spendthrift provision in trust created by quadriplegic husband from his insurance benefits was not enforceable where the husband was both settlor and beneficiary); Bank of Dallas v. Republic Nat’l Bank of Dallas, 540 S.W.2d 499, 501-02 (Tex.App.1976) (applying Texas law, and holding settlor who created spendthrift trust and made herself a beneficiary thereof could not protect her interest in the trust from her creditors).

7. In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this Court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to close of business on September 30, 1981.

8. Sources setting forth the common law of trusts frequently are cited by Florida courts for guidance regarding construction of spendthrift and other trusts. See, e.g., Bacardi v. White, 463 So.2d 218, 222 (Fla.1985) (citing Restatement (Second) of Trusts regarding spendthrift trusts); Waterbury, 32 So.2d at 605 (citing Bogert’s Trusts & Trustees and Griswold’s Spendthrift Trusts regarding spendthrift trusts); Gilbert v. Gilbert, 447 So.2d 299, 301 (Fla.App.1984) (citing Scott’s The Law of Trusts regarding spendthrift trusts).

9. The fact that Appellee cannot exercise dominion over the trust assets is irrelevant to this analysis. The issue of self-settlement is separate from the issue of control, and either can serve as an independent ground for invalidating a spendthrift provision. See, e.g., In re Spenlinhauer, 182 B.R. at 363 (declining to address beneficiaries’ control over trust where the trust was self-settled and, therefore, the spendthrift provision was ineffective on that basis alone); In re Wheat, 149 B.R. at 1004 (“However, the Debtor’s degree of control is irrelevant in this case since one cannot create a spendthrift trust for oneself in Florida.”); Walro v. Striegel (In re Walro), 131 B.R. 697, 701 (Bankr.S.D.Ind.1991) (holding self-settlement prevented agreement from qualifying as a spendthrift trust, although beneficiary did not have any control over assets).Although some cases appear to intertwine the issues of self-settlement and control, those cases are distinguishable because their facts supported invalidity of the spendthrift trusts at issue under both grounds. See, e.g., Fehlhaber v. Fehlhaber, 850 F.2d 1453, 1455 (11th Cir.1988) (citing In re Witlin and other cases for the proposition that a settlor who creates a trust for his own benefit cannot protect his interest under the trust from his creditors, but also stating a settlor who exercises dominion over the trust cannot protect the trust from creditors); Lawrence v. Chapter 7 Trustee (In re Lawrence), 251 B.R. 630, 641-42 (Bankr.S.D.Fla.2000) (invalidating spendthrift provision where trust was self-settled and the beneficiary exercised control over the trust), aff’d, 279 F.3d 1294 (11th Cir.2002); In re Cattafi, 237 B.R. 853, 855-56 (Bankr.M.D.Fla.1999) (same). In those cases, there was no need to address the issues as separate grounds for invalidation.

10. Some limited exceptions to this general rule exist which do not apply in this case. For example, creditors of a settlor-beneficiary who has reserved only a right to income may reach both the income and the corpus of a trust if the trustee has discretion to invade the corpus for the benefit of the settlor. See, e.g., Miller v. Ohio Dept. of Human Servs., 105 Ohio App.3d 539, 664 N.E.2d 619, 621 (Ohio App.1995) (holding entire amount of trust was available to Medicaid even though settlor was given only income for life, where the trustee in his discretion could expend the principal on her behalf). Likewise, creditors may reach the corpus of a trust where the beneficiary is given not only an income stream for life, but also the ability to designate remaindermen. See, e.g., Bank of Dallas, 540 S.W.2d at 502 (holding income as well as corpus of an irrevocable spendthrift trust created by the settlor for her and her children’s benefit was subject to garnishment by creditors where the settlor received all the income from the corpus and held a general power of appointment exercisable at death); Restatement (Second) of Trusts § 156 cmt. c (“If the settlor reserves for his own benefit not only a life interest but also a general power to appoint the remainder by deed or will or by deed alone or by will alone, his creditors can reach the principal of the trust as well as the income.”). In this case, the trustee of the ICRUA does not have discretion to invade the corpus of the trust for Appellee’s benefit. Additionally, Appellee does not have a general power of appointment regarding remaindermen; rather, her right to redesignation is strictly limited to substituting other Internal Revenue Code qualified charities.

11. See also Greenwich Trust Co. v. Tyson, 129 Conn. 211, 27 A.2d 166, 173-74 (Conn.1942) (“While we have found few cases dealing with a situation where the settlor of the trust, after reserving to himself the income for life, creates vested indefeasible interests, to take effect at his death, we have found none which subjects such interests to the demands of the settlor’s creditors, and on principle there is no question that the creditors cannot reach those interests. Over them the settlor has no dominion, and his creditors have no more right to reach them than they would any interests in property formerly owned by him which has passed into the ownership of another.”); Henderson v. Sunseri, 234 Ala. 289, 174 So. 767, 770 (Ala.1937) (holding settlor’s creditors could only reach the income stream reserved to the settlor, and not the remainder which was vested in the settlor’s children); Dillon v. Spilo, 275 N.Y. 275, 9 N.E.2d 864, 866 (N.Y.App.1937) (holding settlor’s reserved life estate was subject to reach by her creditors, but not the remainder of the trust); Egbert v. De Solms, 218 Pa. 207, 67 A. 212, 212-13 (Pa.1907) (holding settlors’ creditors could reach income from trust which was reserved for settlors’ benefit, but could not reach the remainder of the trust which was vested in the settlors’ children).

12. Likewise, her interest vests in her bankruptcy trustee. See II Scott § 147.1 (“Where a beneficiary of a trust becomes bankrupt, his interest under the trust vests in the trustee in bankruptcy, unless either by the terms of the trust or by statute there is a restraint on the alienation of his interest. If his interest is assignable by him or if his creditors can reach it, it vests in the trustee in bankruptcy.”).

BLACK, Circuit Judge:

Fairstar: Utah Court Ignores State of Filing for Charging Order Purposes

Posted by McCullough

American Institutional Partners, LLC v. Fairstar Resources, Ltd., 2011 WL 1230074 (D.Del., Mar. 31, 2011)

United States District Court,

D. Delaware.

AMERICAN INSTITUTIONAL PARTNERS, LLC, et al., Plaintiffs,

FAIRSTAR RESOURCES LTD., and Goldlaw Pty Ltd., Defendants.

C.A. No. 10–489–LPS.

March 31, 2011.

Theodore Allan Kittila, Esq. of Elliot Greenleaf, Wilmington, DE, for Plaintiffs.

David E. Wilks, Esq. of Wilks, Lukoff & Bracegirdle, LLC, Wilmington, DE, for Defendants.

MEMORANDUM OPINION

STARK, District Judge.

*1 Pending before the Court is the Motion to Dismiss or Transfer Venue filed by defendants Fairstar Resources LTD (“Fairstar”) and Goldlaw PTY, LTD (“Goldlaw”) (collectively, “Defendants”). (D.I.4) Plaintiffs American Institutional Partners, LLC (“AIP”), AIP Lending, LLC (“Lending”), AIP Resort Development, LLC (“AIP RD”), Peninsula Advisors, LLC (“Peninsula”), and Mark Robbins (“Robbins”) (collectively, “Plaintiffs”) oppose the motion. (D.I.7) For the reasons discussed below, the Court will grant in part and deny in part Defendants’ motion.

I. BACKGROUND

A. The Parties

AIP, Lending, Peninsula, and AIP RD are limited liability companies organized under the laws of Delaware. (Am.Coml.¶ 3–6) AIP is the holder of 100% of the membership interest in and the managing member of Lending, and also is the holder of 55% of the membership interest in and manager of AIP RD. ( Id. ¶¶ 3, 16) Robbins is the manager of AIP, holder of 100% of the membership interest in and the managing member of Cavalion Group LLC (“Cavalion”)-a Delaware limited liability company which holds 100% of the membership interest in Peninsula-and former owner of 49% of the membership interest in and current manager of Seven Investments LLC, a Utah LLC which, in turn, holds 100% of the membership interests in AIP. ( Id. ¶¶ 7, 14)

Fairstar is a diversified exploration company organized under the laws of Australia, with its principal place of business in Osborne Park, Western Australia. (D.I. 4 at 9; Am. Compl. ¶ 8 ) Goldlaw is a corporation also organized under the laws of Australia, with its principal place of business in Osborne Park, Western Australia. (D.I. 4 at 9) Plaintiffs allege that Goldlaw is controlled by Fairstar. (Am.Compl.¶ 9) Fairstar and Goldlaw are judgment creditors of AIP, AIP Lending, and Robbins. (D.I. 4 Ex. B ¶ 2)

B. Out–of–State Proceedings

This dispute stems from litigation in a Utah state court. Defendants brought an action in the Third Judicial District of Utah against AIP, Lending, and Robbins (“the Utah Action”), in which Defendants prevailed.FN1 The Utah court entered judgment for Defendants in the amount of $2,296,651.38 and, upon Defendants’ request, issued numerous charging orders over various corporate interests held by Robbins.FN2 (D.I. 4 at 13; Am. Compl. Ex. C) FN3 The orders charge the various companies with payment of the unsatisfied judgment plus interest, attorney fees, and costs, as well as order the foreclosure and constable sale of the corporate interests to satisfy the judgment. (D.I. 4 Ex. A; D.I. 7 Ex. B) The Utah court specified the constable sales would result in payment to Defendants’ counsel in the Utah Action, and buyers would acquire all rights in a purchased company if AIP, Lending, or Robbins was the company’s sole member. ( Id.)

FN1. The Utah Action is captioned Fairstar Resources Ltd. and Goldlaw Pty. Ltd. v. American Institutional Partners, LLC, AIP Lending, LLC, and Mark Robbins, Civil No. 080916464.

FN2. The record contains thirty charging orders. (D.I. 4 Ex. A; D.I. 7 Ex. B) Neither party specifies the total number of charging orders entered by the Utah court.

FN3. The Complaint in this action appears in the record only as an attachment to Defendants’ Motion to Dismiss or Transfer. (D.I. 4 Ex. A) The Court, therefore, will cite to the Complaint in this manner, with no reference to a specific docket item number.

The record contains three objections filed by AIP, Lending, and Robbins to some of these charging orders, dated March 18, 2009, April 2, 2009, and May 22, 2009, respectively. (D.I. 4 Ex. F) In all three, AIP, Lending, and Robbins raised, among other things, the same contention: that Delaware law applies to the charging proceedings because the charged corporations are Delaware entities. ( Id.) AIP, Lending, and Robbins also filed a motion on May 16, 2010 for stay of the constable sales pending resolution of the instant action. (D.I. 4 Ex. G) The Utah court issued three orders in response. The first is dated April 16, 2009 (“the April 16 Order”) and denied objections to the constable sale of Peninsula. (D.I. 4 Ex. E) The court stated “that Utah law applies to all execution proceedings in this matter, including the foreclosure of a member’s interest in a limited liability [company], whether such company is domestic or foreign.” ( Id.) In the second, dated April 23, 2009 (“the April 23 Order”), the court summarily denied an objection to the sale of interests in Cavalion. ( Id.) Finally, in a June 4, 2010 order (“the June 4 Order”), the Utah court denied a motion to stay the pending constable sales until the resolution of the instant action, finding that the court had already ruled on arguments raised by AIP, Lending, and Robbins, including the assertion that Delaware law controlled the proceedings. (D.I. 4 Ex. H)

*2 A series of related litigations are also taking place in other states concerning the sale of a Utah ski resort known as The Canyons (“the Canyons Actions”). (Am.Compl.¶ 17) Peninsula has been involved in several of these actions, including one in the Colorado state courts (“the Colorado Action”). FN4 (D.I. 7 at 2) Fairstar and Goldlaw are not parties to the Canyons Actions. (D.I. 4 at 6) Plaintiffs, however, assert that Defendants have taken control of Peninsula’s actions in the Colorado Action, going so far as to sue Robbins. (D.I. 7 at 4)

FN4. The Colorado Action is captioned Vail Resorts, Inc. v. Peninsula Advisors, Case No. 07 CV 7264. (D.I.7 at 2)

C. Procedural History

Plaintiffs filed suit in the Delaware Court of Chancery on May 14, 2010, seeking a declaratory judgment that Defendants’ foreclosures upon Plaintiffs’ membership interests in eight Delaware limited liability companies (“the Subject LLCs”),FN5 which took place in Utah pursuant to a Utah court’s charging orders, are invalid under Delaware law, and a declaration of the identity of the members and managers of the Subject LLCs. (Am.Compl.¶¶ 25–28, 34–37) Plaintiffs also requested an injunction to prevent Defendants from obtaining confidential and privileged documents through assertion of membership and managerial interests in the Subject LLCs. ( Id. ¶¶ 2, 30–32) Defendants removed the action to this Court on June 4, 2010. (D.I.2) Defendants filed their Motion to Dismiss or Transfer Venue on July 13, 2010. (D.I.4) Plaintiffs filed their Opposition on August 12, 2010, and Defendants filed their Reply on August 25, 2010.

FN5. The eight Subject LLCs are AIP, AIP Lending, AIP RD, Peninsula, Cavalion, Smarthedge, LLC, Talisker Canyons Acquisition Co., LLC, and Pelican Equity, LLC. (Am.Compl.¶ 21)

Plaintiffs also filed a Motion for a Temporary Restraining Order and Preliminary Injunction on August 24, 2010, on which it requested to be heard. (D.I.10) The Court held a teleconference on the emergency motion on August 26, 2010, during which the Court denied the motion. This ruling was memorialized in a written Order issued on August 30, 2010. (D.I.14)

The Court held oral argument on the motion to dismiss or transfer on November 5, 2010. See Hr’g Tr., November 5, 2010 (D.I.15) (hereinafter “Tr.”).

D. The Parties’ Contentions

By their motion, Defendants seek dismissal of the complaint on the grounds that: (1) pursuant to Federal Rule of Civil Procedure 12(b)(2), this Court lacks personal jurisdiction over them because the Delaware implied consent statute, 6 Del. C. § 18–109(a) (“the Implied Consent Statute”), is inapplicable, and exercising personal jurisdiction would fail to comport with Due Process; (2) pursuant to Federal Rule of Civil Procedure 12(b)(6), the Complaint fails to state a claim on which relief can be granted because the Rooker–Feldman doctrine precludes this Court from considering Plaintiffs’ claims; and (3) pursuant to Federal Rule of Civil Procedure 12(b)(6), the Complaint fails to state a claim on which relief can be granted because, under the doctrine of res judicata, a decision by a Utah state court bars Plaintiffs’ claims. (D.I. 4 at 4–9, 10–11, 15–16) In the alternative, Defendants seek a transfer of venue pursuant to 28 U.S.C. § 1404(a) to the United States District Court for the District of Utah. (D.I. 4 at 17–20)

*3 Plaintiffs respond that Defendants are subject to personal jurisdiction under the Implied Consent Statute and that Defendants have minimum contacts with Delaware, making the exercise of personal jurisdiction proper under the Due Process Clause. (D.I. 7 at 6–11) They argue, in the alternative, that this Court has jurisdiction pursuant to 6 Del. C. § 18–110(a), which gives Delaware courts jurisdiction to determine who is entitled to serve as a manager of a Delaware limited liability company. ( Id at 11–14) They also contend that neither res judicata nor the Rooker–Feldman doctrine bar their claims. ( Id. at 16–22) Finally, Plaintiffs assert that a transfer of venue to Utah is inappropriate. ( Id. at 23–24)

II. LEGAL STANDARDS

A. Motion to Dismiss Pursuant to Rule 12(b)(2)

Federal Rule of Civil Procedure 12(b)(2) directs the Court to dismiss a case when it lacks personal jurisdiction over the defendant. Determining the existence of personal jurisdiction requires a two-part analysis. First, the Court analyzes the long-arm statute of the state in which the Court is located. See IMO Indus., Inc. v. Kiekert AG, 155 F.3d 254, 259 (3d Cir.1998). Next, the Court must determine whether exercising jurisdiction over the defendant in this state comports with the Due Process Clause of the Constitution. See id. Due Process is satisfied if the Court finds the existence of “minimum contacts” between the non-resident defendant and the forum state, “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (internal quotation marks omitted).

Once a jurisdictional defense has been raised, the plaintiff bears the burden of establishing, by a preponderance of the evidence and with reasonable particularity, the existence of sufficient minimum contacts between the defendant and the forum to support jurisdiction. See Provident Nat’l Bank v. Cal. Fed. Sav. & Loan Ass’n, 819 F.2d 434, 437 (3d Cir.1987); Time Share Vacation Club v. Atl. Resorts, Ltd., 735 F.2d 61, 66 (3d Cir.1984). To meet this burden, the plaintiff must produce “sworn affidavits or other competent evidence,” since a Rule 12(b)(2) motion “requires resolution of factual issues outside the pleadings.” Time Share, 735 F.2d at 67 n. 9; see also Philips Elec. N. Am. Corp. v. Contec Corp., 2004 WL 503602, at *3 (D.Del. Mar. 11, 2004) (“After discovery has begun, the plaintiff must sustain [its] burden by establishing jurisdictional facts through sworn affidavits or other competent evidence.”).

If no evidentiary hearing has been held, a plaintiff “need only establish a prima facie case of personal jurisdiction.” O’Conner v. Sandy Lane Hotel Co., 496 F.3d 312, 316 (3d Cir.2007). A plaintiff “presents a prima facie case for the exercise of personal jurisdiction by establishing with reasonable particularity sufficient contacts between the defendant and the forum state.” Mellon Bank (E.) PSFS, Nat. Ass’n v. Farino, 960 F.2d 1217, 1223 (3d Cir.1992). On a motion to dismiss for lack of personal jurisdiction, “the plaintiff is entitled to have its allegations taken as true and all factual disputes drawn in its favor.” Miller Yacht Sales, Inc. v. Smith, 384 F.3d 93, 97 (3d Cir.2004). A court is always free to revisit the issue of personal jurisdiction if it later is revealed that the facts alleged in support of jurisdiction are in dispute. See Metcalfe v. Renaissance Marine, Inc., 566 F.3d 324, 331 (3d Cir.2009).

B. Motion to Dismiss Pursuant to Rule 12(b)(6)

*4 Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the Court to accept as true all material allegations of the complaint. See Spruill v. Gillis, 372 F.3d 218, 223 (3d Cir.2004). “The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir.1997) (internal quotation marks omitted). Thus, the Court may grant such a motion to dismiss only if, after “accepting all well-pleaded allegations in the complaint as true, and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief.” Maio v. Aetna, Inc., 221 F.3d 472, 481–82 (3d Cir.2000) (internal quotation marks omitted).

However, “[t]o survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true (even if doubtful in fact).’ ” Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir.2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). While heightened fact pleading is not required, “enough facts to state a claim to relief that is plausible on its face” must be alleged. Twombly, 550 U.S. at 570. A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949 (2009). At bottom, “[t]he complaint must state enough facts to raise a reasonable expectation that discovery will reveal evidence of [each] necessary element” of a plaintiff’s claim. Wilkerson v. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3d Cir.2008) (internal quotation marks omitted). “[W]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should … be exposed at the point of minimum expenditure of time and money by the parties and the court.” Twombly, 550 U.S. at 558 (internal quotation marks omitted). Nor is the Court obligated to accept as true “bald assertions,” Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir.1997) (internal quotation marks omitted), “unsupported conclusions and unwarranted inferences,” Schuylkill Energy Res., Inc. v. Pa. Power & Light Co., 113 F.3d 405, 417 (3d Cir.1997), or allegations that are “self-evidently false,” Nami v. Fauver, 82 F.3d 63, 69 (3d Cir.1996).

C. Motion to Transfer Venue Pursuant to 28 U.S.C. § 1404(a)

Under appropriate circumstances, transfer of a case from one federal court to another is authorized by 28 U.S.C. § 1404(a). Section 1404 provides: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.” 28 U.S.C. § 1404(a). The burden of demonstrating that such a transfer is appropriate rests with the moving party. See Jumara v. State Farm Ins. Co., 55 F.3d 873, 879 (3d Cir.1995). In evaluating such a motion, courts consider a nonexclusive list of six private factors and six public factors articulated in Jumara:

*5 (1) plaintiff’s foram preference as manifested in the original choice;

(2) the defendant’s preference;

(3) whether the claim arose elsewhere;

(4) the convenience of the parties as indicated by their relative physical and financial condition;

(5) the convenience of the witnesses-but only to the extent that the witnesses may actually be unavailable for trial in one of the fora;

(6) the location of books and records (similarly limited to the extent that the files could not be produced in the alternative forum);

(7) the enforceability of the judgment;

(8) practical considerations that could make the trial easy, expeditious, or inexpensive;

(9) the relative administrative difficulty in the two fora resulting from court congestion;

(10) the local interest in deciding local controversies at home;

(11) the public policies of the fora; and

(12) the familiarity of the trial judge with the applicable state law in diversity cases.

Id. at 879–80.

In considering a motion to transfer venue and determining “whether, on balance, the litigation would more conveniently proceed and the interests of justice be better served by a transfer to a different foram,” it bears emphasis that “the plaintiff’s choice of venue should not be lightly disturbed.” Id. at 879. Hence, “unless the balance of convenience of the parties is strongly in favor of defendant, the plaintiff’s choice of forum should prevail.” Shutte v. Armco Steel Corp., 431 F.2d 22, 25 (3d Cir.1970) (internal quotations omitted). “Because a plaintiff’s choice of forum is accorded substantial weight and venue is transferred only if the defendant truly is regional (as opposed to national) in character, a defendant has the burden of establishing that the balance of convenience of the parties and witnesses strongly favors the defendant. Therefore, defendants [seeking transfer] must prove that litigating in Delaware would pose a unique or unusual burden on their operations.” L’Athene, Inc. v. Earthspring LLC, 570 F.Supp.2d 588, 592 (D.Del.2008) (internal citations and quotation marks omitted).

III. DISCUSSION

A. Personal Jurisdiction

Plaintiffs bear the burden of adducing facts which, at a minimum, “establish with reasonable particularity” that personal jurisdiction exists over Defendants. See Provident Nat’l Bank, 819 F.2d at 437. Plaintiffs assert two bases for exercising personal jurisdiction over Defendants. First, Plaintiffs rely on the Implied Consent Statute. Second, they rely on 6 Del. C. § 18–110(a), a provision that gives Delaware courts jurisdiction to determine who is entitled to serve as manager of a Delaware limited liability corporation. Under either basis, the exercise of personal jurisdiction must also comport with the Due Process Clause of the Constitution. See IMO Indus., 155 F.3d at 259; PT China LLC v.. PT Korea LLC, 2010 WL 761145, at *5 (Del. Ch. Feb. 26, 2010) (“Even if one is served pursuant to § 18409(a), personal jurisdiction must still be consistent with due process.”). This requirement is met, Plaintiffs advert, because Defendants have the requisite minimum contacts with Delaware.

*6 The Court concludes that Plaintiffs have made an adequate showing under the Implied Consent Statute to justify the exercise of personal jurisdiction over Fairstar, and that with respect to Fairstar the requirements of Due Process are satisfied. However, no adequate showing has been made for Goldlaw. Also, asserting personal jurisdiction over either Defendant pursuant to § 18–110(a) would be inappropriate.

1. Implied Consent Statute

Delaware’s Implied Consent Statute provides a basis for exercising personal jurisdiction over an out-of-state citizen who is a manager, or participates in the management, of a Delaware limited liability company. The provision states:

(a) A manager … of a limited liability company may be served with process in the manner prescribed in this section in all civil actions or proceedings brought in the State of Delaware involving or relating to the business of the limited liability company … whether or not the manager … is a manager … at the time suit is commenced…. Such service as a manager … shall signify the consent of such manager … that any process when so served shall be of the same legal force and validity as if served upon such manager … within the State of Delaware…. As used in this subsection (a) …, the term “manager” refers (i) to a person who is a manager as defined in § 18–101(10) of this title and (ii) to a person, whether or not a member of a limited liability company, who, although not a manager as defined in § 18–101(10) of this title, participates materially in the management of the limited liability company; provided however, that the power to elect or otherwise select or to participate in the election or selection of a person to be a manager as defined in § 18–101(10) of this title shall not, by itself, constitute participation in the management of the limited liability company.

6 Del. C. § 18–109 (emphasis added).

Defendants argue that the Implied Consent Statute is inapplicable because the Complaint does not involve or relate to the business of the Subject LLCs. FN6 (D.I. 4 at 4) Defendants emphasize that, while the complaint alleges they are purporting to act as managers, the Implied Consent Statute applies only to actual managers or entities actually participating in management. (Id) If Plaintiffs are correct (i.e., Defendants are wrongfully exercising management rights), Defendants argue, the basis for jurisdiction under the Implied Consent Statute (material participation in management) “falls out” of the case, making jurisdiction improper. ( Id.)

FN6. This argument is unpersuasive. “An action involves or relates to the business of an LLC if: (1) the allegations against the manager focus centrally on his rights, duties and obligations as a manager of a Delaware LLC; (2) the resolution of this matter is inextricably bound up in Delaware law; and (3) Delaware has a strong interest in providing a forum for disputes relating to the ability of managers of an LLC formed under its law to properly discharge their respective managerial functions.” Vichi v. Koninklijke Philips Elecs. N.V., 2009 WL 4345724, at *8 (Del. Ch. Dec. 1, 2009) (internal quotation marks omitted). A dispute regarding the identity of the proper members and managers of an LLC clearly relates to the business of that LLC. See Cornerstone Techs., LLC v.. Conrad, 2003 WL 1787959, at *12 (Del. Ch. Mar. 31, 2003) (“Clearly, the question of whether [one of the defendants] was properly removed as a manager, CEO, and President of the Companies relates to the business of the Companies…. [T]he issue as to who owns what part of [the Companies] … is related in some respect to the management disputes underlying this case—i.e., it relates to the business of the Companies…. In view of the importance of these issues to the capital structure and control of closely-held Delaware LLCs, they obviously relate to the business of those Companies and fall within the literal terms of § 18–109.”).

Defendants also assert that Plaintiffs’ factual claims are insufficient to establish jurisdiction under the Implied Consent Statute. In the Complaint, Plaintiffs assert that Defendants have acted as managers of Peninsula, one of the Subject LLCs, in two ways. First, Defendants’ counsel in Utah—who does not represent them here—sent a letter to Peninsula’s former counsel in Utah—who does not represent Peninsula here—on April 20, 2010, demanding that the latter turn over all files related to its representation of Peninsula.FN7 (D.I. 7 Ex. A) Second, Plaintiffs allege that Defendants, purportedly acting on behalf of Peninsula, have made filings in the Colorado Action reversing Peninsula’s prior litigating positions. ( Id. ¶ 19)

FN7. This demand was renewed in an August 16, 2010 letter, spurring Plaintiffs to file the motion for a temporary restraining order and preliminary injunction discussed above in Section I.C.

*7 Defendants contend that the April 20, 2010 letter was not sent on Defendants’ behalf and does not represent Defendants as Peninsula managers. (D.I. 4 at 5) Defendants also emphasize that they never executed on any membership interest in Peninsula, although Fairstar admits to owning 100% of the membership interest in Cavalion, which is the sole member of Peninsula and which appointed Peninsula’s sole manager. ( Id. at 6) Given what Defendants characterize as “limited activity” related to Peninsula, Defendants assert they could not have orchestrated Peninsula’s reversal of positions in the Colorado Action. ( Id. at 7)

In response, Plaintiffs argue that the Implied Consent Statute applies when a defendant participates materially in management, whether or not the participation is proper. (D.I. 11 at 7) The Court agrees. The statute indicates that a manager is subject to personal jurisdiction “whether or not the manager … is a manager … at the time suit is commenced.” 6 Del. C. § 18–109(a). Undoubtedly, this provision contemplates the situation where a former manager, who is no longer a manager at the start of the suit, is being sued. However, the language also encompasses actions against purported managers who may never have been actual managers. At this stage, the Court need not decide the propriety of Defendants’ alleged assertion of managerial interests. Instead, the Court is merely concluding that Defendants’ alleged assertion of managerial interests is sufficient to justify haling Defendants into a Delaware court, as Plaintiffs have established with reasonable particularity that Defendants materially participated in management of the Subject LLCs, making personal jurisdiction proper under the Implied Consent Statute.

Plaintiffs rely on four factual allegations to establish material participation in management: (1) Fairstar’s assertion of a 100% ownership interest in Cavalion, which owns Peninsula, and the accompanying power to appoint managers of both entities; (2) Defendants’ Utah counsel’s demand for Peninsula documents; (3) Defendants’ alleged court filings on behalf of Peninsula in the Colorado Action; and (4) Fairstar’s filings in a bankruptcy proceeding in the United States Bankruptcy Court for the District of Utah (the “Utah Bankruptcy Proceeding”).FN8 Fairstar’s asserted ownership interest FN9 is a sufficient basis for jurisdiction only if the ownership interest, or the accompanying power to appoint managers, equates to material participation in management. Generally, an ownership interest does not (by itself) imply managerial control—a point the statute makes explicitly. See 6 Del. C. § 18–109(a); see also Fisk Ventures, LLC v. Segal, 2008 WL 1961156 (Del. Ch. May 7, 2008) (finding no material participation in management where member had right to appoint two of five managers, and entity he owned was member with power to appoint third manager); Nolu Plastics, Inc. v. Ledingham, 2005 WL 5654418 (Del. Ch. Dec. 17, 2005) (finding no material participation in management where defendant had right to elect manager of LLC); Palmer v. Moffat, 2001 WL 1221749 (Del.Super.Ct. Oct. 10, 2001) (finding three members were not managers even though members were authorized to appoint majority of managers). But Defendants have done more than just own Cavalion and, through it, Peninsula. Here, Fairstar, as sole owner of Cavalion, appointed Cavalion’s sole manager. (D.I. 4 Ex. C ¶ 4) Further, Cavalion, which wholly owns Peninsula, has appointed Peninsula’s sole manager. ( Id.) The only case addressing the issue of material participation in management in the context of a sole member/sole manager LLC—which, as best as this Court can discern from the record, is the situation here—is a ruling from this District, in which personal jurisdiction was exercised. See Christ v. Cormick, 2007 WL 2022053 (D.Del. July 10, 2007) (holding that defendant materially participated in management by forming LLC in Delaware and serving as sole initial member). FN10 Although an entity that wholly owns an LLC and appoints its sole manager likely participates materially in its management, the corporate structures of Cavalion and Peninsula are not clearly established in record.

FN8. The Utah Bankruptcy Proceeding and the motion brought by Fairstar in that proceeding were first brought to the attention of the Court at the hearing held on November 5, 2010. ( See Tr. at 18–20) Defendants did not object to the Court’s consideration of this evidence. ( See id. at 44–45)

FN9. Defendants emphasize, at great length, that Fairstar has acquired a membership interest in Cavalion, but not in Peninsula. (D.I. 11 at 5–8) While it is true Cavalion is not a party to this action, Cavalion is one of the Subject LLCs for which Plaintiffs request a declaration. (Am.Compl.¶ 21) Therefore, if Plaintiffs establish that Defendants participated in Cavalion’s management, personal jurisdiction is proper under the Implied Consent Statute.

FN10. Plaintiffs also argue that there was an interim period prior to the appointment of the Cavalion manager when Fairstar served as the corporation’s sole member and manager. (D.I. 7 at 9) This interim period, Plaintiffs assert, is sufficient to warrant jurisdiction under the Implied Consent Statute. ( Id.) Given the Court’s above finding, the Court need not address this unestablished interim period.

*8 Plaintiffs offer more to justify the exercise of personal jurisdiction. Plaintiffs allege facts that support a finding of material participation in management by Fairstar (e.g., the allegation that Defendants directed the mailing of the demand letter and the Colorado Action filings that switched Peninsula’s litigating positions). Defendants’ Utah counsel, Mr. David Walquist, is an employee of Kirton & McConkie, the law firm that made the demand for the Peninsula documents. (D.I. 4 Ex. E, Ex. H) At this stage, the Court must construe disputed facts in favor of Plaintiffs and, thus, draw the inference that Fairstar retained Kirton & McConkie to represent its newly acquired entities, Cavalion and Peninsula (which it owns through Cavalion). See Metcalfe, 566 F.3d at 330 (“[A] court is required to accept the plaintiff’s allegations as true, and is to construe disputed facts in favor of the plaintiff.”). Plaintiffs also point to action by Fairstar in the Utah Bankruptcy Proceeding. ( See Tr. at 18–20) Fairstar filed a motion in that proceeding in which it asserted that it acquired all membership interest in AIP RD and appointed AIP RD’s manager. See Memorandum in Support of Ex Parte Joint Motion of Fairstar Resources Ltd. and Petitioning Creditors AD Capital, LLC and Lockhart & Munroe for Order Pursuant to Bankruptcy Rule 1007(d) Directing Moving Parties to Prepare and File the Debtor’s Statements and Schedules by August 13, 2010 at 2, In re AIP Resort Dev. LLC, Bankruptcy Case No. 10–25027 (Bankr.D.Utah July 15, 2010). Notably, Fairstar stated that AIP RD failed to make a required filing because Fairstar—not AIP RD—lacked the necessary information to prepare the filing. Id. at 4 (“The Debtor’s Statements and Schedules and the List of 20 Largest Creditors were not filed by the Debtor [AIP RD] within the deadlines outlined in Bankruptcy Rule 1007 because the financial information needed to prepare the Statements and Schedules and this List was not in the possession or control of Fairstar, which now holds all of the membership interests in the Debtor [AIP RD].”). Assuming the document demand and Colorado Action filings were made at the behest of Fairstar, along with Fairstar’s 100% ownership interest in Cavalion and the accompanying authority to designate its sole manager, as well as Fairstar’s representations in the Utah Bankruptcy Proceeding, the Court finds the exercise of personal jurisdiction over Fairstar proper.

With respect to Goldstar, however, the only basis Plaintiffs assert for exercising personal jurisdiction over Goldlaw is an unsubstantiated contention that Fairstar controls Goldlaw. (Am.Compl.¶ 9) This allegation is insufficient to support the inference that Goldlaw was behind the document demand or court filings in the Colorado Action and the Utah Bankruptcy Proceeding. The inferential gap is simply too large. Plaintiffs, therefore, have failed to justify the exercise of personal jurisdiction over Goldlaw under the Implied Consent Statute.

2. 6 Del. C. § 18–110(a)

*9 Plaintiffs argue, in the alternative, that jurisdiction is proper under 6 Del. C. § 18–110(a), a provision that grants Delaware courts jurisdiction to determine the rightful managers of a Delaware limited liability company. (D.I. 7 at 11) If personal jurisdiction over Defendants is lacking, Plaintiffs ask that the Court drop them from the case, realign the parties, and exercise jurisdiction under § 18–110(a). ( Id. at 12) This realignment would be much more extensive than the realignment that occurred in the authorities Plaintiffs cite. Plaintiffs want Defendants dropped completely from the case and AIP, AIP Lending, AIP RD, and Peninsula realigned as defendants, turning the action into a dispute between Robbins and the LLCs over his ouster as member and manager. This does more than realign the parties; it changes the entire theory of the case.

The three cases Plaintiffs cite involve realigning parties to determine if there is complete diversity of citizenship, allowing the federal courts to assess whether they had subject matter jurisdiction. See Indianapolis v. Chase Nat’l Bank, 314 U.S. 63, 69 (1941); Employers Ins. v. Crown Cork & Seal Co., 905 F.2d 42, 46 (3d Cir.1990); Polak v. Kobayashi, 2005 WL 2008306 (D.Del. Aug. 22, 2005). The Court finds these cases to be inapposite. Given the case Plaintiffs chose to file, the changes Plaintiffs request simply ask too much.

3. Due Process Analysis

Fairstar asserts that it lacks minimum contacts with Delaware. (D.I. 4 at 8 ) The accused conduct, Fairstar contends, was the execution of the Utah judgment, which occurred in Utah and was not action directed at Delaware. ( Id.) The only ties Fairstar has to Delaware are the membership interests it gained through the foreclosure sales. ( Id.) Fairstar emphasizes that it is an Australian company, which has transacted no business in Delaware and has no offices, employees, telephones numbers, or bank accounts here. ( Id.) Plaintiffs respond that Fairstar purposefully availed itself of Delaware law by acquiring the management interest in Delaware LLCs through the foreclosure sales. (D.I. 7 at 10) The Court agrees with Plaintiffs.

Fairstar, by foreclosing on Delaware LLCs and taking ownership rights in them, has purposefully availed itself of Delaware law. Fairstar cannot be surprised it has been haled into a Delaware court for a dispute over the governance of these Delaware LLCs. See Cornerstone Techs. v. Conrad, 2003 WL 1787959, at *13 (Del. Ch. Mar. 31, 2003) (holding that due process requirements were met because defendant purposefully availed himself of Delaware law and cannot be surprised to face lawsuit in Delaware). There is nothing unfair or unjust about exercising personal jurisdiction over Fairstar. See PT China, 2010 WL 761145, at *8 n. 44 (finding that exercise of personal jurisdiction over Chinese individual comported with due process, fairness, and substantial justice because individual submitted himself to jurisdiction by taking management position in Delaware LLC, and claims asserted related to his obligations as manager). Since Plaintiffs’ claims involve the management rights of Peninsula, among other Delaware LLCs, they relate to Fairstar’s obligation as a member who participates materially in management. Due process requirements are, thus, satisfied. See id. (finding due process requirements satisfied for specific claim because it pertained to defendant’s rights, duties, and obligations as manager of Delaware LLC); Palmer, 2001 WL 1221749, at *4 (“The Court finds that [the defendant] could reasonably have anticipated being subject to Delaware jurisdiction under these circumstances to answer for his actions as a manager and that exercise of jurisdiction would not offend traditional notions of fair play and substantial justice.”); Assist Stock Mgmt. LLC v.. Rosheim, 753 A.2d 974, 981 (Del. Ch.2000) (finding exercise of personal jurisdiction proper under Due Process Clause “because: (1) the allegations against [defendant] Rosheim focus centrally on his rights, duties and obligations as a manager of a Delaware LLC; (2) the resolution of this matter is inextricably bound up in Delaware law; and (3) Delaware has a strong interest in providing a forum for disputes relating to the ability of managers of an LLC formed under its law to properly discharge their respective managerial functions”) (internal quotation marks omitted).

B. Failure to State a Claim

1. Res Judicata

*10 When deciding whether a party’s claim is precluded by a prior state court judgment, this Court must give the judgment “the same preclusive effects” that a court from “the state in which the judgment was entered[ ] would.” Turner v. Crawford Square Apartments III, L.P., 449 F.3d 542, 548 (3d Cir2006). The Court, therefore, applies the law of Utah, the state where the allegedly preclusive orders were issued. In Utah, for a claim to be precluded by a prior ruling, (1) “both cases must involve the same parties or their privies;” (2) “the claim that is alleged to be barred must have been presented in the first suit or be one that could and should have been raised in the first action;” and (3) “the first suit must have resulted in a final judgment on the merits.” Snyder v. Murray City Corp., 73 P.3d 325, 332 (Utah 2003).

Defendants argue these three elements are met. (D.I. 4 at 15–17) First, AIP, AIP Lending, Robbins, Fairstar, and Goldlaw were all parties to the Utah Action; and AIP RD and Peninsula, Defendants assert, are privies of AIP and Robbins, as they have identical legal interests. ( Id. at 15) Second, Defendants contend that Plaintiffs raised the same issue in the Utah Action: whether Delaware law controlled and prohibited the constable sales. ( Id. at 16) Finally, the April 16 Order and the April 23 Order were substantive rulings qualifying as final judgments on the merits. ( Id. at 17)

Plaintiffs counter that Peninsula and AIP RD were neither parties nor privies to the Utah Action, relying on the bedrock principle of a corporation’s separate legal existence. (D.I. 7 at 18) Defendants respond that the parties have identical interests and represent the same legal rights, making them privies under Utah law, (D.I. 11 at 15) Plaintiffs also contend that the April 16 Order has no bearing on this litigation since it denied an objection to a charging order on Peninsula, but Defendants never executed on that order. (D.I. 7 at 16) Defendants argue that the April 16 Order extended beyond the charge on Peninsula; the Utah court ruled that Utah law, not Delaware law, applied to all execution proceedings in the Utah Action. (D.I. 11 at 12) Even assuming Utah law—specifically Utah Code Ann.1953 § 48–2c–l 103(6)—controls, Plaintiffs advert, Defendants’ assertion of control over Peninsula is still improper. (D.I. 7 at 17)

Finally, Plaintiffs argue the claims here are broader than those resolved in the April 16 Order and the April 23 Order. ( Id. at 19) Those orders decided whether the constable sales in Utah should proceed. Here, Plaintiffs want a declaration of the proper members and managers of the Subject LLCs subsequent to those sales, and a ruling that Defendants have no right to demand the production of Peninsula files. ( Id.)

In the June 4 Order, the Utah court denied a stay of the foreclosure sales pending resolution of this action. ( Id. at 20) Plaintiffs assert this ruling in no way validates the foreclosures. ( Id.) Defendants disagree, pointing to the Utah court’s statement that it was denying the motion because the court had “already ruled on the issues presented,” reincorporating the prior ruling that Utah law controls, under which the charging orders are proper. (D.I. 11 at 13)

*11 Plaintiffs do not challenge the finality of the April 16 Order, April 20 Order, or June 4 Order. (D.I. 7 at 15–21). Only the first and second elements of claim preclusion are in dispute.

a. Same parties or privies

Under Utah law, a privy is “a person so identified in interest with another that he represents the same legal right.” Searle Bros. v. Searle, 588 P.2d 689, 691 (Utah 1978). “Thus, privity depends mostly on the parties’ relationship to the subject matter of the litigation.” Press Pub. Ltd. v. Matol Botanical Intern. Ltd., 37 P.3d 1121, 1128 (Utah 2001) (internal citations omitted). In Press Publishing, the Supreme Court of Utah found that affiliates and subsidiaries of an entity, Matol Botanical International Ltd. (“MBI”), were its privies because, in a prior bankruptcy proceeding, the sister corporations had defended MBI in their affiliate capacity. Also, the causes of action in the earlier bankruptcy proceeding “stem[med] from the same alleged conduct, obligations, and legal theory.” Id. But in a more recent case, the Utah Supreme Court emphasized that, to comport with Due Process requirements, a finding of privity for claim preclusion as opposed to issue preclusion—between corporate affiliates requires “additional findings establishing the appropriateness of the transfer” of judgment. See Brigham Young Univ. v. Tremco Consultants, Inc., 110 P.3d 678, 686–88 (Utah 2005). The parties must have a relationship that “is sufficiently close to justify preclusion,” which cannot be based on corporate affiliation alone. Id. at 688. A theory such as alter ego or veil piercing must be established to ensure the “substantive precepts of corporate law” are respected. Id. (“In cases involving liability between and among corporations, findings of alter ego or a piercing of the corporate veil, for example, could suffice to establish the appropriateness of extending or transferring the liability of one corporate entity to another…. Absent such a finding, however, liability cannot be imposed upon the second entity without displacing substantive precepts of corporate law.”).

Although language in Press Publishing, which Defendants cite (D.I. 11 at 15), implies a finding of privity was made based on an entity’s status as an affiliate, putting it at odds with BYU, an examination of the facts there reveals no tension. MBI originally filed suit against Press Publishing Ltd. (“Press”) for breach of contract. Press responded with counterclaims of misappropriation against MBI and various affiliates and subsidiaries. Press Publishing, 37 P.3d at 1123. As part of its misappropriation claims, Press argued that the counterclaim-defendants acted “in concert and as agents and alter egos” to carry out a scheme to destroy Press, and there was no distinctness among any of them. Id. at 1124. MBI then dropped its breach of contract claim, leaving only Press’ counterclaims, and the MBI affiliates moved to dismiss the counterclaims as being barred by a prior bankruptcy ruling. Id. at 1126. MBI was a party to that bankruptcy proceeding and the affiliates argued they were MBI’s privies. Id. In response, Press argued the affiliates were not alter egos of MBI, the complete opposite of its prior assertion. Id. The Supreme Court of Utah held that the affiliates were privies because of their status as sister corporations, their defense of MBI (as affiliates) in one of the bankruptcy proceedings, and the fact that the two causes of action arose from the same conduct, obligations, and legal theory, all of which combined to create an identity of legal interests between the parties. Id. at 1128. The court emphasized that MBI’s “attempt to retract its previous allegation of privity” based on an alter-ego theory was disingenuous, indicating it was holding MBI to its earlier position. Id. The Press Publishing ruling, therefore, involved an assertion (and perhaps establishment) of an alter ego theory, meeting the requirement clarified in BYU.

*12 Here, Defendants raise no basis to disregard the separate legal existence of AIP RD and Peninsula, and in fact argue the separate existence is “beside the point.” (D.I. 11 at 15) They merely rely on the ownership interests the parties to the Utah Action have in AIP RD and Peninsula, citing authority from the Tenth Circuit and the Southern District of New York. ( Id. at 16) But in Utah “additional findings establishing the appropriateness of the transfer” of judgment are required, which Defendants have failed to present. The claims brought by AIP RD and Peninsula, therefore, are not barred.

Since the remaining Plaintiffs were parties to the Utah Action, the Court must turn to the second requirement for claim preclusion with regard to their claims.

b. Claim presented, or should have been presented, in the first suit

In Utah, for purposes of claim preclusion, “[c]laims or causes of action are the same as those brought or that could have been brought in the first action if they arise from the same operative facts, or in other words from the same transaction.” Mack v. Utah State Dep’t of Commerce, Div. of Sec., 221 P.3d 194, 203 (Utah 2009). The Utah Supreme Court stated in Mack that it has “moved toward the transactional theory of claim preclusion espoused by the Restatement (Second) [of Judgments]” and moved away from requiring the causes of action to “rest on the same state of facts” or that the necessary evidence be of the “same kind or character.” FN11 Id. In Press Publishing, the same claims were involved because the causes of action “stem[ed] from the same alleged conduct, obligations, and legal theory” as those in the prior proceeding. 37 P.3d at 1128.

FN11. Plaintiffs rely on the “sameness of evidence” rationale, arguing Defendants have attempted to control Peninsula only after the Utah rulings, and Plaintiffs could not have raised claims based on these future facts. (D.I. 11 at 20) In making this argument, Plaintiffs rely on Macris & Assocs., Inc. v. Neways, Inc., 16 P.3d 1214 (Utah 2000). But, in Mack, the Utah Supreme Court explained that the holding in Macris turned on a transactional theory; there was no preclusion because the claims arose from different transactions. See Mack, 221 P.3d at 203–04.

This action and the Utah Action involve one transaction: the constable sales of the Delaware LLCs. In the Utah Action, AIP, Lending, and Robbins challenged the future sales preemptively through objections that resulted in the April 16 Order and April 20 Order. Here, these entities challenge the consummated sales after-the-fact by requesting a declaration that Defendants do not own any interest in the Subject LLCs, are not entitled to any property owned by the Subject LLCs, and are not members or managers of the Subject LLCs. (Am.Compl.¶¶ A, B, D, E) Granting relief requires a finding that the sales were invalid. The challenge is based on Delaware law, making it identical to the challenge raised in the Utah Action. The Utah court resolved this claim in the April 16 Order by holding that Utah law controlled; this holding was later incorporated into the June 4 Order.FN12

FN12. Plaintiffs emphasize the fact that the April 16 Order was a challenge to a charging order that was never executed on, but the Utah court clearly incorporated its holding there into the June 4 Order, leaving no doubt as to the finality of the holding. (D.I. 4 Ex. H)

Plaintiffs also challenge acts by Defendants which Plaintiffs argue are attempts to control Peninsula (the document demand, the Colorado Action filings, and the Utah Bankruptcy Proceeding filing). But they do so by requesting an injunction. To issue the injunction, the Court must find that the foreclosure sales are void. The claim is based, somewhat, on conduct occurring after the Utah rulings, but it is still premised on the same transaction: the constable sales. Plaintiffs argue that even under Utah law, Defendants could gain no managerial rights in Peninsula. (D.I. 7 at 17) Plaintiffs have progressed from challenging the acquisition of membership rights under Delaware law to challenging the acquisition of managerial rights under Utah law. Although this claim was not raised in the Utah Action, it “could and should have been.” When Plaintiffs received the unfavorable ruling refusing to stop the sales, they could and should have asked the Utah court for a declaration (as they do here) clarifying the rights Defendants would acquire through the sales. If they had done this, they would have asked a Utah court (not a Delaware court) for a ruling under Utah law.

2. Rooker–Feldman Doctrine

*13 The Rooker–Feldman doctrine, by removing subject matter jurisdiction, prevents district courts from reviewing and rejecting state court decisions in federal actions brought by the party that lost in the state forum. See Turner v. Crawford Square Apartments III, L.P., 449 F.3d 542, 547 (3d Cir.2006). The scope of this doctrine, however, is very narrow. See id. (“[T]he [Supreme] Court … [has] emphasized the narrow scope of the Rooker–Feldman doctrine, holding that it ‘is confined to cases of the kind from which the doctrine acquired its name: cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.’ “) (quoting Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005)). In fact, “a district court is not divested of subject-matter jurisdiction simply because a party attempts to litigate in federal court a matter previously litigated in state court. Id.

Here, Plaintiffs raise issues not presented in the Utah Action (i .e., the challenge under Utah law and the challenge to the demand for Peninsula documents). They request a declaration of corporate rights in the aftermath of the Utah rulings. They do not seek a stay of the sales—the remedy prayed for in Utah-or damages for harm caused by the denial of a stay; this action is not framed as an appeal of the Utah ruling. See 18B C. Wright & A. Miller, Federal Practice and Procedure § 4469.1 (2d ed. 2010) (“The most obvious occasions to apply Rooker–Feldman principles arise in the occasional actions that are expressly framed as attempted appeals from a state-court judgment to a federal district court.”). When, as here, additional claims are asserted in the federal forum, the Rooker–Feldman doctrine is no bar, even if the claims contradict a legal conclusion made by the state court. See Exxon Mobil Corp., 544 U.S. at 1527 (“If a federal plaintiff presents some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party, then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion.”) (internal citations omitted). The Rooker–Feldman doctrine is, therefore, inapplicable.

C. Transfer of Venue

Since the claims asserted by AIP RD and Peninsula against Fairstar survive the analysis above, the Court must consider Defendants’ request to transfer venue to the District of Utah. Defendants’ request arises pursuant to 28 U.S.C. § 1404(a), which permits transfer of “any civil action to any other district or division where it might have been brought.” Venue is proper in the District of Utah under 28 U.S.C. § 1391(a)(2) because it is the “judicial district in which a substantial part of the events … giving rise to the claim occurred,” namely, the constable sales. No party contends venue is improper in Delaware. See 28 U.S.C. § 1391. Since two proper venues have been identified, the Court must consider the factors identified by the Third Circuit in Jumara v. State Farm Insurance Co., 55 F.3d 873, 879 (3d Cir.1995). Having done so, the Court concludes that Defendants have failed to meet the high burden imposed on them by the law of this Circuit, which requires a showing that convenience and fairness strongly favor transfer.

*14 Specifically, the Court makes the following findings with respect to each of the Jumara factors, (i) Plaintiffs have clearly manifested their preference for Delaware as a forum by filing the Amended Complaint in this jurisdiction, (ii) Defendants prefer an alternative forum: the District of Utah. The Court notes that Defendants are Australian companies with their principal places of business in Osborne Park, Western Australia. (D.I. 4 at 9) The only tie to Utah the Court can discern from the record is Defendants’ choice to file the Utah Action there, presumably because that is where AIP and Lending have their principal places of business. (D.I. 4 Ex. B. ¶ 3) FN13 This connection is weaker than Defendants’ tie to this forum: their asserted ownership (and possible managerial) interest in various Delaware LLCs, (iii) Plaintiffs’ claim did arise in Utah. The basis for their claims are the foreclosure sales through which Defendants executed on the Subject LLCs, which occurred in Utah pursuant to Utah law and a Utah court’s charging orders.

FN13. Defendants’ Utah counsel states in an affidavit attached to Defendants’ motion that he “personally entered the Plaintiffs’ AIP LLC, AIP Lending, and Peninsula’s principal place of business which was located in Utah.” (D.I. 4 Ex. B ¶ 3) Plaintiffs do no challenge this assertion.

(iv) The record contains little information about the physical and financial conditions of the parties,FN14 and nothing about the convenience of litigating in Utah as opposed to Delaware. (v) Although some witnesses reside in Utah, there is no indication that any witness would be unavailable in Delaware. The convenience of witnesses is not, therefore, highly pertinent. (vi) While Defendants assert that documentary evidence is located in Utah, they do not suggest it would be difficult to produce this evidence in Delaware. Hence, these considerations do little to offset the heavy weight afforded to Plaintiffs’ choice of forum, as they show no unusual burden presented by litigation in Delaware. See, e.g., Tsoukanelis v. Country Pure Foods, Inc., 337 F.Supp.2d 600, 604 (D.Del.2004) (“This court … has denied motions to transfer venue when the movants were unable to identify documents and witnesses that were unavailable for trial.”); Wesley–Jessen Corp. v. Pilkington Visioncare, Inc., 157 F.R.D. 215, 218 (D.Del.1993) (“[T]echnological advances have substantially reduced the burden of having to litigate in a distant forum.”).

FN14. The Court notes that on March 18, 2011, a suggestion of bankruptcy was filed in this case informing the Court that AIP filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C § 11, in the United States Bankruptcy Court for the District of Delaware. (D.I.16)

(vii) There is no suggestion that a judgment would be unenforceable in either District. (viii) Defendants argue that practical considerations such as ease and expense of trial favor transfer to Utah because evidence and witnesses are located there. But shipment and travel costs for proceeding in Delaware are not compared to those for litigating in Utah, providing no indication of the weight this factor should be given.

(ix) Notwithstanding the heavy caseload carried by the judges in this District, and the ongoing judicial vacancy, the Court is not persuaded that administrative difficulties due to court congestion favor transfer. See Textron Innovations, Inc. v. The Taro Co., 2005 WL 2620196, at *3 (D.Del. Oct. 14, 2005) (“[T]he court is not persuaded that any disparity in court congestion, to the extent there is any, will be so great as to weigh strongly in favor of a transfer.”).

*15 (x) Both venues have a local interest in deciding the controversy and (xi) public policy considerations favoring resolution there. Delaware clearly has a substantial interest in resolving lawsuits pertaining to the ownership and control of Delaware LLCs. Also, when Defendants executed on Delaware LLCs, they were fully cognizant of the possibility of being sued here. By taking ownership, Defendants “received the benefits of Delaware incorporation” and cannot now complain that they have been sued here. See Auto. Techs Int 7, Inc. v. Am. Honda Motor Co. Inc., 2006 WL 3783477, at *2 (D.Del. Dec. 21, 2006). That being said, Utah has a significant local interest also. The Subject LLCs are registered to do business in Utah and have their principal places of business there. This dispute requires an examination of the implications of a Utah court’s ruling and constable sales that took place in Utah. Since both Delaware and Utah can assert significant local interests and public policy concerns related with this lawsuit, this factor favors neither venue.

Finally, (xii) a district judge in the District of Utah undoubtedly has more occasion to apply Utah law than a district judge here. But there is no reason to believe that this Court is unable to render an informed ruling under Utah law. Further, application of Delaware law is likely also required, as the action is brought under a provision of Delaware corporate law. Hence, this final factor favors neither venue.

At bottom, this analysis turns on a balance between the first and third factors: the great weight given to the Plaintiffs’ choice of forum and the origin of the claim in Utah. The Court concludes that the latter factor does not outweigh the presumption that a case should be litigated in the forum chosen by the plaintiff. Defendants have failed to meet the heavy burden of demonstrating that another forum clearly would be more convenient or otherwise more fair. Therefore, Defendants’ motion to transfer venue will be denied.

IV. CONCLUSION

For the reasons set forth above, Defendants’ motion to dismiss or transfer venue is GRANTED IN PART and DENIED IN PART. The claims against defendant Goldstar are dismissed for lack of personal jurisdiction. The claims asserted by AIP, Lending, and Robbins are barred under the doctrine of claim preclusion and, thus, dismissed. Defendants’ motion to transfer venue is DENIED. This suit will proceed as an action by AIP RD and Peninsula against Fairstar.

ORDER

At Wilmington, this 31st day of March 2011, for the reasons set forth in the Memorandum Opinion issued this date, IT IS HEREBY ORDERED that:

1. The Motion to Dismiss or Transfer Venue (D.I.4) filed by Defendants Fairstar Resources Ltd. and Goldlaw Pty Ltd. is GRANTED to the extent it challenges personal jurisdiction over Goldlaw Pty Ltd. and to the extent it asserts the claims of American Institutional Partners LLC, AIP Lending LLC, and Mark Robbins are barred under the doctrine of claim preclusion, and DENIED to the extent it challenges personal jurisdiction over Fairstar Resources Ltd., asserts the claims of Peninsula Advisors LLC and AIP Resort Development LLC are barred by the doctrine of claim preclusion or the Rooker–Feldman doctrine, and requests transfer of venue to the United States District Court for the District of Utah.

*16 2. The Clerk of Court is directed to DISMISS American Institutional Partners LLC, AIP Lending LLC, Mark Robbins, and Goldlaw Pty Ltd. This action will proceed as Peninsula Advisors LLC and AIP Resort Development LLC against Fairstar Resources Ltd.

In re Mortensen: Self-Settled Trusts Don’t Work in Bankruptcy

Posted by McCullough

Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011.UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ALASKAIn re: Case No. A09-00565-DMD THOMAS WILLIAM MORTENSEN,Debtor.Chapter 7

Filed On

5/26/11

KENNETH BATTLEY, Plaintiff,

ERIC J. MORTENSEN, ROBIN MARIE MULLINS, MARY MARGARET MORTENSEN-BELOUD, in their capacities as trustees of the Mortensen Seldovia Trust, and THOMAS W. MORTENSEN, in his individual capacity,

Defendants.

Adv. No. A09-90036-DMD

HON. DONALD MacDONALD IV, United States Bankruptcy Judge

MEMORANDUM DECISION

Kenneth Battley, chapter 7 trustee, has brought this adversary proceeding to set aside a transfer of real property as a fraudulent conveyance. It is a core proceeding under 28 U.S.C. sec. 157(b)(2)(H). Jurisdiction arises under 28 U.S.C. sec. 1334(b) and the district court’s order of reference. Trial was held on March 21 – 23, 2012. I find for the plaintiff.

Factual Background

Thomas Mortensen, the debtor and one of the defendants herein, is a self- employed project manager. He has a master’s degree in geology but has not worked in that field for 20 years. He manages the environmental aspects of construction projects. Mortensen has contracted with major oil companies for work in the past.

In 1994, Mortensen and his former wife purchased 1.25 acres of remote, unimproved real property located near Seldovia, Alaska.FN1 They paid $50,000.00 cash for the purchase. The parties divorced in 1998. Mortensen received his former wife’s interest in the property. Subsequently, improvements were made to the property. A small shed was placed on the parcel in 2000 and some other small structures were built on it from 2001 through 2004. There is power to the property along with a well and septic system. The debtor transferred the property to a self-settled trust on February 1, 2005. The transfer of this property is the focal point of the current dispute.

FN1 Mortensen testified that he accesses the property by taking a boat from Homer to Seldovia, then driving about 7 miles down an old logging road out of Seldovia and, finally, switching to a narrower footpath or ATV trail to reach the parcel.

Mortensen’s divorce was a contested proceeding. In 1998, when the court divided the parties’ assets and liabilities, Mortensen argued that the Seldovia property had been purchased with an inheritance and was to remain his sole and separate property. The court rejected his argument. It found that Mortensen wasn’t credible on the issue,FN2 and that the property was joint marital property.FN3 Nonetheless, Mortensen received the Seldovia property. He also received $61,581.00 from his wife’s SBS account, another $24,000.00 in cash from the refinance of the couple’s home and other miscellaneous personal property. In total, Mortensen received assets of $164,402.00 in the divorce.FN4

FN2 Pl.’s Ex. 13 at 8, para. 36.

FN3 Id. at 12, para. 66.

FN4 Id. at 13, para. 17.

Mortensen was not liable for any debt arising out of the marital estate. His ex- wife received the family home. She assumed an encumbrance against the home and was obligated to remove Mortensen’s name from a $78,000 obligation encumbering the home.FN5

FN5 Id. at 14, para. 84.A.

There was no credit card debt described in the courts findings and conclusions and no credit card debt was to be assumed by either party to the divorce.FN6

FN6 Pl.’s Ex. 13.

In June of 2004, Mortensen filed a motion to impose child support against his ex-wife.FN7 Despite a joint custody arrangement, he asked for an increase in child support due to a decrease in his income. After the superior court granted his uncontested request, Mortensen’s former spouse filed a Rule 60(b) motion. He filed an opposition to the motion on July 30, 2004. In his opposition, Mortensen stated:

FN7 Exhibit 12.

The property settlement and other expenses of the divorce drove me deeply into debt. After the divorce my debt continued to increase due to the ongoing legal expenses and the time required from profitable work in order to respond to two more years of repeated motions from the defendant. The defendant continued with motion practice for two years after the divorce ended. The defendant did not cease the motion practice until Judge Shortell told her in 2000 that he would consider awarding me attorney’s fees if she persisted in filing frivolous motions. Saddled with debt and with increasing competition in my shrinking business market I have not recovered from the financial carnage of the divorce.FN8

FN8 Pl.’s Ex. 9 at 15.

Mortensen’s income fluctuated substantially from year to year after the divorce. His 1999 income tax return was not placed into evidence. At a hearing held in state court on December 22, 2004, Mortensen revealed his annual income from 2000 through 2004. His net income in 2000 was $32,822.00.FN9 He also cashed out an annuity for $102,023.18 that year. In 2001, Mortensen had net income of $16,985.00.FN10 In 2002, his annual income dipped to $3,236.00.FN11 2003 yielded income of $13,185.00.FN12 Mortensen’s 2004 income was about the same” as 2003.FN13 Prior to the divorce, Mortensen had averaged $50,000.00 to $60,000.00 a year in net income.FN14

FN9 Pl.’s Ex. 4 at 24:22.

FN10 Id. at 24:20.

FN11 Id. at 24:16.

FN12 Id. at 21:25 – 22:6.

FN13 Pl.’s Ex. 4 at 24:25.

FN14 The superior court found that Mortensen earned $54,000.00 in 1994, $57,000.00 in 1995, $46,500.00 in 1996, and $62,690.00 in 1997. His estimated income for 1998 was between $53,360.00 and $69,000.00. Exhibit 13, page 5, paragraph 13.

Mortensen didn’t reveal his interest in establishing an asset protection trust at the hearing in December of 2004. Mortensen had heard about Alaska’s asset protection trust scheme in casual conversation. He researched the topic and, using a template he had found, drafted a document called the “Mortensen Seldovia Trust (An Alaska Asset Preservation Trust).” Mortensen then had the trust document reviewed by an attorney. He said only minor changes were suggested by the attorney.

The express purpose of the trust was “to maximize the protection of the trust estate or estates from creditors’ claims of the Grantor or any beneficiary and to minimize all wealth transfer taxes.”FN15 The trust beneficiaries were Mortensen and his descendants. Mortensen had three children at the time the trust was created.

FN15 Def.’s Ex. A at Mortenson 0006.

Mortensen designated two individuals, his brother and a personal friend, to serve as trustees. His mother was named as a “trust protector,” and had the power to remove and appoint successor trustees and designate a successor trust protector. She could not designate herself as a trustee, however. The trustees and Mortensen’s mother are named defendants in this adversary proceeding.

The trust was registered on February 1, 2005.FN16

FN16 Def.’s Ex. B.

As required by AS 34.40.110(j), Mortensen also submitted an affidavit which stated that: 1) he was the owner of the property being placed into the trust, 2) he was financially solvent, 3) he had no intent to defraud creditors by creating the trust, 4) no court actions or administrative proceedings were pending or threatened against him, 5) he was not required to pay child support and was not in default on any child support obligation, 6) he was not contemplating filing for bankruptcy relief, and 7) the trust property was not derived from unlawful activities.FN17

FN17 Def.’s Ex. C.

On February 1, 2005, Mortensen quitclaimed the Seldovia property to the trust, as contemplated in the trust document.FN18 Per the trust, this realty was “considered by the Grantor and the Grantor’s children to be a special family place that should not be sold and should remain in the family.”FN19 To facilitate this purpose, the trustees of the trust were requested, but not directed, to maintain and improve the Seldovia property “in the trust for the benefit, use and enjoyment of the Grantor’s descendants and beneficiaries.”FN20

FN18 Def.’s Ex. D. The quitclaim deed was recorded in the Seldovia Recording District on February 3, 2005. Id.

FN19 Def.’s Ex. A at Mortensen 0009.

FN20 Id.

The Seldovia property was worth roughly $60,000.00 when it was transferred to the trust in 2005. Mortensen’s mother sent him checks totaling $100,000.00 after the transfer. Mortensen claims this was part of the deal in his creation of the trust; his mother was paying him to transfer the property to the trust because she wanted to preserve it for her grandchildren. This desire is corroborated by notes his mother included with the two $50,000.00 checks she sent to him. The first check, No. 1013, was dated February 22, 2005, and referenced the Seldovia Trust, which had been registered just three weeks earlier.FN21 A short, handwritten note from Mortensen’s mother, bearing the same date stated:

FN21 Def.’s Ex. E at Mortensen 0079.

Enclosed is my check #1013 in the amount of fifty thousand dollars, as we have discussed, to pay you for the Seldovia property that you have put into the trust for my three special “Grands”!

In the next few weeks there will be a second check mailed to you in the amount of fifty thousand dollars, making a total of $100,000.00.

What a lot of fun memories have been made there!FN22

FN22 Id. at Mortensen 0080.

Mortensen’s mother wrote him a second check on April 8, 2005.FN23 This check also referenced the Seldovia Trust. It was accompanied by a typewritten note which said, “Here we go with the second and final check for the Seldovia property in the amount of fifty thousand dollars, totaling in all $100,000.00, as we have been talking about.”FN24

FN23 Id. at Mortensen 0087.

FN24 Id. Mortensen 0088.

Mortensen says he used the money his mother sent him to pay some existing debts and also put about $80,000.00 of the funds into the trust’s brokerage account as “seed money” to get the trust going and to pay trust-related expenses, such as income and property taxes. There was no promissory note for the money he lent to the trust. Mortensen said these funds were invested, some profits were made, and he was repaid “pretty much” all of the loan within about a year’s time.

Mortensen says the Seldovia property is recreational property. It was used primarily by him and his three children, but other family members also used it. Before the trust was created, Mortensen had lived on the property the majority of the time, and he says he could have exempted it from creditors’ claims as an Alaska homestead if he had retained it rather than placing it in the trust. In support of this contention, he has provided copies of his 2004 Alaska voter registration application,FN25 his 2003 fishing certificate,FN26 his 2004 Alaska PFD application (filed in 2005),FN27 a January, 2005, jury summons,FN28 and his Alaska driver’s license,FN29 which all indicate that he resided in Seldovia when the trust was created.

FN25 Def.’s Ex. I.

FN26 Def.’s Ex. J.

FN27 Def.’s Ex. K.

FN28 Def.’s Ex. L.

FN29 Def.’s Ex. M.

Mortensen’s financial condition has deteriorated since the establishment of the trust. His income has been sporadic.FN30 He used the cash he received from his mother and his credit cards to make speculative investments in the stock market and to pay living expenses. His credit card debt ballooned after the trust was created. In 2005, total credit card debt ranged from $50,000.00 to $85,000.00.FN31 When he filed his petition in August of 2009, Mortensen had over $250,000.00 in credit card debt. The $100,000.00 he received from his mother has been lost.

FN30 Mortensen had total income of $63,197.00 in 2005; $24,430,00 in 2006; $50,040.00 in 2007; $24,887 in 2008; and $6,142.00 in 2009.

FN31 Mortensen’s statements and other evidence regarding the amount of his credit card debt at the time of the creation of the trust have been inconsistent.

Mortensen claims that he was always able to make at least the minimum monthly payment on his credit card debts until he became ill in April of 2009. He needed immediate surgery and was hospitalized for almost two weeks. His illness required a long period of convalescence. Mortensen says he tried to return to work but was on pain medication which made him “fuzzy.” He lost several work contracts while he was recovering. He first considered filing bankruptcy in early August, 2009.

Mortensen filed his chapter 7 petition on August 18, 2009. He owned no real property at the time of filing, but his Schedule B itemized personal property with a value of $26,421.00. He scheduled no secured or priority claims. General unsecured claims totaled $259,450.01, consisting of $8,140.84 in medical debt and $251,309.16 in credit card debt on 12 separate credit cards. His interest in the Seldovia Trust was not scheduled, but Mortensen disclosed the creation of the trust on his statement of financial affairs. His monthly income was listed as $4,221.00, consisting of $321.00 in child support and the balance as income from the operation of his business as a geologist and permits consultant. Mortensen indicates that he expected his income to decrease due to his ongoing health issues and the increasingly unfavorable market conditions for his profession. His itemized monthly expenses totaled $5,792.00, which exceeded his income by more than $1,500.00. Expenses included $1,350.00 for rent, $600.00 for “income and FICA tax obligations, not withheld,” and $1,650.00 for expenses from the operation of his business.

Analysis

The trustee alleges that Mortensen failed to establish a valid asset protection trust under Alaska’s governing statutes because Mortensen was insolvent when the trust was created on February 1, 2005. Under A.S. 34.40.110(j)(2), the settlor of an Alaskan asset protection trust must file an affidavit stating that “the transfer of the assets to the trust will not render the settlor insolvent.”FN32 “Insolvent” is not defined in Alaska’s asset protection trust statute or in any cases arising thereafter. The trustee applies the Bankruptcy Code’s definition of insolvency found in 11 U.S.C. sec. 101(32), which provides that the term “insolvent” means:

(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair evaluation, exclusive of –

(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and

(ii) property that may be exempted from property of the estate under section 522 of this title;FN33

FN32 AS 34.40.110(j)(2).

FN33 11 U.S.C. sec. 101(32)(A).

While there is no indication that Alaska would adopt a similar definition in the trust statute, other states have adopted a similar approach.FN34 I conclude that insolvency is established for purposes of Alaska’s asset protection trust law if the debtor’s liabilities exceed its assets, excluding the value of fraudulent conveyances and exemptions. Here, the applicable exemptions will be determined under state rather than federal law, because this court is applying Alaska law to determine if the trust was correctly established. The federal exemption statutes have no role in making that determination.

FN34 See 37 AM.JUR. 2D Fraudulent Conveyances and Transfers secs. 20, 21 (1964).

The trustee contends that the $100,000.00 received from Mortensen’s mother was a gift and cannot be considered as an asset in making a determination of solvency. I respectfully disagree. Mortensen and his mother had an oral agreement for the creation of a trust for the benefit of Ms. Mortensen-Belound’s grandchildren. Mortensen was to place the Seldovia property in trust and in return, his mother promised to pay him $100,000.00. Mortensen performed his end of the bargain. Based on his mother’s promise, he transferred the Seldovia property to an irrevocable trust on February 1, 2005.FN35 His partial performance took the agreement outside the statute of frauds.FN36 As noted in sec. 90(1) of the Restatement (Second) of Contracts:

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.FN37

FN35 Article 13 of the trust states that it is an irrevocable trust. See Def.’s Ex. A at Mortensen 0043.

FN36 Martin v. Mears, 602 P.2d 421, 428-429 (Alaska 1979).

FN37 Restatement (Second) of Contracts sec. 90 (1981).

Ms. Mortensen-Belound’s promise of payment should reasonably have been expected to induce action on the part of Mortensen and it did induce such action. The promise was binding on Ms. Mortensen-Belound and the proper remedy for a breach would have been payment of $100,000.00. Justice could have been avoided only by enforcement of the promise because Mortensen’s creation of the trust was irrevocable. Justice would not require limitation of a remedy for breach because the damages are clearly liquidated. It is proper to include the $100,000.00 in Mortensen’s balance sheet to determine solvency as a contract right existing as of February 1, 2005.

Mortensen prepared a balance sheet on March 8, 2010, which reconstructs his financial status as of February 1, 2005.FN38 This balance sheet shows that Mortensen had $153,020.00 in assets as of February 1, 2005. Some of those assets may have been exempt. He had a brokerage account designated as “ML SEP” for $3,606.00. This may be a form of pension plan that is exempt under AS 09.38.017. His other liquid assets may be exempt in the sum of $1,750.00 under A.S. 09.38.020 as it existed in 2005. The only other exemption for Mortensen would have been for an automobile in the amount of $3,750.00. After deductions for exemptions, Mortensen had assets totaling $143,914.00.

FN38 Pl.’s Ex. 21; Def.’s Ex. G.

Mr. Mortensen’s balance sheet lists liabilities totaling $49,711.00 as of February 1, 2005.FN39 This sum may be low. At his sec. 341 creditors’ meeting held on September 24, 2009, Mortensen testified that he owed roughly $85,000.00 on credit cards at the time the trust was created.FN40 Using either figure, however, Mortensen was solvent at the time he created the trust. The trust was created in accordance with Alaska law.

FN39 Id.

FN40 Pl.’s Ex. 2 at 6.

Battley seeks judgment against Mortensen under 11 U.S.C. sec. 548(e), which contains a ten-year limitation period for setting aside a fraudulent transfer. Section 548(e) provides:

(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if –

(A) such transfer was made to a self- settled trust or similar device;

(B) such transfer was by the debtor;

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.FN41

FN41 11 U.S.C. sec. 548(e)(1).

Section 548(e) was added to the Bankruptcy Code in 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act.FN42 Section 548(e) “closes the self-settled trusts loophole” and was directed at the five states that permitted such trusts, including Alaska.FN43 Its main function “is to provide the estate representative with an extended reachback period for certain types of transfers.”FN44 However, the “actual intent” requirement found in sec. 548(e)(1)(D) is identical to the standard found in sec. 548(a)(1)(A) for setting aside other fraudulent transfers and obligations.FN45

FN42 Pub. L. No. 109-8, sec. 1042 (2005).

FN43 5 COLLIER ON BANKRUPTCY para. 548.10[1], [3][a] n.6 (N. Alan Resnick & Henry J. Sommer eds., 16th ed.).

FN44 Id., para. 548.10[2].

FN45 11 U.S.C. sec. 548(a)(1)(A), (e)(1)(D), see also 5 COLLIER ON BANKRUPTCY para. 548.10[3][d].

Mortensen’s trust, established under AS 34.40.110, satisfies the first three subsections of sec. 548(e) – the Seldovia property was transferred to a self-settled trust, Mortensen made the transfer, and he is a beneficiary of the trust. The determinative issue here is whether Mortensen transferred the Seldovia property to the trust “with actual intent to hinder, delay, or defraud” his creditors.FN46

FN46 11 U.S.C. sec. 548(e)(1)(D).

Mortensen says he did not have this intent when he created the trust and that he simply wanted to preserve the property for his children. Battley counters that Mortensen’s intent is clear from the trust language itself. The trust’s stated purpose was “to maximize the protection of the trust estate or estates from creditors’ claims of the Grantor or any beneficiary and to minimize all wealth transfer taxes.”FN47 Mortensen argues that the trust language cannot be used to determine intent because Alaska law expressly prohibits it. Under Alaska law, “a settlor’s expressed intention to protect trust assets from a beneficiary’s potential future creditors is not evidence of an intent to defraud.”FN48 But is this state statutory provision determinative when applying sec. 548(e)(1)(D) of the Bankruptcy Code?

FN47 Def.’s Ex. A at Mortenson 0006.

FN48 AS 34.40.110(b)(1).

Ordinarily, it is state law, rather than the Bankruptcy Code, which creates and defines a debtor’s interest in property.FN49

FN49 Butner v. United States, 440 U.S. 48, 55 (1979).

Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.FN50

FN50 Id.

Here, Congress has codified a federal interest which requires a different result. Only five states allow their citizens to establish self-settled trusts.FN51 Section 548(e) was enacted to close this “self-settled trust loophole.”FN52 As noted by Collier:

[T]he addition of section 548(e) is a reaction to state legislation overturning the common law rule that self-settled spendthrift trusts may be reached by creditors (and thus also by the bankruptcy trustee.)FN53

FN51 In addition to Alaska, Delaware, Nevada, Rhode Island and Utah permit the creation of self-settled trusts.

FN52 5 COLLIER ON BANKRUPTCY para. 548.10[1], citing H.R. Rep. No. 109-31, 109th Cong., 1st Sess. 449 (2005) (statement of Rep. Cannon).

FN53 5 COLLIER ON BANKRUPTCY para. 548.10[3][a] (footnotes omitted).

It would be a very odd result for a court interpreting a federal statute aimed at closing a loophole to apply the state law that permits it. I conclude that a settlor’s expressed intention to protect assets placed into a self-settled trust from a beneficiary’s potential future creditors can be evidence of an intent to defraud. In this bankruptcy proceeding, AS 34.40.110(b)(1) cannot compel a different conclusion.

To establish an avoidable transfer under sec. 548(e), the trustee must show that the debtor made the transfer with the actual intent to hinder, delay and defraud present or future creditors by a preponderance of the evidence.FN54 Here, the trust’s express purpose was to hinder, delay and defraud present and future creditors. However, there is additional evidence which demonstrates that Mortensen’s transfer of the Seldovia property to the trust was made with the intent to hinder, delay and defraud present and future creditors.

First, Mortensen was coming off some very lean years at the time he created the trust in 2005. His earnings over the preceding four years averaged just $11,644.00 annually.FN55 He had burned through a $100,000.00 annuity which he had cashed out in 2000. He had also accumulated credit card debt of between $49,711.00 to $85,000.00 at the time the trust was created. He was experiencing “financial carnage” from his divorce. Comparing his low income to his estimated overhead of $5,000.00 per month (or $60,000.00 per year), Mortensen was well “under water” when he sought to put the Seldovia property out of reach of his creditors by placing it in the trust.

FN54 Consolidated Partners Inv. Co. v. Lake, 152 B.R. 485, 488 (Bankr. N.D. Ohio 1993).

FN55 See the discussion herein regarding Mortensen’s income during this time, at pp. 4 – 5.

Further, when Mortensen received the $100,000.00 from his mother he didn’t pay off his credit cards. Rather, he transferred $80,000.00 into the trust after paying a few bills and began speculating in the stock market. He had a substantial credit card debt due to AT&T, approximately $15,200.00,FN56 which was not paid in 2005. This debt had increased to $19,096.00 by the time he filed his bankruptcy petition.FN57 In 2005, Mortensen also owed Capital 1 approximately $6,350.00 in credit card debt.FN58 This debt had bumped up to$7,525.00 when he filed for bankruptcy.FN59 He had a Discover card with a balance of $12,588.00 as of Feb. 1, 2005.FN60 He owed Discover $11,905.00 when he filed bankruptcy.FN61

FN56 Pl.’s Ex. 23.

FN57 Pl.’s Ex. 18 at 13. Citibank took over AT&T”s credit card business. It is listed as a creditor in the debtor’s bankruptcy schedules for a loan with the same account number as the AT&T debt.

FN58 Pl.’s Ex. 24 at 12.

FN59 Pl.s Ex. 18 at 14.

FN60 Pl.’s Ex. 25.

FN61 Pl.’s Ex. 18 at 13.

Mortensen claims he paid these accounts off on a number of occasions and then re-borrowed against them. I can find no evidence of such pay-offs in the documentary evidence and I don’t believe Mortensen. Nor do I believe that the trust repaid Mortensen the $80,000 in 2006. If that had been the case, Mortensen wouldn’t have needed to borrow another $29,000.00 on his credit cards.FN62 I conclude that Mortensen’s transfer of the Seldovia property and the placement of $80,000.00 into the trust constitutes persuasive evidence of an intent to hinder, delay and defraud present and future creditors.

FN62 Pl.’s Ex. 44 shows an increase of about $29,000.00 in credit card debt from February 1, 2005 through December 31, 2006.

Mortensen alleged that the purpose of the trust was to preserve the Seldovia property for his children. Yet he used the trust as a vehicle for making stock market investments. In 2005, the trust had capital gains of nearly $7,000.00.FN63 In 2006, the trust had capital gains of over $26,000.00.FN64 In 2007, the trust had capital gains of $6,448.00.FN65 In 2008 and 2009 the trust had either no capital gain income or experienced losses.FN66 The trust also made a car loan to one of Mortensen’s acquaintances. These activities had no relationship to the trust’s alleged purpose.

FN63 Def.’s Ex. S.

FN64 Def.’s Ex. T.

FN65 Def.’s Ex. U.

FN66 Def.’s Exs. V and W.

The bottom line for Mr. Mortensen is that he attempted a clever but fundamentally flawed scheme to avoid exposure to his creditors. When he created the trust in 2005, he failed to recognize the danger posed by the Bankruptcy Abuse Protection and Consumer Protection Act, which was enacted later that year. Mortensen will now pay the price for his actions. His transfer of the Seldovia property to the Mortensen Seldovia Trust will be avoided.

The trustee has asked for costs and attorney’s fees. His costs will be awarded.

However, under the American Rule, attorney’s fees are generally not recoverable for litigating federal issues absent an agreement or specific statutory authority.FN67 This avoidance action is brought under a provision of the Bankruptcy Code and raises federal issues. The trustee is not entitled an award of attorney’s fees against the defendants.

FN67 Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975).

Conclusion

The transfer of the Seldovia property from Thomas Mortensen to the Mortensen Seldovia trust will be avoided, pursuant to 11 U.S.C. sec. 548(e). The trustee will be awarded his costs but denied attorney’s fees. An order and judgment will be entered consistent with this memorandum.

SEC v. Jamie Solow, 2010 WL 303959 (S.D. FL., Jan 22, 2010)

Posted by McCullough

Debtor Found in Contempt of Court for Refusing to Repatriate Funds from Offshore Trust

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA

CASE No.06-81041-CIV-MIDDLEBROOKS/JOHNSON

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

vs. JAMIE SOLOW,

Defendant, ____________________________________/

ORDER DENYING DEFENDANT’S MOTION TO DISMISS

This Cause comes before the Court on Defendant’s Motion to Dismiss (DE 27), filed April 16, 2007. The Court has reviewed the record and is fully advised in the premises.

I. Plaintiff’s Complaint

Plaintiff Securities and Exchange Commission (“SEC”) brought a five-count amended complaint against Defendant Jamie Solow (“Solow”) on April 2, 2007. The SEC alleges that Solow 1) violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder; 2) violated Section 17(a) of the Securities Act of 1933 (“Securities Act”); 3) aided and abetted violations by Archer Alexander Securities Corp. (“Archer”) of Section 17(a) of the Exchange Act; 4) aided and abetted Archer’s violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder; and 5) aided and abetted Archer’s violations of Section 17(a) of the Exchange Act and Rule 17a-5(a)(2) thereunder.

These alleged violations stem from Solow’s practice of trading in new issues of inverse floating rate collateralized mortgage obligations (“inverse floaters”). Inverse floaters are defined by the National Association of Securities Dealers (“NASD”) as high-risk investments suitable to sophisticated investors. See NASD Notice to Members 93-73.

The Complaint alleges that Archer had in place various policies regarding the trading of inverse floaters, and that Solow intentionally disregarded these policies. One of these policies required Solow to trade on a riskless principal basis, which means that when a dealer receives a purchase order from a customer, he purchases the requested security in a transaction that is proximate in time to the customer’s order. Archer’s policies allegedly required Solow to have a willing buyer in place for any security that he purchased. Plaintiff SEC alleges that Archer’s CEO discussed this restriction with Solow on more than one occasion.

Another Archer policy allegedly required Solow to get authorization from the CEO before entering into any specific transaction or trade. After obtaining this pre-approval, Solow was required to fax trade tickets to Archer and the clearing firm. The complaint alleges that Archer did not follow these procedures, purchasing inverse floaters for settlement one to two months after the trade date. It is claimed that these improper trades committed Archer to proprietary positions without its knowledge or approval. It is further alleged that Solow falsified trade tickets to make it appear that his transactions conformed to Archer’s policies. As a result of these alleged improprieties, Archer submitted inaccurate reports required by the securities laws.

The Complaint also alleges fraudulent sales of unsuitable securities, claiming that Solow did not tell his risk-averse retail customers that he was investing for them in high-risk inverse floaters. Plaintiff claims that Solow actually told risk-averse customers that the inverse floaters were in fact a suitable investment. He allegedly told customers that government sponsored enterprises, such as Fannie Mae, guaranteed the principal on such investments. However, this guarantee applies only if the positions are held to maturity, and interest rate changes could extend the maturity date into the future.

As a basis for the claims for violating the books and records, net capital, and FOCUS report filing requirements, Plaintiff argues that Defendant’s improper conduct caused Archer to violate these rules. His alleged concealment of his improper inverse floater trades resulted in Archer’s general ledger not reflecting these positions. As a result, Archer’s net capital computations were inaccurate throughout 2003, and it continued to do business while undercapitalized. This also resulted in Archer filing inaccurate FOCUS reports.

II. Legal Analysis

A motion to dismiss is appropriate when it is demonstrated “beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957). For the purpose of the motion to dismiss, the complaint is construed in the light most favorable to the plaintiff, and all facts alleged by the plaintiff are accepted as true. Hishon v King & Spaulding, 467 U.S. 69, 73 (1984). Regardless of the alleged facts, however, a court may dismiss a complaint on a dispositive issue of law. Marshall County Bd. of Educ. v. Marshall County Gas Dist., 992 F.2d 1171, 1174 (11th Cir. 1993).

As fraud claims are a part of this action, Plaintiff’s complaint must also satisfy the provisions of Fed. R. Civ. P. 9(b).1 However, when considering the question of whether or not a pleading of fraud is alleged with adequate particularity in a securities law context, a court must not read Rule 9(b) of the Federal Rules of Civil Procedure to abrogate the notice pleading requirements of the Federal Rules of Civil Procedure. See Friedlander v. Nims, 755 F.2d 810, 813 (11th Cir. 1985), see also SEC v. Physicians Guardian, 72 F. Supp. 2d 1342, 1352 (M.D.Fla. 1999).

A. Claims for Fraudulent Inverse Floater Trading

A violation occurs under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder when there is (1) a misrepresentation or omission, (2) that was material, (3) which was made in the offer and sale of a security [Section 17(a)(1)] or in connection with the purchase or sale of securities [Section 10(b) and Rule 10b-5], (4) scienter, and (5) the involvement of interstate commerce, the mails, or a national securities exchange. See SEC v. Gane, 2005 U.S. Dist. LEXIS 607, 28-29 (S.D. Fla. 2005), citing 15 U.S.C. § 77q(a)(1) (2004); 15 U.S.C. § 78j(b) (2004); see also United States SEC v. Corporate Rels. Group, Inc., 2003 U.S. Dist. LEXIS 24925, at *24 (M.D. Fla. 2003); see also SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999)(noting that essentially the same elements are required under Section 17(a) and Rule 10b-5).

For the first claim, violations of section 10(b) and rule 10b-5, Defendant argues that the complaint fails to sufficiently allege material misrepresentations or omissions and fails to detail how Solow falsified trade tickets. However, plaintiff is correct in its argument that the complaint alleges multiple instances of potential fraud, including dates and the nature of the alleged omissions. See Amd. Comp. ¶¶ 30a-e, 32 a-c, 43 a-d. This level of specificity satisfies both Rule 12(b)(6) and Rule 9(b), as the Amended Complaint provides clear notice and sufficient particularity. The Defendant could discern that the SEC is claiming that he engaged in material omissions by disregarding Archer’s policies and secretly buying the inverse floaters, all while allegedly knowing that he was violating these policies. His alleged failure to ask for the required approval and alleged falsification of trade tickets is enough to sustain Plaintiff’s claim at the pleading stage, where I treat all of Plaintiff’s allegations as true.

I reach the same result as to the claim of unsuitable investment recommendations. The elements of an unsuitability claim brought under the antifraud provisions are (1) that the securities purchased were unsuited to the buyer’s needs; (2) that the defendant knew or reasonably believed the securities were unsuited to the buyer’s needs; (3) that the defendant recommended or purchased the unsuitable securities for the buyer anyway; (4) that, with scienter, the defendant made material misrepresentations (or, owing a duty to the buyer, failed to disclose material information) relating to the suitability of the securities; and (5) that the buyer justifiably relied to its detriment on the defendant’s fraudulent conduct. See Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993).

The Amended Complaint alleges that Solow knew inverse floaters were risky investments, due to that description in the NASD notice, and that he also knew from the account forms that many of his customers were risk averse. Plaintiff has listed specific examples of the customers there were allegedly placed in unsuitable investments. Additionally, the complaint alleges that Solow made misleading statements to these investors, telling them that the securities were a good investment, that GSE’s like Fannie Mae guaranteed the principal, and that he could manage these inverse floaters in any interest rate environment. These plead facts, when accepted as true, are adequate to sustain the claim pursuant to the test noted above.

Defendant’s primary argument on these claims is based upon a factual inquiry. He argues that it is simply not possible to buy an inverse floater and settle it on the same day as the purchase, and that the practice he engaged in is common in the industry. Solow also states that Archer and its CEO had to know about his practices, because it constituted a substantial portion of their revenue. However, as noted, these are factual disputes, and while they may prove useful to Solow’s defense, they are inappropriate at the motion to dismiss phase.

B. Aiding and Abetting Claims

Liability for aiding and abetting a securities violation occurs “if some other party has committed a securities law violation, if the accused party has general awareness that his role was part of an overall activity that is improper, and if the accused aider-abettor knowingly and substantially assisted the violation.” Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 (11th Cir. 1986).

Here the complaint alleges in the facts section that Archer committed books and records violations, along with violations of net capital and FOCUS reporting requirements. Plaintiff states that Solow had an awareness that his role was part of improper activity, as he was concealing trades and falsifying trade tickets. The SEC addresses the knowledge prong by alleging that because Solow was a registered representative of Archer, he was required to know of Archer’s obligations to maintain accurate books and records. All of these facts in the complaint give adequate notice to Solow of the basis for the claims, and they are sufficient at the motion to dismiss stage.

Again, Solow’s primary argument for dismissal of these claims is factual in nature. He contends that while he was a registered agent, he did not have knowledge of Archer’s obligations under the reporting rules, or whether Archer was complying with these regulations. Such alleged facts, if true, would certainly be critical at a later stage of the proceedings. However, at this stage I am bound to accept all of Plaintiff’s well-plead facts as true. My review of the amended complaint and the relevant case law leads to the conclusion that Plaintiff has stated viable claims with the requisite particularity.

Accordingly, it is

ORDERED AND ADJUDGED that Defendant’s Motion to Dismiss (DE 27) is DENIED.

DONE AND ORDERED in Chambers at West Palm Beach, FL, this 10th day of May 2007.

DONALD M. MIDDLEBROOKS
UNITED STATES DISTRICT JUDGE

Herring v. Keasler

Posted by McCullough

Using LLCs for Asset Protection

Herring v. Keasler, 150 NC App 598 (01-1000) 06/04/2002

NO. COA01-1000

NORTH CAROLINA COURT OF APPEALS

Filed: 4 June 2002

MAX HERRING, as assignee of

BRANCH BANKING & TRUST CO.,
Plaintiff,

v . Wake County
No. 94 CVS 7235
BENNETT M. KEASLER, JR.,
Defendant.

Appeal by plaintiff from order filed 16 May 2001 by Judge Jack W. Jenkins in Wake County Superior Court. Heard in the Court of Appeals 14 May 2002.
Michael W. Strickland & Associates, P.A., by Nelson G. Harris, for plaintiff-appellant.Hunton & Williams, by John D. Burns, for defendant-appellee.GREENE, Judge.

Max Herring (Plaintiff), as assignee of Branch Banking & Trust Company (BB&T), appeals an order filed 16 May 2001 enjoining Plaintiff from seizing or selling Bennett M. Keasler, Jr.’s (Defendant) membership interests in various limited liability companies.
On 3 January 1996, BB&T obtained a default judgment (the judgment) against Defendant and his wife in the amount of $29,062.57 plus interest. (See footnote 1) On 12 December 2000, BB&T assigned its interest in the judgment to Plaintiff, and Plaintiff obtained awrit of execution against Defendant on 19 March 2001. Subsequently, on 19 April 2001, Defendant filed an emergency motion seeking an order to restrain Plaintiff from attempting to have Defendant’s membership interests in several limited liability companies seized and sold. In Defendant’s affidavit, he stated he had a 20% membership interest in several limited liability companies, “including River Place I, LLC; River Place II, LLC; River Place III, LLC[;] and River Place IV, LLC [(collectively, the LLCs)], which were created for the purpose of developing real estate in Wake County, North Carolina.”
In an order dated 20 April 2001, the trial court temporarily restrained Plaintiff from seeking the seizure and sale of Defendant’s membership interests in the LLCs. Thereafter, Plaintiff filed a motion on 23 April 2001 seeking an order under N.C. Gen. Stat. § 1-362 directing Defendant’s membership interests in the LLCs be sold and the proceeds applied towards the judgment. Pending the sale of Defendant’s membership interests in the LLCs, Plaintiff requested an order directing any distributions and allocations of those interests to be applied towards the satisfaction of the judgment (charging order). On 16 May 2001, the trial court filed an order: enjoining Plaintiff from seeking the seizure or sale of Defendant’s membership interests in the LLCs; denying Plaintiff’s motion, insofar as he sought to have Defendant’s membership interests in the LLCs sold or transferred; and granting Plaintiff’s motion for a charging order. With respect to the charging order, the trial court directed: Defendant’smembership interests in the LLCs to be charged with payment of the judgment, plus interest; the LLCs to deliver to Plaintiff any distributions and allocations that Defendant would be entitled to receive on account of his membership interests in the LLCs; Defendant to deliver to Plaintiff any allocations and distributions he would receive; and Plaintiff to not obtain any rights in the LLCs, except as those of an assignee and under the respective operating agreement.

__________________________________

The dispositive issue is whether N.C. Gen. Stat. § 57C-5-03 permits a trial court to order a judgment debtor’s membership interest in a limited liability company seized and sold and the proceeds applied towards the satisfaction of a judgment.
Generally, a trial court may order any property, whether subject or not to be sold under execution (except the homestead and personal property exemptions of the judgment debtor), in the hands of the judgment debtor or of any other person, or due to the judgment debtor, to be applied towards the satisfaction of [a] judgment.N.C.G.S. § 1-362 (2001). North Carolina General Statutes § 57C-5- 03, however, provides that with respect to a judgment debtor’s membership interest in a limited liability company, a trial court “may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest.” N.C.G.S. § 57C-5-03 (2001). This “charge” entitles the judgment creditor “to receive . . . the distributions and allocations to which the [judgment debtor] would be entitled.” N.C.G.S. § 57C-5-02 (2001). The “charge” “does not dissolve the limited liability company or entitle the [judgment creditor] to become or exercise any rights of a member.” Id. Furthermore, because the forced sale of a membership interest in a limited liability company to satisfy a debt would necessarily entail the transfer of a member’s ownership interest to another, thus permitting the purchaser to become a member, forced sales of the type permitted in section 1-362 are prohibited. See N.C.G.S. § 57C-3-03 (2001) (except as provided in the operating agreement or articles of organization, consent of all the members of a limited liability company required to “[a]dmit any person as a member”).

In this case, despite Plaintiff’s attempts to have Defendant’s membership interests in the LLCs seized and sold, his only remedy is to have those interests charged with payment of the judgment under N.C. Gen. Stat. § 57C-5-03. Accordingly, the trial court did not err in ordering that the judgment be satisfied through the application of the distributions and allocations of Defendant’s membership interests in the LLCs and in denying Plaintiff’s motion to have Defendant’s membership interests seized and sold.
Affirmed.
Judges HUDSON and BIGGS concur.

Footnote: 1

The judgment as to Defendant’s wife was subsequently vacated.

Olmstead v. Federal Trade Commission, No. SC08-1009, FL Sup. Ct. (24 june 2010)

Posted by McCullough

Charging Order Provision does Not Protect Interest in a Single-Member LLC

Supreme Court of Florida

_____________

No. SC08-1009

____________

SHAUN OLMSTEAD, et al.,
Appellants,

vs.

FEDERAL TRADE COMMISSION,
Appellee.

[June 24, 2010]

CANADY, J.

In this case we consider a question of law certified by the United States Court of Appeals for the Eleventh Circuit concerning the rights of a judgment creditor, the appellee Federal Trade Commission (FTC), regarding the respective ownership interests of appellants Shaun Olmstead and Julie Connell in certain Florida single-member limited liability companies (LLCs). Specifically, the Eleventh Circuit certified the following question: “Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all ̳right, title, and interest‘ in the debtor‘s single-member limited liability company to satisfy an outstanding judgment.” Fed. Trade Comm‘n v. Olmstead, 528 F.3d 1310, 1314 (11th Cir. 2008). We have discretionary jurisdiction under article V, section 3(b)(6), Florida Constitution.

The appellants contend that the certified question should be answered in the negative because the only remedy available against their ownership interests in the single-member LLCs is a charging order, the sole remedy authorized by the statutory provision referred to in the certified question. The FTC argues that the certified question should be answered in the affirmative because the statutory charging order remedy is not the sole remedy available to the judgment creditor of the owner of a single-member limited liability company.

For the reasons we explain, we conclude that the statutory charging order provision does not preclude application of the creditor‘s remedy of execution on an interest in a single-member LLC. In line with our analysis, we rephrase the certified question as follows: “Whether Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor‘s single- member limited liability company to satisfy an outstanding judgment.” We answer the rephrased question in the affirmative.

I. BACKGROUND

The appellants, through certain corporate entities, “operated an advance-fee credit card scam.” Olmstead, 528 F.3d at 1311-12. In response to this scam, the FTC sued the appellants and the corporate entities for unfair or deceptive trade practices. Assets of these defendants were frozen and placed in receivership. Among the assets placed in receivership were several single-member Florida LLCs in which either appellant Olmstead or appellant Connell was the sole member. Ultimately, the FTC obtained judgment for injunctive relief and for more than $10 million in restitution. To partially satisfy that judgment, the FTC obtained—over the appellants‘ objection—an order compelling appellants to endorse and surrender to the receiver all of their right, title, and interest in their LLCs. This order is the subject of the appeal in the Eleventh Circuit that precipitated the certified question we now consider.

II. ANALYSIS

In our analysis, we first review the general nature of LLCs and of the charging order remedy. We then outline the specific relevant provisions of the Florida Limited Liability Company Act (LLC Act), chapter 608, Florida Statutes (2008). Next, we discuss the generally available creditor‘s remedy of levy and execution under sale. Finally, we explain the basis for our conclusion that Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor‘s single-member LLC to satisfy an outstanding judgment. In brief, this conclusion rests on the uncontested right of the owner of the single- member LLC to transfer the owner‘s full interest in the LLC and the absence of any basis in the LLC Act for abrogating in this context the long-standing creditor‘s remedy of levy and sale under execution.

A. Nature of LLCs and Charging Orders

The LLC is a business entity originally created to provide “tax benefits akin to a partnership and limited liability akin to the corporate form.” Elf Altochem North Am., Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1998). In addition to eligibility for tax treatment like that afforded partnerships, LLCs are characterized by restrictions on the transfer of ownership rights that are related to the restrictions applicable in the partnership context. In particular, the transfer of management rights in an LLC generally is restricted. This particular characteristic of LLCs underlies the establishment of the LLC charging order remedy, a remedy derived from the charging order remedy created for the personal creditors of partners. See City of Arkansas City v. Anderson, 752 P.2d 673, 681-683 (Kan. 1988) (discussing history of partnership charging order remedy). The charging order affords a judgment creditor access to a judgment debtor‘s rights to profits and distributions from the business entity in which the debtor has an ownership interest.

B. Statutory Framework for Florida LLCs

The rules governing the formation and operation of Florida LLCs are set forth in Florida‘s LLC Act. In considering the question at issue, we focus on the provisions of the LLC Act that set forth the authorization for single-member LLCs, the characteristics of ownership interests, the limitations on the transfer of ownership interests, and the authorization of a charging order remedy for personal creditors of LLC members.

Section 608.405, Florida Statutes (2008), provides that “[o]ne or more persons may form a limited liability company.” A person with an ownership interest in an LLC is described as a “member,” which is defined in section 608.402(21) as “any person who has been admitted to a limited liability company as a member in accordance with this chapter and has an economic interest in a limited liability company which may, but need not, be represented by a capital account.” The terms “membership interest,” “member‘s interest,” and “interest” are defined as “a member‘s share of the profits and losses of the limited liability company, the right to receive distributions of the limited liability company‘s assets, voting rights, management rights, or any other rights under this chapter or the articles of organization or operating agreement.” § 608.402(23), Fla. Stat. (2008). Section 608.431 provides that “[a]n interest of a member in a limited liability company is personal property.”

Section 608.432 contains provisions governing the “[a]ssignment of member‘s interest.” Under section 608.432(1), “[a] limited liability company interest is assignable in whole or in part except as provided in the articles of organization or operating agreement.” An assignee, however, has “no right to participate in the management of the business and affairs” of the LLC “except as provided in the articles of organization or operating agreement” and upon obtaining “approval of all of the members of the limited liability company other than the member assigning a limited liability company interest” or upon “[c]ompliance with any procedure provided for in the articles of organization or operating agreement.” Id. Accordingly, an assignment of a membership interest will not necessarily transfer the associated right to participate in the LLC‘s management. Such an assignment which does not transfer management rights only “entitles the assignee to share in such profits and losses, to receive such distribution or distributions, and to receive such allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned.” § 608.432(2)(b), Fla. Stat. (2008).

Section 608.433—which is headed “Right of assignee to become member”—reiterates that an assignee does not necessarily obtain the status of member. Section 608.433(1) states: “Unless otherwise provided in the articles of organization or operating agreement, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.” Section 608.433(4) sets forth the provision— mentioned in the certified question—which authorizes the charging order remedy for a judgment creditor of a member:

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to the member‘s interest.

C. Generally Available Creditor’s Remedy of
Levy and Sale under Execution

Section 56.061, Florida Statutes (2008), provides that various categories of real and personal property, including “stock in corporations,” “shall be subject to levy and sale under execution.” A similar provision giving judgment creditors a remedy against a judgment debtor‘s ownership interest in a corporation has been a part of the law of Florida since 1889. See ch. 3917, Laws of Fla. (1889) (“That shares of stock in any corporation incorporated by the laws of this State shall be subject to levy of attachments and executions, and to sale under executions on judgments or decrees of any court in this State.”). An LLC is a type of corporate entity, and an ownership interest in an LLC is personal property that is reasonably understood to fall within the scope of “corporate stock.” “The general rule is that where one has any ̳interest in property which he may alien or assign, that interest, whether legal or equitable, is liable for the payment of his debts.‘” Bradshaw v. Am. Advent Christian Home & Orphanage, 199 So. 329, 332 (Fla. 1940) (quoting Croom v. Ocala Plumbing & Electric Co., 57 So. 243, 245 (Fla. 1911)).

At no point have the appellants contended that section 56.061 does not by its own terms extend to an ownership interest in an LLC or that the order challenged in the Eleventh Circuit did not comport with the requirements of section 56.061. Instead, they rely solely on the contention that the Legislature adopted the charging order remedy as an exclusive remedy, supplanting section 56.061.

D. Creditor’s Remedies Against the Ownership
Interest in a Single-Member LLC

Since the charging order remedy clearly does not authorize the transfer to a judgment creditor of all an LLC member‘s “right, title and interest” in an LLC, while section 56.061 clearly does authorize such a transfer, the answer to the question at issue in this case turns on whether the charging order provision in section 608.433(4) always displaces the remedy available under section 56.061. Specifically, we must decide whether section 608.433(4) establishes the exclusive judgment creditor‘s remedy—and thus displaces section 56.061—with respect to a judgment debtor‘s ownership interest in a single-member LLC.

As a preliminary matter, we recognize the uncontested point that the sole member in a single-member LLC may freely transfer the owner‘s entire interest in the LLC. This is accomplished through a simple assignment of the sole member‘s membership interest to the transferee. Since such an interest is freely and fully alienable by its owner, section 56.061 authorizes a judgment creditor with a judgment for an amount equaling or exceeding the value of the membership interest to levy on that interest and to obtain full title to it, including all the rights of membership—that is, unless the operation of section 56.061 has been limited by section 608.433(4).

Section 608.433 deals with the right of assignees or transferees to become members of an LLC. Section 608.433(1) states the basic rule that absent a contrary provision in the articles or operating agreement, “an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.” See also § 608.432(1)(a), Fla. Stat (2008). The provision in section 608.433(4) with respect to charging orders must be understood in the context of this basic rule.

The limitation on assignee rights in section 608.433(1) has no application to the transfer of rights in a single-member LLC. In such an entity, the set of “all members other than the member assigning the interest” is empty. Accordingly, an assignee of the membership interest of the sole member in a single-member LLC becomes a member—and takes the full right, title, and interest of the transferor— without the consent of anyone other than the transferor.

Section 608.433(4) recognizes the application of the rule regarding assignee rights stated in section 608.433(1) in the context of creditor rights. It provides a special means—i.e., a charging order—for a creditor to seek satisfaction when a debtor‘s membership interest is not freely transferable but is subject to the right of other LLC members to object to a transferee becoming a member and exercising the management rights attendant to membership status. See § 608.432(1), Fla. Stat. (2008) (setting forth general rule that an assignee “shall have no right to participate in the management of the business affairs of [an LLC]”).

Section 608.433(4)‘s provision that a “judgment creditor has only the rights of an assignee of [an LLC] interest” simply acknowledges that a judgment creditor cannot defeat the rights of nondebtor members of an LLC to withhold consent to the transfer of management rights. The provision does not, however, support an interpretation which gives a judgment creditor of the sole owner of an LLC less extensive rights than the rights that are freely assignable by the judgment debtor. See In re Albright, 291 B.R. 538, 540 (D. Colo. 2003) (rejecting argument that bankruptcy trustee was only entitled to a charging order with respect to debtor‘s ownership interest in single-member LLC and holding that “[b]ecause there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate”); In re Modanlo, 412 B.R. 715, 727-31 (D. Md. 2006) (following reasoning of Albright).

Our understanding of section 608.433(4) flows from the language of the subsection which limits the rights of a judgment creditor to the rights of an assignee but which does not expressly establish the charging order remedy as an exclusive remedy. The relevant question is not whether the purpose of the charging order provision—i.e., to authorize a special remedy designed to reach no further than the rights of the nondebtor members of the LLC will permit—provides a basis for implying an exception from the operation of that provision for single- member LLCs. Instead, the question is whether it is justified to infer that the LLC charging order mechanism is an exclusive remedy.

On its face, the charging order provision establishes a nonexclusive remedial mechanism. There is no express provision in the statutory text providing that the charging order remedy is the only remedy that can be utilized with respect to a judgment debtor‘s membership interest in an LLC. The operative language of section 608.433(4)—”the court may charge the [LLC] membership interest of the member with payment of the unsatisfied amount of the judgment with interest”— does not in any way suggest that the charging order is an exclusive remedy.

In this regard, the charging order provision in the LLC Act stands in stark contrast to the charging order provisions in both the Florida Revised Uniform Partnership Act, §§ 620.81001-.9902, Fla. Stat. (2008), and the Florida Revised Uniform Limited Partnership Act, §§ 620.1101-.2205, Fla. Stat. (2008). Although the core language of the charging order provisions in each of the three statutes is strikingly similar, the absence of an exclusive remedy provision sets the LLC Act apart from the other two statutes. With respect to partnership interests, the charging order remedy is established in section 620.8504, which states that it “provides the exclusive remedy by which a judgment creditor of a partner or partner‘s transferee may satisfy a judgment out of the judgment debtor‘s transferable interest in the partnership.” § 620.8504(5), Fla. Stat. (2008) (emphasis added). With respect to limited partnership interests, the charging order remedy is established in section 620.1703, which states that it “provides the exclusive remedy which a judgment creditor of a partner or transferee may use to satisfy a judgment out of the judgment debtor‘s interest in the limited partnership or transferable interest.” § 620.1703(3), Fla. Stat. (2008) (emphasis added).

“[W]here the legislature has inserted a provision in only one of two statutes that deal with closely related subject matter, it is reasonable to infer that the failure to include that provision in the other statute was deliberate rather than inadvertent.” 2B Norman J. Singer & J.D. Shambie Singer, Statutes and Statutory Construction § 51:2 (7th ed. 2008). “In the past, we have pointed to language in other statutes to show that the legislature ̳knows how to‘ accomplish what it has omitted in the statute [we were interpreting].” Cason v. Fla. Dep‘t of Mgmt. Services, 944 So. 2d 306, 315 (Fla. 2006); see also Horowitz v. Plantation Gen. Hosp. Ltd. P‘ship, 959 So. 2d 176, 185 (Fla. 2007); Rollins v. Pizzarelli, 761 So. 2d 294, 298 (Fla. 2000).

The same reasoning applies here. The Legislature has shown—in both the partnership statute and the limited partnership statute—that it knows how to make clear that a charging order remedy is an exclusive remedy. The existence of the express exclusive-remedy provisions in the partnership and limited partnership statutes therefore decisively undermines the appellants‘ argument that the charging order provision of the LLC Act—which does not contain such an exclusive remedy provision—should be read to displace the remedy available under section 56.061.

The appellants‘ position is further undermined by the general rule that “repeal of a statute by implication is not favored and will be upheld only where irreconcilable conflict between the later statute and earlier statute shows legislative intent to repeal.” Town of Indian River Shores v. Richey, 348 So. 2d 1, 2 (Fla. 1977). We also have previously recognized the existence of a specific presumption against the “[s]tatutory abrogation by implication of an existing common law remedy, particularly if the remedy is long established.” Thornber v. City of Fort Walton Beach, 568 So. 2d 914, 918 (Fla. 1990). The rationale for that presumption with respect to common law remedies is equally applicable to the “abrogation by implication” of a long-established statutory remedy. See Schlesinger v. Councilman, 420 U.S. 738, 752 (1975) (” ̳[R]epeals by implication are disfavored,‘ and this canon of construction applies with particular force when the asserted repealer would remove a remedy otherwise available.”) (quoting Reg‘l Rail Reorganization Act Cases, 419 U.S. 102, 133 (1974)). Here, there is no showing of an irreconcilable conflict between the charging order remedy and the previously existing judgment creditor‘s remedy and therefore no basis for overcoming the presumption against the implied abrogation of a statutory remedy.

Given the absence of any textual or contextual support for the appellants‘ position, for them to prevail it would be necessary for us to rely on a presumption contrary to the presumption against implied repeal—that is, a presumption that the legislative adoption of one remedy with respect to a particular subject abrogates by implication all existing statutory remedies with respect to the same subject. Our law, however, is antithetical to such a presumption of implied abrogation of remedies. See Richey; Thornber; Tamiami Trails Tours, Inc. v. City of Tampa, 31 So. 2d 468, 471 (Fla. 1947).

In sum, we reject the appellants‘ argument because it is predicated on an unwarranted interpretive inference which transforms a remedy that is nonexclusive on its face into an exclusive remedy. Specifically, we conclude that there is no reasonable basis for inferring that the provision authorizing the use of charging orders under section 608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor‘s interest in single-member LLC. Contrary to the appellants‘ argument, recognition of the full scope of a judgment creditor‘s rights with respect to a judgment debtor‘s freely alienable membership interest in a single-member LLC does not involve the denial of the plain meaning of the statute. Nothing in the text or context of the LLC Act supports the appellants‘ position.

III. CONCLUSION

Section 608.433(4) does not displace the creditor‘s remedy available under section 56.061 with respect to a debtor‘s ownership interest in a single-member LLC. Answering the rephrased certified question in the affirmative, we hold that a court may order a judgment debtor to surrender all right, title, and interest in the debtor‘s single-member LLC to satisfy an outstanding judgment.

It is so ordered.

QUINCE, C.J., and PARIENTE, LABARGA, and PERRY, JJ., concur.
LEWIS, J., dissents with an opinion, in which POLSTON, J., concurs.

NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION, AND IF FILED, DETERMINED.

LEWIS, J., dissenting.

I cannot join my colleagues in the judicial rewriting of Florida‘s LLC Act. Make no mistake, the majority today steps across the line of statutory interpretation and reaches far into the realm of rewriting this legislative act. The academic community has clearly recognized that to reach the result of today‘s majority requires a judicial rewriting of this legislative act. See, e.g., Carter G. Bishop & Daniel S. Kleinberger, Limited Liability Companies: Tax and Business Law, ¶ 1.04[3][d] (2008) (discussing fact that statutes which do not contemplate issues with judgment creditors of single-member LLCs “invite Albright-style judicial invention”); Carter G. Bishop, Reverse Piercing: A Single Member LLC Paradox, 54 S.D. L. Rev. 199, 202 (2009); Larry E. Ribstein, Reverse Limited Liability and the Design of Business Associations, 30 Del. J. Corp. L. 199, 221-25 (2005) (“The situation in Albright theoretically might seem to be better redressed through explicit application of traditional state remedies than by a federal court trying to shoehorn its preferred result into the state LLC statute. The problem . . . is that no state remedy is appropriate because the asset protection was explicitly permitted by the applicable statute. The appropriate solution, therefore, lies in fixing the statute.” (emphasis supplied)); Thomas E. Rutledge & Thomas Earl Geu, The Albright Decision – Why an SMLLC Is Not an Appropriate Asset Protection Vehicle, Bus. Entities, Sept.-Oct. 2003, at 16; Jacob Stein, Building Stumbling Blocks: A Practical Take on Charging Orders, Bus. Entities, Sept.-Oct. 2006, at 29. (stating that the Albright court “ignored Colorado law with respect to the applicability of a charging order” where the “statute does not exempt single- member LLCs from the charging order limitation”). An adequate remedy is available without the extreme step taken by the majority in rewriting the plain and unambiguous language of a statute. This is extremely important and has far- reaching impact because the principles used to ignore the LLC statutory language under the current factual circumstances apply with equal force to multimember LLC entities and, in essence, today‘s decision crushes a very important element for all LLCs in Florida. If the remedies available under the LLC Act do not apply here because the phrase “exclusive remedy” is not present, the same theories apply to multimember LLCs and render the assets of all LLCs vulnerable.

I would answer the certified question in the negative based on the plain language of the statute and an in pari materia reading of chapter 608 in its entirety. At the outset, the majority signals its departure from the LLC Act as it rephrases the certified question to frame the result. The question certified by the Eleventh Circuit requested this Court to address whether, pursuant to section 608.433(4), a court may order a judgment debtor to surrender all “right, title, and interest” in the debtor‘s single-member limited liability company to satisfy an outstanding judgment. The majority modifies the certified question and fails to directly address the critical issue of whether the charging order provision applies uniformly to all limited liability companies regardless of membership composition. In addition, the majority advances a position with regard to chapter 56 of the Florida Statutes that was neither asserted by the parties nor discussed in the opinion of the federal court.

Despite the majority‘s claim that it is not creating an exception to the charging order provision of the statute for single-member LLCs, its analysis necessarily does so in contravention of the plain statutory language and general principles of Florida law. The LLC Act inherently displaces the availability of the execution provisions in chapter 56 of the Florida Statutes by providing a remedy that is intended to prevent judgment creditors from seizing ownership of the membership interests in an LLC and from liquidating the separate assets of the LLC. In doing so, the LLC Act applies uniformly to single- and multimember limited liability companies, and does not provide either an implicit or express exception that permits the involuntary transfer of all right, title, and interest in a single-member LLC to a judgment creditor. The statute also does not permit a judgment creditor to liquidate the assets of a non-debtor LLC in the manner allowed by the majority today. Therefore, under the current statutory scheme, a judgment creditor seeking satisfaction must follow the statutory remedies specifically afforded under chapter 608, which include but are not limited to a charging order, regardless of the membership composition of the LLC.

Although this plain reading may require additional steps for judgment creditors to satisfy, an LLC is a purely statutory entity that is created, authorized, and operated under the terms required by the Legislature. This Court does not possess the authority to judicially rewrite those operative statutes through a speculative inference not reflected in the legislation. The Legislature has the authority to amend chapter 608 to provide any additional remedies or exceptions for judgment creditors, such as an exception to the application of the charging order provision to single-member LLCs, if that is the desired result. However, by basing its premise on principles of law with regard to voluntary transfers, the majority suggests a result that can only be achieved by rewriting the clear statutory provisions. In effect, the majority accomplishes its result by judicially legislating section 608.433(4) out of Florida law.

For instance, the majority disregards the principle that in general, an LLC exists separate from its owners, who are defined as members under the LLC Act. See §§ 608.402(21) (defining “member”), 608.404, Fla. Stat. (2008) (“[E]ach limited liability company organized and existing under this chapter shall have the same powers as an individual to do all things necessary to carry out its business and affairs . . . .”). In other words, an LLC is a distinct entity that operates independently from its individual members. This characteristic directly distinguishes it from partnerships. Specifically, an LLC is not immediately responsible for the personal liabilities of its members. See Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298, 312 (Conn. App. Ct. 2002), overruled on other grounds by Robinson v. Coughlin, 830 A.2d 1114 (Conn. 2003). The majority obliterates the clearly defined lines between the LLC as an entity and the owners as members.

Further, when the Legislature amended the LLC requirements for formation to allow single-member LLCs, it did not enact other changes to the provisions in the LLC Act relating to an involuntary assignment or transfer of a membership interest to a judgment creditor of a member or to the remedies afforded to a judgment creditor. Moreover, no other amendments were made to the statute to demonstrate any different application of the provisions of the LLC Act to single- member and multimember LLCs. For example, the LLC Act generally does not refer to the number of members in an LLC within the separate statutory provisions. The Legislature is presumed to have known of the charging order statute and other remedies when it introduced the single-member LLC statute. Accordingly, by choosing not to make any further changes to the statute in response to this addition, the Legislature indicated its intent for the charging order provision and other statutory remedies to apply uniformly to all LLCs. This Court should not disregard the clear and plain language of the statute.

In addition, the majority fails to correctly set forth the status of a member in an LLC and the associated rights and interests that such membership entails. An owner of a Florida LLC is classified as a “member,” which is defined as

any person who has been admitted to a limited liability company as a member in accordance with this chapter and has an economic interest in a limited liability company which may, but need not, be represented by a capital account.

§ 608.402 (21), Fla. Stat. (2008) (“Definitions”) (emphasis supplied). Therefore, to be a member of a Florida LLC it is now necessary to be admitted as such under chapter 608 and to also maintain an economic interest in the LLC. Moreover, a member of an LLC holds and carries a “membership interest” that encompasses both governance and economic rights:

“Membership interest,” “member‘s interest,” or “interest” means a member‘s share of the profits and the losses of the limited liability company, the right to receive distributions of the limited liability company‘s assets, voting rights, management rights, or any other rights under this chapter or the articles of organization or operating agreement.

§ 608.402(23), Fla. Stat. (2008) (emphasis supplied). This provision was adopted during the 1999 amendments, which was after the modification to allow single- member LLCs. See ch. 99-315, § 1, at 4, Laws of Fla. In stripping the statutory protections designed to protect an LLC as an entity distinct from its owners, the majority obliterates the distinction between economic and governance rights by allowing a judgment creditor to seize both from the member and to liquidate the separate assets of the entity.

Consideration of an involuntary lien against a membership interest must address what interests of the member may be involuntarily transferred. Contrary to the view expressed by the majority, a member of an LLC is restricted from freely transferring interests in the entity. For instance, because an LLC is a legal entity that is separate and distinct from its members, the specific LLC property is not transferable by an individual member. In other words, possession of an economic and governance interest does not also create an interest in specific LLC property or the right or ability to transfer that LLC property. See § 608.425, Fla. Stat. (2008) (stating that all property originally contributed to the LLC or subsequently acquired is LLC property); see also Bishop, supra, 54 S.D. L. Rev. at 226 (discussing in context of federal tax liens the fact that “[t]ypically, a member is not a co-owner and has no transferable interest in limited liability company property”) (citing Unif. Ltd. Liab. Co. Act § 501 (1996), 6A U.L.A. 604 (2003)). The specific property of an LLC is not subject to attachment or execution except on an express claim against the LLC itself. See Bishop & Kleinberger, supra, ¶ 1.04[3][d].

The interpretation of the statute advanced by the majority simply ignores the separation between the particular separate assets of an LLC and a member‘s specific membership interest in the LLC. The ability of a member to voluntarily assign his, her, or its interest does not subject the property of an LLC to execution on the judgment. Under the factual circumstances of the present case, the trial court forced the judgment debtors to involuntarily surrender their membership interests in the LLCs and then authorized a receiver to liquidate the specific LLC assets to satisfy the judgment. In doing so, the trial court ignored the clearly recognized legal separation between the specific assets of an LLC and a member‘s interest in profits or distributions from those assets. See F.T.C. v. Peoples Credit First, LLC, No. 8:03-CV-2353-T-TBM, 2006 WL 1169677, *2 (M.D. Fla. May 3, 2006) (ordering the appellants to “endorse and surrender to the Receiver, all of their right, title and interest in their ownership/equity unit certificates” of the LLCs for the receiver to liquidate the assets of these companies). The majority approves of this disregard by improperly applying principles of voluntary transfers to allow creditors of an LLC member to attack and liquidate the separate LLC assets.

Additionally, the transfer of a membership interest is restricted by law and by the internal operating documents of the LLC. Although a member may freely transfer an economic interest, a member may not voluntarily transfer a management interest without the consent of the other LLC members. See § 608.432(1), Fla. Stat. (2008). Contrary to the view of the majority, in the context of a single-member LLC, the restraint on transferability expressly provided for in the statute does not disappear. Unless admitted as a member to the LLC, the transferee of the economic interest only receives the LLC‘s financial distributions that the transferring member would have received absent the transfer. See § 608.432(2), Fla. Stat. (2008); see also Bishop & Kleinberger, supra, ¶ 1.01[3][c]. Consequently, a member may cease to be a member upon the assignment of the entire membership interest (i.e., transferring all of the following: (1) share of the profits and losses of the LLC, (2) right to receive distributions of LLC assets; (3) voting rights, (4) management rights, and (5) any other rights). See §§ 08.402(23), 608.432(2)(c), Fla. Stat. (2008). Furthermore, a transferring member no longer qualifies under the statutory definition of “member” upon a transfer of the entire economic interest. See § 608.402(21), Fla. Stat. (2008) (defining “member” as a person who has an economic interest in an LLC). However, unless otherwise provided in the governing documents of the entity (i.e., the articles of incorporation and the operating agreement), the pledge or granting of “a security interest, lien, or other encumbrance in or against, any or all of the membership interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member.” § 608.432(2)(c), Fla. Stat. (2008) (emphasis supplied). Accordingly, a judgment or a charging order does not divest the member of a membership interest in the LLC as the member retains governance rights. It only provides the judgment creditor the economic interest until the judgment is satisfied.

Whether the LLC Act allows a judgment creditor of an individual member to obtain this entire membership interest to exert full control over the assets of the LLC is the heart of the underlying dispute. Neither the Uniform Limited Liability Company Act nor the Florida LLC Act contemplates the present situation in providing for single-member LLCs but restricting the transferability of interests. This problematic issue is not one solely limited to our state, though our decision must be based solely on the language and purpose of the Florida LLC Act. Thus, in my view, this Court must apply the plain meaning of the statute unless doing so would render an absurd result. In contrast, the majority simply rewrites the statute by ignoring those inconvenient provisions that preclude its result.

Legislative Intent With Regard to the Rights of a Judgment Creditor of a Member

I understand the policy concerns of the FTC and the majority with the inherent problems in the transferability of both governance and economic interests under the LLC Act because the plain language does not contemplate the impact of a judgment creditor seeking to obtain the entire membership interest of a single- member LLC and to obtain the ability to liquidate the assets of the LLC. The Florida statute simply does not create a different mechanism for obtaining the assets of a single-member LLC as opposed to a multimember LLC and, therefore, there is no room in the statutory language for different rules.

However, I decline to join in rewriting the statute with inferences and implications, which is the approach adopted by the majority. This Court generally avoids “judicial invention,” as accomplished by the majority, when the statute may be construed under the plain language of the relevant legislative act. See Bishop & Kleinberger, supra, ¶ 1.04[3][d]. In construing a statute, we strive to effectuate the Legislature‘s intent by considering first the statute‘s plain language. See Kasischke v. State, 991 So. 2d 803, 807 (Fla. 2008) (citing Borden v. East- European Ins. Co., 921 So. 2d 587, 595 (Fla. 2006)). When, as it is here, the statute is clear and unambiguous, we do not “look behind the statute‘s plain language for legislative intent or resort to rules of statutory construction to ascertain intent.” Daniels v. Fla. Dep‘t of Health, 898 So. 2d 61, 64 (Fla. 2005). This is especially applicable in the instance of a business entity created solely by state statute.

If the statute had been written as the majority suggests here, I would agree with the result requested by the FTC. However, the underlying conclusion lacks statutory support. By reading only self-selected provisions of the statute to support this result, the majority disregards the remainder of the LLC Act, which destroys the isolated premise that the charging order provision only applies to multimember LLCs and that other statutory restrictions do not exist.

Additionally, exceptions not found within the statute cannot simply be read into the statute, as the majority does by holding that single-member LLCs are an implicit exception to the charging order provision. The remedy provided to the FTC by the federal district court and approved by the majority in this instance— that a judgment creditor of a single-member LLC is entitled to receive a surrender and transfer of the full right, title, and interest of the judgment debtor and to liquidate the LLC assets—is not provided for under the plain language of the LLC Act without judicially writing an exception into the statute.

Judgment Creditor Can Charge the Debtor Member’s Interest in the LLC
With Payment of the Unsatisfied Judgment

As a construct of statutory creation, an LLC is an entity separate and distinct from its members, and thus the liability of the LLC is not directly imputed to its members. In a similar manner, the liability of individual members is not directly imposed separately upon the LLC.

Although a member‘s interest in an LLC is considered to be personal property, see § 608.431, Fla. Stat. (2008), and personal property is generally an asset that may be levied upon by a judgment creditor under Florida law, see § 56.061, Fla. Stat. (2008), there are statutory restrictions in the LLC context. Any rights that a judgment creditor has to the personal property of a judgment debtor are limited to those provided by the applicable creating statute.

The appellants contend that if a judgment creditor may seek satisfaction of a member‘s personal debt from a non-party LLC, the plain language of the LLC Act limits the judgment creditor to a charging order. See § 608.433(4), Fla. Stat. (2008). A charging order is a statutory procedure whereby a creditor of an individual member can satisfy its claim from the member‘s interest in the limited liability company. See Black‘s Law Dictionary 266 (9th ed. 2009) (defining term in the context of partnership law). It is understandable that the FTC challenges the charging order concept being deemed a remedy for a judgment creditor because, from the creditor‘s perspective, a charging order may not be as attractive as just seizing the LLC assets. For example, a creditor may not receive any satisfaction of the judgment if there are no actual distributions from the LLC to the judgment creditor through the debtor-member‘s economic interest. See Elizabeth M. Schurig

& Amy P. Jetel, A Shocking Revelation! Fact or Fiction? A Charging Order is the Exclusive Remedy Against a Partnership Interest, Probate & Property, Nov.-Dec. 2003, at 57, 58. The preferred creditor‘s remedy would be a transfer and surrender of the membership interest that is subject to the charging order, which is a more permanent remedy and may increase the creditor‘s chances of having the debt satisfied. See id.

The application of the charging order provision, including its consequences and implications, has been hotly debated in the context of both partnership and LLC law because of the similarities of these entities. The language of the charging order provision in the Revised Uniform Limited Partnership Act (1976), as amended in 1985, is virtually identical to that used in the Uniform Limited Liability Company Act, as well as in the Florida LLC Act. See §§ 608.433(4), 620.153, Fla. Stat. (2008). The Uniform Limited Partnership Act of 2001 significantly changed this provision by explicitly allowing execution upon a judgment debtor‘s partnership interest. See Schurig & Jetel, supra, at 58. However, the Florida Partnership Act provides that a charging order is the exclusive remedy for judgment creditors. See § 620.8504(5), Fla. Stat. (2008) (stating the charging order provision provides the “exclusive remedy by which a judgment creditor of a partner or partner‘s transferee may satisfy a judgment out of the judgment debtor‘s transferable interest in the partnership”). In the context of partnership interests, Florida courts have also determined that a charging order is the exclusive remedy for judgment creditors based on the straightforward language of the statute. See Givens v. Nat‘l Loan Investors L.P., 724 So. 2d 610, 612 (Fla. 5th DCA 1998) (holding that charging order is the exclusive remedy for a judgment creditor of a partner); Myrick v. Second Nat‘l Bank of Clearwater, 335 So. 2d 343, 345 (Fla. 2d DCA 1976) (substantially similar). The Florida LLC Act has neither adopted an explicit surrender-and-transfer remedy nor does it include a provision explicitly stating that the charging order is the exclusive remedy of the judgment creditor. The plain language of the charging order provision only provides one remedy that a judgment creditor may choose to request from a court and that the court may, in its discretion, choose to impose. See § 608.433(4), Fla. Stat. (2008).

To support its conclusion that charging orders are inapplicable to single- member LLCs, the majority compares the provision in the partnership statute that mandates a charging order as an exclusive remedy to the non-exclusive provision in the LLC Act. The exclusivity of the remedy is irrelevant to this analysis. By relying on an inapplicable statute, the majority ignores the plain language of the LLC Act and the other restrictions of the statute, which universally apply the use of a charging order to judgment creditors of all LLCs, regardless of the composition of the membership. The majority opinion now eliminates the charging order remedy for multimember LLCs under its theory of “nonexclusivity” which is a disaster for those entities.

Plain Meaning of the Statute’s Actual Language

The charging order provision does not act as a reverse-asset shield against the creditors of a member. Instead, the LLC Act implements statutory restrictions on the transfer and assignment of membership interests in an LLC. These restrictions limit the mechanisms available to a judgment creditor of a member of any type of LLC to obtain satisfaction of a judgment against the membership interest. Specifically, section 608.433(4) grants a court of competent jurisdiction the discretion to enter a charging order against a member‘s interest in the LLC in favor of the judgment creditor:

608.433. Right of assignee to become member.—

Unless otherwise provided in the articles of organization or operating agreement, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.
An assignee who has become a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of the assigning member under the articles of organization, the operating agreement, and this chapter. An assignee who becomes a member also is liable for the obligations of the assignee‘s assignor to make and return contributions as provided in s. 608.4211 and wrongful distributions as provided in s. 608.428. However, the assignee is not obligated for liabilities which are unknown to the assignee at the time the assignee became a member and which could not be ascertained from the articles of organization or the operating agreement.
If an assignee of a limited liability company interest becomes a member, the assignor is not released from liability to the limited liability company under ss. 608.4211, 608.4228, and 608.426.
On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest. This chapter does not deprive any member of the benefit of any exemption . . . .

§ 608.433, Fla. Stat. (2008) (emphasis supplied).

The majority asserts that the placement of the charging order provision
within the section titled “Right of assignee to become member” mandates that the provision only applies to circumstances where the interest of the member is subject to the rights of other LLC members. There is absolutely nothing to support the notion that the Legislature‘s placement of the charging order provision as a subsection of section 608.433, instead of as a separately titled section elsewhere in the statute, was intended to unilaterally link its application only to the multimember context. For instance, the Revised Uniform Limited Liability Company Act, unlike the Florida statute, places the charging order provision as a separately titled section within the article that discusses transferable interests and rights of transferees and creditors. See Unif. Ltd. Liab. Co. Act § 503 (revised 2006), 6B U.L.A. 498 (2008). Other states have also adopted a statutory scheme that places the charging order remedy within a separate provision specifically dealing with the rights of a judgment creditor. See Conn. Gen. Stat. § 34-171 (2007). Thus, the majority‘s interpretation would again fail by a mere movement of the charging order provision to a separately titled section within the Act.

In contrast to the majority, my review of this provision begins with the actual language of the statute. In construing a statute, it is our purpose to effectuate legislative intent because “legislative intent is the polestar that guides a court‘s statutory construction analysis.” See Polite v. State, 973 So. 2d 1107, 1111 (Fla. 2007) (citing Bautista v. State, 863 So. 2d 1180, 1185 (Fla. 2003)) (quoting State v. J.M., 824 So. 2d 105, 109 (Fla. 2002)). A statute‘s plain and ordinary meaning must be given effect unless doing so would lead to an unreasonable or absurd result. See City of Miami Beach v. Galbut, 626 So. 2d 192, 193 (Fla. 1993). Here, the plain language establishes a charging order remedy for a judgment creditor that the court may impose. This section provides the only mechanism in the entire statute specifically allocating a remedy for a judgment creditor to attach the membership interest of a judgment debtor. In the multimember context, the uncontested, general rule is that a charging order is the appropriate remedy, even if the language indicates that such a decision is within the court‘s discretion. See Myrick, 335 So. 2d at 344. As the Second District explained:

Rather, the charging order is the essential first step, and all further proceedings must occur under the supervision of the court, which may take all appropriate actions, including the appointment of a receiver if necessary, to protect the interests of the various parties.

Id. at 345. Without express language to the contrary, the discretionary nature of this remedy applies with equal force to single- and multimember LLCs, which the majority erases from the statute.

Nevertheless, the certified question before us is not the discretionary nature of this remedy but whether a court should even apply the charging order remedy to single-member LLCs. The majority rephrases the question certified to this Court as not considering whether an exception to the charging order provision should be implied for single-member LLCs. In doing so, the majority unjustifiably alters and recasts the question posited by the federal appellate court to fit the majority‘s result. The convoluted alternative presented by the majority is premised on a limited application of a charging order without express language in the statutory scheme to support this assertion.

Here, the plain language crafted by the Legislature does not limit this remedy to the multimember circumstance, as the majority holds. Further, exceptions not made in a statute generally cannot be read into the statute, unless the exception is within the reason of the law. See Cont‘l Assurance Co. v. Carroll, 485 So. 2d 406, 409 (Fla. 1986) (“This Court cannot grant an exception to a statute nor can we construe an unambiguous statute different from its plain meaning.”); Dobbs v. Sea Isle Hotel, 56 So. 2d 341, 342 (Fla. 1952) (“We apprehend that had the legislature intended to establish other exceptions it would have done so clearly and unequivocally. . . . We cannot write into the law any other exception . . . .”). Thus, without going behind the plain language of the statute, at first blush, the statute applies equally to all LLCs, regardless of membership composition.

The distinction asserted by the FTC is clearly inconsistent with the plain language of section 608.434 with regard to the proper method for a judgment creditor to reach the interest of a member in a LLC in that a complete surrender of the membership interest and the subsequent liquidation of the LLC assets are not contemplated by the LLC Act. The majority‘s interpretation that the charging order remedy only applies to multimember LLCs can only be given effect if the plain language of this provision renders an absurd result, which it does not.

The purpose of creating the charging order provision was never limited to the protection of “innocent” members of an LLC. Moreover, when amending the LLC Act to permit single-member LLCs, the Legislature did not also amend the assignment of interest and charging order provisions to create different procedures for single- and multimember LLCs. The appellants argue that this indicates a manifestation of legislative intent; however, it appears more likely that our Legislature, as with many other states, had not yet contemplated the situation before us. Even so, the appropriate remedy in this circumstance is not for this Court to impose its speculative interpretation, but for the Legislature to amend the statute to reflect its specific intention, if necessary. When interpreting a statute that is unambiguous and clear, this Court defers to the Legislature‘s authority to create a new limitation and right of action. Here, the actual language of the statute does not distinguish between the number of members in an LLC. Thus, the charging order applies with equal force to both single-member and multimember LLCs, and the assignment provision of section 608.433 does not render an absurd result.

The majority purports to base its analysis on the plain language of the statute. However, the FTC and a multitude of legal theorists agree that the plain language of the statute does not support this result. See e.g., Bishop & Kleinberger, supra, ¶ 1.04[3][d]; Bishop, supra, 54 S.D. L. Rev. at 202; Ribstein, supra, 30 Del. J. Corp. L. at 221-25; Rutledge & Geu, supra, Bus. Entities, Sept.- Oct. 2003 at 16; Stein, supra, Bus. Entities, Sept.-Oct. 2006 at 28. All authorities recognize that the sole way to achieve the result desired by the FTC and the majority is to ignore the plain language of the statute. No external support exists for the majority‘s bare assertions.

Rights of an Assignee

The plain language of section 608.433(4) applies the charging provision to the judgment creditor of both a single-member and multimember LLC. The next analytical step is to determine what rights that charging order provision grants the judgment creditor. To the extent that a membership interest is charged with a judgment, the plain text of the statute specifically provides that the judgment creditor only possesses the rights of an assignee of such interest. See § 608.433(4), Fla. Stat. (2008) (“To the extent so charged, the judgment creditor has only the rights of an assignee of such interest.”).

To determine the rights of an assignee of such an interest, we look to section 608.432, which defines these rights. To divine the intent of the Legislature, we construe related statutory provisions together, or in pari materia, to achieve a consistent whole that gives full, harmonious effect to all related statutory provisions. See Heart of Adoptions, Inc. v. J.A., 963 So. 2d 189, 199 (Fla. 2007) (quoting Forsythe v. Longboat Key Beach Erosion Control Dist., 604 So. 2d 452, 455 (Fla. 1992)). The FTC asserts that the rights delineated in this section render an absurd result when applied to single-member LLCs; however, the FTC ignores that the same rule applies even if only a part of a member‘s interest is needed to satisfy a debt amount. Further, an assignee is entitled solely to an economic interest and is not entitled to governance rights without the unanimous approval of the other members or as otherwise provided in the articles of incorporation or the operating agreement.

The plain reading of this provision does not establish the judgment creditor as an assignee of such interest, only that to the extent of the judgment amount charged to the economic interest, the judgment creditor has the same rights as an assignee. Though section 608.433(4) directs that the judgment creditor has only the rights of an assignee of such interest, as provided in section 608.432, it is important to clarify that the judgment creditor does not become an assignee; the language merely indicates that the judgment creditor‘s rights do not exceed those of an assignee.

This clear distinction can be seen when considering the voluntary and involuntary nature of these different interests—an assignment is generally a voluntary action made by an assignor, whereas a charging order is clearly an involuntary assignment by a judgment debtor. For that reason, the majority formulates a false conclusion that section 404.433(1) provides a foundation for the bare assertion that a charging order is inapplicable in the context of a single- member LLC. Exploiting this false foundation, the majority asserts a result that is unsupportable when considered in pari materia with the entirety of the statutory scheme.

The question before this Court requires articulation of a general principle of law that applies to all types of judgments, whether less than, equal to, or greater than the value of a membership interest, and to all types of LLCs. Reading section 608.433(4) and 608.432 together, a judgment creditor may be assigned a portion of the economic interest, depending on the amount of the judgment. This provision contemplates that a charging order may not encompass a member‘s entire membership interest if the judgment is for less than the available economic distributions of an LLC. For instance, if the LLC membership interest here were worth more than the $10 million judgment, it would be unnecessary under this provision to transfer the full economic interest in the LLC to satisfy the judgment. Further, a member does not lose the economic interest and membership status unless all of the economic interest is charged to the judgment creditor. See § 608.432(2)(c), Fla. Stat. (2008). Thus, if the judgment were for less than the value of either the membership interest or the assets in the LLC, the members could transfer a portion of their economic interest and still retain their membership interest, in that they would still hold an economic and governance interest in the LLC. The FTC would then only have the right to receive distributions or allocations of income in an amount corresponding to satisfaction of a partial economic interest. Regardless of the amount of the interest assigned, the judgment creditor does not immediately receive a governance interest. See § 608.432(1), (2), Fla. Stat. (2008).

In such a circumstance, the result contemplated by the FTC does not come to pass—the single member maintains his, her, or its membership rights because a member only ceases to be a member and to have the power to exercise any governance rights upon assignment of all of the economic interest of such member. See id. The majority disregards this factual possibility and considers only the application of the statutory scheme in the context of a judgment that is equal to or greater than the value of the membership interest. Under the majority‘s interpretation of the statute, a judgment creditor could force a single-member LLC to surrender all of its interest and liquidate the assets specifically owned by the LLC, even if the judgment were for less than the assets‘ worth.

Alternative Remedies

Currently, the plain language of the statute provides additional remedies to the charging order provision for judgment creditors seeking satisfaction on a judgment that is equal to or greater than the economic distributions available under a charging order—(1) dissolution of the LLC, (2) an order of insolvency against the judgment debtor, or (3) an order conflating the LLC and the member to allow a court to reach the property assets of the LLC. First, upon the issuance of a charging order that exceeds a member‘s economic interest in an LLC for satisfaction of the judgment, dissolution may be achieved because the remaining member ceases to possess an economic interest and governance rights in the LLC following the assignment of all of its membership interest. See § 608.432(2)(c), Fla. Stat. (2008) (“Assignment of member‘s interest”). The statutory provision with regard to the assignment of a member‘s interest provides, in relevant part:

(2) Unless otherwise provided in the articles of organization or operating agreement:
….

(c) A member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of the membership interest of such member. Unless otherwise provided in the articles of organization or operating agreement, the pledge of, or granting of a security interest, lien, or other encumbrance in or against, any or all of the membership interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member.

Id. (emphasis supplied). This demonstrates a clear and unambiguous distinction between a voluntary assignment of all the interest and the granting of an encumbrance against any or all of the membership interest. Because a “member” is defined as an actual or legal person admitted as such under chapter 608, who also has an economic interest in the LLC, it is the assignment of all of that economic interest that divests the member of his, her, or its status and power. Thus, if the charging order is only for a part of the economic interest held by the judgment debtor, the statute does not require that the member cease to be a member. See §§ 608.402(21), 608.432(2)(c), Fla. Stat. (2008). If, on the other hand, the charging order is to the extent that it requires a surrender of all of the member‘s economic interest, in that circumstance, the member ceases to be a member under section 608.432(2)(c). In the case of a member-managed LLC, this would leave the LLC without anyone to govern its affairs. However, within the manager-managed LLC context, the manager would remain in a position to direct the LLC and distribute any profits according to any governing documents.

This provision need not be limited to single-member LLCs. For example, if the appellants had entered into a multimember LLC, that entity would be subject to the same statutory construction issues as a single-member LLC. Once the FTC obtained a judgment against a member of the multimember LLC, a charging order would be lodged against that member‘s interest. In that circumstance, though there may be charging orders against separate membership interests, in essence the same divestiture of the membership interest would occur if the judgment was for all of each member‘s economic interest.

It is important to note, however, if an LLC becomes a shell or legal fiction with no actual governing members, the LLC shall be dissolved under section 608.441. The dissolution statute provides:

(1) A limited liability company organized under this chapter shall be dissolved, and the limited liability company‘s affairs shall be concluded, upon the first to occur of any of the following events:

(d) At any time there are no members; however, unless otherwise provided in the articles of organization or operating agreement, the limited liability company is not dissolved and is not required to be wound up if, within 90 days, or such other period as provided in the articles of organization or operating agreement, after the occurrence of the event that terminated the continued membership of the last remaining member, the personal or other legal representative of the last remaining member agrees in writing to continue the limited liability company and agrees to the admission of the personal representative of such member or its nominee or designee to the limited liability company as a member, effective as of the occurrence of the event that terminated the continued membership of the last remaining member; or

….
(4) Following the occurrence of any of the events specified in this section which cause the dissolution of the limited liability company, the limited liability company shall deliver articles of dissolution to the Department of State for filing.

§ 608.441(1)(d), (4), Fla. Stat. (2008) (emphasis supplied). A dissolved LLC continues its existence but does not carry on any business except that which is appropriate to wind up and liquidate its business and affairs under section 608.4431. Once dissolved, the liquidated assets may then be distributed to a judgment creditor holding a charging order. See § 608.444(1), Fla. Stat. (2008).

The judgment creditor may also seek an order of insolvency against the individual member, in which instance that member ceases to be a member of the single-member LLC, and the member‘s interest becomes part of the bankruptcy estate. In Florida, the commencement of a bankruptcy proceeding also terminates membership within an LLC. See §§ 608.402(4), 608.4237, Fla. Stat (2008). The decisions advanced by the FTC involved bankruptcies of the judgment debtor, and the rights of a judgment creditor in a bankruptcy are substantially different than the rights of a judgment creditor generally. See In re Modanlo, 412 B.R. 715 (Bankr. D. Md. 2006), aff‘d, No. 06-2213 (4th Cir. 2008); In re Albright, 291 B.R. 538, 539 (Bankr. D. Colo. 2003). Upon commencement of a bankruptcy proceeding, a bankruptcy estate includes all legal or equitable property interests of the debtor.

An LLC membership interest is the personal property of the member. Therefore, when a judgment debtor files for bankruptcy, or is subject to an order of insolvency, the judgment debtor effectively transfers any membership interest in an LLC to the bankruptcy estate. In this context, it is reasonable for the bankruptcy courts to construe the LLC Act to no longer require a charging order because the judgment debtor has passed the entire membership interest to the bankruptcy estate, and the trustee stands in the shoes of the judgment debtor, who is now seeking reorganization of its assets. See, e.g., In re Albright, 291 B.R. at 541. The majority refuses to even acknowledge any of these approaches.

This bankruptcy context is distinguishable from the general case of a judgment creditor seeking to execute upon the assets of an LLC because the judgment may not meet or exceed the economic interest remaining in the LLC. Thus, the Albright bankruptcy situation should not alter our determination that the plain language of the statute applies the charging order provision to both single- and multimember LLCs. This may be a more complicated procedure than to allow a court to simply “shortcut” and rewrite the law and enter a surrender-and-transfer order of a member‘s entire right, title, and interest in an LLC as the majority accomplishes today. However, it is the method prescribed by the statute. Although the procedures created by the statute may involve multiple steps and legal proceedings, they are not absurd or irreconcilable with chapter 608 as a whole.

A Charging Order, in and of Itself, Does Not Entitle a Judgment Creditor to
Seize and Dissolve a Florida LLC

Based on the plain language of the statute and the construction of chapter 608 in pari materia, I would answer the certified question in the negative: A court may not order a judgment debtor to surrender and transfer outright all “right, title, and interest” in the debtor‘s single-member LLC to satisfy an outstanding judgment. If a judgment creditor wishes to proceed against a single-member LLC, it may first request a court of competent jurisdiction to impose a charging order on the member‘s interest. If the judgment creditor is concerned that the member is constraining distribution of assets and incomes, the creditor may seek judicial remedies to enforce proper distribution. In addition, if the economic interest so charged is insufficient to satisfy the judgment, the judgment creditor may move through additional proceedings: (1) seek to dissolve the LLC and to have its assets liquidated and subsequently distributed to the judgment creditor; (2) seek an order of insolvency against the judgment debtor, in which case the trustee of the bankruptcy estate will control the assets of the LLC, or (3) request a court to pierce the liability shield to make available the personal assets of the company to satisfy the personal debts of its member. This plain reading of chapter 608 may create additional steps for judgment creditors and judgment debtors to satisfy, as characterized by the federal district court in this case. However, only the Legislature, as the architects of this statutorily created entity, has the authority to provide a more streamlined surrender of these rights, not the judicial branch through selective reading and rewriting of the statute. As enacted, the plain meaning of the statute is unambiguous and does not require “judicial invention” of exceptions that are clearly not provided in the LLC Act. If the Legislature wishes to make either an exception to the charging order provision for single-member LLCs or to provide additional remedies to judgment creditors, it may do so through an amendment of chapter 608.

Accordingly, I would answer the certified question in the negative. Under Florida law, a court does not have the authority to order an LLC member to surrender and transfer all right, title, and interest in an LLC and have LLC assets liquidated without first going through the statutory requirements created by the Legislature.

POLSTON, J., concurs.

Certified Question of Law from the United States Court of Appeals for the
Eleventh Circuit – Case Nos. 06-13254-DD and 03-02353-CV-T-17-TBM

Thomas C. Little, Clearwater, Florida,

for Appellant

William Blumenthal, General Counsel, John F. Daly, Deputy General Counsel and John Andrew Singer, Attorney, Federal Trade Commission, Washington, D.C.,

for Appellee

Daniel S. Kleinberger, Professor, William Mitchell College of Law, St. Paul, Minnesota,

As Amicus Curiae

In re Hicks

Posted by McCullough

In re: James Tillman HICKS, Jr., a/k/a J. T. Hicks, Jr., a/k/a Sonny Hicks, Debtor; Benjamin C. ABNEY, Trustee, Plaintiff v. James Tillman HICKS, Jr., the Citizens and Southern National Bank, and Lois Reagan Hicks, Defendants

Case No. 80-01342A, Adversary No. 81-1877A

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION

22 B.R. 243; 1982 Bankr. LEXIS 3653

July 26, 1982

COUNSEL: [**1] Benjamin C. Abney, Esq., Carr, Abney, Tabb & Schultz, N.W., Atlanta, Georgia, for Plaintiff.

Jeffrey Starnes, Esq., Conyers, Georgia, (attorney for James Tillman Hicks, Jr.).

C. R. Vaughn, Jr., Esq., Vaughn & Barksdale, Conyers, Georgia, (attorney for C&S National Bank and Lois Reagan Hicks).

JUDGES: W. Homer Drake, United States Bankruptcy Judge.

OPINION BY: DRAKE

OPINION

[*244] ORDER

This case is before the Court on the plaintiff’s Complaint for Declaratory Relief to determine what interest, if any, the debtor may have in certain property held in trust pursuant to his father’s will. The plaintiff alleges that the interest held by the debtor is a vested remainder and that the debtor held this interest when he filed his bankruptcy petition. If this interest exists, it would be part of the estate of the debtor under 11 U.S.C. § 541(a)(5)(A). In re McLoughlin, 507 F.2d 177 (5th Cir. 1975). The defendants contend that the interest which the debtor has under his father’s will is contingent and not vested. The parties have filed Motions for Summary Judgment and submitted briefs in support thereof.

The will in question is that of James Tillman Hicks, Sr., the debtor’s father. Mr. [**2] Hicks, Sr. died May 29, 1970, almost ten years prior to the time the debtor filed his petition in bankruptcy on April 24, 1980. The Citizens and Southern National Bank (“C&S”) and Lois Reagan Hicks are trustees of the residuary trust created pursuant to Item V of the Last Will and Testament of J. T. Hicks, Sr. Lois Reagan Hicks, who was the wife of J. T. Hicks, Sr., and the mother of the debtor, is currently alive. She was given a life estate and the power of appointment which enabled her to direct the trustee to turn over any of the corpus of the trust to any descendant of J. T. Hicks, Sr. or to pay any income from the trust to any descendants of J. T. Hicks, Sr. Lois Reagan Hicks has not exercised this power of appointment.

The power of appointment held by Lois Reagan Hicks gives her total discretion as to the division of the trust corpus among the descendants of J. T. Hicks, Sr. The [*245] vesting of the debtor’s interest in the estate is contingent upon one of two events. The first is the exercise of the power of appointment by Lois Reagan Hicks. The plaintiff contends that this Court should find a vested interest in J. T. Hicks, Jr. Essentially, that would require [**3] the Court to compel Mrs. Hicks to exercise her power of appointment. Section 36-602 of the Ga. Code states that: “Equity may not compel a party, having a discretion, to exercise the power of appointment;”. Based on Ga. Code § 36-602, this Court finds that it cannot compel the exercise of a discretionary power of appointment. See also In re McLoughlin, supra.

Lois Reagan Hicks was given a life estate in the trust created under the will of J. T. Hicks, Sr. Under Georgia law, when a will creates a life estate for the widow, the remainder interest does not vest in the remaindermen until the death of the life tenant, and the estates of the remaindermen who predecease the life tenant are not entitled to an interest in the estate. Ruth v. First National Bank of Atlanta, 230 Ga. 490, 197 S.E.2d 699 (1973). Accordingly, the interest created in the children of J. T. Hicks, Sr. is a contingent remainder. The Ruth case illustrates the second way by which J. T. Hicks, Jr.’s interest could vest, i.e. J. T. Hicks, Jr. would have to survive the life tenant, Lois Reagan Hicks. Because the estate created in the children is a contingent remainder, it is not property of the [**4] debtor’s estate under 11 U.S.C. § 541(a)(5)(A) and therefore it is not subject to the claim of the trustee in bankruptcy. Thornton v. Scarborough, 348 F.2d 17, 22 (1965).

In a recent case, the Fifth Circuit Court of Appeals held that under Georgia law, a father’s will created contingent remainders in his children who are required to survive a mother – life tenant because until her death, her survivors were unascertained persons. In re McLoughlin, 507 F.2d 177, 182 (1975). Since Lois Reagan Hicks is in life and was alive at the time the debtor filed his bankruptcy petition, the beneficiaries of the trust cannot be ascertained, and their interests are contingent. Id. at 181. Because the interest created in the debtor is a contingent remainder, it is non-transferrable under Georgia law. Id. at 181.

Therefore, for the above-stated reasons, the debtor’s interest in J. T. Hicks, Sr.’s will is a contingent remainder and is not subject to the claim of the trustee in bankruptcy as property of the estate under the ambit of 11 U.S.C. § 541. The plaintiff’s Motion for Summary Judgment is hereby denied and the defendants’ Motion for Summary Judgment is granted.

IT IS SO [**5] ORDERED.

At Atlanta, Georgia, this 26 day of July, 1982.

W. HOMER DRAKE, UNITED STATES BANKRUPTCY JUDGE