Morgan Stanley Smith Barney LL v. Christopher Johnson

United States Court of Appeals
For the Eighth Circuit
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No. 18-3106
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Morgan Stanley Smith Barney LLC, et al.
lllllllllllllllllllllPlaintiffs - Appellees
v.
Christopher Johnson
lllllllllllllllllllllDefendant - Appellant
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Appeal from United States District Court
for the District of Minnesota
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Submitted: October 16, 2019
Filed: March 13, 2020
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Before LOKEN, SHEPHERD, and STRAS, Circuit Judges.
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LOKEN, Circuit Judge.
In April 2017, Morgan Stanley Smith Barney, LLC, commenced an action
under the Federal Arbitration Act, 9 U.S.C. § 9, to confirm a $1,502,000 arbitration
award against Christopher Johnson. He did not respond, and the district court1
1
The Honorable Paul A. Magnuson, United States District Judge for the District
of Minnesota.
entered judgment in Morgan Stanley’s favor. In September 2018, the court entered
an order granting in part Morgan Stanley’s motions to appoint a receiver under
Federal Rule of Civil Procedure 66 and to enter a charging order under Rule 69(a)
and Minn. Stat. § 322C.0503. Johnson appealed, arguing the district court abused its
discretion by appointing a receiver, and by giving the receiver powers beyond those
authorized by Minn. Stat. § 322C.0503. The district court declined to stay its order
pending appeal. Having jurisdiction to consider this interlocutory appeal under 28
U.S.C. § 1292(a)(2), we affirm.
I. The Order Appointing a Receiver.
Like most circuits, we have held that “[t]he appointment of a receiver in a
diversity case is a procedural matter governed by federal law and federal equitable
principles.” Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316
(8th Cir. 1993).2 Rule 66 provides that the Federal Rules “govern an action in which
the appointment of a receiver is sought,” and a receiver’s practice “must accord with
the historical practice in federal courts.” “[T]o the extent Rule 66 dictates what
principles should be applied to federal receiverships, courts must comply with the
Rule even in the face of differing state law.” Nat’l P’ship Inv. Corp. v. Nat’l Hous.
Dev. Corp., 153 F.3d 1289, 1291 (11th Cir. 1998). “[A]lthough a state statute may
provide a vehicle for the appointment of a receiver, such a statute does not change the
nature of the federal courts’ equitable powers.” Canada Life Assurance Co. v.
LaPeter, 563 F.3d 837, 843 (9th Cir. 2009); see 12 C. Wright & A. Miller, Federal
Practice and Procedure § 2983, at 25-26 (3d ed. 2014).
2
Jurisdiction in this case is based on diversity of citizenship because the Federal
Arbitration Act “bestow[s] no federal jurisdiction but rather requir[es] an independent
jurisdictional basis.” Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 581-82
(2008).
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“A receiver is an extraordinary equitable remedy that is only justified in
extreme situations.” Aviation Supply, 999 F.2d at 316. No formula determines when
a receiver should be appointed; factors we typically consider are:
a valid claim by the party seeking the appointment; the probability that
fraudulent conduct has occurred or will occur to frustrate that claim;
imminent danger that property will be concealed, lost, or diminished in
value; inadequacy of legal remedies; lack of a less drastic equitable
remedy; and likelihood that appointing the receiver will do more good
than harm.
Aviation Supply, 999 F.2d at 316-17. Though Johnson argues to the contrary, “fraud
is not required to support a district court’s discretionary decision to appoint a
receiver.” Id. at 317. Rather, a receiver may be appropriate “to protect a judgment
creditor’s interest in a debtor’s property when the debtor has shown an intention to
frustrate attempts to collect the judgment.” Id. (quotation omitted); see 12 Wright &
Miller § 2983, at 15-16. Thus, “receivership may be an appropriate remedy for a
judgment creditor . . . who has had execution issued and returned unsatisfied, or who
proceeds through supplementary proceedings pursuant to Rule 69.” Santibanez v.
Wier McMahon & Co., 105 F.3d 234, 241 (5th Cir. 1997) (quotation omitted); accord
Hendricks & Lewis PLLC v. Clinton, 766 F.3d 991, 999 (9th Cir. 2014). We review
the appointment of a receiver for abuse of discretion.
In the year leading up to the order appointing a receiver, judgment creditor
Morgan Stanley obtained a writ of execution for cash belonging to Johnson, but the
writ returned unsatisfied. It also served writs of garnishment on banks where it
believed Johnson held accounts; those netted only $2,879.85. Through a search on
the Minnesota Secretary of State’s website, Morgan Stanley identified limited liability
companies (“LLCs”) in which it believed Johnson held an interest. It served twenty
one writs of garnishment on eighteen LLCs and one other company. No garnishee
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disclosed owing Johnson money or possessing his personal property, instruments, or
papers.
Using certified mail, Morgan Stanley sent Johnson a demand for financial
disclosures. It also sent post-judgment discovery requests in aid of execution,
including interrogatories and document requests. When Johnson did not respond,
Morgan Stanley filed its motion for appointment of a receiver. The next day,
Johnson’s counsel entered an appearance in the district court. He opposed a receiver,
claiming this motion was the first time Johnson received the interrogatories,
document requests, and demand for disclosures. Counsel soon produced over 600
pages of documents, including bank account statements, credit card statements,
Johnson’ tax returns, and the tax returns and financial statements for his LLCs.
At the motion hearing, counsel for Morgan Stanley represented that the tax
documents were incomplete and that Johnson had not disclosed how much money he
received from LLCs over the past two years. Regarding the documents produced,
Morgan Stanley advised the court that its analysis revealed that Johnson received
nearly $400,000 in loan repayments in 2017 and $500,000 in 2018 from Providence
Development, an LLC in which he owns a 50 percent interest. Additional research
revealed that Providence Development purported to own and operate multi-tenant
rental properties in the Twin Cities area, had $550,000 worth of equity in buildings
and $490,000 in a Fidelity account, and owned several other LLCs, which, in turn,
own real property. Another LLC, Providence Twin Cities, reportedly owned
buildings and was operating out of Johnson’s business office, but Johnson did not
produce “a scrap of paper” for that business. Morgan Stanley also pointed to a
corporation, Sun BioPharma, Inc., from which Johnson may have purchased $75,000
in notes in 2017 and received $35,400 in cash compensation in 2015. Finally,
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Morgan Stanley advised that Johnson reported $53 million in stock transactions in
2015 and $30 million in 2016.3
After the hearing, the district court granted Morgan Stanley’s motion to appoint
a receiver in part, directing the receiver “to make any inquiry Johnson would have the
right to make of the LLCs[,] to conduct a full accounting of the LLCs’ financial
transactions since January 1, 2015, [and to] have all the powers of receivers under
Minnesota law.”4 In deciding that this extraordinary creditor’s remedy was
appropriate, the court found significant the charging order provisions of the
Minnesota Revised Uniform Limited Liability Company Act found in Minn. Stat.
§ 322C.0503, which provides in relevant part:
Subdivision 1. Charging order against transferable interest. On
application by a judgment creditor of [an LLC] member or transferee, a
court may enter a charging order against the transferable interest of the
judgment debtor for the unsatisfied amount of the judgment. A charging
order constitutes a lien on a judgment debtor’s transferable interest and
requires the limited liability company to pay over to the person to which
the charging order was issued any distribution that would otherwise be
paid to the judgment debtor.
3
In a lengthy Reply Brief, Johnson argues that we should ignore Morgan
Stanley’s “attempts to expand and distort the record by making allegations that are
wholly without evidentiary support.” Johnson made the same assertions at oral
argument before the district court, to no avail. “[T]he form and quantum of evidence
required on a motion requesting the appointment of a receiver is a matter of judicial
discretion.” Santibanez, 105 F.3d at 241, quoting 12 Wright & Miller § 2983. We
see no abuse of discretion in rejecting this attempt to further delay review of
Johnson’s financial assets and transactions. See Citronelle-Mobile Gathering, Inc.
v. Watkins, 934 F.2d 1180, 1189-90 (11th Cir. 1991).
4
Federal law requires the receiver to “manage and operate the property in his
possession . . . according to the requirements of the valid laws of the State in which
such property is situated.” 28 U.S.C. § 959(b).
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Subd. 2. Charging order effectuation. To the extent necessary to
effectuate the collection of distributions pursuant to a charging order in
effect under subdivision 1, the court may:
(1) appoint a receiver of the distributions subject to the charging order,
with the power to make all inquiries the judgment debtor might have
made; and
(2) make all other orders necessary to give effect to the charging order.
Subd. 3. Foreclosure and sale. Upon a showing that distributions
under a charging order will not pay the judgment debt within a
reasonable time, the court may foreclose the lien and order the sale of
the transferable interest.
The statute defines “transferable interest” as an LLC member’s “right . . . to receive
distributions from [the LLC] in accordance with the operating agreement.” Id. at
§ 322C.0102, subd. 28. The court entered a charging order against Johnson’s
transferrable interests in Providence Development, LLC, and Providence Investments,
LLC. Johnson does not appeal that order. The district court denied without prejudice
Morgan Stanley’s request for an order to foreclose on Johnson’s LLC interests, as
authorized by Minn. Stat. § 322C.0503, subd. 3, concluding that the receiver should
be limited to “evaluat[ing] the LLCs’ payment arrangements with Johnson” and
“determin[ing] whether the arrangements are a subterfuge for avoiding Johnson’s
debt to Morgan Stanley.”
The district court’s consideration of this state statute was not contrary to our
decision in Aviation Supply. Though appointing a receiver is a matter of federal law,
“in the absence of substantial federal precedent in a particular context, federal courts
are quite likely to look to state law for guidance.” 12 Wright & Miller § 2983, at 26.
Minnesota’s charging order statute reflects a legislative determination that
extraordinary equitable remedies including receivership may be appropriate when a
frustrated judgment creditor seeks to recover from a debtor who may be using
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membership in an LLC to avoid paying his debt. Other courts have recognized that
entering charging or accounting orders and appointing receivers may be necessary
when a judgment debtor is using LLCs or intercorporate transfers to shield assets and
income from creditors by keeping assets undistributed or otherwise out of reach. See
Citronelle-Mobile Gathering, 934 F.2d at 1189-90; Gen. Elec. Capital Corp. v. JLT
Aircraft Holding Co., LLC, No. Civ. 09-1200, 2010 WL 3023316, at *5 (D. Minn.
July 28, 2010); United States v. Hoffman, 560 F. Supp. 2d 772, 777-78 (D. Minn.
2008); EarthGrains Baking Cos. v. Sycamore Family Bakery, Inc., No.
2:09CV523DAK, 2018 WL 5776545, at *5-6 (D. Utah Nov. 2, 2018); Otero v. Vito,
No. 5:07-CV-405, 2008 WL 4004979, at *3-4 (M.D. Ga. Aug. 25, 2008); World Fuel
Servs. Corp. v. Moorehead, 229 F. Supp. 2d 584, 589, 595-97 (N.D. Tex. 2002).
The record also supports the district court’s finding that Johnson was a
judgment debtor with direct or indirect access to substantial wealth and assets, who
had frustrated Morgan Stanley’s considerable efforts to collect its judgment, and
appeared committed to not disclosing assets and not making LLC distributions,
thereby keeping substantial assets out of Morgan Stanley’s reach. In this case,
Morgan Stanley’s repeated attempts at execution yielded less than $3,000. Despite
belated discovery responses and Morgan Stanley research revealing financial
relationships with various LLCs, Johnson claimed he did not earn any income from
any source in the eighteen months prior to submitting his interrogatory responses,
aside from “interest payments” from a personal loan to one LLC. Nor did he explain
how he pays for his living expenses in a home valued at more than $1,000,000. He
also failed to produce relevant tax documents, including those for an undisclosed
LLC operating out of his business office. See Aviation Supply, 999 F.2d at 317 (a
“pattern of willful nondisclosure” and refusing to cooperate with discovery supported
appointing a receiver); World Fuel Servs., 229 F. Supp. 2d at 589; EarthGrains, 2018
WL 5776545 at *6.
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Johnson responds that Morgan Stanley was not entitled to appointment of a
receiver because it did not make enough of an effort to employ the “normal remedies
[of] a judgment creditor” that in most cases “are adequate to permit it to enforce its
claim.” Aviation Supply, 999 F.2d at 317. But what efforts are sufficient and
adequate is a judgment call that turns on the specific facts in each case, a
determination left to the sound discretion of the district court. Here, the district court
concluded that the passage of one year was insufficient to warrant the “drastic relief”
of foreclosing on Johnson’s LLC interests. Rather, mindful that appointment of a
receiver is an “extraordinary equitable remedy,” it determined that a receiver was
warranted to “investigate and determine what assets Johnson possesses, whether in
the LLCs or otherwise,” and to “determine whether the arrangements are a subterfuge
for avoiding Johnson’s debt.” On this record, we conclude the court did not abuse its
discretion in appointing a receiver under Federal Rule 66 to exercise extraordinary
investigative powers to determine whether Morgan Stanley’s substantial judgment
can be paid within a reasonable time.
II. The Scope of the Receiver’s Powers.
Johnson further argues that the district court abused its discretion by appointing
a “general receiver” over his interests in the LLCs, when Minn. Stat. § 322C.0503,
subd. 2, provides that a receiver may only be appointed “[t]o the extent necessary to
effectuate the collection of distributions pursuant to a charging order in effect under
subdivision 1.” This contention is without merit. Morgan Stanley’s motion for a
charging order under Minn. Stat. § 322C.0503 properly relied on Federal Rule 69(a)
and state law, while its motion for a receiver relied on the district court’s federal
equitable powers under Rule 66. The district court’s order appointing a receiver was
expressly based on “federal law and federal equitable principles,” not on Minn. Stat.
§ 322C.0503, subd. 2. We have concluded that the court’s appointment of a receiver
was not an abuse of its discretion under federal law. At this interlocutory stage of the
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proceedings, we are “limited to reviewing the question whether the [district] court has
abused its discretion in making the appointment.” 12 Wright & Miller § 2986, at 45.
The Order of the district court dated September 27, 2018, is affirmed. We deny
Morgan Stanley’s motion to supplement the record on appeal.
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