SEC v. Brogdon, 2021 WL 2802153 (D.N.J., July 2, 2021).
United States District Court, D. New Jersey.
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
CHRISTOPHER BROGDON, Defendant,
CONNIE BROGDON, et al., Relief Defendants.
Civ. No. 15-8173 (KM)
KEVIN MCNULTY United States District Judge
PAGE_1 The Court has entered final judgment against defendant Christopher Brogdon and relief defendant Connie Brogdon (collectively, “the Brogdons”), resulting in the defendants owing some $48 million in disgorgement. (DE 543.) The judgment, entered on January 17, 2020, was payable within 30 days. A substantial portion of the judgment remains unpaid. Plaintiff, the Securities and Exchange Commission (“SEC”), has since sought to execute on its judgment by means of, inter alia, writs of garnishment on a variety of entities. This opinion addresses motions filed by the SEC requesting that the Court enter certain orders in support of execution of judgment.
For the reasons discussed below, the SEC’s motions are GRANTED.
I. PROCEDURAL HISTORY
Familiarity with the convoluted history of this matter is assumed. On January 17, 2020, the Court entered final judgment against the defendants in the amount of approximately $48 million. (DE 543.) The Court then issued writs of garnishment against numerous LLCs which are either owned by the defendants or in which the defendants have an interest. (See, e.g., DE 586–607, 639–43.) Many of the garnishees and the defendants objected to the writs, but I denied those objections. (See DE 584, 632.) The Brogdons have appealed the denial of those objections to the U.S. Court of Appeals for the Third Circuit.
The SEC then filed motions for turnover, vacatur, and an order forbidding transfer of certain funds (DE 661), as well as a motion for a charging order (DE 666). The Brogdons oppose those motions, which are now fully briefed.
_ [Section II omitted for brevity.]
III. SEC’S MOTION FOR A CHARGING ORDER
PAGE_5 The SEC moves for a charging order against a number of companies which were identified in an “Entity Activity Report” submitted by the Brogdons’ tax preparer. The entities against which the SEC seeks the order are listed at DE 666-2. (See also Ex. A to the Charging Order accompanying this Opinion.)
N.J. Stat. Ann. § 42:2C-43 states:
On application by a judgment creditor of a member, a court may charge the transferable 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 the limited liability company interest. An action by a court pursuant to this section does not deprive any member of the benefit of any exemption laws applicable to his transferable interest.
Thus, under this provision, I am authorized to issue an order charging these entities with the amount they might transfer to a judgment creditor.
The SEC seeks a charging order against 60 entities listed in DE 666-2.2 The Brogdons raise a number of objections: (A) this Court lacks personal jurisdiction over the garnished entities; (B) N.J. Stat. Ann. § 42:2C-43 does not authorize charging orders against limited liability companies which are not organized under New Jersey law; (C) the Brogdons have not received distributions from many of the listed entities; (D) many of the entities have already been sold; (E) some of the entities have filed in bankruptcy and are in the process of working through a Chapter 11 plan; (F) the Brogdons do not have an ownership interest in many of the listed entities.
For the reasons stated below, I reject all of these arguments. The SEC’s motion for a charging order is therefore GRANTED.
A. Whether the Court Has Personal Jurisdiction Over the Garnishee Entities
The Brogdons assert that I lack personal jurisdiction over the entities listed in DE 666-2. They cite Steamfitters Union Loc. 420 Welfare Fund v. Direct Air, LLC, 2020 WL 6131163 (E.D. Pa. Oct. 19, 2020), where the court concluded it could not issue a charging order on a Pennsylvanian’s transferable interests held by New Jersey LLCs which did not have minimum contacts with Pennsylvania. The court reasoned that it needed personal jurisdiction over the entities, and not just the Pennsylvania member who had an interest in the entities, to issue the charging order. Id. at PAGE_3. The Brogdons argue that the entities in DE 666-2 are not formed under New Jersey law, are not physically present in New Jersey, have no contacts with New Jersey, do no business in this State, and do not sell products that enter New Jersey’s stream of commerce.
District courts appear to have split on this issue. Contrary to Steamfitters, other courts have exercised jurisdiction over foreign LLCs for the purpose of a charging order, finding it sufficient that they possessed jurisdiction over the member whose interest was sought to be charged. See, e.g., Oberg v. Lowe, 2021 WL 495043 (D. Kan. Jan. 4, 2021); German American Capital Corporation v. Morehouse, 2017 WL 3411941 (D. Md. Aug. 4, 2017). I tend to agree, but it is not necessary to resolve this legal dispute. As courts have repeatedly stated, “personal jurisdiction represents a restriction on judicial power as a matter of individual liberty,” Synthes, Inc. v. Marotta, 281 F.R.D. 217, 229 (E.D. Pa. 2012) (citing Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702–03 (1982). “Given the individual nature of this right, many courts have found that a defendant lacks standing to raise absence of personal jurisdiction on behalf of proposed co-defendants.” Id. (citing SmithKline Beecham v. Geneva Pharms., 287 F. Supp. 2d 576, 580 n.7 (E.D. Pa. 2002)).
PAGE_6 As in the cited cases, the Brogdons are attempting to assert lack of personal jurisdiction on behalf of a non-objecting third party. None of the entities in DE 666-2 have lodged an objection to garnishment based on this Court’s lacking personal jurisdiction over them. The Brogdons do not hazard any basis for asserting these entities’ rights, but purport to make this argument in their own right. (See Charging Opp. at 1 (“Defendant Christopher Freeman Brogdon and Relief Defendant Connie Brogdon ... file this response”). Since the Brogdons lack standing to raise this defense on behalf of the entities, I reject their argument without reaching the merits of the personal jurisdiction issue.
B. N.J. Stat. Ann. § 42:2C-43
The Brogdons argue that N.J. Stat. Ann. § 42:2C-43 does not authorize the issuance of a charging order against LLCs which were not established in New Jersey. Their argument goes like this: N.J. Stat. Ann. § 42:2C-43 permits an application for a charging order by a judgment creditor of a “member”; a “member” is defined in the statute as a “person that has become a member of a limited liability company”; a “limited liability company” is defined in the statute as “an entity formed under this act,” “except in the phrase ‘foreign limited liability company’ ”; and “[f]oreign limited liability company’ [is defined as] an unincorporated entity formed under the law of a jurisdiction other than this State and denominated by that law as a limited liability company.” N.J. Stat. Ann. § 42:2C-2. The Brogdons reason that the definition of “limited liability company” specifically excludes “foreign limited liability company”; the term “members” therefore cannot include membership in a foreign liability company; and that therefore, N.J. Stat. Ann. § 42:2C-43 does not permit a charging order against a foreign LLC.
I find it unlikely that the statutory definitional provision “except in the phrase ‘foreign limited liability company’ ” was intended to limit New Jersey courts from issuing charging orders where appropriate against foreign limited liability companies. While New Jersey authority is lacking, I consider case law from other states which, like New Jersey, have based their local statutes on the Uniform Limited Liability Company Act.3
For example, in Vision Marketing Resources, Inc. v. McMillin Group, LLC, the District of Kansas considered a Kansas statute which, like N.J. Stat. Ann. § 42:2C-2, limited the definition of “limited liability company” to companies “formed under the laws of the state of Kansas,” and thus “suggest[ed] ... that a court does not have authority to issue a charging order against the interests in LLCs formed under another state’s law.” 2015 WL 4390071 at PAGE_6 (D. Kan. July 15, 2015). The court noted that this apparent gap is a recognized “foreign LLC ‘glitch’ in the Revised Uniform Limited Liability Company Act.” Id.
Vision Marketing, however, ultimately concluded that this apparent “glitch” did not bar the issuance of charging orders against interests in non-Kansas LLCs. Id. It reasoned that “the purpose of a charging order ... is to execute or collect upon a judgment,” and that “[l]imiting the issuance of charging orders under [the Kansas statute] to judgment debtor interests in Kansas-formed LLCs would ... significantly hinder a judgment creditor in Kansas from attempting to collect its judgment from a debtor with interests in foreign LLCs. The judgment creditor would be forced to investigate where each LLC was formed and seek a charging order against the debtor’s interest in each of those states.” Id. The court reasoned that “the Kansas legislature likely did not intend such a result, which could significantly hinder the ability of a judgment creditor to collect its judgments.” Id. Other courts have tended to agree with the Vision Marketing approach, see Morehouse, 2017 WL 3411941 at PAGE_1 (noting the “absence of any language specifically barring the entry of charging orders against foreign limited liability companies”). Still, as the Brogdons note, there is judicial authority for their interpretation. See McElroy v. Sumrall, 2021 WL 1741850 at PAGE_1–2 (S.D. Ala. May 3, 2021) (“the defined term “limited liability company” excludes foreign LLC[ ]s and thus limits the range of entities subject to charging orders to domestic LLCs”).
PAGE_7 It is possible to design a contraption whereby one presses the definitional button at one end, and a bar on out-of-state charging orders emerges from the other. Like the Vision Marketing court, I am persuaded that the New Jersey legislature, in enacting the definitional section, did not intend that result. Such an interpretation would hobble litigants’ ability to collect on judgments by requiring that they travel all over the country to obtain charging orders in every state where there is an LLC in which a judgment debtor (who is, by definition, subject to the court’s power) might have a transferable interest. Such a result is not so much as hinted at in New Jersey’s charging order statute. It is inconsistent with the purpose of a charging order, which is to collect upon a judgment, and inconsistent with the New Jersey legislature’s direction in N.J. Stat. Ann. § 42:2C-7 that the charging order statute be read in conjunction with “principles of law and equity.” As the SEC notes, equity does not favor an interpretation under which the Brogdons may shelter assets within a maze of foreign LLCs, frustrating the collection of the SEC’s judgment.
Even if I conceded the Brogdons’ technical point regarding the interpretation of New Jersey’s charging order statute, I would not necessarily be bound by it. Substantial, not perfect, compliance with state law is sufficient under Federal Rule 69. Arnold v. Blast Intermediate Unit 17, 843 F.2d 122, 125 (3d Cir. 1988). The public interest in the SEC’s fulfillment of its antifraud mission weighs against confining the district court’s broad authority in a state-law “procedural straitjacket.” United States v. Kincaid, 811 F. App’x 362, 365 (7th Cir. 2020) (quoting Resolution Tr. Corp. v. Ruggiero, 994 F.2d 1221, 1226–27 (7th Cir. 1993)).
I therefore authorize the issuance of these charging orders against non-New Jersey LLCs, pursuant to the authority of N.J. Stat. Ann. § 42:2C-43, as well as Fed. R. Civ. P. 69.
C. Whether the Brogdons are Receiving Income from the Entities
The Brogdons argue that they have not received cash distributions from many of the entities and that where they did receive cash distrbutions they paid those distributions to the monitorship plan. That is not, however, a reason to deny issuance of the charging order. As the SEC notes, whether the Brogdons are currently receiving distributions, they might have a transferable interest in the entities which could result in distributions in the future.
D. Whether the Entities’ Assets Have Been Sold
The Brogdons assert that a number of entities have already sold their assets and that the proceeds of the sale went to pay the monitorship plan. They claim the entities will not, going forward, operate as going concerns in which the Brogdons have an interest. If that is the case, then the entities will have no transferable interest to which the order would apply; if it is not, then a charging order is appropriate and potentially efficacious. I thus do not regard this objection as a reason to refrain from issuance of an order.
E. A Charging Order Against Entities Which Are Currently in or Have Exited From Chapter 11 Bankruptcy
The Brogdons assert that a number of the entities in DE 666-2 have exited from bankruptcy through an approved Chapter 11 plan which bars the Brogdons from recovering distributions. Thus the SEC, they argue, would be similarly barred. The entities to which they refer are Ban NH, LLC, Oak Lake, LLC, Kenmetal, LLC, and Senior NH, LLC. The Brogdons assert that the proceeds of those four entities are to be deposited in a distribution fund to make payments provided for in their Chapter 11 plans and so they cannot be subject to a charging order.
As the SEC points out, the Brogdons do not make clear whether they have a continuing interest in the entities which have passed through bankruptcy. A charging order will not upend the entities’ Chapter 11 plans—all it will do is direct that any distributions for the benefit of the Brogdons, whatever they are, will instead be paid to the SEC. I thus reject this objection.
F. Whether the Brogdons Have Ownership Interests in Three of the Entities
PAGE_8 The Brogdons disclaim any ownership of three of the 60 entities: River Willows NH, LLC (which the Brogdons claim they have no interest in and were not aware of); Oklahoma Investors, LLC (which they claim they have no ownership interest in); and “East Lake Space” (which they claim is not an entity at all, but rather a leased space behind a restaurant).
The SEC, however, explains that all three alleged entities were identified as entities in which the Brogdons have an ownership interest in the Brogdons’ tax returns. (Charging Order Reply at 7–8.) I will thus grant the charging order. As the SEC notes, they are in the process of obtaining the Brogdons’ underlying 2020 tax information, which may shed light on the issue of the Brogdons’ continued ownership of these entities and whether East Lake Space exists as a separate entity. Should those documents or any other information indicate that the Brogdons are correct, the charging order can be vacated on a proper application.
I therefore GRANT the SEC’s motions for turnover, forbidding transfer of funds, vacatur, and for a charging order.
1. The parties submitted a consent order correcting Marsh Pointe’s submission indicating that it owed a liability to the Brogdons—in fact, it does not owe the Brogdons any money.
2. The SEC has withdrawn its request for a charging order against one entity on the list, Bama Oaks Retirement LLC. (DE 673.)
3. See All Saints University of Medicine Aruba v. Chilana, 2012 WL 6652510 at PAGE_11 n.9 (App. Div. Dec. 24, 2012) (recognizing that the New Jersey statute is adopted from the Uniform Act).