JPMorgan Chase Bank, N.A. v. Winget, 2022 WL 2389287 (6th Cir., July 1, 2022).
JPMorgan Chase Bank, N.A. v. Winget, 2022 WL 2389287 (6th Cir., July 1, 2022).
JPMORGAN CHASE BANK, N.A., Plaintiff,
ALTER DOMUS LLC, Plaintiff-Appellee,
LARRY J. WINGET; LARRY J. WINGET LIVING TRUST, Defendants-Appellants.
Case No. 21-1568
July 01, 2022
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN
Before: SUTTON, Chief Judge; BATCHELDER and THAPAR, Circuit Judges.
THAPAR, Circuit Judge.
A tale as old as time? Not quite. But for the past fifteen years JPMorgan Chase Bank has been trying to collect a nearly half-a-billion-dollar debt that Larry Winget and the Larry J. Winget Living Trust guaranteed. Unsurprisingly, they don't want to pay. And as a result, we've already handled eight appeals arising out of this case and related litigation.
Today, we address whether Winget can revoke the Trust, making the trust assets unreachable to Chase. He cannot.
This case arises out of a $450 million loan that Larry Winget's holding company, Venture, obtained to buy a European company. But that company eventually became insolvent, triggering default and acceleration clauses in the loan agreement. JPMorgan Chase Bank—the administrative agent for the lenders—required new collateral to prevent acceleration of the debt.1 So Winget agreed to guarantee the loan both in his individual capacity and as a representative of the Larry J. Winget Living Trust; Winget is the Trust's settlor (the person who creates the trust), trustee, and sole beneficiary. The guaranty agreement limited Winget's personal liability to $50 million but did not similarly limit the Trust's liability.
fn1. Alter Domus, LLC is now the administrative agent and thus the appellee in this case. For ease of reference, we refer only to Chase.
In 2003, Venture filed for bankruptcy. This triggered a default under the parties' guaranty agreement and the debt became due. Chase sued both Winget and the Trust to recover. Winget paid $50 million and no longer owes the bank any money in his personal capacity. But the Trust is liable for the rest of the debt, which now amounts to more than $750 million.
Winget, as trustee of the Trust, has resisted paying the Trust's debt at every step. In 2014, nearly six years after Chase sued to recover the debt, Winget revoked the Trust and removed all trust assets. According to Winget, the trust instrument (the document which created the Trust) gave him "the right at any time ... to revoke or amend th[e] Trust" by his act alone. R. 696-1, Pg. ID 25418. Winget kept the revocation secret for over a year. During this time, the district court entered an amended final judgment establishing that the Trust owed Chase nearly half-a-billion dollars under the guaranty agreement. And the parties were actively litigating whether Chase could use the trust assets—which, unbeknownst to anyone but Winget, no longer existed—to satisfy that debt.
Winget came clean when he sought a declaratory judgment that would establish that, given the revocation, Chase has no further recourse against him or the assets that were once held in the Trust. Chase counter-claimed, arguing that the revocation was a constructively fraudulent transfer under the Michigan Uniform Fraudulent Transfer Act (MUFTA). The district court agreed with Chase and granted its motion for judgment on the pleadings. Winget didn't appeal this ruling. Rather, he rescinded his revocation, retitling to the Trust all property that it held at the time of the revocation.
But Winget had one more card to play. Before he rescinded the revocation, various LLCs that had been held in the Trust (until Winget revoked it) distributed hundreds of millions of dollars in cash and promissory notes to Winget. When Chase learned about these distributions, it sued Winget for unjust enrichment. Chase moved for summary judgment and sought a constructive trust over the distributions. The district court granted the motion and ordered Winget to place the distributions (both cash and promissory notes) in a constructive trust. In the same order, the district court dismissed Winget's action for declaratory judgment.
The district court entered a final judgment on the fraudulent-transfer claim, the unjust-enrichment claim, and Winget's declaratory-judgment action. Winget appealed all three rulings.2 Given the procedural history and the issues presented in the appeal, we directed the parties to submit supplemental briefing on several questions.
fn2. After Winget reinstated the Trust, the district court enjoined Winget from further interfering with the trust property. We upheld the injunction, and it remains in place today. See JPMorgan Chase Bank, N.A. v. Winget, 801 F. App'x 962 (6th Cir. 2020). According to Chase, Winget's claim for declaratory relief is moot given this injunction. But Winget can (and did) appeal the fraudulent-transfer decision. And since Chase prevails, Winget's claim for declaratory relief necessarily must fail. After all, a declaration that Chase has no recourse against the trust assets is the inverse of whether Chase is entitled to the assets based on a fraudulent transfer. So we need not address mootness nor the declaratory-judgment action.
We start with the fraudulent-transfer claim and review de novo the district court's order granting Chase judgment on the pleadings.
A prerequisite to any fraudulent-transfer claim is that a transfer in fact occurred. See Mich. Comp. Laws § 566.35(1). MUFTA defines transfer as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset." Mich. Comp. Laws § 566.31(q). Thus, when a creditor has access to the assets, and a debtor takes action to fraudulently put those assets beyond the creditor's reach, a creditor has a basis for relief. Glazer v. Beer, 72 N.W.2d 141, 143 (Mich. 1955).3
fn3. Glazer involved the Michigan Uniform Fraudulent Conveyance Act (MUFCA), which was replaced by MUFTA in 1998. But courts interpret the relevant provisions the same under both statutes. See In re Harlin, 321 B.R. 836, 839–40 (E.D. Mich. 2005); see also Jeffrey L. LaBine, Michigan's Adoption of the Uniform Fraudulent Transfer Act: An Examination of the Changes Effected to the State of Fraudulent Conveyance Law, 45 Wayne L. Rev. 1479, 1481, 1488, 1491–92, 1500 (1999).
The revocation of the Trust constitutes such a transfer. Before the revocation, the Trust had assets that creditors like Chase could take to fulfill the Trust's debt. See JPMorgan Chase Bank, N.A. v. Winget, 942 F.3d 748, 750–51 (6th Cir. 2019). But after the revocation, those assets were placed beyond Chase's reach. In other words, the revocation caused the Trust to effectively "part[ ] with" its assets. Mich. Comp. Laws § 566.31(q). To be sure, the revocation could be considered involuntary as it was done by Winget, not the Trust. But MUFTA explicitly sweeps involuntary transfers within its ambit. Id. Thus, the revocation is a transfer under MUFTA.
Winget thinks otherwise. The thrust of his argument is that a debtor can fraudulently transfer only "that which the debtor actually owns." In re CyberCo Holdings, Inc., 382 B.R. 118, 142 (Bankr. W.D. Mich. 2008). And as we explained before, trusts don't usually "own" property. Winget, 942 F.3d at 750. Rather, they hold property for the benefit of others. See, e.g., Wellpoint, Inc. v. Comm'r, 599 F.3d 641, 648 (7th Cir. 2010); Restatement (Third) of Trusts § 2 cmt. d (Am. L. Inst. 2003). Because he was the Trust's settlor and maintained the power to revoke, Winget suggests that he—rather than the Trust—owned the property held by it. So, according to Winget, revoking the Trust didn't transfer anything; he simply maintained property he already owned.
This is not the first time Winget has made an "ownership" argument. In a prior appeal, he asserted that because he (a non-debtor) "owns" the trust property, Chase can't take it to satisfy the Trust's debt. See Winget, 942 F.3d at 750. But we rejected that argument, explaining that "if ownership mattered, creditors of a trust ... could almost never recover from the trust property." Id. And that, we said, conflicts with not only Michigan law but also hornbook trust law. Id.4
fn4. Further, under Winget's theory of ownership, neither a revocable trust nor an irrevocable trust would ever own property. And no one disputes that when an irrevocable trust breaks a contract, a creditor can go after the assets held by the irrevocable trust.
At bottom, Winget takes issue with our prior ruling. See id. at 750–52. For if there was no initial transfer of property into the Trust (and thus no transfer when it was revoked), presumably there are no trust assets that Chase can reach. In both cases, the assets are (and always were) Winget's as settlor. But just as before, ownership is irrelevant. MUFTA's understanding of "transfer" does not turn on who owns the assets. Instead, it turns on how the revocation affected Chase's access to the assets. See Glazer, 72 N.W.2d at 143; cf. Isaiah v. JPMorgan Chase Bank, 960 F.3d 1296, 1302 (11th Cir. 2020) (interpreting identical language in the Florida Uniform Fraudulent Transfer Act to mean that a transfer occurs "[a]s long as the debtor relinquishes some interest in or control over the asset ... even if he remains the technical owner of the asset"). The revocation placed the trust assets beyond Chase's reach. Thus, the revocation was a transfer.
Winget still pushes back. He suggests that this case resembles Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017). There, we held that a bankruptcy trustee could not hold a bank liable for checking deposits that the debtor made to the bank under a fraudulent-transfer theory. Id. at 725–28. We reasoned that the bank acted as a mere conduit and did not maintain sufficient "dominion and control" over the deposits to be a "transferee" under the bankruptcy code. Id. at 725–26.5 Winget argues that the Trust similarly lacked "dominion and control" over the trust assets here because he could demand the property back at any time, much like the debtor in Meoli could demand its money from its checking account. According to Winget, without "dominion and control," the Trust was not a transferee when he first placed the property into the Trust. And so the Trust could not be a transferor when Winget later revoked the Trust. Winget again emphasizes that a "debtor can only transfer ... that which the debtor actually owns." Reply Br. 15 (quoting In re CyberCo Holdings, 382 B.R. at 142).
fn5. Although there are some differences between fraudulent transfer under the bankruptcy code and MUFTA, those differences are not relevant here. Compare 11 U.S.C. § 548(a), with Mich. Comp. Laws § 566.35; see also 4 Norton Bankr. L. & Prac. 3d § 67:1.
Winget's comparison is unconvincing. In Meoli, we emphasized that the bank's "obligation to maintain liquidity" was "sufficiently important to defeat any dominion and control" that the bank might otherwise have over the funds. 848 F.3d at 726 (internal quotation marks omitted). And here, although Winget could demand the trust property back at any time, the Trust did not have to remain liquid. Indeed, so long as the property remained in the Trust, the trustee explicitly had the power to enter contracts and make decisions that could affect the value of the assets in a way that a depository bank can't.
Having established that a transfer occurred, we now consider whether the transfer was fraudulent. Chase does not contend that Winget intended to defraud it by revoking the Trust. Rather, it argues the revocation was constructively fraudulent. See Mich. Comp. Laws § 566.35(1). A transfer of assets is constructively fraudulent if: (1) the creditor's claim "arose before the transfer," (2) the debtor was insolvent at the time of transfer or "became insolvent as a result of the transfer," and (3) the debtor did not receive "a reasonably equivalent value in exchange for the transfer." Id.; Dillard v. Schlussel, 865 N.W.2d 648, 656 (Mich. Ct. App. 2014). Here, all three elements are met.
First, Chase's claim arose well before Winget revoked the Trust. MUFTA defines a "claim" as the "right to payment, whether or not the right is reduced to judgment." Mich. Comp. Laws § 566.31(c). Chase's right to payment arose when Venture began bankruptcy proceedings in 2003. That's because the bankruptcy constituted a default under the company's loan agreement with Chase. And under default, Chase could enforce the guaranty against Winget and the Trust. So Chase's claim arose more than ten years before Winget's 2014 revocation.
Second, the Trust was insolvent after the revocation. Under the Act, a debtor is insolvent if "the sum of the debtor's debts is greater than the sum of the debtor's assets." Mich. Comp. Laws § 566.32. Here, the revocation documents state that Winget revoked the Trust in its entirety. Thus, its assets were zero. Because it owed money to Chase under the guaranty agreement, the Trust was, by definition, insolvent.
Third, the Trust did not receive "reasonably equivalent value in exchange" for the revocation. Indeed, Winget admits that the Trust received nothing. That's the nature of a revocable trust; the settlor can usually revoke at any time, for any reason. The reasonably-equivalent-value requirement thus feels out of place in the revocable-trust context. After all, a trust ceases to exist after it is revoked so it can never receive "reasonably equivalent value." But that doesn't mean a revocation can't be fraudulent. The Trust has a duty to maintain value given its obligation to repay Chase and that in turn determines whether the revocation was fraudulent. Cf. McCaslin v. Schouten, 292 N.W. 696, 699 (Mich. 1940) (explaining that what constitutes reasonably equivalent value is "determined from the standpoint of creditors," not debtors). From Chase's perspective, the revocation depleted the Trust, and in exchange, the Trust received nothing from which it could pay the outstanding debt.
Winget complains that this interferes with his contractual right to revoke the Trust at any time. But his right is not unlimited. As we explained in our prior opinion, trusts—both revocable and irrevocable—can enter binding contracts. Winget, 942 F.3d at 750. A necessary consequence is that a trust's contractual obligation may affect the rights of third parties, like beneficiaries and settlors, even if they are not themselves parties to the contract. Here, the Trust guaranteed Venture's loan. So when Venture defaulted, the Trust had to pay Chase and could do so with the trust assets. See id. at 750–51. That's when Chase's claim to the assets arose. At that time, Winget no longer had an unfettered right to the trust assets—at least not until Chase was repaid. And Winget could no longer revoke the Trust since doing so after Chase's claim arose would (and did) deplete the trust assets, preventing the Trust from fulfilling its obligation to Chase. In this way, Winget's right to revoke was limited by the Trust's obligation to Chase—an obligation Winget himself assumed as trustee.
Winget disagrees. He argues that the Trust's obligation to Chase didn't impact his revocation right since he and the Trust are separate legal persons with separate obligations to Chase. Because he fulfilled his individual obligation, Winget suggests that Chase has no recourse against him for the Trust's debt. Winget is correct: We previously held that he is a separate legal person from the Trust. Indeed, throughout the contract setting up the loan, Winget and the Trust are listed as separate entities. But that doesn't give Winget the right to revoke the Trust after Chase's claim arose. Doing so would allow Winget to interfere with Chase's ability to recover from the Trust under the guaranty agreement. And that arguably constitutes a separate tort: intentional interference with contract. Cf. Restatement (Second) of Torts § 766 cmt. b (Am. L. Inst. 1979) (explaining that "there is a general duty not to interfere intentionally with another's reasonable business expectancies ... with third persons"). It doesn't matter that Winget was not a party to the Trust's contract with Chase; those who tortiously interfere rarely are. See id.; see also Tata Consultancy Servs. v. Sys. Int'l, Inc., 31 F.3d 416, 423–24 (6th Cir. 1994) (outlining the development of tortious interference under Michigan law). So separate legal personhood doesn't give Winget license to revoke the Trust to Chase's detriment.
Winget resists this conclusion. Because his right to revoke predated the guaranty agreement, Winget says, Chase had notice of his revocation right and chose not to limit it when negotiating the guaranty. He asserts that we must enforce the parties' agreement as written and find his revocation not fraudulent. Anything else, according to Winget, would rewrite the parties' agreement.
But this goes too far. The guaranty does not say one way or the other how Winget's revocation right interacts with the Trust's obligation. That is a fundamental difference between this case and the case Winget cites for support. See Cyber Solutions Int'l, LLC v. Pro Mktg. Sales, Inc., 634 F. App'x 557 (6th Cir. 2016). There, the agreement explicitly noted that the lender was "assuming the risk" that its rights "might be disrupted" by an earlier lender's security agreement. Id. at 565. So contrary to Winget's assertion, restricting his revocation right here does not rewrite the guaranty. It simply applies a default rule in the face of contractual silence.
Winget still pushes back. He likens this case to a priority dispute between creditors and argues that he has the superior claim to the trust assets. In making this argument, Winget emphasizes that Chase was a subsequent, unsecured creditor. But this makes no difference to whether a fraudulent transfer occurred. MUFTA was enacted in large part to protect unsecured creditors like Chase. See Dillard, 865 N.W.2d at 662. And here, it appears Winget revoked the Trust just so Chase (an unsecured creditor) could not reach the trust assets. That's exactly the type of conduct MUFTA aims to prevent.
Perhaps in a last-ditch effort, Winget argues that "fact questions" preclude us from ruling for Chase. He disputes whether he as settlor intended to allow the Trust's guaranty to bind his property or restrict his revocation rights. But that's not relevant. Winget's intent is not part of the analysis for a constructive-fraudulent-transfer claim. See Mich. Comp. Laws § 566.35. And nothing in the terms of the guaranty agreement suggests that was the case. In fact, the agreement implicitly recognizes that Winget and the Trust are separate legal entities and that both Winget and the Trust are bound by the agreement. That should have been enough to put Winget on notice that Chase could recover from the Trust upon default.
Because all three elements of fraudulent transfer are met, Chase is entitled to judgment on the pleadings.
Chase also contends that Winget was unjustly enriched by the LLC distributions (both the promissory notes and cash) that he received during the revocation period (after Winget revoked the Trust and before he rescinded the revocation). The district court agreed and granted Chase summary judgment on the unjust-enrichment claim. As a remedy, it imposed a constructive trust over the promissory notes and cash distributions. We review the grant and the remedy in turn.
The doctrine of unjust enrichment is rooted in the idea that no one should be allowed to profit inequitably at another's expense. Wright v. Genesee County, 934 N.W.2d 805, 809 (Mich. 2019). To maintain an unjust-enrichment claim under Michigan law, a plaintiff must show (1) the defendant received a benefit from the plaintiff that (2) resulted in an inequity to the plaintiff. AFT Mich. v. Michigan, 846 N.W.2d 583, 590 (Mich. Ct. App. 2014). The remedy is restitution. See Wright, 934 N.W.2d at 809–10. That's because the goal is not to compensate for an injury (like it would be with a tort or breach-of-contract claim), but to return to the plaintiff the benefit that "unjustly enriched" the defendant.
To begin, we must consider the nature of the LLC distributions and who is entitled to them. Before the revocation, the Trust held membership interests in the LLCs that later distributed cash and promissory notes to Winget during the revocation period. Those who hold membership interests in an LLC are generally entitled to its distributions. But under the amended final judgment Chase had a right to execute on the trust assets—including the LLCs' membership interests—to fulfill the Trust's debt. See Winget, 942 F.3d at 750–52. Chase would have typically moved for charging orders entitling it to all distributions arising from the Trust's membership interests. See Mich. Comp. Laws § 450.4507(1)–(2). But before Chase could do so, Winget revoked the Trust and retitled the trust property (including the membership interests) in his own name. Because Winget now held the LLC-membership interests, he received the distributions that would have otherwise gone to Chase under the charging orders.
Retracing this chain of events makes clear that Chase satisfied the elements of unjust enrichment: (1) Winget received a benefit (distributions from the membership interests) that (2) resulted in inequity to Chase. The inequity? Chase could no longer receive the distributions that it would have received with charging orders but for the fraudulent revocation. In other words, Winget "profited inequitably" at Chase's expense. Wright, 934 N.W.2d at 809 (cleaned up).
Winget rejects this conclusion on two main grounds. He denies that he was unjustly enriched by the promissory notes and disputes the amount by which the cash distributions unjustly enriched him.
Start with the promissory notes. One of the LLCs distributed the promissory notes to Winget after he revoked the Trust. Winget suggests he was not unjustly enriched by them because they reflect a debt the LLC already owed Winget. Rather than take about $100 million in cash distributions, Winget says he loaned that money back to the LLC to fund operations. And Winget argues that the promissory notes he allegedly received in exchange for these loans merely reflect this debt.
But the timing is key. Chase's right to the LLC's distributions arose once it could obtain a charging order (i.e., when the amended final judgment issued). See Mich. Comp. Laws § 450.4507(1)–(2). So if the promissory notes reflect a debt that predates the amended final judgment, they'd be outside the scope of a charging order and Chase isn't entitled to them. But if they're a debt incurred after the judgment, Chase is entitled to them.
Winget argues the former. And to bolster his argument, he points to the deposition testimony of several individuals, including Timothy Bradley, the LLC's manager. The testimony supports Winget's allegation that, for several years before the amended final judgment, rather than taking cash distributions as an LLC member, Winget loaned that money back to the LLC to fund operating costs and the promissory notes represent those loans.
But there's a problem for Winget. The promissory notes include integration clauses that explain "there are no conditions or understandings which are not expressed in this Note." R. 926-26, Pg. ID 30460; R. 926-27, Pg. ID 30465. That means we can't look beyond the four corners of the notes to determine whether they represent a debt from before the amended final judgment. See JPMorgan Chase Bank, N.A. v. Winget, 602 F. App'x 246, 256 (6th Cir. 2015) ("[W]here the parties include an explicit integration clause within a contract, that clause is conclusive that the parties intended the contract to be the final and complete expression of their agreement."). Based on the language of the notes, we know only that the LLC "promise[d] to pay" Winget $150,000,000. And that the effective date of these promises was June 29, 2017—nearly two years after the amended final judgment. There is no mention of an earlier agreement. So we can't assume the notes reflect an earlier debt to Winget. And because Chase was entitled to all distributions when the promissory notes were penned, Winget was unjustly enriched by them.
In his supplemental brief, Winget argues that the Trust was not a party to the loans between the LLC and Winget, nor was the Trust a party to the promissory notes that represent those loans. Winget suggests this means the Trust would have had no right to the promissory notes and thus Chase—as the Trust's judgment creditor—has no right to them either.
But these facts don't add up. Winget claims that he personally loaned the money to the LLC rather than receive cash distributions as the LLC's member. Yet until he revoked the Trust, Winget was not a member of the LLC—the Trust was. Indeed, the Trust was the LLC's only member. And distributions are issued to members, not third parties (which Winget was at the time he alleges the loans were made). That means the LLC would have made distributions to the Trust, not Winget. And it would have been the Trust, not Winget, who loaned back the cash to cover the LLC's operating costs.
There's a simple explanation for why the Trust wasn't a party to the promissory notes: Winget revoked the Trust before the notes were memorialized. Thus, the Trust didn't exist at the time the promissory notes were distributed. But since the revocation was fraudulent, we must consider what would have happened but for the revocation. And but for the revocation, the Trust would have been the LLC's member and the party to whom the LLC issued the promissory notes. So Chase would have been entitled to them under the charging orders.
As for the cash distributions, Winget argues he should not be liable for the portion that he used to pay the federal taxes on the LLCs' income (about $79 million). According to Winget, he was not unjustly enriched by this amount since it was always "earmarked" for taxes. If Chase can recover this portion, Winget suggests, it will receive a greater benefit than he retained. And that violates the purpose of restitution. See Wright, 934 N.W.2d at 809–10.
Whether Winget was unjustly enriched by the $79 million paid in taxes depends on whether he is personally liable for the taxes on the LLCs' income. And that in turn depends on who is liable for the Trust's taxes.
First, the LLCs' income. The LLCs elected to be "pass-through" entities for federal income-tax purposes. See 26 U.S.C. § 1366. That means the LLCs aren't taxed directly like a C corporation would be. Rather, the LLCs' income, losses, deductions, and credits "pass through" to its members. See S Corporations, I.R.S. (Jan. 18, 2022), https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations. The members then report their allocable share of the LLC's income on their personal tax returns and are taxed at their individual income-tax rates. 26 U.S.C. § 1366. Here, the Trust was the member of the relevant LLCs until Winget revoked the Trust. So the Trust was personally responsible for the taxes on the LLCs' income; the LLCs' income would thus be taxed based on the Trust's tax classification.
LLC members—like the Trust—can't pay for income tax associated with an LLC directly from the LLC's assets. Cf. Florence Cement Co. v. Vettraino, 807 N.W.2d 917, 922–23 (Mich. Ct. App. 2011) (explaining that LLC members cannot "treat[ ] their personal liabilities" as the LLC's liabilities). Rather, the Trust would typically seek a distribution to cover the taxes. But a member with a charging order on its membership interest—like the Trust—can't seek a distribution. That's because, under Michigan's charging-order statute, judgment creditors (here, Chase) are entitled to all distributions regardless of the distribution's purpose. See Mich. Comp. Laws § 450.4507(1)–(2). So any distribution here would have gone directly to Chase rather than the Trust.
But even under a charging order, the Trust would remain a member of the LLCs and thus would be liable for the income tax arising from its membership interests. See id. § 450.4507(4) ("[T]he member that is the subject of the charging order remains a member of the limited liability company and retains all rights and powers of membership except the right to receive distributions to the extent charged."); cf. United States v. Basye, 410 U.S. 441, 453–54 (1973) ("[I]t is axiomatic that each [member] must pay taxes on his distributive share of the partnership's income without regard to whether that amount is actually distributed to him."); see also 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:24 (June 2022 Update); Jay D. Adkisson, Carter G. Bishop & Thomas E. Rutledge, Recent Developments in Charging Orders, Bus. L. Today, Feb. 2013, at 1–2. To pay the taxes on the LLCs' income, then, the Trust would have had to come up with the money itself.6
fn6. If at some point the Trust becomes insolvent, the IRS would have priority to any distribution issued by the LLCs rather than Chase. See 14A Mertens Law of Fed. Income Tax'n § 54:147 (May 2022 Update).
Who is liable for the Trust's taxes? The district court didn't answer that question. Rather, it assumed without explanation that Winget would be personally liable because the LLCs elected to be taxed as pass-through entities. But that skips a step. The Trust—not Winget—was the member of the LLCs before the Trust was revoked. So who is liable for the taxes on the LLCs' income depends on who is liable for the Trust's taxes. And whether Winget was unjustly enriched by the $79 million turns on this question. If Winget is personally liable, he would have had to pay for the taxes himself, leaving the trust assets to repay Chase. But if the Trust is liable, it would have paid for the taxes out of its own assets and that in turn would have diminished the assets available to Chase. Winget was unjustly enriched only if the former is true.
It isn't clear that Winget was personally liable for the Trust's income tax. For under the Internal Revenue Code, the settlor of a revocable trust typically remains liable for the income tax of the trust only so long as his power to revoke is "exercisable." 26 U.S.C. § 676(a); see also Bogert's The Law of Trusts and Trustees § 264.5 (June 2021 Update). Winget was the settlor of the Trust but his power to revoke was likely not "exercisable." That's because his ability to revoke was limited by the Trust's obligation to repay Chase. Indeed, when Winget exercised his right to revoke, it resulted in a fraudulent transfer. So the typical rules for revocable trusts may not apply.
Chase doesn't argue that Winget's revocation right was exercisable. Nor does it point to another provision of the Internal Revenue Code that should apply instead. And that's a problem. After all, it's Chase's burden to show that Winget was unjustly enriched by the full amount of the cash distributions, including the $79 million he paid in taxes. See AFT Mich., 846 N.W.2d at 590. To meet that burden, Chase needed to prove that Winget is personally liable for the Trust's taxes and thus couldn't pay for them out of the trust assets. It didn't meet that burden.
Thus, the district court should have excluded the $79 million from Chase's relief. It didn't. So we reverse that aspect of the district court's decision. That said, Winget was unjustly enriched by the remaining cash distributions. Indeed, Chase has shown it is entitled to all but the $79 million that Winget paid in taxes.
Finally, we turn to the remedy: the constructive trust imposed on the promissory notes and cash distributions. Winget challenges that decision as an abuse of discretion. See Anchor v. O'Toole, 94 F.3d 1014, 1025 (6th Cir. 1996).
A constructive trust is "not a real trust" like Winget's Trust. See Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. b (Am. L. Inst. 2011). Rather, it is an equitable remedy that comes into existence after a court determines that the plaintiff is entitled to specific property in the defendant's possession. In re Omegas Grp., Inc., 16 F.3d 1443, 1451 (6th Cir. 1994); see also In re Filibeck Estate, 853 N.W.2d 448, 449–50 (Mich. Ct. App. 2014). The "trust" language is merely a metaphor: The defendant (here, Winget) holds the designated property "in constructive trust" for the plaintiff (here, Chase). See Restatement (Third) of Restitution & Unjust Enrichment § 55 cmt. b (Am. L. Inst. 2011). Translation: The plaintiff has a superior claim to property in the defendant's possession, so the defendant is simply "holding" the property for the plaintiff until it is returned. The practical result is a "mandatory injunction" directing the defendant to surrender the property to the plaintiff. Id.
Under Michigan law, a constructive trust may be imposed when "necessary to do equity or to prevent unjust enrichment." Kammer Asphalt Paving Co. v. E. China Twp. Sch., 504 N.W.2d 635, 641 (Mich. 1993) (citation omitted). Constructive trusts are often imposed when the property at issue was "obtained through fraud, misrepresentation, concealment, undue influence," or another circumstance that makes it "unconscionable" for the defendant to "retain and enjoy the property." Id. (citation omitted).
And that's exactly what happened here. Winget obtained the promissory notes and cash distributions only because of his fraudulent revocation—precisely the behavior that justifies a constructive trust. See id. Further, when he rescinded the revocation, Winget told the court that he returned the trust property to "exactly the condition it was [in] immediately before the Trust was revoked." R. 777, Pg. ID 27032. Yet he kept the cash distributions and promissory notes for himself. This behavior is arguably concealment. In any event, Winget's actions directly contributed to the reason the district court imposed the constructive trust. See Kammer Asphalt Paving, 504 N.W.2d at 641. Thus, the district court did not abuse its discretion.
Still, Winget attacks the district court's decision on three fronts. First, he argues that a constructive trust is inappropriate when money damages are calculable and the target of the constructive trust is solvent. And here, the Trust is solvent so, Winget says, a constructive trust wasn't necessary.
But that's not the law. In Michigan, a court may impose a constructive trust whenever "necessary to do equity or to prevent unjust enrichment." Id. And Michigan courts have upheld constructive trusts against solvent parties. See, e.g., Sloan v. Silberstein, 141 N.W.2d 332, 338–40 (Mich. Ct. App. 1966). True, Chase could have sought a money judgment against the Trust. So a constructive trust may be a belt-and-suspenders remedy; that is, it is just a way to ensure the Trust will pay up. See Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. c (Am. L. Inst. 2011). But that doesn't mean the district court abused its direction by imposing one. Cf. Winget, 942 F.3d at 751–52 (describing the "extremely broad" authority that Michigan gives courts to execute judgments (citation omitted)). Indeed, there was reason to believe that Winget—after secretly revoking the Trust—might try to pull another fast one on Chase. A constructive trust ensures he can't.
Next, Winget objects to the fact that the constructive trust directs the assets directly to Chase rather than the LLCs that gave him the distributions (both cash and promissory notes). As he sees it, the LLCs can't be fully restored (the goal of restitution) if the assets go to Chase. But he's got the analysis flip-flopped: The goal of restitution is to extract the unjust benefit from the wrongdoer (Winget) and to return that benefit to the wronged party. See Wright, 934 N.W.2d at 810. Here, Chase is the wronged party, not the LLCs. Indeed, had Winget not revoked the Trust, Chase would have been entitled to the distributions—not the LLCs. So the district court did not abuse its direction by imposing a constructive trust on the promissory notes and cash distributions (save for the $79 million paid to the IRS).
And last, Winget argues that imposing a constructive trust on the $79 million he paid to the IRS is "impossible" because those funds are no longer "identifiable." Appellants Br. 51. We need not address this argument. As mentioned above, Chase has not met its burden to prove Winget was unjustly enriched by the $79 million. That means Chase is not entitled to the $79 million currently held in constructive trust and the district court abused its discretion by imposing a constructive trust on this money.
Winget makes additional arguments about the interaction between the fraudulent-transfer claim and the unjust-enrichment claim. He objects to the fact that the two claims are based on the same wrongful conduct: the revocation. And he suggests the unjust-enrichment claim (including the constructive-trust remedy) can't stand because courts may not "grant equitable relief without first determining that the plaintiff has no adequate remedy at law." Golden v. Kelsey-Hayes Co., 73 F.3d 648, 662 (6th Cir. 1996). Winget argues that MUFTA—not equity—provides the remedy. But that misstates Michigan law. MUFTA doesn't supplant common-law remedies like unjust enrichment, it supplements them. Mich. Comp. Laws § 566.42. That means Chase can seek relief under both theories. See Morris Pumps v. Centerline Piping, Inc., 729 N.W.2d 898, 907 (Mich. Ct. App. 2006). And as for the remedy, Michigan courts have held that a constructive trust may be imposed "even where a legal remedy exists." Reed & Noyce, Inc. v. Mun. Contractors, Inc., 308 N.W.2d 445, 448 (Mich. Ct. App. 1981). So in this regard, Winget's gripe with the district court's ruling rings hollow.
According to the dissent, the above analysis stems from flawed premises. See Dissenting Op. 33. Rather than consider the issues presented in this appeal, it would wind back the clock seven years and reverse our prior decision that held the Trust had a binding contract with Chase. Id. at 12. The dissent makes several points as to why that decision could be wrong. And if we were working on a blank slate, we would take seriously each of these arguments as well as the competing arguments on the other side. But we aren't working on a blank slate. Our slate is chock full of prior decisions—each building from and relying on our unchallenged prior holding that the Trust and Chase have a binding contract.
Before we disturb seven years of litigation based on a single bad apple, we have an obligation to weigh prudential concerns and consider the consequences. See 18B C. Wright & A. Miller, Federal Practice and Procedure § 4478 (3d ed. Apr. 2022 Update). Indeed, the Supreme Court has explained that courts should be "loath[ ]" to revisit prior decisions absent "extraordinary circumstances." Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817 (1988). Here, we can't properly consider whether extraordinary circumstances might justify revisiting our prior opinion. That's because neither party has asked us to review the so-called rotten apple. The last time Winget challenged the ruling from that appeal was when he sought certiorari in the U.S. Supreme Court. But the Court denied cert. Winget v. JPMorgan Chase Bank, N.A., 577 U.S. 1048 (2015) (mem.). Since then, everyone—court and parties included—has operated within the confines of the ruling, for better or worse. Winget even accepted the ruling as law of the case in a prior appeal. See Brief of Appellants at 20 n.6, JPMorgan Chase Bank, N.A. v. Winget, No. 19-2194 (6th Cir. Dec. 16, 2019). That concession arguably waived any argument challenging the holding. The dissent doesn't explain why we should overturn a decision that Winget not only waived but has not asked us to review. See Berkshire v. Dahl, 928 F.3d 520, 530 (6th Cir. 2019) (explaining that a party forfeits an argument if he does not raise it below); cf. Bousley v. United States, 523 U.S. 614, 622–23 (1998) (requiring parties to preserve arguments even when binding precedent forecloses them).
To reconsider our prior holding unprompted would run contrary to the principle of party presentation—a principle the Supreme Court has told us to take seriously. See United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579–82 (2020). And for good reason. To start, our adversarial system depends on it. We assume that counsel—rather than courts—know how to best serve their clients. Id. at 1579. Courts are merely "passive instruments of government." Id. (citation omitted). Thus, we should not "sally forth each day looking for wrongs to right." Id. (citation omitted). Unnecessarily considering (or reconsidering) issues not raised by the parties turns this relationship on its head.
What's more, had Winget asked us to revisit our prior ruling, Chase could have responded. Indeed, Chase might have equally convincing arguments that would support that holding. But we don't know, because Winget didn't ask us to revisit our ruling. In light of the circumstances, it would be inappropriate for us to reconsider seven years of litigation and dozens of judicial opinions.
_ . . . . .
This litigation may feel like the story that never ends. But for the sake of finality and the swift adjudication of justice—two bedrock principles of our judicial system—we hope this marks the final chapter. We affirm in part and reverse in part.
THAPAR, J., delivered the opinion of the court in which SUTTON, C.J., joined. BATCHELDER, J. (pp. 23–34), delivered a separate dissenting opinion.
ALICE M. BATCHELDER, Circuit Judge, dissenting.
During the past 15 years, this dispute has generated over 50 judicial opinions: nine in this court and more than 40 in the district court. Almost all are sound. Several are very good, even excellent. One, however, is rotten. And at least the way I see it, this one bad apple spoils the whole bunch.
Rather than continue to accept, and work around, that rotten opinion—and the obstacles that continue to sprout from its holding—I would prefer to correct that decision, apply the law in plain terms, and end this litigation in the way that Judge Cohn decided ten years ago. Therefore, despite my concession that the majority has written a legally sound and rather good opinion, and my recognition of the importance of finality, I will respectfully dissent.
A word about revocable trusts. "Under Michigan law, a revocable trust is not a separate legal entity with regard to the rights of creditors." Mickam v. Joseph Louis Palace Tr., 849 F. Supp. 516, 523 (E.D. Mich. 1993) (relying on M.C.L. § 556.128); accord M.C.L. § 700.7506(1)(a) ("During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors."); see also In re Hertsberg Inter Vivos Tr., 578 N.W.2d 289, 291 (Mich. 1998).
A revocable (or living) trust is just a conceptual way for a person (the settlor or grantor) to organize or manage his or her assets. The settlor transfers title to the assets to the revocable trust but retains full ownership and control over those assets. To the extent that the trustee has any role, the trustee acts at the will of the settlor and owes a fiduciary duty to the settlor. While the settlor is alive, the beneficiary has no rights whatsoever. The settlor can change the terms, change the contents, or even dissolve a revocable trust at any time, for any reason. Accordingly, the settlor's creditors can reach the assets held in the trust. And the settlor must pay the taxes incurred by assets held in the trust—the trust does not have a tax-identification number or file a tax return.1
fn1. The real benefits of a revocable trust take effect only after the settlor dies, at which point the settlor—being dead—is no longer able to revoke the trust and it passes (i.e., its contents pass) to the beneficiary(-ies). The most significant benefit is that, by passing via the trust, the transfer of assets avoids probate. The trust might also provide the settlor an easier means of managing the assets after death or during the transition, and in some cases might reduce or defer estate taxes, particularly if some assets are domiciled in another state. Therefore, a revocable trust is almost always used as an estate planning tool—namely, as a will substitute—and is commonly referred to as a living trust.
In stark contrast, a settlor who creates an irrevocable trust relinquishes control of the assets to the trustee, who manages the trust under a fiduciary duty to the beneficiary. The irrevocable trust becomes its own separate legal entity. The settlor cannot change the terms, change the contents, or dissolve the trust. The settlor's creditors cannot reach the trust assets. And the trustee would file a tax return for the irrevocable trust using a tax-identification number for the trust.
In conceptual terms, opening a revocable trust is like renting a storage unit at the local self-storage facility. You rent a unit and put some of your belongings in there. Over time, you might move any number of things to and from, in and out of the storage unit. That is how it works. You can theoretically put all your belongings in there if you want. Or you can empty it and close it, and terminate the lease. So it goes with a revocable trust: fill it, change it, empty it, close it. That is the promise of a revocable trust: you, as settlor, can revoke it at any time. The tradeoff is that your placing of your assets in a revocable trust does not protect your assets from your creditors. But neither do you risk ever losing control over your assets in a revocable trust. Like a self-storage unit, a revocable trust is fundamentally just a place where a settlor keeps his or her assets.
This case involves Larry Winget's revocable trust, which "held most, if not all, of Winget's assets." JP Morgan Chase Bank, N.A. v. Winget, 901 F. Supp. 2d 955, 961 (E.D. Mich. 2012). As if to make this even easier, Winget is the Trust's settlor, trustee, and sole beneficiary. The key point is that Winget owns the assets, all of them, and happens to keep them in his revocable trust. The Trust does not own any assets. As settlor, Winget can move his assets to and from, in and out, of his revocable trust at any time, for any reason. He can put all his assets in it if he wants. Or he can empty it and close it. The revocable trust is a storage place, not a distinct legal entity.
The short story. Winget's company, Venture, borrowed $450 million from Chase and defaulted on the loan with about $350 million outstanding. With Venture facing likely bankruptcy, Chase was left facing a cents-on-the dollar collection. Rather than call the loan, force liquidation, and suffer a substantial ($300-plus million) loss on this loan, Chase and Winget negotiated a loan forbearance agreement in which Chase would continue to extend the $350 million loan in exchange for Winget's new personal Guaranty of certain collateral, with a $50 million limit.
Thereafter ensued a back-and-forth negotiation to finalize the draft written agreement. In one of the proposed edits, Chase added Winget's Trust to the designation of Guarantor because Winget kept the pledged assets in the Trust. Note that, legally, this edit did not change anything: Winget—not the Trust—owned and controlled the assets; Chase, as creditor, could reach those assets in the Trust as if Winget owned them himself; and Winget could remove those assets from the Trust (or even close the Trust) at any time, for any reason. Even at this late date, Chase concedes as much. See Chase Br. at 6, (Dkt. No. 19, Sept. 17, 2021) ("Indeed, [Chase] agrees that Mr. Winget had the right to move property in and out of his trust as he saw fit, both before and after the Guaranty was signed."). Because the Trust is revocable, the pledge of assets by Winget-and-Trust is no different from the pledge of assets by Winget alone insofar as Chase's claim to those assets. The Trust did not—and could not—make a Guaranty pledge that was distinct from Winget's. Reciprocally, Winget could not have substituted the Trust as Guarantor to protect himself personally from Chase's claims; Chase could reach through the Trust to collect from Winget in the same way it could reach through Winget to collect from the Trust. Winget is the owner. The revocable Trust is a storage space for Winget's assets, not a distinct legal entity.
But, during that back-and-forth exchange of the countless proposed edits to the draft written agreement, the parties made a mistake: the editors changed the provision listing the Guarantor to include both Winget and the Trust, but they did not similarly change the provision for the $50-million limit, which was left naming only Winget (not the Trust). We know this was a mistake because the district court held an eight-day trial, heard witnesses, scrutinized evidence, and considered the competing claims. Chase claimed that Winget and the Trust had each given a separate guaranty and, while Winget had limited his guaranty to $50 million, the Trust had given Chase an unlimited guaranty. Winget countered that such an outcome was not their agreement, but was a mistake; that both parties had intended and agreed that the Guaranty was limited to $50 million and the inclusion of the reference to the Trust did not change that. Judge Cohn issued a thorough and meticulous opinion finding as a factual certainty and explaining beyond any doubt that the final version's failure to include the Trust in the limitation provision was a mistake:
The Winget Trust for purposes of this case is no different than Larry Winget individually. A living, or inter vivos trust, is a common estate planning tool which is often used to control the distribution of assets. See Restatement (Third) of Trusts § 25 Validity and Effect of Revocable Inter Vivos Trust (2003). Here, Winget was the settlor, trustee, and beneficiary of the Winget Trust. As settlor, Winget owned the assets in the Winget Trust. See M.C.L. § 556.128. The Winget Trust was essentially Winget's alter ego. Winget used the Winget Trust to hold ownership of many of his assets, including the pledged stock. It had no special significance for purposes of this case.
The Winget Trust was purposely added to the [Guaranty] and related documents to secure ownership of the pledged stock. It was not added to secure any additional liability. As such, the failure to include the Winget Trust under [the limitation provision] was a mistake. It was a mistake that was overlooked by both parties. It is a mistake that the Court has the power to correct.
Winget, 901 F. Supp. 2d at 972 (minor edits to capitalization). The court held that the $50-million limitation applied to Winget and the Trust together. Winget wired a $50 million payment to Chase. JP Morgan Chase Bank, NA v. Winget, No. 08-13845, 2014 WL 320686, at PAGE_1 n.1 (E.D. Mich. Jan. 29, 2014). Thus, while certain collateral claims and issues remained, this effectively ended Chase's claim to recover against Winget or the Trust under the terms of the Guaranty.
Now the bad apple. When Chase claimed on appeal that the parties had not been mistaken, the panel agreed and held that "[t]he agreement executed by Winget, the Trust, and Chase reflected the parties' intent as a matter of law," such that the parties necessarily intended that Winget and the Trust were separate entities with "Winget, and only Winget [alone], as having limited exposure." JPMorgan Chase Bank, N.A. v. Winget, 602 F. App'x 246, 258-59 (6th Cir. 2015). Not only does that proposition fail as a matter of common sense, it is fundamentally flawed as a matter of trust law. The Trust, being a revocable trust, is not a distinct legal entity separate from Winget; it is just a place for Winget to store his assets. The only aspect of the analysis with which I can agree is the off-the-cuff statement that "the district court should never have held a trial in the first instance." Id. at 258. That is true, but not for the reasons stated in the opinion. Rather, a trial was unnecessary because the "mistake" theory was unnecessary. For purposes of Chase's creditor claim, Winget and the Trust necessarily merged into Winget alone; they are not separate entities, they are both just Winget as the one and only true owner of the assets. Winget pledged the assets to guaranty the loan and the agreement limited that pledge to $50 million.
The opinion's proffered analysis of this issue is specious. After characterizing the district court's decision as based on a "scrivener's error" (in which parties reach an agreement, or meeting of the minds, but then make a mistake when memorializing that agreement, i.e., reducing it to written form), the opinion rejects and completely discards the district court's trial-based findings of fact in favor of its own factual finding: "We disagree with the district court's interpretation and conclude that there was no prior agreement between the parties." Id. at 258. The opinion offers three reasons: (1) there was no "binding contract" until the parties signed the final version; (2) the pre-agreement documents were not a binding agreement; and (3) the agreement contained an integration clause. Id. The first two "reasons" do not disprove a scrivener's error, they are universal circumstances underlying a scrivener's error: the parties reached a mutual understanding but, during the back-and-forth bickering over the written specifics, committed a mutual mistake that was erroneously included in the final, binding document.
Reliance on the integration clause is equally wrong. Once it is established (as the district court did here) that the parties were mistaken about the substantive terms of the document (i.e., the important parts), the only reasonable corollary is that those same parties were equally mistaken about the integration clause. If this purported "reason" were valid, and the inclusion of a boilerplate integration clause necessarily overcomes any and all mutual mistakes in the formation of a contract (meeting of the minds), then the doctrine of mutual mistake would cease to exist.
Instead, "[i]t is widely agreed that oral testimony is admissible to prove fraud or misrepresentation, mistake or illegality. [And] [t]his exception to the parol evidence rule applies even if the testimony contradicts the terms of a completely integrated writing." 6 Peter Linzer, Corbin on Contracts § 25.20, at 277 (2010). As for Michigan law, parol evidence is generally not admissible to vary the terms of a contract which is clear, unambiguous, and fully integrated, but this "overlooks the prerequisite to the application of the parol evidence rule: there must be a finding that the parties intended the written instrument to be a complete expression of their agreement as to the matters covered." NAG Enterprises, Inc. v. All State Indus., Inc., 285 N.W.2d 770, 771 (Mich. 1979). Thus, it is well settled that parties may submit parol evidence to prove that an agreement was the product of mistake. Goldberg v. Cities Service Oil Co., 266 NW 321, 325 (Mich. 1936); Scott v. Grow, 3 N.W.2d 254, 258 (Mich. 1942) ("It is not necessary ... [to show] that particular words were misunderstood. It is sufficient that the parties had agreed to accomplish a particular object by the instrument to be executed, and that the instrument as executed is insufficient to effectuate their intention." (quoting 5 Williston on Contracts, Rev. Ed., § 1585)).
We were wrong in Winget, 602 F. App'x at 257-59. The district court was right in Winget, 901 F. Supp. 2d at 972. And this case should have ended with the determination that Winget and the Trust were one and the same, with the $50 million limitation applicable to both.
Instead, because we held that Winget and the Trust are separate entities and the Trust agreed to an unlimited guaranty, Chase has pursued litigation against the Trust in an effort to take assets that the Trust does not own, could not have pledged, and did not agree to pledge.
This brings us to the present appeal and the majority opinion, which confronts and decides certain needlessly complicated questions. These questions are "needlessly complicated" because our prior (incorrect) holding compels the majority to proceed from the flawed premise that Winget's revocable Trust is something other than an ordinary revocable trust.
Consider the "transfer" question—whether Winget "transferred" assets when he removed assets from his revocable Trust (i.e., revoked his revocable trust). See Maj. Op. § II.A. In any other case—every other case—this is a simple question with a simple answer: because this is a revocable trust, there was no transfer. Winget owned the assets, regardless of where he kept them. See M.C.L. § 556.128 ("When the grantor in a conveyance reserves to himself an unqualified power of revocation, he is thereafter deemed still to be the absolute owner of the estate conveyed, so far as the rights of his creditors and purchasers are concerned."). Winget's act of closing the Trust did not "dispose of or part with" any assets. The Michigan Uniform Fraudulent Transfers Act (MUFTA) defines "transfer" as: "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset." M.C.L. § 566.31(q) (emphasis added). Here, Winget owned the assets both before and after he closed the Trust. As a matter of Michigan trust law, Winget's movement of the assets out of his revocable Trust did not affect Chase's rights at all. See M.C.L. § 700.7506(1)(a) ("During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors.").
It is only due to our faulty holding in Winget, 602 F. App'x at 257-59—contrary to Michigan law, see Mickam, 849 F. Supp. at 523—that this revocable Trust is not a normal revocable trust, but is instead treated as a distinct legal entity that pledged to Chase the assets therein. This requires that the Trust—not Winget—own the assets, inasmuch as the word "assets" involves ownership. See, e.g., Merriam-Webster Online (offering a definition of "assets" as "the entire property of a person, association, corporation, or estate applicable or subject to the payment of debts"); Dictionary.com ("items or resources owned by a person, business, or government"). If the Trust does not own these items, then they would hardly qualify as the Trust's "assets."
The majority navigates this complication by proposing that "ownership is irrelevant" to the fraudulent transfer; the act of moving the assets beyond Chase's reach makes this a "transfer." If ownership mattered, and Winget owned the assets (unequivocally the situation under ordinary Michigan trust law), then Winget's act of closing the Trust did not transfer (dispose of or part with) any assets, see M.C.L. § 566.31(q). Therefore, the Trust entity must have disposed of or parted with the assets (by returning them from whence they came, namely, Winget's personal ownership and possession), thus moving them beyond Chase's reach. Of course, if this were an ordinary revocable trust, this movement of assets would not put them beyond Chase's reach.
The question of "fraudulent" is similarly convoluted. See Maj. Op. § II.B. Under ordinary trust law, the assets held in the Trust are entirely Winget's assets, so Chase's claim against the Trust would just fold back into a claim against Winget, whether Winget placed the assets in the Trust or not. See M.C.L. §§ 556.128 & 700.7506(1)(a). Of course, Chase agreed to limit its recovery from Winget to $50 million. But, otherwise, Winget could not avoid Chase's claim by transferring assets to or from his Trust, and therefore could not commit a "fraudulent" transfer.
Our prior faulty opinion in Winget, 602 F. App'x at 257-59, again complicates this by holding that the Trust is its own entity, and it owns the assets. The majority declares that the Trust is the "debtor," and finds that "the Trust was insolvent after the revocation," inasmuch as "its assets were zero." This presupposes that the Trust—not Winget—owned the assets; if Winget owned the assets and simply stored them in his revocable trust, then the "Trust's assets" were zero all along. Similarly, a finding that the Trust did not receive reasonably equivalent value in exchange for the revocation also presupposes that the Trust owned the assets. If the Trust "owned" nothing, then it did receive equivalent value. Namely, nothing. Of course, on this same reasoning, Winget received nothing when he placed his assets into the Trust, certainly unaware that he was "transferring ownership" and could not recover his assets from his revocable trust without paying equivalent value in exchange (i.e., buying his own property back from his own Trust).
On Winget's argument that as the settlor of a revocable trust he has a fundamental right revoke the trust at any time, the majority answers that his right is not unlimited: the Trust's contractual obligation to its creditor prevents the settlor from revoking the revocable trust. Thus, as a practical matter, this means a trustee can convert a revocable trust into an irrevocable trust by entering a contract with a third-party, effectively making the third-party the trust beneficiary, and can do so, apparently, without the settlor's agreement or participation. In fact, the majority suggests that a settlor who removes his encumbered assets from his revocable trust does not just assume the obligations against those assets, see M.C.L. §§ 556.128 & 700.7506(1)(a), that settlor commits an intentional-interference-with-contract tort. That is far afield from ordinary trust law.
Finally, consider the taxes. See Maj. Op. at § III.A.2. Under ordinary trust principles, the settlor of a revocable trust pays any incurred taxes—a revocable trust does not even have a tax-identification number, much less a means of filing or paying taxes. Again, the basic principle of revocable trusts is that the trust does not own anything, it is just a place for the settlor to store his assets. Because the settlor owns the assets placed in the trust, the settlor pays the taxes. Again, considering this question under ordinary trust law, Winget—the settlor—owned the assets held in the trust, including the LLC distributions, so Winget was obliged to report the income on his personal income tax returns and was responsible for paying the taxes incurred by the LLCs.
The majority recognizes that "the typical rules for revocable trusts may not apply" and suggests that the Trust may have been responsible for paying its own taxes. As a practical matter, this would require the Trust (i.e., the trustee, Winget, I suppose) to formally convert the Trust to an irrevocable trust, to obtain a tax-identification number from the IRS, prepare and file a tax return, and pay the requisite taxes to the IRS. Of course, the IRS was expecting Winget—as the settlor of the revocable Trust—to pay the taxes, so this new undertaking might involve a filing amendment (reducing Winget's personal taxable income and, correspondingly, his tax liability), a refund of Winget's $79 million overpayment, or a repayment by the Trust to Winget for the taxes he erroneously paid on the Trust's behalf (perhaps with its own tax consequences).
All of this is merely to demonstrate, or emphasize, how very far we have ranged from ordinary trust law. And to submit that, along these lines, things are getting worse, not better.
Our prior faulty opinion in Winget, 602 F. App'x at 257-59, stated or necessarily implied three findings or conclusions that have served as premises for all of the judicial decisions that have followed: (1) the revocable Winget Trust is a separate legal entity, distinct from its settlor, Larry Winget; (2) the Trust entity—not the settlor, Winget—owns the assets held in the revocable Trust; and (3) the trustee of this Trust entity (Winget) pledged the "Trust's assets" as an unlimited Guaranty on Chase's entire loan. I find all three to be legally unsound and factually untrue.
The majority's opinion, like other judicial opinions since Winget, 602 F. App'x at 257-59, accepts these premises and ingeniously builds its analysis around them, leading to certain new propositions that will likely serve as premises for future judicial decisions: (1) the Trust's pledge of assets converted Winget's revocable trust to an irrevocable trust, forfeiting Winget's ownership and control of the assets (and eliminating his tax obligation); and (2) Winget's attempt to control his assets (i.e., revoke his revocable trust) under ordinary principles of revocable trusts was not only a fraudulent transfer, but possibly an intentional-interference-with-contract tort.
For all of my criticism here, I recognize that the majority here, like others before, has diligently and thoroughly built its analysis around the given premises to reach a justifiable and defensible conclusion. But I also recognize that, in so doing, with every successive judicial opinion in this case, or application of these opinions as precedent, we do further damage to trust law.
Rather than continue to craft new, and increasingly creative, proclamations about the law of revocable trusts, I would prefer to admit our mistake in Winget, 602 F. App'x at 257-59, correct it, and apply plain and ordinary revocable-trust principles in a plain and ordinary way.
I believe that Judge Cohn was correct: "The Winget Trust for purposes of this case is no different than Larry Winget individually." Winget, 901 F. Supp. 2d at 972. Therefore, the $50-million limitation applied to Winget and the Trust together, Winget has paid Chase that $50 million, and Chase has no further recourse against Winget (or the Trust) on the Guaranty.
Moreover, I believe that the Trust and Winget are not separate entities; the Trust, being a revocable trust, is just a place for Winget to put his assets and Winget had every right to fill it, change it, empty it, or close it however he saw fit. Winget owns all the assets, the Trust "owns" nothing. Winget's revocation of the revocable Trust was not a fraudulent transfer—indeed was not a transfer at all—nor was it an intentional-interference-with-contract tort. And Winget is personally liable for the taxes incurred by the Trust.
Given the importance of finality—and the majority's compelling defense of it, see Maj. Op. at § IV—I should concur. But in the perhaps vain hope that this small gesture might help restrain the opinions and holdings in this case to just this case, I will respectfully dissent.
Alter Domus, LLC v. Winget, 2023 WL 4865590 (E.D.Mich., July 31, 2023).
United States District Court, E.D. Michigan, Southern Division.
ALTER DOMUS, LLC, Plaintiff/Counter-Defendant,
Larry J. WINGET and the Larry J. Winget Living Trust, Defendants/Counter-Plaintiffs.
Case Number 08-13845
Signed July 31, 2023
Attorneys and Law Firms
Kendra L. Stead, Emily K. Scholtes, James W. Ducayet, Jennifer M. Wheeler, Melville W. Washburn, Sidley Austin LLP, Chicago, IL, Kelsey E. Annu-Essuman, Chicago, IL, Paul E. Bateman, Jr., Sperling & Slater, LLC, Chicago, IL, Aaron V. Burrell, James A. Plemmons, William T. Burgess, Dickinson Wright, PLLC, Detroit, MI, Scott A. Petz, Dickinson Wright, Troy, MI, for Plaintiff/Counter-Defendant.
John E. Anding, Thomas V. Hubbard, Drew, Cooper, Grand Rapids, MI, for Defendants/Counter-Plaintiffs.
OPINION AND ORDER GRANTING IN PART PLAINTIFF'S MOTIONS TO HOLD DEFENDANT LARRY J. WINGET IN CIVIL CONTEMPT OF COURT
DAVID M. LAWSON, United States District Judge
PAGE_1 Plaintiff Alter Domus, LLC (the Agent), an agent for a group of creditors seeking to collect an unsatisfied judgment against defendant Larry J. Winget Living Trust, has filed a motion asking the Court to hold defendant Larry J. Winget in contempt for filing a probate petition in state court. Winget purportedly filed the petition to seek clarification on certain trust administration issues allegedly created by the Sixth Circuit's July 1, 2022 opinion filed in this case. However, in the petition, Winget also asks the probate court to enter an order nullifying 19 years of contributions he made to the Winget Trust. The Agent argues that, by filing the petition, Winget violated a September 2019 order issued by the Court that enjoined Winget from disposing of or transferring property out of the Trust (the Status Quo Order). The Court agrees with the plaintiff in one respect: by asking the probate court to nullify the contributions to the Trust, Winget violated the Court's Status Quo Order, which prevented Winget from “selling, transferring, assigning, encumbering, destroying, concealing, or otherwise disposing of the assets owned, titled in the name of, or otherwise held by the Trust or its trustee.” He did not violate that order, however, by seeking clarification of certain trust administration issues from the probate court. As a contempt sanction, the plaintiff asks for fines, an additional injunction, and attorney's fees. The Court does not believe all those remedies are appropriate. Winget is in contempt of the Status Quo Order, and he may purge that contempt by withdrawing the appeal of the probate court's order dismissing his petition. The plaintiff will be awarded attorney's fees for having to bring this contempt motion.
The parties are familiar with the long and complex history of this litigation. A brief summary may be helpful here, however, to provide context for the entry of the Status Quo Order that defendant Winget is accused of violating. For more details, read JPMorgan Chase Bank, N.A.v. Winget, No. 08-13845, 2021 WL 37479 (E.D. Mich. Jan. 5, 2021), aff'd in part, rev'd in part, No. 21-1568, 2022 WL 2389287 (6th Cir. July 1, 2022), cert. denied sub nom. Winget v. Alter Domus, LLC, 143 S. Ct. 748 (Mem) (U.S. Jan. 23, 2023).
Larry Winget's holding company, Venture, obtained a loan from various lenders, which both he and his trust, defendant Larry J. Winget Living Trust, guaranteed. Venture filed for bankruptcy, eventually triggering the guarantors’ obligation to pay.
PAGE_2 The administrative agent for the lenders — then JPMorgan Chase (the “Agent”) — sued both Winget and the Trust to recover. (In early 2021, Chase entered an Agency Transfer Agreement with Alter Domus, LLC, that made Alter Domus the successor administrative agent for the lenders in this case. See ECF Nos. 989-90.) Winget paid $50 million and no longer owes the bank any money in his personal capacity. But the Trust is liable for the rest of the debt, which now has swelled to more than $775 million.
In 2014, nearly six years after the Agent sued to recover the debt, Winget revoked the Trust and removed all trust assets. According to Winget, the trust instrument that created the Trust gave him the right to revoke or amend the Trust by his act alone. Winget did not disclose the revocation for more than a year. During this time, the Court entered an amended final judgment establishing that the Trust owed the Agent nearly half-a-billion dollars under the guaranty agreement. And the parties actively were litigating whether the Agent could attach the trust assets — which, unbeknownst to the Agent, no longer existed — to satisfy that debt.
Winget revealed the revocation when he sought a declaratory judgment that would establish that, given the revocation, the Agent had no further recourse against him or the assets that were once held in the Trust. The Agent counter-claimed, arguing that the revocation was a constructively fraudulent transfer under the Michigan Uniform Fraudulent Transfer Act (MUFTA). The Court agreed with the Agent and granted its motion for judgment on the pleadings. Winget did not appeal that ruling. Rather, he rescinded his revocation, retitling to the Trust all property that it held at the time of the revocation.
After Winget reinstated the Winget Trust, the Agent requested entry of Charging Orders with respect to membership interests in certain limited liability companies (LLCs) held by the Trust. Winget and the Winget Trust responded, arguing among other things, that the Agent could not execute on the property held in the Trust because the Trust did not own the membership interests; rather, Winget actually owned them as settlor of the Trust. The Court disagreed with Winget's argument, granted the motions, and entered the requested Charging Orders on August 15, 2019. In connection with entry of the Charging Orders, the Court directed the Agent to focus its collection efforts on the assets held in the Winget Trust. ECF No. 855.
Winget appealed entry of the Charging Orders. He argued that because Winget “owned” all of the Winget Trust property, the Guaranty did not allow the Agent to attach that property through charging liens or otherwise. That reasoning did not take root. On November 7, 2019, the Sixth Circuit affirmed entry of the Charging Orders and rejected Winget's argument, explaining that “it doesn't matter who ‘owns’ the trust property,” because “a party who has a contract with a trust can recover from the property held by the trust.” JPMorgan Chase Bank, N.A. v. Winget, 942 F.3d 748, 750 (6th Cir. 2019). Thus, the Sixth Circuit held that Chase could recover against the Winget Trust from the property held by the Winget Trust.
After Winget reinstated the Trust, the Agent moved for a writ of execution on the corporate stock owned by the Trust and for an order preventing the transfer or dissipation of Trust assets. See ECF No. 863. The motion requested entry of an order allowing the Agent to execute on the corporate stock owned by the Winget Trust in the following entities: Golf Course Corporation 1, Golf Course Development Co., Oakland Land Company, PIM Management Company, Venture Sales & Engineering Corp., and VIMCO Corporation (the “Trust corporations”). The motion further requested that the injunction prohibit Winget, the Trust, and their agents from “engaging in any non-ordinary course transfer, dissipation, encumbrance, or modification of Trust assets,” including the “transfer of significant assets held by companies of which the Trust is a stockholder or member” or “any other action the effect of which would be to materially encumber or impact the value of the assets held by the Trust.” See ECF No. 863, PageID.28733. The Court's predecessor, the Honorable Avern Cohn, referred the motion to a Special Master, who determined that the Agent was entitled to a writ of execution and injunction. Winget objected to the entry of an injunction, arguing among other reasons that Michigan's Limited Liability Company Act barred the Court from restricting any LLC activity.
PAGE_3 Judge Cohn adopted the Special Master's Report and Recommendation and ordered the trustee of the Trust to “deliver to the District Court all stock certificates titled in the name of the Trust or its trustee” of the Trust corporations. See ECF No. 915, PageID.29784 (the “Status Quo Order”). The Court ordered the Agent to submit to the Court, after considering the Trust's reasonable objections, a proposed form of judicial sale. Ibid. Finally, the Court restrained Winget from transferring the Trust's assets, directing that:
Larry J. Winget and the Larry J. Winget Living Trust, and anyone acting as their agents or on their behalf, are enjoined from selling, transferring, assigning, encumbering, destroying, concealing, or otherwise disposing of the assets owned, titled in the name of, or otherwise held by the Trust or its trustee outside of the ordinary course of business. For avoidance of doubt, this Order allows Larry J. Winget and the Larry J. Winget Living Trust to take such actions as are reasonable and necessary to the ongoing and continued operations of their businesses.
Id. at PageID.29784-85.
Winget appealed the injunction, but not the writ of execution. See JPMorgan Chase Bank, N.A. v. Winget, 801 F. App'x 962, 962 (6th Cir. 2020). Noting the “extremely broad authority” of Michigan courts to enforce their judgments, the Sixth Circuit concluded that the Court was well within its discretion to “enjoin actions contrary to its collection orders” in this matter. Id. at 963. The injunction remains in place today.
Meanwhile, the Agent sued Winget for unjust enrichment arising from his revocation of the Winget Trust. The Agent had learned that, before Winget rescinded his revocation of the Trust, the LLCs that had been held in the Trust distributed hundreds of millions of dollars in cash and promissory notes to Winget. Winget received the distributions and used a portion — $79 million — to pay taxes on the LLCs’ income. See Special Master R&R, ECF No. 986, PageID.31893. The Agent moved for summary judgment and sought a constructive trust over all of the distributions. The Court granted the motion and imposed a constructive trust on the distributions — including $104,775,478 in cash and $150 million in promissory notes. On June 1, 2021, the Court entered a final judgment on the fraudulent-transfer claim and the unjust-enrichment claim. ECF No. 1017. Winget placed the cash distributions and promissory notes in escrow while he appealed both rulings.
On July 1, 2022, the Sixth Circuit issued an opinion affirming the Court's fraudulent transfer ruling and affirming its unjust enrichment ruling in part. Significantly, the court of appeals reasoned that Winget's right to revoke the Trust was not unlimited.
As we explained in our prior opinion, trusts — both revocable and irrevocable — can enter binding contracts. A necessary consequence is that a trust's contractual obligation may affect the rights of third parties, like beneficiaries and settlors, even if they are not themselves parties to the contract. Here, the Trust guaranteed Venture's loan. So when Venture defaulted, the Trust had to pay Chase and could do so with the trust assets. That's when Chase's claim to the assets arose. At that time, Winget no longer had an unfettered right to the trust assets — at least not until Chase was repaid. And Winget could no longer revoke the Trust since doing so after Chase's claim arose would (and did) deplete the trust assets, preventing the Trust from fulfilling its obligation to Chase. In this way, Winget's right to revoke was limited by the Trust's obligation to Chase — an obligation Winget himself assumed as trustee.
PAGE_4 Winget, 2022 WL 2389287, at PAGE_4. The court of appeals therefore agreed that Winget's revocation of the Trust constituted a fraudulent transfer executed to put the Trust's assets beyond the reach of the Agent. The Sixth Circuit likewise agreed that Winget was unjustly enriched by the LLC distributions he received during the revocation period, after he revoked the Trust but before he rescinded the revocation. Id. at PAGE_9. “This litigation may feel like the story that never ends,” the court of appeals wrote in the conclusion of its July 1, 2022 opinion. “But for the sake of finality and the swift adjudication of justice — two bedrock principles of our judicial system — we hope this marks the final chapter.” Id. at 11. Hope springs eternal in the human breast, but it sometimes is unrequited.
On September 29, 2022, Winget filed an action in Oakland County, Michigan probate court seeking “equitable relief to nullify contributions of new assets [Winget] made to the Trust years after 2003.” Probate Pet., ECF No. 1032-3, PageID.32590. In the petition, Winget represents that the Sixth Circuit's July 2022 decision “retroactively converted the otherwise express revocable trust into an irrevocable one as of 2003 ... when the Chase loan went into default.” Ibid. He says that he would not have placed new assets in the Trust if he had known that the Trust was irrevocable, explaining that he “never intended to transfer any property beyond his recall to the Trust or create even the potential of millions of dollars in federal gift tax on the property he never intended to gift.” Id. at PageID.32591. Winget asked the probate court to do two things:
(1) “remedy the inequity” arising from his “contributing new assets into the Trust after the Chase loan but before the Sixth Circuit's 2022 opinion” by “nullify[ing] these post-2003 contributions to the Trust through trust reformation, modification, imposition of a constructive trust, and/or confirmation that Larry did not make an effective gift to the Trust,” ibid.; and
(2) provide “instruction and construction of what the Sixth Circuit has deemed an irrevocable Trust which will impact his administration of the Trust,” including clarifying (a) the extent to which his power of administration over the Trust is limited by the court of appeals’ July 1, 2022 opinion, (b) his duty to communicate with qualified trust beneficiaries, (c) whether Winget remains “a Trust beneficiary holding the equitable interest in the Trust's assets and the Trustee holds only legal title,” and (d) whether the Trust would be subject to creditors at Winget's death, id. at PageID.32607.
On October 20, 2022, Winget filed an amended probate petition in response to the Agent's present contempt motion. The amended petition includes significant revisions that focus on Winget's alleged need for
instruction of important administration issues in light of the Sixth Circuit's 2022 ruling retroactively replacing (effective as of 2003) Larry's revocable will substitute Trust [sic] with an irrevocable Trust, including the fiduciary rights and obligations of: (1) Larry as Settlor; (2) the Trustee with respect to the administration of the Trust res as to the ten beneficiaries of the Trust; and (3) the beneficiaries’ interest in the Trust res.
Am. Probate Pet., ECF No. 1052-1, PageID.33038-40. And it states that Winget does not seek “to set aside any orders duly entered by the federal district court with respect to any of the trust res.” Id. at PageID.33010. However, the amended petition also includes a request that the probate court, “subject to the Charging Orders,”
enter an Order nullifying the LLC contributions Larry made to the Trust when Larry believed it remained revocable from 2003 until the Sixth Circuit's 2022 opinion making the Trust irrevocable so that the assets belong to Larry, by reforming or modifying the Trust, declaring that Larry did not make effective gifts of the LLC interests to the Trust, and/or imposing a constructive trust over the LLC interests for the benefit of Larry individually.
PAGE_5 Id. at PageID.33040.
The Agent filed the present motion asking the Court to hold Winget and his counsel in contempt for filing the state probate petition and require Winget to withdraw the petition. Contending that the petition violates the Status Quo Order, the Agent asks that the Court fine Winget $5,000 per day until he withdraws the petition or, alternatively, to enjoin the state probate proceeding. It also asks the Court to award it attorney's fees and expenses for preparing and litigating its contempt motion.
Winget filed two responses to the Agent's contempt motion: a response opposing a contempt finding, filed October 18, 2022, and a separate response opposing the Agent's request that the Court enjoin the probate proceeding. As noted above, he also filed an amended probate petition in an apparent effort to address some of the deficiencies raised in the Agent's contempt motion. Alter Domus filed a reply brief in support of its motion for contempt and a sur-reply responding to Winget's injunction arguments.
The Court heard arguments on the motion on May 23, 2023 and learned that on April 17, 2023, Oakland County, Michigan Probate Judge Linda S. Hallmark issued an opinion and order denying Winget's amended petition for reformation of the Larry J. Winget Living Trust. See Probate Order, ECF No. 1093-2, PageID.33492. Judge Hallmark rejected all of Winget's arguments for nullifying his contributions to the Trust. First, she concluded that the probate petition was an improper attempt retroactively to invalidate Winget's transfers of assets to the Trust. Second, she concluded that Winget validly transferred his interests in certain limited liability companies to the Trust and did not retain the power to recall them. Third, she found that it would be an improper exercise of the probate court's equitable power to impose a constructive trust over the assets of the Winget Trust. Fourth, she found the tax and trust administration questions enumerated in the petition to be speculative and relate to possible future events and thus to be improperly before the probate court. And finally, she found that the probate petition was barred by res judicata because the issue of removal of the LLC interests from the Trust already was litigated before the Sixth Circuit.
On May 8, 2023, Winget appealed Judge Hallmark's order denying his probate petition.
The Agent contends that, by seeking relief in state probate court, Winget is violating the Court's Status Quo Order enjoining him from seeking to remove property from the Trust and, thus, from its own reach. It construes Winget's probate petition as asking the probate court to do what the Court unambiguously has said cannot be done: nullify contributions Winget made to the Trust so that he can reclaim those assets.
A party may seek to enforce a court order through a contempt petition. See Shillitani v. United States, 384 U.S. 364, 370 (1966) (“There can be no question that courts have inherent power to enforce compliance with their lawful orders through civil contempt.”); Elec. Workers Pension Tr. Fund of Local Union #58, IBEW v. Gary's Elec. Serv. Co., 340 F.3d 373, 378 (6th Cir. 2003) (“Contempt proceedings enforce the message that court orders and judgments are to be complied with in a prompt manner.”). To succeed, the plaintiff must prove “by clear and convincing evidence” that the defendant violated the Court's prior order. Glover v. Johnson, 934 F.2d 703, 707 (6th Cir. 1991). The order violated must be “definite and specific” and must require the defendant “to perform or refrain from performing a particular act or acts.” Rolex Watch U.S.A., Inc. v. Crowley, 74 F.3d 716, 720 (6th Cir. 1996) (quoting NLRB v. Cincinnati Bronze, Inc., 829 F.2d 585, 591 (6th Cir. 1987)). The plaintiff also must show that the defendant had “knowledge of the court's order.” Ibid. However, since civil contempt is remedial in nature, the charging party need not establish willfulness; “intent in disobeying [an] order ... is irrelevant to the validity of the contempt finding.” In re Jaques, 761 F.2d 302, 306 (6th Cir. 1985) (citation omitted).
PAGE_6 “Clear and convincing evidence is ... not a light burden and should not be confused with the less stringent, proof by a preponderance of the evidence.” Elec. Workers, 340 F.3d at 379 (citation omitted). But “[o]nce the movant establishes his prima facie case, the burden shifts to the contemnor who may defend by coming forward with evidence showing that he is presently unable to comply with the court's order.” Ibid. (citing United States v. Rylander, 460 U.S. 752, 757 (1983)). “To meet this production burden in this circuit ‘a defendant must show categorically and in detail why he or she is unable to comply with the court's order.’ ” Ibid. (quoting Rolex Watch, 74 F.3d at 720.)
It has been said that “a defendant that ‘hew[s] to the narrow letter of the injunction while simultaneously ignoring its spirit’ charts such a course at its peril.” CFE Racing Prod., Inc. v. BMF Wheels, Inc., No. 11-13744, 2015 WL 13022178, at PAGE_5 (E.D. Mich. Feb. 20, 2015) (quoting Inst. of Cetacean Rsch. v. Sea Shepherd Conservation Soc'y, 774 F.3d 935, 954 (9th Cir. 2014)). Defendants act “at their own risk by failing to seek the court's interpretation of the injunction if they had any good faith doubt as to its meaning.” Polo Fashions, Inc. v. Stock Buyers Int'l, Inc., 760 F.2d 698, 700 (6th Cir. 1985).
Winget maintains that, because the Status Quo order does not specifically prohibit him from seeking a judicial ruling from the probate court, the Agent has not shown that he clearly and unequivocally violated a Court command. Winget is both right and wrong. As noted above, Winget asks for two forms of relief in his probate petition: (1) instruction on trust administration issues, and (2) the nullification of contributions he made to the Trust. The first request cannot be viewed fairly as “selling, transferring, assigning, encumbering, destroying, concealing, or otherwise disposing of [Trust] assets.” Reversing Winget's contributions to the Trust, however, is precisely the type of asset dissipation endeavor that the Status Quo Order specifically prohibits.
Among other things, Winget's probate petition asks that court to clarify his fiduciary rights and obligations in light of the Sixth Circuit's July 2022 opinion. He posits the proposition that the federal court of appeals effectively converted his Trust from a revocable trust to an irrevocable trust, and he purportedly wants guidance on how to deal with that. Of course, the court of appeals did nothing of the sort. It did affirm this Court's orders that prevented Winget from removing trust assets, but that pronouncement was based on the unremarkable reality that as long as a creditor has a judgment against trust assets, the trustee cannot dissipate those assets until the judgment is satisfied. Once the judgment has been paid in full, the trustee can deal with the assets in whatever manner the trust instrument allows.
Whether Winget genuinely is confused on that point need not be determined here. Asking for guidance, though, does not clearly violate a definite and specific order of the Court. The Status Quo Order enjoins Winget from transferring or disposing of the Trust's assets, but it does not prohibit him from continuing to administer the Trust. To the contrary, the order specifically permits Winget and the Trust “to take such actions as are reasonable and necessary to the ongoing and continued operations of their businesses.” Status Quo Order, ECF No. 915, PageID.29784-85. Winget contends that instruction from the probate court on his fiduciary duties and tax obligations is necessary for him to continue administering the Trust. That effort may also be part of a broader “program of experimentation” in protest of the court of appeals’ opinion and the various orders and opinions entered by this Court. McComb v. Jacksonville Paper Co., 336 U.S. 187, 192 (1949). Nevertheless, the act of seeking legal guidance on issues of trust administration does not itself violate the injunction promulgated in the Court's Status Quo Order.
PAGE_7 Winget's request that the probate court nullify 19 years of LLC contributions he made to the Trust and impose a constructive trust over those interests for his own benefit plainly violates the injunction issued in the Status Quo Order. An order from the probate court granting Winget his requested relief would result in a transfer of assets out of the Winget Trust, the precise outcome the Court sought to prevent when it entered the Status Quo Order broadly enjoining Winget from disposing of assets held by the Trust.
Winget contends that the injunction does not sweep so broadly, arguing that, both by its terms and as a matter of law, the injunction applies only to the transfer or disposal of the Trust corporations’ stock and not to the limited liability companies also held in the Trust. Winget's argument on that point is specious. The Status Quo Order granted the Agent both a writ of execution and an injunction, and although the writ of execution applied only to the Trust's corporate stock, the injunction contained no such limitation. The mandatory language unambiguously enjoined Winget “from selling, transferring, assigning, encumbering, concealing, or otherwise disposing of the assets owned, titled in the name of, or otherwise held by the Trust or its trustee.” Status Quo Order, ECF No. 915, PageID.29784 (emphasis added). Moreover, the Status Quo Order granted the Agent's motion for an injunction, which sought to prevent Winget from taking “any” action that would “materially encumber or impact the value of the assets held by the Trust.” Mot. for Writ of Execution, ECF No. 863, PageID.28733. Winget opposed that motion and sought unsuccessfully to cabin the reach of the injunction; invoking the Michigan Limited Liability Company Act, he suggested instead that it should apply only to the Trust's corporate stock. See Prop. Inj. Order, ECF No. 908-1, PageID.29746; Obj. to Prop. Order, ECF No. 889, PageID.29322-23. He also complained about the scope of the injunction after the fact, without ever suggesting that the injunction applied only to the corporate stock. See, e.g., Brief of the Appellant, JPMorgan Chase Bank, N.A. v. Winget, 801 F. App'x 962 (6th Cir. 2020) (No. 19-2194). Winget's own actions evince his understanding that the Status Quo Order broadly enjoins him from taking actions that interfere with the property held in the Trust, including both the corporate stock and LLCs held in the Trust.
Winget's argument that he cannot be enjoined from interfering with the limited liability companies as a matter of law similarly is meritless. In support, he cites Section 507 of the Michigan Limited Liability Company Act, which is inapplicable to this dispute. See Mich. Comp. Laws § 450.4507(6). The section that “applies to satisfaction of a judgment against a member of an LLC.” JPMorgan Chase Bank, N.A. v. Winget, No. 08-13845, 2017 WL 2868538, at PAGE_11 (E.D. Mich. July 5, 2017), aff'd, No. 21-1568, 2022 WL 2389287 (6th Cir. July 1, 2022). Here, the Agent has a judgment against the Trust, which is not an LLC, for a fraudulent transfer claim against Winget, who also is not an LLC. Ibid. And the Agent “has not asked the court to ‘charge [any] membership interest of [Winget] with payment,’ order ‘any distribution or distributions to which [Winget] is entitled’ be paid to [the Agent], or foreclose on any membership interest.” Ibid. Instead, the Status Quo Order merely requires that Winget, whose trust is a judgment debtor to the lenders, maintain the status quo, including by not altering Trust assets to avoid the Agent's enforcement efforts. Such an order is within the Court's broad authority to effectuate its judgments and does not conflict with Michigan law.
PAGE_8 Winget contends that the Court lacked the authority to enter the Status Quo Order because it is a “remedial order” that is not a charging order and thus is barred by the terms of Section 507. His argument is illogical. The Status Quo Order was entered to enforce the charging orders, which the Court entered to ensure that the Agent received all distributions arising from the Trust's membership interest in the limited liability companies held in the Trust. See Winget, 2022 WL 2389287 at PAGE_6. When Winget revoked the Trust and retitled the Trust property in his name, he received the distributions that would have otherwise gone to the Agent under the charging orders. Ibid. Winget unjustly was enriched by the cash distributions. Id. at PAGE_9. Nevertheless, because Winget continued to argue that he lawfully could remove assets from the Trust, the Court enjoined him from transferring or disposing of the Trust property during the collection proceedings. The injunction does not charge the Trust, whose membership interests are at issue, with doing anything; rather, it prevents Winget from taking further action that violates the charging orders he now invokes in an effort to avoid complying with the injunction.
As the Sixth Circuit repeatedly has noted during this litigation, “Michigan law gives courts ‘extremely broad authority’ to enforce their judgments.” Winget, 801 F. App'x at 963 (quoting JPMorgan Chase Bank, N.A. v. Winget, 942 F.3d 748, 751-52 (6th Cir. 2019)). That includes the authority to “[m]ake any order” within the Court's discretion “to subject any nonexempt assets of any judgment debtor to the satisfaction of any judgment against the judgment debtor.” Mich. Comp. Laws § 600.6104(5). The Court may also “restrain[ ] the judgment debtor from making or suffering any transfer or other disposition of, or interference with any of his property then held or thereafter acquired.” Mich. Comp. Laws § 600.6116(1). Post-judgment orders restraining the transfer of assets routinely are entered by courts to enforce judgments under Michigan law. See, e.g., Laborers’ Pension Tr. Fund – Detroit & Vicinity v. Telegraph Paving Co., 2012 WL 2018054, at PAGE_1-3 (E.D. Mich. 2012) (Lawson, J.) (entering post-judgment order restraining the transfer of certain property); Comerica Bank v. Esshaki, 314 F. Supp. 3d 832, 836 (E.D. Mich. 2018) (Whalen, M.J.) (same); Arbor Farms, LLC v. GeoStar Corp., 305 Mich. App. 374, 378, 853 N.W.2d 421, 424 (2014) (discussing post-judgment status quo order entered to restrain defendant from transferring assets); Hooper Hathaway, PC v. Atlas Techs., LLC, No. 357185, 2022 WL 4281557, at PAGE_6 (Mich. Ct. App. Sept. 15, 2022) (same). That is all that the Court did here.
Winget nevertheless insists that he did not knowingly violate a “definite and specific” order of the Court. See Gascho v. Glob. Fitness Holdings, LLC, 875 F.3d 795, 800 (6th Cir. 2017) (quoting NLRB v. Cincinnati Bronze, Inc., 829 F.2d 585, 591 (6th Cir. 1987)). He says that because the Status Quo Order did not specifically bar him from filing probate petitions, he may continue to seek relief in probate court that would nullify his contributions to the Trust. This, too, is a specious argument. Winget does not actually contend that the Status Quo Order was so vague or ambiguous that he was “unable to comply” with it. Gascho, 875 F.3d at 800 (citing Gary's Elec., 340 F.3d at 379). Rather, he effectively suggests that he has “an immunity from civil contempt because the plan or scheme” he adopted by filing the probate petition “was not specifically enjoined.” McComb, 336 U.S. at 192. That is not the law. “The schemes available to those determined to evade injunctions are many and varied, and no injunction can explicitly prohibit every conceivable plan designed to defeat it.” Inst. of Cetacean Rsch., 774 F.3d at 954. Courts therefore may issue orders categorically prohibiting conduct without violating the rule that an injunction must be definite and specific. Ibid. If it were otherwise, litigants like Winget could prevent accountability through “persistent contumacy,” effectively nullifying injunctions through a “program of experimentation with disobedience.” McComb, 336 U.S. at 192.
PAGE_9 Contempt “is reserved for those who ‘fully understand[ ]’ the meaning of a court order and yet ‘choose[ ] to ignore its mandate.’ ” Gascho, 875 F.3d at 800 (quoting Int'l Longshoremen's Ass'n, Loc. 1291 v. Philadelphia Marine Trade Ass'n, 389 U.S. 64, 76 (1967)). As described above, there is ample evidence that Winget fits neatly into that category. The injunction was necessitated in the first instance by Winget's secret revocation of the Trust. Winget then proceeded to ask the probate court to nullify Trust contributions without informing the Agent or the Court that he had filed a petition seeking that relief. He never sought any clarification from the Court regarding the propriety of his probate petition or indicated that he was in any way unclear as to the scope of the injunction. See Polo Fashions, 760 F.2d at 700. Instead, Winget claimed to assume—wrongly — that the petition to nullify his Trust contributions was allowed, simply because the Status Quo Order did not include the phrase “probate petition.” By construing his obligations “narrowly to include only refraining from acts specifically enumerated in the injunction, and not acts likely to nullify the injunction,” Winget assumed the risk that his “attempts at technical compliance would prove wanting.” Inst. of Cetacean Rsch., 774 F.3d at 954-55.
Because Agent has produced clear and convincing evidence demonstrating that Winget willfully violated the definite and specific provisions of the injunctive terms of the Status Quo Order, the burden shifts to Winget to demonstrate that he presently is unable to comply with the Court's injunction. Elec. Workers, 340 F.3d at 379. Winget has not made that showing. He has not even attempted to demonstrate that he “took all reasonable steps within [his] power to comply with” the Court's Status Quo Order, Gary's Elec., 340 F.3d at 379 (quoting Peppers v. Barry, 873 F.2d 967, 969 (6th Cir. 1989)), let alone that he made a diligent effort toward compliance, see Glover, 934 F.2d at 708 (noting that “diligence alone does not satisfy” a contemnor's burden of production). Nor would it even be possible for Winget to meet that burden when he willfully and voluntarily submitted the probate petition. Logically, it was not “impossibl[e]” for him to act otherwise. Ibid. (quoting Fortin v. Comm'r of Mass. Dep't of Pub. Welfare, 692 F.2d 790, 796–97 (1st Cir. 1982)).
The amended probate petition does not change this analysis. In that amendment, Winget still asks the probate court to nullify the LLC contributions Winget made to the Trust. By asking the probate court to nullify his contributions to the Trust, Winget is in contempt of the Court's Status Quo Order enjoining him from transferring or disposing of the assets (or attempting to do so) held in the Trust.
The Agent insists that the attorneys representing Winget in this case also should be held in contempt, even though they are not representing Winget in his probate proceedings. The Agent cites no legal authority in support of this extraordinary request, which, if granted, effectively would bar Winget from responding to the Agent's contempt motion or presenting related arguments before this Court. Nor has the Agent pointed to any definite and specific provisions of any Court order barring Winget's counsel from doing anything in this case. The Agent's request to sanction Winget's counsel for contempt will be denied.
Courts fashioning a remedy against a civil contemnor must be mindful that coercion — not punishment — is the main objective. The “objective of any contempt determination is to enforce the message that court orders and judgments are to be taken seriously.” Elec. Workers Pension Tr. Fund of Local Union #58, IBEW v. Gary's Elec. Serv. Co., 340 F.3d 373, 385 (6th Cir. 2003) (citing Cincinnati Bronze, 829 F.2d at 590). Nonetheless, “judicial sanctions can be used not only to coerce compliance, but also to compensate the complainant.” Ibid. (quoting United Mine Workers, 330 U.S. at 303-04); see also United States v. Work Wear Corp., 602 F.2d 110, 115 (6th Cir. 1979) (“Civil contempt is meant to be remedial and to benefit the complainant either by coercing the defendant to comply with the Court's order via a conditional fine or sentence or by compensating the complainant for any injury caused by the defendant's disobedience.”). Although framing the sanction to “fit the violation” is a matter of the Court's discretion, 11A Wright, Miller, & Kane, Fed. Prac. & Proc. Civ. § 2960 (3d ed.), the Court is obliged to employ “the least possible power adequate to the end proposed,” Shillitani v. United States, 384 U.S. 364, 371 (1966) (citation omitted).
PAGE_10 The Court need not impose monetary sanctions to coerce Winget's compliance with the Status Quo Order here. The probate court already denied the petition. Of course, Winget filed an appeal from the dismissal, but the Court may enforce its Status Quo Order simply by ordering Winget to withdraw the appeal, or to limit the appeal expressly to the issue of trust administration and disavow any effort in the state courts to reverse or challenge in any way the contributions to the Trust. There is little reason to doubt that Winget would comply with such a sanction: Winget volunteered that he would withdraw his probate petition upon an order from the Court, and it is likely that he would follow form with the appeal. And it is within the Court's discretion to order nonmonetary sanctions it believes are necessary to bring about compliance with the injunction. See, e.g., Reed v. Rhodes, 635 F.2d 556, 558 (6th Cir. 1980) (ordering school board to appoint a desegregation administrator); Lance v. Plummer, 353 F.2d 585, 592 (5th Cir. 1965) (ordering sheriff to give up badge and cease functions as a peace officer until he demonstrated compliance with court orders); Nabkey v. Hoffius, 827 F. Supp. 450, 455 (W.D. Mich. 1993) (barring plaintiff from filing further court papers until she had met certain requirements), aff'd sub nom. Nabkey v. 61st Dist. Ct., 79 F.3d 1148 (6th Cir. 1996).
The Agent alternatively asks the Court to enjoin the probate court proceedings (and presumably the ensuing appeal to the Michigan Court of Appeals) to protect or effectuate its judgments in this case. The Anti-Injunction Act “generally prohibits the federal courts from interfering with proceedings in the state courts.” Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 145 (1988). The Court “may not grant an injunction to stay proceedings in a State Court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” Id. (quoting 28 U.S.C. § 2283). The last clause — the so-called relitigation exception — is tightly circumscribed by the overriding tenets of federalism and may be applied only in the narrowest of circumstances where claims or issues actually have been decided by a federal court. Smith v. Bayer Corp., 564 U.S. 299, 306-07 (2011); Chick Kam Choo, 486 U.S. at 148.
The Court's order here will not be directed to any state court. But it could be argued that ordering Winget to withdraw or amend his appeal has the same effect as enjoining his state appellate proceedings. That is because under the Anti-Injunction Act, enjoining a party from pursuing state-court litigation has the same practical effect as enjoining the state court directly. See 20 Fed. Prac. & Proc. Deskbook § 49 (2d ed.) (“It is accepted that the prohibition against enjoining state-court proceedings cannot be avoided by framing an injunction as a restraint on a party rather than directly on the state court.”) (citing Imperial Cnty., Cal. v. Munoz, 449 U.S. 54, 58-59 (1980); Oklahoma Packing Co. v. Oklahoma Gas & Elec. Co., 309 U.S. 4, 9 (1940)); Tropf v. Fid. Nat. Title Ins. Co., 289 F.3d 929, 942 (6th Cir. 2002) (finding that an order “indirectly enjoining” state court proceedings violated the Act where the relitigation exception did not apply). But even if the Anti-Injunction Act applies to this factual scenario, the Agent has made the “strong and unequivocal” showing necessary to invoke the relitigation exception for the purpose of barring Winget from nullifying his Trust contributions in probate court. American Town Ctr. v. Hall 83 Assoc., 912 F.2d 104, 111 (6th Cir. 1990) (holding that “a complainant must make a strong and unequivocal showing of relitigation of the same issue in order to overcome the federal courts’ proper disinclination to intermeddle in state court proceedings”). As explained at length above, it “actually ha[s] been decided by the federal court” that Winget cannot take actions contrary to the Court's collection orders. Chick Kam Choo, 486 U.S. at 148. That precisely is what Winget asked the probate court to declare that he may do. See Am. Probate Pet., ECF No. 1046-1, PageID.32851 (“Larry Winget as settlor and trustee of the Trust respectfully requests the Court ... enter an Order nullifying the LLC contributions Larry made to the Trust” from 2003 to 2022). The “essential prerequisite for applying the relitigation exception” therefore is met, and it is within the Court's discretion to enjoin Winget from relitigating in the state probate court and the court of appeals the issue of withdrawing property from the Trust. Chick Kam Choo, 486 U.S. at 148.
PAGE_11 It is unnecessary to impose severe monetary sanctions to compensate the Agent. Compensatory sanctions typically provide relief to a complainant for a failure to pay a monetary judgment; they “must of course be based upon evidence of [the] complainant's actual loss.” United Mine Workers, 330 U.S. at 303-04. But Winget's failure to comply with the Status Quo Order has not caused the Agent financial harm, except that the Agent has incurred attorney's fees and expenses bringing this contempt motion. The Court properly may grant the Agent's request that Winget compensate it for those fees; it is “well recognized” that “[c]ourts have inherent authority to enforce their judicial orders and decrees in cases of civil contempt by assessing attorneys’ fees.” Liberis v. Craig, 845 F.2d 326, 1988 WL 37450, at PAGE_5 (6th Cir. 1988) (table); see also Nicole Gas Prod., Ltd., 916 F.3d 566, 579 (6th Cir. 2019) (affirming fee award as sanction for contempt finding); Inst. of Cetacean Rsch., 774 F.3d at 958 (“[T]he cost of bringing the violation to the attention of the court is part of the damages suffered by the prevailing party.” (quotation marks omitted)). Before the Court awards the Agent its costs, however, the Agent first must make an accounting of its fees and expenses to the Court.
The conduct of Larry J. Winget filing a petition asking a Michigan probate court to nullify contributions from limited liability companies Winget made to the Larry J. Winget Living Trust violated the Status Quo Order's prohibition against “encumbering, destroying, concealing, or otherwise disposing of the assets owned, titled in the name of, or otherwise held by the Trust or its trustee outside of the ordinary course of business.”
Accordingly, it is ORDERED AND ADJUDGED that Larry J. Winget is in CIVIL CONTEMPT of the order of this Court.
It is further ORDERED that the plaintiff's motion to hold Larry J. Winget in civil contempt (ECF No. 1036) is GRANTED IN PART.
It is further ORDERED that Larry J. Winget may purge his contempt by immediately withdrawing his appeal of the Opinion and Order Regarding Trustee and Settlor's Amended Petition for Reformation, Construction, Instructions and Other Relief entered on April 17, 2023 in Oakland County, Michigan Probate Court Case Number 2022-409601-TV, or by expressly limiting the appeal to the issue of trust administration and disavowing any effort in the state courts to reverse or challenge in any way the contributions to the Trust. Larry J. Winget must immediately file a declaration of compliance with this Court.
It is further ORDERED that if the plaintiff wishes to recover attorney's fees, it must file with the Court an appropriate motion for attorney's fees, subject to Local Rule 7.1, documenting the time and expenses incurred in filing its contempt motion in this Court.