The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
2013 - Nevada - Renteria
Renteria v. Canepa, Case No. 3:11-cv-00534-RCJ-CWH (D.Nev., 2013).
OSCAR RENTERIA et al., Plaintiffs,
EUGENE CLEVELAND CANEPA, Defendant.
United States District Court, D. Nevada.
June 19, 2013.
ROBERT C. JONES, District Judge.
This is a breach of contract action to enforce five promissory notes due and owing. Pending before the Court are a Motion for Charging Order (ECF No. 36), a Motion for Rule 11 Sanctions (ECF No. 39), and a Motion for Attorney's Fees (ECF No. 49). For the reasons given herein, the Court grants the motions.
I. FACTS AND PROCEDURAL HISTORY
In late 2006, Defendant Eugene Cleveland Canepa made five promissory notes to Plaintiff the Renteria Family Trust (the "Trust") in the amounts of $100,000; $70,000; $100,000; $200,000; and $375,000, signing them all in his individual capacity and as President of a company called French Quarter, Inc. (See Promissory Notes, ECF Nos. 1-1). Defendant failed to pay the notes upon demand in April 2007, and in August 2007, French Quarter filed for Chapter 11 bankruptcy protection. (See Order, 2:20-26, July 3, 2012, ECF No. 12). Plaintiffs, Defendant, and French Quarter entered into a settlement agreement, which the bankruptcy judge approved, permitting Plaintiffs an unsecured claim against French Quarter for $887,000 and agreeing that Defendant was a co-maker of the notes in the total amount of $845,000, which notes remained valid and binding, and that Plaintiffs reserved their rights to sue on them. (See id. 2:27-3:16). The bankruptcy estate eventually distributed $354,800 to Plaintiffs in May 2010, which amount covered accrued interest to that date, plus $4146.85 of the late fees, leaving $38,103.15 in late fees and the entire principal amount. (See id. 3:25-4:2).
Interest continued to accrue, and Plaintiffs sued Defendant in another court of this District, the Hon. Edward C. Reed, on July 26, 2011 for breach of contract, unjust enrichment, money lent, and money had and received. Plaintiffs moved for judgment on the pleadings. Judge Reed granted the motion in part, ruling that Defendant was liable on all five promissory notes for a total of $998,870.27, representing $845,000 in principal, $115,767.12 in interest from the May 2010 bankruptcy distribution through the date of the Complaint, and $38,103.15 in yet-unpaid late fees. (See Order 10). Judge Reed refused to award attorney's fees at that time but granted leave to Plaintiffs to file a later motion. (See id. 11). Judge Reed also ruled that Plaintiffs could not also recover under quasi-contractual theories, because there was a contract governing the relationship. The magistrate judge ordered Defendant to appear for a Rule 69 judgment debtor exam at Plaintiffs' attorneys' law offices in Reno, Nevada at 9:00 a.m. on Monday, November 12, 2012, reminding Defendant that failure to appear could constitute contempt of court. (See Order, Oct. 15, 2012, ECF No. 26). The Clerk has issued to the U.S. Marshal for the District of Nevada a Writ of Execution (the "Writ") for a total of $1,000,295,51, which amount includes $1425.24 of post-judgment interest at the federal rate of 0.21% per annum ($5.74 per day) from the date of judgment through the date of the Writ. (See Writ, Mar. 8, 2013, ECF No. 48). The case has since been reassigned to this Court. Plaintiffs have filed a Motion for Charging Order (ECF No. 36), a Motion for Rule 11 Sanctions (ECF No. 39), and a Motion for Attorney's Fees (ECF No. 49).
A. Charging Order
Plaintiffs ask the Court to issue an order charging Defendant's stock in two Nevada corporations, FQ Men's Club, Inc. and Monkey Bars, Inc., as well as Defendant's membership interest in Nevada limited liability company Western Properties of Nevada, with payment of the unsatisfied judgment.
Defendant responds that because federal tax liens were recorded against the assets at issue before the judgment in this case was entered, the federal tax liens are prior and execution on the judgment against those assets would be inappropriate. Defendant attaches a Notices of Federal Tax Lien ("NFTL") filed in Douglas County on October 11, 2010 containing five claims: one against him personally pursuant to 26 U.S.C. sec. 6672 in the amount of $152,272.89, and four against FQ Men's Club, Inc. itself pursuant to sec.sec. 940 and 941 in the total amount of $183,436.08. (See NFTL, Oct. 11, 2010, ECF No. 38-1).
Plaintiffs reply that these liens do not prevent the assets identified from being charged with paying the judgment under state law. The Court agrees with Plaintiffs that Defendant is not himself in bankruptcy, and French Quarter's bankruptcy does not affect Defendant's own immediate liability. The Court also agrees that no controversy between Plaintiffs and the IRS is before the Court. It is only for this Court to determine whether the charging order requested is available under state law, which it is. See Nev, Rev, Stat. sec.sec. 78.746, 86.401. If the IRS or the entities to be charged wish to challenge Plaintiff's subsequent attempts to enforce the charging order under federal priority statutes, that is a separate matter.
B. Rule 11 Sanctions
Plaintiffs ask the Court to award sanctions against Defendant's counsel, Attorney Del Hardy and Hardy Law Group, pursuant to Rule 11(b) based upon Defendant's filing of the Motion to Set Aside Order/Judgment (ECF No. 31) without making a reasonable inquiry into the factual contentions allegedly supporting Defendant's arguments and failing to withdraw it after Plaintiffs brought its deficiencies in this regard to Defendant's attention. The Court grants the motion. The Court notes that Judge Reed in his order denying the Motion to Set Aside Order/Judgment (ECF No. 31) noted that the only putative basis therefore was testimony by a witness in a separate case that he believed the settlement reached during the bankruptcy proceedings prevented Plaintiffs from pursing an action on "the notes." Judge Reed noted it was clear that "the notes" referred to in that unrelated testimony were not the notes at issue in the present case but notes that Defendant had made to other non-parties. As Judge Reed noted, it was clear that the settlement agreement specifically reserved Plaintiffs' rights to pursue the notes against Defendant, and counsel had come forth with nothing rebutting this fact.
Defendant's response is unimpressive. Defendant mostly complains that Plaintiffs' counsel failed to provide the original $375,000 note for expert handwriting analysis. But the issue had already been decided under Rule 12. Defendant's counsel had no right to demand discovery that was no longer permitted and to use Plaintiffs' refusal to voluntarily acquiesce as an excuse to file a motion for which they had no basis apart from speculation.
The Court finds that the claims made in the motion were both legally frivolous under Rule 11(b)(2) and factually unsupported under Rule 11(b)(3). Counsel failed to take advantage of the "safe harbor" rule and withdraw the motion when opposing counsel contacted them by letter, with the proposed present Motion for Sanctions attached. The Court therefore will award reasonable fees related to Plaintiffs' opposition of the original motion and litigation of the present motion. Counsel for Plaintiffs shall file an affidavit of attorney's fees supporting the requested amount. Plaintiffs shall have the burden of establishing that none of the requested fees have already been awarded pursuant to the present separate Motion for Attorney's Fees (ECF No. 49). If that is the case, counsel for Plaintiffs shall move to amend the present order to deny the Motion for Rule 11 Sanctions (ECF No. 39) as moot, or to ask the Court to grant a different remedy.
C. Attorney's Fees
Finally, Plaintiffs have filed a Motion for Attorney's Fees (ECF No. 49). Reasonable attorney's fees are available under the terms of the notes themselves. Judge Reed has already determined that Plaintiffs are entitled to fees under the notes, and the Court will not upset that clearly correct ruling. However, he required Plaintiffs to re-file their motion in proper form under the local rules. Plaintiffs have now done so, and they request $12,677.50 in fees: (1) 5.8 hours for Attorney Lukas at an average rate of $417.59 per hour; (2) 38.1 hours for Attorney Hollandsworth at an average rate of $235.13 per hour; (3) 7.9 hours for Paralegal Arnold at an average rate of $160.25 per hour; and (4) 0.2 hours for Librarian Nelson at a rate of $155 per hour. The Court agrees that the full amount requested is warranted for the reasons given in the motion. Also, Defendant has not responded to the motion, and the response in approximately two months late.
IT IS HEREBY ORDERED that the Motion for Charging Order (ECF No. 36), Motion for Rule 11 Sanctions (ECF No. 39), and Motion for Attorney's Fees (ECF No. 49) are GRANTED.
IT IS FURTHER ORDERED that Eugene Cleveland Canepa's stock in FQ Men's Club, Inc. and Monkey Bars, Inc. is CHARGED pursuant to NRS section 78.746 to satisfy the judgment entered in this case against him and in favor of the Renteria Family Trust.
IT IS FURTHER ORDERED that Eugene Cleveland Canepa's membership interest in Western Properties of Nevada is CHARGED pursuant to NRS section 86.401 to satisfy the judgment entered in this case against him and in favor of the Renteria Family Trust.
IT IS FURTHER ORDERED that attorney's fees are awarded in favor of the Renteria Family Trust and against Eugene Cleveland Canepa in the amount of $12,677.50.
IT IS SO ORDERED.
 Although Oscar and Denise Renteria are listed as Plaintiffs both in their individual capacities and in their capacities as trustees of the Trust, it appears that they only have standing to sue in the latter capacity, because the Trust is the payee of the notes. The Rentarias resided in California at the time the action was commenced, and Canepa resided in Nevada.
by Jay Adkisson
2020.06.20 ... Payment Of Distributions Directly To Creditor Holding A Charging Order Deemed Appropriate In BMO Case
2020.04.30 ... Charging Order Denied For Lack Of Proof Of The Debtor's Interest In Dhillon
2020.02.29 ... Florida Charging Order Requires Distributions To Be Re-Directed To The Creditor In Kostoglou
More Articles On Charging Orders click here
LAW REVIEW ARTICLES
by Jay Adkisson
For more on the historical background of Charging Orders and contemporary issues involving the same, see Jay Adkisson's article, Charging Orders: The Peculiar Mechanism, 61 South Dakota Law Review 440 (2016). Available at SSRN: https://ssrn.com/abstract=2928487
Analysis of Uniform Limited Liability Company Act Sections re Charging Orders
The Uniform Acts re Charging Orders and Transferable Interests (without Jay's comments):
Effect of Bankruptcy On The Debtor-Member's LLC Interest here
Collected Court Opinions On Charging Orders here and below
NATURE OF REMEDY
Distributions/Economic Rights - Creditors rights to distributional interests/economic rights
Prejudgment Relief - Freezing the interest and distributions pending judgment
Procedure - The procedure for obtaining a charging order and ancillary provisions
Unknown Interest - Where the debtor's interest, if any, has not been ascertained
Order Form Generally - Most issues to the form of the charging order
Order Form Future Interests - How the charging order affects subsequently-acquired interests
Exemptions - Available state and federal protections that may apply to charging orders
Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute
Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs
Foreign Entities - Charging orders against out-of-state entities
Creditor Rights Restrictions - Limitations on creditors' management and informational rights
Information Rights - Creditors' ability to access information about the LLC
Management & Voting Rights - Rights of creditor after charging order issued
LIEN EFFECT AND PRIORITY
Lien - The lien effect of a charging order and priority issues
Compliance - Issues for the LLC and non-debtor members in complying with a charging order
Receiver - The role of the receiver in charging order proceedings
SINGLE MEMBER LLC
Single-Member LLCs - Enforcing the judgment against an LLC with a sole member
Foreclosure - Liquidation by judicial sale of the debtor's right to distributions
REPURCHASE AND REDEMPTION RIGHTS
Repurchase/Redemption Rights - Third-parties' ability to purchase the charged interest
Appeal - Issues relating to the appeal of a charging order
RELATION TO OTHER REMEDIES
Exclusivity - The charging order as the sole remedy available to creditors and exceptions
Voidable Transactions/Fraudulent Transfers - Issues relating to avoidable transfers of interests
Bankruptcy - Treatment of the debtor/member's interest in bankruptcy
Intra-Member Disputes - Where one member obtains a charging order against another
Taxes - Tax issues relating to charging orders for all involved parties
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Additional Court Opinions About charging orders (unsorted)
THE CHARGING ORDERS PRACTICE GUIDE
The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association, click here for more
Available for purchase directly from the ABA at https://goo.gl/faZzY6
Also available from Amazon at https://www.amazon.com/Charging-Orders-Practice-Guide-Understanding/dp/1641052643
OTHER INFORMATIONAL WEBSITES
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