The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
Mack Film Development, LLC v. Benevolent Partners, L.P., 2014 WL 929702 (Conn.Super., Unpublished, 2014).
UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.
Superior Court of Connecticut, Judicial District of Fairfield.
MACK FILM DEVELOPMENT, LLC et al.
BENEVOLENT PARTNERS, L.P. et al.
Feb. 6, 2014.
Attorneys and Law Firms
Winston & Winston PC, New York, NY, for Mack Film Development, LLC et al.
Robert Lawrence Strassberg, Strassberg & Strassberg PC, New York, NY, Grady & Riley LLP, Waterbury, for Grant Johnson.
1. Introduction and Background
*1 Before the court are several motions by the plaintiff creditors in this case, Mack Film Development, LLC, Millie Film Development, LLC, and Robert Cort Productions, Inc., hereinafter the plaintiff creditors. The motions are Application for Charging Order against the Partnership Interests of Judgment Debtors in JHJ Limited Partnership and for Immediate Foreclosure of Same, and Judgment Creditors' Motion for Sanctions and Contempt against Judgment Debtors.
The following procedural history which is also a matter of record is relevant to the court's consideration of the subject motions. On July 16, 2008, following a jury trial, the plaintiff creditors obtained a judgment against the defendants Benevolent Partners, LP and Grant Johnson, hereinafter the defendant debtor (Grant Johnson) and the defendant debtors (Benevolent Partners, LP and Grant Johnson), in the amount of $5,000,793.20 which included a $1,750,000 .00 punitive damage award for the defendant debtors' failure/refusal to provide financial information. On November 7, 2008, the Superior Court for the State of California, Los Angeles County entered an order against the defendant debtors for attorneys fees in the amount of $815,000.00. On August 25, 2010, the California Appellate Court affirmed the judgment, including the punitive damages award. On January 5, 2011, the California Superior Court entered an Order for attorneys fees on appeal in the sum of $167,316.00 in favor of the plaintiff creditors and against the defendant debtors. The judgment remains unpaid except for $9,206.08 which was recently garnished from two bank accounts in California and New York.
The defendant debtor is a limited partner of Benevolent Partners, LP. Based on the evidence presented at the California trial, the jury pierced the corporate veil of Benevolent Partners, LP and found that the defendant debtor is the alter ego for Benevolent Partners, LP. At all times relevant to these proceedings the defendant debtor has also functioned as the managing member of Benevolent Capital Management, LLC, the general partner of Benevolent Partners, LP. The defendant debtor is also a limited partner in JHJ Limited Partnership, LP, which was not a party to the California lawsuit. The jury also found that the plaintiff creditors proved that the defendant debtors had intentionally misrepresented their financial assets. The jury returned a verdict against the defendant debtor on grounds of malice, oppression and/or fraud in his conduct.
As background for the court's consideration of the motions herein, the California Court ordered the defendant debtor to produce his financials and the financials of Benevolent Partners, LP. The California Court found that the defendant debtor failed to comply with his duty to provide financials and accordingly issued a punitive damage award in the amount of $1.75 million against him based on the defendant debtor's testimony and the failure to produce financial records as ordered. "The trial court found the financial records produced by Johnson were so inadequate on their face as to completely frustrate the purpose of the proceeding and did not even approximate a good faith attempt to comply with the court's order." Mack Film Development v. Johnson, Docket No. B210933, 2010 Cal.App.Unpub. LEXIS 6777 *7 (Cal.App.2d August 25, 2010). The defendant debtor failed to cure the default and the judgment, including the punitive damage award, was upheld on appeal. Foreign judgments are treated the same as a judgment of a Connecticut court and are subject to the same procedures and enforcement guidelines as a judgment of this state. General Statutes sec. 52–605(b).
*2 On August 13, 2010, the plaintiff creditors through their president Robert Cort filed a Petition for Examination of Judgment Debtor, in which they alleged that postjudgment interrogatories had been served on the defendant debtor pursuant to Gen.Stat. 52–397 without a response. The Order for Hearing and Notice of Hearing set the date of February 14, 2011, for the hearing.
In February 2011, the defendant debtor appeared for a post-judgment examination. Despite the extensive history of this case and the defendant debtor's background as a private equity investor, he did not produce complete personal financial records or financial records for the companies he controlled, judgment debtor Benevolent Partners, LP and non-judgment debtor Benevolent Capital Management, LLC. Benevolent Partners, LP was created in or about 1999 and the underlying California action was commenced in 2005. The Benevolent Partners, LP partnership agreement required the defendant debtor to keep the partnership's financial records for 6 years. Further facts relating to this matter are described below.
This court heard argument and testimony on June 21, August 14, September 25 and 26, October 23, November 26, December 9 and 10, 2013.
2. Applicable Law: Examination of Judgment Debtor
The availability of an examination of judgment debtor is governed by statute. Specifically, chapter 906 of title 52 of the General Statutes, comprised of General Statutes secs. 52–347 to 52–400f, inclusive, provides for postjudgment procedures, including rules and procedures for the enforcement of a money judgment, postjudgment discovery, examination of a judgment debtor and execution of a judgment against the defendant debtor's property located within the state. "[T]he primary purpose of post judgment discovery is to identify assets that can be utilized at some later time to satisfy a money judgment ..." All Seasons Services, Inc. v. Gulidner, 89 Conn.App. 781, 789, 878 A.2d 370 (2005). Such discovery is limited to the amount, nature, and location of nonexempt assets. See General Statutes sec. 52–351b(a) (providing for discovery of nonexempt assets) and General Statutes sec. 52–352b (providing categories of property exempt from execution); see also Colandro v.. Allstate Ins. Co., Superior Court, judicial district of New Haven, Docket No. CV–92–0337064–S (July 12, 2000, Pittman, J.) (27 Conn. L. Rptr. 497, 499) ("[General Statutes sec. 52–351b] thus limits inquiry, in the case of a debtor corporation, to the amount, nature and location of assets").1
General Statutes sec. 52–397, the section that specifically authorizes an examination of judgment debtor, provides in pertinent part: "Any judgment debtor, an execution against whom has been returned unsatisfied in whole or in part or who has failed to respond within thirty days to any post judgment interrogatories ... may be examined on oath ... concerning his property and means of paying such judgment ..."2 Thus, "[a]s a basis for obtaining permission to conduct a court-ordered examination of a judgment debtor, the creditor must allege either that an execution was issued which was returned unsatisfied, or that post judgment interrogatories as described in [General Statutes] sec. 52–351b were served on the defendant debtor and the defendant debtor failed to respond to the interrogatories." Great Country Bank v. Dietter, Superior Court, judicial district of New Haven, Docket No. CV–91–0324140–S (March 8, 2006, Pittman, J.) (40 Conn. L. Rptr. 793, 793).
*3 In this action for examination of judgment debtor, the plaintiff creditors certify via Robert Cort's July 16, 2010, certification that they obtained a judgment against the defendant debtors in California and that the entirety of that judgment is unsatisfied. It is not necessary under the law of this state as applied to the facts of this case for the creditor to present further evidence before this court as to the amount of the debt due to it. An execution was issued by the Superior Court in Connecticut on August 5, 2011. Although neither the court's docket nor the present record reveals whether that execution was returned unsatisfied, there does not appear to be any dispute concerning whether an examination of judgment debtor is appropriate in the present context. The defendant debtor challenges the scope of the examination, specifically, the plaintiff creditors' attempt to identify sources other than his personal assets which would be available to satisfy the judgment. The law of this state does not support the defendant debtor's argument.
General Statutes sec. 52–398 is entitled "Scope of inquiry; debtor not excused from answering." It provides that "[t]he debtor shall not be excused from answering any question on the ground that his answer might tend to convict him of fraud or show that he has been party to any fraudulent or illegal conveyance, but his answers shall not be used against him in any criminal proceeding except in a prosecution for perjury." General Statutes sec. 52–398. Practice Book sec. 13–20 provides further details as to the scope of discovery against a judgment debtor: "(a) A judgment creditor may obtain discovery from the defendant debtor, or from any third person the judgment creditor reasonably believes, in good faith, may have assets of the defendant debtor, or from any financial institution to the debtor, or from any financial institution to the extent provided by this section, of any matters relevant to satisfaction of the money judgment ... (b) ... The judicial authority may order such discovery as justice requires provided the order shall contain a notice that failure to comply therewith may subject the person served to being held in contempt of court."3
"[T]he power of a judgment creditor to use the judicial process to compel third parties to provide information about the assets of a judgment debtor is circumscribed in Connecticut by the provisions of Conn. Gen.Stat. sec. 52–351b ... [T]he entire subsection seems to allow the judgment creditor to undertake discovery without leave of the court but to allow the party against whom discovery is sought to oppose responding unless the judgment creditor obtains a court order ." Prime Bank v. Lutsky, Superior Court, judicial district of New Haven, Docket No. CV–98–0410075–S (February 29, 2000, Pittman, J .) (26 Conn. L. Rptr. 626, 627). Specifically, sec. 52–351b(d) provides that "[a]ny party from whom discovery is sought may seek a protective order pursuant to section 52–400a." Id. General Statutes sec. 52–400a provides in pertinent part that "(a) [o]n motion of a judgment debtor or third person from whom discovery is sought, and for good cause shown, or on its own motion, the court may make any order which justice requires to protect such debtor or third person from annoyance, embarrassment, oppression or undue burden or expense."4
*4 Various Superior Court cases have discussed the scope of the examination of a judgment debtor. "[T]he plaintiff may inquire of the defendant as to information concerning its assets, and the defendant is required to disclose its assets and provide financial records reasonably designed to satisfy the outstanding judgment." CT Insulation Distributors Corp. v. Westconn Architectural Panel Systems, Inc., Superior Court, judicial district of Danbury, Docket No. CV–99–0335501–S (September 7, 2001, White, J.). "For these purposes, assets include, without limitation, any interests in partnerships, corporations and other business entities, real estate, bank and investment accounts, notes, bonds and securities, leases, security interests, insurance policies, trusts, accounts receivable and the like." P.G.S. Realty Company v. ZPP & W Associates, Superior Court, judicial district of Hartford, Docket No. CV–93–0531233–S (February 15, 2001, Bryant, J.). The statute contemplates inquiry and production related to the amount, nature and location of the defendant debtor's nonexempt assets contemplated by the statute. The proper scope of such inquiry, including examination of witnesses, is determined by the particular facts of each case. In Colandro v. Allstate Ins. Co., supra, 27 Conn. L. Rptr. at 499, the court considered whether and how to permit examination of several third-party entities owned by the same family that owned the defendant debtor company. The court's analysis in Colandro provides a thorough review of the statute. However, the case is factually distinguishable in several aspects. It is significant that the court declined to pierce the corporate veil in Colandro, whereas in this case, a jury not only pierced Benevolent's corporate veil, but its decision was further upheld on appeal. Furthermore, in this case, even with the limited disclosure by the debtor, it is evident that he has access to assets from family members who are also involved in various partnerships which have engaged in loans and other transactions for the benefit of the debtor since the date of the judgment. Finally, the total amount of the judgment in this case, over five million dollars, contrasts starkly with the far smaller amounts at stake in Colandro and the other superior court decisions which this court has reviewed. Unlike the creditors in Colandro, the creditors here are not using "a modest money judgment against a corporation as a cudgel against all family members who may once have been associated with the defendant debtor." Id.
The court thus concludes from its review of the relevant statutes and Superior Court decisions addressing this issue that it has wide discretion to either permit examination or restrict it as justice requires. The hearing before this court has provided sufficient basis for the court to identify assets in which the defendant debtor has or has had an interest or rights during the relevant time period and to craft an order tailored to locating those assets which fairly upholds the rights of both the creditor and the defendant debtor.
3. Applicable Law: Basis for a Charging Order
*5 In the present case, as previously noted, the plaintiff creditors move for a charging order against the defendant debtor's interest in JHJ Limited Partnership. The defendant debtor claims that the plaintiff creditors failed to provide evidence of the amount of the judgment still due. The plaintiff creditors respond that the defendant debtor's interest is estimated at between $500,000 and $2 million and all the evidence they previously provided demonstrates that the amount of indebtedness is over $5 million.
"[A] charging order ... is neither fish nor fowl. It is neither an assignment nor an attachment ... Under this procedure, a court may grant a judgment creditor's application and issue an order charging the debtor partner's interest in the partnership with payment of the judgment debt. General Statutes sec. 34–66. The charging order leaves the partnership intact but diverts to the judgment creditor the debtor partner's share of the profits." Madison Hills Ltd. Partnership (II) v. Madison Hills, Inc., 35 Conn.App. 81, 84–85, 644 A.2d 363 (1994). The terms of General Statutes sec. 34–349, on charging orders on a partnership, are incorporated into General Statutes sec. 34–30, regarding charging orders on a limited partnership. Id., at 82.
General Statutes sec. 34–30 provides: "Rights of judgment creditor to charge partnership interest of partner. On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the partnership interest. Nothing in this chapter shall be held to deprive a partner of the benefit of any exemption laws applicable to his partnership interest."
General Statutes sec. 34–349 provides: "Partner's transferable interest subject to charging order. (a) On application by a judgment creditor of a partner or of a partner's transferee, a court having jurisdiction may charge the transferable interest of the defendant debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the defendant debtor in respect of the partnership and make all other orders, directions, accounts and inquiries the defendant debtor might have made or which the circumstances of the case may require.
"(b) A charging order constitutes a lien on the defendant debtor's transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.
"(c) At any time before foreclosure, an interest charged may be redeemed: (1) By the defendant debtor; (2) with property other than partnership property, by one or more of the other partners; or (3) with partnership property, by one or more of the other partners with the consent of all of the partners whose interests are not so charged.
*6 "(d) Sections 34–300 to 34–399, inclusive, do not deprive a partner of a right under exemption laws with respect to the partner's interest in the partnership.
"(e) This section provides the exclusive remedy by which a judgment creditor of a partner or partner's transferee may satisfy a judgment out of the defendant debtor's transferable interest in the partnership."
The statutes do not specifically state that a hearing is necessary to establish the amount of indebtedness or the value of a partnership interest prior to a charging order being issued. In Madison Hills Ltd. Partnership, II v. Madison Hills, Inc., supra, 35 Conn.App. at 82, "[t]he trial court held a hearing at which the plaintiff established the amount of the unsatisfied judgment and the percentage of the defendant's partnership interest in the plaintiff." The court also accepted "expert testimony ... to assist the court in determining the value of the defendant's partnership interest." Id. In Konover v. Tig–Rfa, Inc., Superior Court, judicial district of Hartford, Docket No. CV–98–0583516–S (March 27, 2001, Rittenband, J.), the court determined that five LPs were in default on promissory notes issued to the plaintiff creditors and ordered the plaintiff creditors to "prepare an appropriate charging order and/or supplemental judgment to be submitted to the Court prior to the hearing to be held on the amount of interest, costs and attorneys fees to be assessed." In contrast in Rockstone Capital, LLC v. Marketing Horizons, LTD., Superior Court, judicial district of New Haven, Docket No. CV–06–5006818–S (July 17, 2013, Young, J.) [56 Conn. L. Rptr. 573], the court made a charging order against an LLC, governed by General Statutes sec. 34–171, without making any finding as to the amount of indebtedness. The court held that it did not need to make the LLC a party to the case and issued an order charging the defendant's interest in the LLC. Id.
The plaintiff creditors also ask for certain information regarding JHJ Limited Partnership, LP. The pertinent statutes make clear that the court may order the production of information that the defendant debtor as a limited partner would be able to access, which include a variety of financial information but not all books and records, and may make additional orders as the circumstances require.
Section 34–349 provides that the court may "make all other orders, directions, accounts and inquiries the defendant debtor might have made or which the circumstances of the case may require." The scope of information which the court may order produced is therefore limited to the information that the defendant debtor had a right to, plus any additional information which the circumstances of the case may require. The scope which the defendant debtor, a limited partner of a limited partnership, has a right to is defined by General Statutes sec. 34–13c and sec. 34–18.5
The phrase "which the circumstances of the case may require" allows for further production of information by the partnership, depending on how narrowly or broadly "the circumstances of the case" are defined. The Comments to the Uniform Limited Partnership Act (2001) sec. 703 state that "[t]he court's power to appoint a receiver and 'make all other orders, directions, accounts, and inquiries the defendant debtor might have made or which the circumstances of the case may require' must be understood in the context of the balance [between the creditor's rights and the rights of the partners of the charged partnership]. In particular, the court's power to make orders 'which the circumstances may require' is limited to 'giv[ing] effect to the charging order.' " The court may therefore order further disclosure of financial information or other actions beyond the defendant debtors' rights as limited partners as are necessary to effectuate the charging order, but may not make orders on the partnership to produce information beyond the defendant debtors' right to information if such orders are not related to the plaintiff creditors' specific efforts to obtain payment from the defendant debtors' interest in JHJ Limited Partnership, LP.
*7 In Rockstone Capital, supra, Superior Court, Docket No. CV–06–5006818–S, the court ordered that "[f]urther, upon twenty-day notice from the Plaintiff to the Companies, all books and records shall be produced for inspection, copying and examination in the Plaintiff's counsel's office." Under the applicable statute, sec. 34–144, members of an LLC have a right to various defined financial information, and to "true and full information of all things affecting the members to any member and to the legal representative of any deceased member or of any member under legal disability." The Rockstone Capital court determined that the case before it merited broader disclosure of financial information than that strictly provided for under the statute. This court may do the same, given the defendant debtor's history of shuffling assets between various entities.
The plaintiff creditors also request foreclosure of the defendant debtor's interest in the partnership. While sec. 34–30 does not provide for a foreclosure remedy, as stated earlier the Appellate Court in Madison Hills Limited Partnership v. Madison Hills, Inc., supra, 35 Conn.App. at 82 stated that one was incorporated from sec. 34–66, now sec. 34–349. Section 34–349 explicitly provides that "[t]he court may order a foreclosure of the interest subject to the charging order at any time."
4. Piercing the Corporate Veil
As noted above, the California jury previously determined in the underlying action that the defendant debtor, Grant Johnson, is the alter ego of the defendant, Benevolent Partners, LP. In addition to the assets of the defendant debtors, the plaintiff creditors are seeking to reach assets of other corporate entities with which the defendant debtor has, or at a point relevant to these proceedings has had, a relationship. This court takes judicial notice of the fact that the California court has pierced the corporate veil and found that Grant Johnson is the alter ego of Benevolent Partners, LP. In order to apply the jury's determination in this case to the subject proceedings, therefore, a brief recitation of the law pertaining to piercing the corporate veil is useful.
"When determining whether piercing the corporate veil is proper, our Supreme Court has endorsed two tests: the instrumentality test and the identity test. The instrumentality rule requires, in any case but an express agency, proof of three elements: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of." (Internal quotation marks omitted.) Breen v. Judge, 124 Conn.App. 147, 152–53, 4 A.3d 326 (2010).
*8 "Courts, in assessing whether an entity is dominated or controlled, have looked for the presence of a number of factors. Those include: (1) the absence of corporate formalities; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes; (4) overlapping ownership, officers, directors, personnel; (5) common office space, address, phones; (6) the amount of business discretion by the allegedly dominated corporation; (7) whether the corporations dealt with each other at arm's length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of debts of the dominated corporation; and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own ... The concept of piercing the corporate veil is equitable in nature ... No hard and fast rule, however, as to the conditions under which the entity may be disregarded can be stated as they vary according to the circumstances of each case ... Ordinarily the corporate veil is pierced only under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice ... The improper use of the corporate form is the key to the inquiry, as [i]t is true that courts will disregard legal fictions, including that of a separate corporate entity, when they are used for fraudulent or illegal purposes. Unless something of the kind is proven, however, to do so is to act in opposition to the public policy of the state as expressed in legislation concerning the formation and regulation of corporations." (Internal quotation marks omitted.) Id., at 153–54. Further, it is important to note that "[e]quitable remedies are not bound by formula but are molded to the needs of justice ..." (Internal quotation marks omitted.) Id., at 159.
Finally, "[t]he identity rule has been stated as follows: If [the] plaintiff can show that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise ." (Internal quotation marks omitted.) Id., at 153.
The above analysis, including factors proper for examination in cases addressing whether to pierce the corporate veil, is likewise relevant to proceedings involving examination of a judgment debtor where the initial finding piercing the corporate veil has been previously made. Any other conclusion would render the decision of the finder of fact in the underlying trial meaningless. The defendant debtor has provided residences at 64 Stags Lane, Greenwich, Connecticut and 19 East 72d Street, New York, NY, which are also the business addresses of several entities in which he has held interests. Throughout his professional career he has been employed by financial service companies either as manager of his own company, or as an employee of family owned financial companies. At a minimum, he or the entities which he has controlled, have had access to the assets of numerous closely held enterprises, including JHJ Limited Partnership, LP.
5. Analysis by the Court of Judgment Debtor Grant Johnson's Compliance
*9 According to the defendant debtor's individual 2007 federal income tax return, he reported taxable income of over one and a half million dollars. The defendant debtor testified obliquely that nothing remained of his 2007 reported taxable income of $1,581,000.00 due to his "lifestyle." He has not been gainfully employed since the judgment was rendered against him and Benevolent Partners, LP in the California lawsuit in 2008. Notwithstanding his lack of employment, he maintains an American Express black card for which his monthly charges of $7,000–$10,000 are paid by family members, is a member of the Core Club which requires a $25,000 initiation fee and substantial membership charges and resides at either of two residences described above without any apparent living expenses. The plaintiff creditors question the fact that the debtor has maintained an expensive lifestyle despite not being employed since the judgment against him over five years ago. They also question that the assets of the defendant debtor's company he managed decreased from allegedly twenty million dollars to zero and that it went out of business without explanation or filing for corporate dissolution.
During the course of the recent proceedings, the defendant debtor has provided some financial records. However, these records are either so incomplete or severely redacted as to lack meaning. They do not under any application of the law of this state qualify as compliance with postjudgment discovery or the subpoena issued in this case. What was established was that the defendant debtor reported income of over 1.5 million dollars in 2007, but virtually none since then. Further, it has been shown that he held, and in some cases, continues to hold limited partnership interests in closely held partnerships along with family members, some of whom he acknowledges are paying his substantial living expenses, credit card bills and Core Club membership dues. The defendant debtor's assertions that he has not transferred any assets for less than fair value are, at best, self-serving conclusions. The defendant debtor's actions in these proceedings, which have gone on for over three years, raise serious questions regarding the debtor's compliance. Creditors claim that the fact that after months of requests he still has failed to provide meaningful, complete and relevant financial documents, has prejudiced the creditor's rights in this matter. In addition to failing to explain how he maintains his expensive lifestyle, the defendant debtor has failed to explain the sudden diminution of his assets, including the date, amount and recipient of any transfer of assets by him, on his behalf or for the benefit of any entity in which he had rights or interests.
Judgment was previously entered against the defendant debtors on July 16, 2008 in the amount of $5,000,793.20 which included a $1,750,000.00 punitive damages award for judgment debtors' failure/refusal to provide financial records. On November 7, 2008, an order for attorneys fees was entered in the sum of $815,000.00 in the Superior Court of the State of California, Los Angeles County in favor of the plaintiff creditors against the defendant debtors. In its decision affirming the lower court, the California Appellate Court noted that the plaintiff creditors sought $5 million in financing for a motion picture development deal with Paramount Pictures. Benevolent, a private equity investment firm owned by the defendant debtor, represented that it had $20 million in assets and agreed to finance the deal on the condition of exclusivity. The plaintiff creditors investigated the defendant debtor's credentials and entered into a series of agreements with Benevolent beginning in May 2003. In fact, Benevolent had less than $1 million to invest and substantially breached its contractual obligations to the plaintiff creditors. The plaintiff creditors' amended complaint, dated April 5, 2006, alleged breach of written contract, breach of written guarantee, promissory fraud, fraud in the inducement, negligent misrepresentation and declaratory relief.
*10 During the jury trial in May 2008, the plaintiff creditors served the defendant debtor with a subpoena to produce financial documents. The jury's finding of fraud as to the defendant debtor required a hearing on the issue of punitive damages. The defendant debtor had previously refused to provide testimony about his net worth at his deposition and continued to do so following the trial by objecting to and failing to comply with the subpoena. The summary of financial information and findings by the jury contained in the California Appellate court decision is practically identical to the evidence presented in the subject hearings before this court. In the absence of disclosure by the defendant debtor, the jury decided the issue of punitive damages based on the testimony at trial. The California court found that "the defendant debtor failed to comply with his duty to provide financial information awarding punitive damages in the amount of $1.75 million based on his testimony and the limited information he provided." According to the California Appellate Court, "The trial court found the financial records produced by Johnson were so inadequate on their face as to completely frustrate the purpose of the proceeding and did not even approximate a good faith attempt to comply with the court's order. Although the subpoena was not effective until after the jury rendered its verdict, the defendant debtor and his counsel were on notice to have the information available at the end of the trial and to gather the documents." Mack Film Development v. Johnson, Docket No. B210933 2010 Cal.App.Unpub. LEXIS 6777 *7 (Cal.App.2d. August 25, 2010). The defendant debtor failed to cure the default and the judgment was upheld on appeal including the punitive damage award. As noted above, foreign judgments are treated the same as the judgment of a Connecticut court and are subject to the same procedures and enforcement rules as a judgment of this state. General Statutes sec. 52–605(b).
6. Factual Findings
Based on the evidence presented at the hearing before it, the court makes the following factual findings.
The defendant debtor's pattern of refusing to produce financial records in violation of court orders, which is a matter of record in the underlying lawsuit, has continued in this case. Over five years later, in the subject postjudgment proceedings, the defendant debtor has produced little further information and the same questions asked by the trial court in 2008 remain unanswered. The defendant debtor initially failed to appear as ordered, requiring the issuance of a capias to secure his appearance. The file in this case reflects that the initial examination of judgment debtor set for February 2011, was adjourned to April 2011, to allow the defendant debtor to produce the corporate records and additional personal records to which creditors were entitled pursuant to Practice Book sec. 13–20. Despite having been granted two additional months by the court to comply, the defendant debtor intentionally chose not to appear for the April 2011 hearing, instead fleeing the state of Connecticut in lieu of complying with court orders to appear and produce the subject financial records. These records would include the original information which he failed to produce as ordered by the California court as well as records which would indicate his conduct regarding these assets subsequent to the 2008 verdict. Following issuance of a capias and his arrest, the defendant debtor was arrested at his Connecticut address of 34 Stag's Lane, Greenwich, Connecticut over two years later on May 26, 2013 by Marshall Holly A. Byrk. The marshal's affidavit describing the actions of the defendant debtor and events at his home reflects a disturbing attempt to avoid service of lawfully issued court orders. His repeated complaints that the court orders for his appearance constitute "harassment" are completely without merit.
*11 Although the defendant debtor finally appeared in court on June 21, 2013, he has still refused to provide relevant and complete records or meaningful explanations regarding assets which may be available to satisfy the judgment against him. His testimony at the several hearings conducted from June to December 2013, to determine the source of such assets and provide the basis for a charging order by the court followed a pattern similar to that which the defendant debtors employed in the underlying trial. It would be most serious if the defendant debtor, having been found to have engaged in fraudulent conduct with respect to the plaintiff creditors in this case, thereafter, took action to shield or in any way protect assets which should lawfully be available to satisfy the judgment.
The defendant debtor's continuing refusal and/or failure to provide financial information risks rendering the Connecticut hearings and the creditors' efforts to identify assets to satisfy the judgment meaningless. The same conduct caused the California Court to conclude that the defendant debtor's failure to produce meaningful, complete financial records frustrated the purpose of the proceeding and did not even approximate a good faith attempt to comply with the court's order. This court was clear in its order to the creditor that "the financial records that are the obligation of the debtor to produce must be complete and meaningful and capable of being understood." Despite these clear orders, as a result of the defendant debtor's stated inability to remember or document relevant transactions or to produce complete, unredacted business records, the court required testimony of an individual capable of explaining the heavily redacted and incomplete materials produced, as well as what had been omitted, what should have been available according to standard business practices and other matters left unanswered by the defendant debtor's apparently deliberately limited testimony and document production. The judgment debtor's statement that, unfortunately, some debtors are simply judgment proof improbably suggests that the court ignore the facts of this case. Even the limited information provided by the debtor indicates otherwise.
Plaintiff creditors called Karen Balmer, a forensic accountant, to explain what had been produced and to identify what, if anything, was further required to determine the existence of assets available to satisfy the judgment. Karen Balmer is a certified fraud examiner with an advanced certificate in forensic examination and experience in a number of recent cases involving fraud and various claims of loss due to financial irregularities. Ms. Balmer testified based on her review of the financial records produced, with particular reference to Exhibits 23–29, 32, 36 and 38, that they reflected numerous financial irregularities, including a possible $400,000 coding error, multiple loans to the defendant debtor or entities which he controlled which were either written off or for which proper financial tracking records were not provided, 1099s and K–2 partnership records, accounting Quickbooks records and other underlying data which would track financial activity in a timely and verifiable way. In short, Ms. Balmer found that the documents produced by the debtor failed to meet minimal requirements for meaningful financial information which would identify the defendant debtor's assets and that the manner in which the documents were produced, in her words, "raised red flags," especially because, in the form produced, they were not direct records from the accountants. The defendant debtor's income tax returns and credit card statements do not satisfy his court ordered obligation. As plaintiff creditors note, at best, they raise more questions than they answer, specifically, how the defendant debtor's taxable income inexplicably changed from $1.5 million in the last tax year before the judgment to six years of unreported or minimal income without any change in his lifestyle.
*12 The defendant debtor's personal financial summary as of August 2006 lists total annual income of one million dollars, liquid net worth of two million dollars and total net worth of eight million dollars. His 2007 and 2008 statements show substantial assets and liabilities but the equity calculations are inaccurate. His 2009 financial summary shows assets of $5,606,000, total liabilities of $4,086,000 and equity of $1,427,000.
In addition, although the defendant debtor testified that Benevolent Partners, LP ceased doing business in 2009, he failed to produce any records which would document its dissolution. An email between the defendant debtor and his accountant indicates that Benevolent Partners, LP was in fact still in existence, a direct contradiction of the defendant debtor's testimony. For example, exhibit 15 indicates that in 2009 Benevolent Partners LP wrote off receivables and investments in the amount of $7,049,000, which included loans to or from the defendant debtor or companies that the defendant debtor controls. This is significant first, because loan forgiveness is treated as income and second, because a loan write off is an asset that flows through corporate entities such as Benevolent Capital Management to the defendant debtor who is both a 99% shareholder and its alter ego. The write off of these loans creates a future benefit to offset against any future gains he may have. For example, the defendant debtor took three million dollars in loans from Benevolent Partners, LP which was not recorded as income but was written off to create a benefit to him against future income.
According to Ms. Balmer, the records which were produced for Benevolent Partners, LP demonstrated numerous accounting irregularities. As an example of the fact that the records did not follow generally accepted accounting principles, Ms. Balmer noted that the balance sheets do not list retained earnings or any equity at all which is simply not possible from the history of the entity. As another example, the K–1 issued by Benevolent Partners, LP to J. Howard Johnson shows an ending capital balance of $3,015,620 in 2006 and a zero beginning and ending balance for the following year. According to Ms. Balmer, the bigger issue from an accounting perspective and for the court in this matter is the absence of the underlying accounting records that would support these balance sheets and income statements. Without the Quickbooks records it is not possible to identify and track the operations of the business. The defendant debtor produced the subject records in Excel format which would enable them to be manipulated. This fact, along with the extensive redactions renders them non responsive to the subject subpoena. In this case, in particular, the records do not reflect the revenues and expenses of the businesses, what Ms. Balmer referred to as the "transactional input into the accounting system." These details are summarized on the balance sheets which show assets, liabilities and equity of the business and on income statements which detail expenses. This information, which is kept in the ordinary course of operating a business, is necessary to determine whether there are assets available for payment of a judgment.
*13 The summary balance sheets and income statements provided are incomplete because they only reflect total numbers. From an accounting standpoint and for the purpose of identifying assets which may be, or should have been, available to satisfy the debt in this case, full detailed documentation of the entity's transactions is critical. Even with the severe limitations imposed by the heavily redacted versions of the records which the defendant debtor has produced it is evident that the transactions in question are in the six and seven figures, and thus involve substantial amounts of money. Among these transactions is a transfer of defendant debtor's interest in UTF, an investment by members of the Johnson family, resulting in its removal as an asset of the defendant debtor without any explanation.
As an example of the inconsistency in the records which have been produced and the need for underlying documentation, Exhibit 24 contains a profit and loss statement for BCM1, LLC with a net loss of $91,171.48 for 2007 and a 2007 K–1 for the same entity to Grant Johnson which lists "other net rental" of $1,987,224 and an increase in the partners' capital. It is not possible to reconcile the difference in these financial records without the underlying documents. In addition, BCM1, LLC's 2008 federal tax return contains discrepancies with respect to $3,974,448 in net rental income, the absence of negative retained earnings in view of the losses claimed on the trial balance sheet, and a redaction regarding an account which appears to have had $669,000 in it.
Similarly, Exhibit 23 is a compilation of records which includes 2008 working trial balance sheets and 2008 adjusting journal entries of six figures or greater. The explanation for two entries in the amount of $2.5 million dollars has been redacted. One of the working trial balance sheets produced for this period lists four columns of entries, the first three entitled "adjusted books," "Federal tax," and "California tax," and an unlabeled column. Many of the large adjusting entries in these columns are annotated with alphabetic letters. One would expect to see a key or code explaining these entries but that has been deleted. For example, the previously referenced Benevolent Capital Management asset, UTF, is listed in the Adjusted books column as $467,401, zero in both federal and California tax return columns and $4,543,109.50 in the last unlabeled column. Thus, although it appears that the $4,534,109 .50 investment has been eliminated, there is no explanation of what the defendant debtor did with it. As explained by Ms. Balmer, "the adjusting debit in the Grant Draws column—row is almost, but not quite the same amount as the adjustment in the investment UTF. And if you add the line below, it is the same amount. Those three items, the UTF adjustment, the Grant Draws and the Grant Earnings columns netted together equal each other." The same document lists Grant Earnings of $1,703,638.56, which is incapable of explanation, again, without the underlying documents. Finally, also in Exhibit 23, Ms. Balmer noted that the 2009 Benevolent Capital Management federal income tax return K–1 partner information indicates that the entity made a distribution of cash or marketable securities as well as other non cash distributions in 2009. Ms. Balmer also testified that the remaining documents which she reviewed for other years presented the same problems of inability to explain what they purported to represent due to the lack of underlying documentation.
*14 Review of other corporate records produced by the defendant debtor continues to demonstrate a pattern of absent retained earnings. Ms. Balmer explained that this is unusual, other than in the initial year of operation of a business.
Referring to Exhibits 24 and 33, Ms. Balmer next addressed the issue of the sale of two parcels of real estate in 2007 for approximately five million dollars for which the defendant debtor claimed a net loss. By way of background, according to Exhibit 24, BCM1 was formed for the purpose of making venture capital and other investments in real estate and aviation leasing sales. Following funding provided by HJ (J. Howard Johnson) to BCM1 on August 4, 2005, BCM1 purchased two lots in Venice California on August 12, 2005 for $5,150,000 with a bank loan of $3,700,000. However, BMJ (Brett M. Johnson) and GDJ (Grant D. Johnson) took title to the properties rather than BCM1, the entity which was obligated to the bank on the loan. Among the serious questions thus raised is whether the entity made and reported monthly principal and interest payments reporting these payments as a loss in this entity when the property was, in fact, owned individually. The post-sale summary indicates that the proceeds were allocated as follows: an $805,000 profit was applied to unidentified debt obligations, $750,000 was paid to HJ immediately, and $55,610 was retained by GDJ for management expenses. The 2008 working trial balance does not list the assets, earnings, profits and expenses of BCM1 although it should have according to accepted accounting practices. In contrast, Exhibit 33, the memorandum of investment understanding states that there were net proceeds from the sale of the two properties of $411,154 and $805,610 which are not reflected on any of the tax returns of BCM1.
Ms. Balmer next reviewed Exhibit 26, records of the JHJ Partnership (JHJ). Although the records are not complete, the defendant debtor's 2007 K–1 statement indicates that the defendant debtor had a beginning capital balance of $915,000, and withdrawals and distributions in the amount of $233,365, resulting in an ending capital balance of $832,409. Similarly, the defendant debtor's 2009 K–1 from JHJ shows a beginning capital balance of $484,000, virtually no distributions and an ending capital balance of $494,072. To the extent that these distributions are return of capital, as opposed to capital gain, interest or dividends, they are not reportable as income. As such, they would not be reflected on the defendant debtor's income tax return. Exhibit 29 shows transfers of UTF assets worth over $5.8 million dollars from Benevolent to JHJ in August 2007.
Exhibit 30 is a purchase and sale agreement for the defendant debtor's interest in JHJ in the amount of $647,085, another capital distribution which would not be reflected on his income tax return. Despite this purported sale of the defendant debtor's JHJ partnership interest in 2007, his K–1 statement indicates a capital balance of $832,409 at year end.
*15 Exhibit 36 is the defendant debtor's 2009 JHJ K–1 statement which shows a distribution of $53,000, leaving a capital balance of $648,148. The defendant debtor did not produce his 2012 JHJ K–1.
Exhibit 32 is a promissory note and a confession of judgment. The $3,474,994 promissory note dated August 31, 2006 is between Benevolent Capital Management, LLC and J. Howard Johnson. The monies associated with this promissory note went into the company in 2006. The confession of judgment, however, is between Benevolent Partners and J. Howard Johnson. In the absence of the underlying documents, it is not possible to determine whether this transaction improperly reduced assets which would have otherwise been available to satisfy the judgment.
Exhibit 27, records of JHJ, is heavily redacted. The records do, however, show a transfer to the defendant debtor by JHJ and raise the reasonable question under the circumstances of whether the redactions relate to transfers to entities related to the defendant debtor or any other party for his benefit. Other assets of note are $267,000 in a Citi Smith Barney account which records reflect has been used as collateral for certain loans over the years and would thus be considered an asset of defendant debtor. Due to the absence of underlying documents and the numerous inconsistencies and extensive redactions in the documents which have been produced, further inquiry is critical to a fair determination of any assets to which the creditors may lay claim.
Evidence of transfers that appear to have both directly and indirectly benefitted the defendant debtor's financial status by limiting available funds raise additional concerns. The defendant debtor further diminished his own credibility by incredibly testifying that he could not recall significant business transactions in which he would have been the primary actor and insisting that he couldn't produce business financial records because they were "destroyed" in the foreclosure of his Venice, California property in 2010. While the facts surrounding the foreclosure itself raise unanswered questions, under no circumstances would such legal proceedings cause business records to disappear. The defendant debtor's foreclosure excuse also doesn't explain why he failed to obtain the Quickbooks records from his accountants. These and numerous other financial records were readily available to the defendant debtor regardless of the 2010 foreclosure action. In addition, Mr. Johnson's statement that, "Some of my records might be with my accountant ... so I produced everything that I had in my possession," and that he had produced all financial records, "That I have available to me ..." are inexplicably evasive.
In summary, the court is forced to conclude that defendant debtor failed to provide persuasive explanations of significant financial matters, failed to recall facts regarding significant financial transactions of which it is clear that he would have personal knowledge and failed to produce complete, accurate and reliable financial records as required by the subpoena and within the scope of the examination of judgment debtor.
7. Position of Defendant Debtor
*16 In his post-trial brief the defendant debtor initially appears to question whether the court has personal jurisdiction over the defendant debtor. The defendant debtor had complained that court orders including the capias issued to secure his appearance in court were harassment and intimidation. He fails, however, to raise any legal challenge to the court's jurisdiction. Furthermore, at the close of the proceedings on December 9, 2013, the court asked the defendant debtor's attorney on the record whether he was claiming lack of jurisdiction. He replied that he was not challenging the court's jurisdiction, but was attempting to emphasize his client's cooperation following issuance of the capias. The court therefore, finds that the defendant debtor has waived any challenge to the jurisdiction of the court in this matter.
Second, the defendant debtor has submitted an affidavit and selected portions of the transcript of the hearing which he argues support his claim that the hearing is concluded. He has also attached an index of documents which he has produced which he relates to the numbered statements in his affidavit. Here again, the defendant debtor's purpose is not clear other than ostensibly to argue that he has no further obligation to the creditor. The fact that the creditor's counsel may not have been able to question further on the documents which were incomplete as well as others which the debtor failed to produce or with respect to the numerous unanswered questions by the creditor is not dispositive of the issues before the court. The record is sufficient to satisfy the purpose of the hearing and enable the court to issue charging orders. Once those orders are issued, it will be the responsibility of the debtor to comply. Should he fail to do so, the creditor will have the right to pursue such further remedies as are warranted under the facts
Third, the defendant debtor argues without logic or authority that the temporal scope of the creditor's examination must be limited to three years because the subpoena which was issued in 2011 stipulates production from 2008 through 2011. The defendant debtor in this case, a private equity investor of substantial means as of the dates relevant to the underlying case, claims that all of his assets were suddenly and inexplicably eradicated as of 2008, the year of the judgment and that any interests he or the entity for which he has been found to be the alter ego are without value. The defendant debtor failed to offer any credible explanation for the disappearance of these assets. As a result of the defendant debtor's own conduct the creditor is entitled to information regarding the debtor's assets from the time of the pendency of the underlying case until present. Any other determination of the scope would render the discovery process meaningless. Based on the record in this case, the extension of the disclosure period was due to the defendant debtor's own conduct. He has no cause to complain on this point.
*17 Fourth, the defendant debtor presents an argument which appears to combine references to actions for fraudulent transfer and spoliation of evidence. Fraudulent transfers are governed by the Uniform Fraudulent Transfer Act, General Statutes secs. 52–552a to 52–552l, inclusive. Section 52–552e(a) provides, in pertinent part: "A transfer made ... by a debtor is fraudulent as to a creditor, if the creditor's claim arose before the transfer was made ... and if the debtor made the transfer ... (1) with actual intent to hinder, delay or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer ..." Section 52–552f(a) provides, as an alternative and in relevant part: "A transfer made ... by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made ... if the debtor made the transfer ... without receiving a reasonably equivalent value in exchange for the transfer ... and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation." Consideration of these arguments is premature at this time. This court has not been asked to make such a finding in these discovery proceedings. While such a claim may be made, it would require evidence beyond the scope of the subject proceedings. Similarly, determination of spoliation would require such claims to be presented according to rules of pleading and proof. While the creditors are not precluded from asserting such claims, they have not done so in these proceedings. The court, therefore, declines to comment on these matters as they are not germane to the creditor's motion for charging order at this point in the proceedings.
Fifth, the defendant debtor appears to continue his objection to the testimony of the forensic accountant, Karen Balmer. Again, his objection is misplaced. "The trial court has wide discretion in ruling on the admissibility of expert testimony and unless that discretion has been abused or the error is clear and involves a misinterpretation of the law, its ruling will not be disturbed." Churchill v. Skjerding, 31 Conn.App. 247, 249–50, 624 A.2d 900, cert. denied, 226 Conn. 914, 628 A.2d 986 (1993). Under Connecticut Rules of Evidence 7.5.3, Connecticut courts are permitted to consider expert testimony where the expert has peculiar knowledge or experience not common to the world that renders that witness's opinion any aid to the trier of fact. The nature of the expert testimony may be either an opinion on a discreet topic or the expert's testimony may assist the trier of fact in understanding the evidence or determining an issue of fact. This latter circumstance requires that the opinion be both analytically reliable and logically relevant to the issues in the case.
Ms. Balmer concluded from her review of the records produced by the debtor that the records were so inadequate as to risk frustration of the purpose of the proceeding. In this case the creditor has been seeking discovery of assets since the date of judgment, and for almost three years in this court alone. This court confirms that it found the three conditions required for expert testimony to have been met, "(1) the witness has special skills or knowledge directly applicable to the matter at issue, (2) that the skill or knowledge is not common to the average person, and (3) that the testimony would be helpful to the court or jury ..." Card v. State, 57 Conn.App. 134, 138, 747 A.2d 32 (2000) (citing State v. Borelli, 227 Conn. 153, 165, 629 A.2d 1105 (1993). Due to the defendant debtor's inability to recall or provide records relating to his business enterprises and access to or disposition of assets and the extensive redaction and inconsistencies in the financial materials produced, it was impossible for the court to determine first, whether the defendant debtor had complied and second to issue appropriate charging orders without the testimony of a forensic accountant such as Ms. Balmer.
*18 It is further troubling that Ms. Balmer testified that the defendant debtor produced records which did not comply with normal accounting standards. For example, values for retained earnings and equity are absent from the balance sheets. Ms. Balmer was able to ascertain that the defendant debtor used the QuickBooks accounting program for business and personal financial records. Thus, the financial records which were created and maintained in Quickbook format would have been readily accessible to the defendant debtor. Not only would these records have disclosed an accurate and complete record of transactions and potential available assets, their timely production at the commencement of this action over three years ago would have saved substantial amounts of time and money spent just to reach this stage in the judicial process. The failure to produce the records in the format in which they were regularly maintained made it impossible to identify and track financial transactions. As Ms. Balmer explained, "because if someone transfers assets or records assets inappropriately, we can't see that from a summary balance sheet or income statement because those are only total numbers at the end of a period. We need the detail of transactions throughout the period ... We should have a copy of the QuickBooks files ... The balance sheet and income statements were produced in Excel format ... They are not reports that are produced directly from the accounting system that defendant ... or his accountants appeared to have used to maintain the accounting ... of his personal and business transactions." For example, Ms. Balmer noted a significant discrepancy between information reported on the profit and loss statement of BCM1, LLC in 2007 and the K–1 issued from BCM1, LLC to the defendant debtor for the same period. According to Ms. Balmer, this was one of many such examples. BCM1, LLC is related to Benevolent Partners, LLC and Benevolent Capitol Management. Another problem was that the debtor produced only income statements without balance sheets which would contain information on the underlying transactions: For example, Exhibit 23 records large adjusted balances, many of which are six figure amounts, two of which are 2.5 million dollars and $4,534,109.50 in an unidentified column, explanatory codes have been deleted for these entries. This same document indicates that the defendant debtor withdrew $467,455 as a distribution and references Grant (Johnson) earnings of $1,203,636.56 in the year 2008.
The concerns and criticisms noted by Ms. Balmer are not minor oversights or accounting errors. They appear to be an attempt to prevent the creditor from identifying assets which may lawfully be available to satisfy the judgment. There is an ample basis to conclude that substantial assets were available at or around the time of the judgment. The defendant debtor and his brother Brett Johnson formed BCM1 for the purpose of making venture capital investments in real estate and aviation leasing sales. The defendant debtor's father wired funds to the BCM1 account for the purchase of two lots for a total of $5,150,000. However, the two parcels of land were purchased in the names of individual GDJ and BMJ, raising the question inter alia, of whether the entity paid and reported the interest expense as a loss while the property was owned individually by the defendant debtor and his brother. In short, earnings, profits and expenses related to BCM1, LLC assets are not properly accounted. This indicates that money was removed from entities in which the defendant debtor had an interest, enabling him to claim that he is judgment proof. The defendant debtor's refusal to produce accurate, complete financial records has obstructed the creditor's efforts to determine the source and amount of any available assets.
*19 According to Ms. Balmer, records of JHJ Partners reflect that the value of the defendant debtor's capital account was $832,409 at the end of 2007 and $494,072 at the end of 2009. Exhibit 26. According to Exhibit 29, in August 2007, Benevolent transferred over 5.8 million dollars in United Trust Fund (UTF) assets to JHJ Partners. In addition, the defendant debtor received $647,085 in the form of a capital distribution when his ownership interest was sold to JHJ in September 2007. Notwithstanding this transfer, the defendant debtor's K–1 for the same year shows that he had a remaining capital balance in JHJ of $832,409, meaning that he had a $1.5 million interest.
Exhibit 32 is a promissory note and confession of judgment. However, the note in the amount of $3,474,994 is from Benevolent Capital Management to J. Howard Johnson while the confession of judgment is by Benevolent Partners, LLC in favor of J. Howard Johnson. Without the underlying documents, it appears that the parties have, at a minimum, disregarded corporate form. Whether it is also part of an attempt to shield assets from the creditors in this case is a reasonable question based on the very documents produced by the defendant debtor.
Ms. Balmer testified to further financial irregularities in the defendant debtor Grant Johnson's 2007 and 2008 balance sheets related to listed assets of 5.6 and 5.5 million and differing liabilities, yet an identical net equity for each year. Exhibit 9 is a document which indicates write off of $7 million in loans to the defendant debtor or entities which he controlled from Benevolent Partners, LP in 2009 without any explanation or justification of this transaction. This transaction has further significance in light of the conclusion by the California Court that the defendant debtor is the alter ego of Benevolent Partners, LP. The absence of records documenting how these significant post-verdict loan transactions were recorded raises further concern. Because the defendant debtor is a 99% shareholder of Benevolent Capital Management these losses flow through him and create a benefit to offset any future gains he has. These losses were created by loans from Benevolent Capital Management to him. They were not recorded as income but were later written off to create a benefit against future income. The court concludes that for the purpose of the motion for charging order, Grant Johnson, Benevolent Partners, LP, and Benevolent Capital Management, LLC represent a unified financial entity with identical interests. Therefore, in order to meaningfully protect the rights of the creditor, disclosure must include financial information from all three in addition to disclosure as noted by and with respect to JHJ.
In conclusion, the purpose of these proceedings is to establish an evidentiary foundation for the charging order which is the subject of a motion before the court and to provide a basis for the court to rule on the creditors' motion for sanctions and contempt. If the defendant debtor is legally judgment proof, he nevertheless has the obligation to provide complete, meaningful and transparent financial records to prove that claim. The defendant debtor's production has failed to meet this minimal burden. The defendant debtor's claims that he lost his financial records and that his assets disappeared are not credible. The defendant debtor has a clear obligation to disclose the assets which he had as of the date of the judgment. If, as it appears, he claims they no longer exist, then he has an obligation to explain what happened to them and whether he has any present or future rights to them. The evidence which was presented is sufficient for the court to determine that the defendant debtor has assets in JHJ Limited Partnership, LP and that a charging order against JHJ Limited Partnership, LP is necessary. Said charging order will serve the dual purpose of securing payment from any assets which the defendant debtor has invested in JHJ and of providing information to the plaintiff creditors regarding the location of other assets of the defendant debtor.
General Statutes sec. 52–351b provides: "Discovery by judgment creditor. (a) A judgment creditor may obtain discovery from the defendant debtor, or from any third person the judgment creditor reasonably believes, in good faith, may have assets of the defendant debtor, or from any financial institution to the extent provided by this section, of any matters relevant to satisfaction of the money judgment. The judgment creditor shall commence any discovery proceeding by serving an initial set of interrogatories, in a prescribed form containing such questions as to the assets and employment of the defendant debtor as may be approved by the judges of the Superior Court or their designee, on the person from whom discovery is sought. Service of an initial set of interrogatories relevant to obtaining satisfaction of a money judgment of a small claims session of the Superior Court may be made by sending such interrogatories by certified mail, return receipt requested, to the person from whom discovery is sought. Questions contained in the interrogatory form shall be in clear and simple language and shall be placed on the page in such manner as to leave space under each question for the person served to insert such person's answer. Such person shall answer the interrogatories and return them to the judgment creditor within thirty days of the date of service. Interrogatories served on a judgment debtor shall be signed by such debtor under penalty of false statement. With respect to assets, the person served is required to reveal information concerning the amount, nature and location of the defendant debtor's nonexempt assets up to an amount clearly sufficient in value to ensure full satisfaction of the judgment with interest and costs, provided disclosure shall be first required as to assets subject to levy or foreclosure within the state. If interrogatories are served on a financial institution, the financial institution shall disclose only whether it holds funds of the defendant debtor on account and the balance of such funds, up to the amount necessary to satisfy the judgment. (b) The interrogatory form shall specify the names and last-known addresses of the judgment creditor and the defendant debtor, the court in which and the date on which the judgment was rendered, and the original amount of the judgment and the amount due thereon. The interrogatory form shall contain a notice of rights with respect to postjudgment interrogatories as prescribed by section 52–361b. (c) On failure of a person served with interrogatories to return, within the thirty days, a sufficient answer or disclose sufficient assets for execution, or on objection by such person to the interrogatories, the judgment creditor may move the court for such supplemental discovery orders as may be necessary to ensure disclosure including (1) an order for compliance with the interrogatories or (2) an order authorizing additional interrogatories. The judgment creditor may obtain discovery, including the taking of depositions, from any person served with interrogatories in accordance with procedures for discovery in civil actions without further order of the court. The court may order such additional discovery as justice requires provided the order shall contain a notice that failure to comply therewith may subject the person served to being held in contempt of court. (d) Any party from whom discovery is sought may seek a protective order pursuant to section 52–400a."
General Statutes sec. 52–397 provides: "Examination of judgment debtor. Any judgment debtor, an execution against whom has been returned unsatisfied in whole or in part or who has failed to respond within thirty days to any postjudgment interrogatories served pursuant to section 52–351b, may be examined on oath, in the court location where the judgment was rendered, concerning his property and means of paying such judgment, before any judge of the Superior Court or before a committee appointed by such judge. Such examination shall be on questions put by the judgment creditor or his attorney, and may be ordered, on the application of the judgment creditor on a form prescribed by the Office of the Chief Court Administrator, (1) by any such judge, to be had before himself or some other such judge or such a committee, at such time and place as such judge appoints and on such reasonable notice to the debtor as such judge prescribes or (2) by the clerk, provided if the clerk finds the application to be in proper form, the clerk shall fix the time and place for the examination and sign the order for hearing and notice. The order for hearing and notice shall be served in accordance with the provisions of sections 52–46 and 52–46a. The judgment creditor or his attorney may provide for the service of a subpoena or subpoena duces tecum on the defendant debtor for appearance at such time and place. Failure of the defendant debtor to so appear in response to such subpoena shall subject him to the provisions of section 52–143, concerning fine, damages and capias."
Practice Book sec. 13–20 provides: "Discovery Sought by Judgment Creditor (a) A judgment creditor may obtain discovery from the defendant debtor, or from any third person the judgment creditor reasonably believes, in good faith, may have assets of the defendant debtor, or from any financial institution to the extent provided by this section, of any matters relevant to satisfaction of the money judgment. The judgment creditor shall commence any discovery proceeding by serving interrogatories on a form approved by the judges of the superior court, or their designees, on the person from whom discovery is sought. Neither the interrogatories nor a notice thereof shall be filed with the court. The interrogatories shall be in clear and simple language and shall be placed on the page in such manner as to leave space under each interrogatory for the person served to insert the answer. The person to whom interrogatories are directed shall answer them and return them to the judgment creditor within thirty days of the date of service. Answers to interrogatories served on a judgment debtor shall be signed by such debtor under penalty of false statement. With respect to assets, the person served is required to reveal information concerning the amount, nature and location of the defendant debtor's nonexempt assets up to an amount clearly sufficient in value to ensure full satisfaction of the judgment with interest and costs, provided disclosure shall be first required as to assets subject to levy or foreclosure within the state. If interrogatories are served on a financial institution, the financial institution shall disclose only whether it holds funds of the defendant debtor on account and the balance of such funds, up to the amount necessary to satisfy the judgment with interest and costs. (b) On failure of a person served with interrogatories to, within the thirty days, return a sufficient answer or disclose sufficient assets for execution, or on objection by such person to the interrogatories, which objection shall not be filed with the court by such person, the judgment creditor may move the judicial authority for such supplemental discovery orders as may be necessary to ensure disclosure including (1) an order for compliance with the interrogatories or authorizing additional interrogatories and (2) an order for production or for examination of the defendant debtor or third person, provided any such examination shall be conducted before the judicial authority. The judicial authority may order such discovery as justice requires provided the order shall contain a notice that failure to comply therewith may subject the person served to being held in contempt of court. (c) On motion of a judgment debtor or third person from whom discovery is sought, and for good cause shown, or on its own motion, the judicial authority may make any order which justice requires to protect such debtor or third person from annoyance, embarrassment, oppression or undue burden or expense. (d) The other provisions of this chapter shall not apply to discovery sought under this section."
General Statutes sec. 52–400a: "Protective order by court. Execution against specified property. (a) On motion of a judgment debtor or third person from whom discovery is sought, and for good cause shown, or on its own motion, the court may make any order which justice requires to protect such debtor or third person from annoyance, embarrassment, oppression or undue burden or expense. (b) On motion of a judgment debtor alleging that the judgment creditor is engaged in any illegal levy or in any other practices for the purpose of collecting his judgment which violate state or federal law, or on its own motion, the court may render such protective order as justice requires. (c) On motion of the defendant debtor or an interested third person, the court may direct the order of execution against specified property of the defendant debtor."
Section 34–13 provides: "Records to be kept. Each limited partnership shall keep at the office referred to in section 34–13b the following: (1) A current list of the full name and last known business address of each partner set forth in alphabetical order, (2) a copy of the certificate of limited partnership and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate has been executed, (3) copies of the limited partnership's federal, state and local income tax returns and reports, if any, for the three most recent years, (4) copies of any then effective written partnership agreements and of any financial statements of the limited partnership for the three most recent years, and (5) unless contained in a written partnership agreement, a writing setting out: (A) The amount of cash and a description and statement of the agreed value of the other property or services contributed by each partner and which each partner has agreed to contribute; (B) the times at which or events on the happening of which any additional contributions agreed to be made by each partner are to be made; (C) any right of a partner to receive, or of a general partner to make, distributions to a partner which include a return of all or any part of the partner's contribution; and (D) any events upon the happening of which the limited partnership is to be dissolved and its affairs wound up. Those records are subject to inspection and copying at the reasonable request, and at the expense, of any partner during ordinary business hours."
Section 34–18 provides: "Rights of limited partner. Each limited partner shall have the right to: (1) Inspect and copy any of the partnership records required to be maintained by section 34–13c; and (2) Obtain from the general partners from time to time on reasonable demand (i) true and full information regarding the state of the business and financial condition of the limited partnership, (ii) promptly after becoming available, a copy of the limited partnership's federal, state and local income tax returns for each year and (iii) other information regarding the affairs of the limited partnership as is just and reasonable."
by Jay Adkisson
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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
by Jay Adkisson
Contact Jay Adkisson:
Phone: 702-953-9617 Fax: 877-698-0678 jay [at] jayad.com
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© 2020 Jay D. Adkisson. All Rights Reserved. No claim to government works or the works of the Uniform Law Commission. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction. This site is https://chargingorder.com Contact: jay [at] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678.