Creditors can examine any companies owned by the same person to make sure they are not being used to shelter money from a judgment.
The Wisconsin Court of Appeals held on Dec. 7 that examination of third parties may be the only means, in some cases, to determine if money has been fraudulently transferred to evade paying a judgment.
Crown Castle USA, Inc., and related companies obtained a judgment in Pennsylvania against Orion Construction Group, LLC, a Wisconsin company whose sole member is Douglas Larson.
Crown Castle sought to enforce the judgment in Wisconsin and a court commissioner gave Orion Construction one month to provide Crown Castle with all records pertaining to its assets.
Six months later, it provided Larson’s personal tax returns, with a letter asserting that Orion Construction had no assets. Crown Castle then sought and obtained an order requiring financial disclosure from a different LLC owned by Larson, Orion Logistics, LLC. Orion Logistics appealed, but the Court of Appeals affirmed in an opinion by Judge Edward R. Brunner.
One of the particular points the court made was that the circuit court properly exercised its discretion in ordering Orion Logistics to submit to a supplemental examination. Orion Construction reported a drastic dropoff in sales for 2007, while Orion Logistics went from no apparent sales to more than $15 million in gross receipts in 2007.
Overall, the court relied heavily on its opinion in Courtyard Condo. Ass’n., Inc., v. Draper, 2001 WI App 115, 244 Wis.2d 153, 629 N.W.2d 38.
In Courtyard Condo., the judgment debtor professed ignorance regarding any marital property, and the creditor sought to examine the debtor’s spouse. The Court of Appeals found that the statute was ambiguous whether a spouse could be examined under sec. 816.03 and 816.06 in the same way the debtor could.
Having found an ambiguity, the court held that it would defy common sense not to permit the examination, because otherwise, the debtor could insulate marital property by transferring it to his or her spouse.
In the case at bar, the Court concluded that the same rationale applies, because Chapter 242 permits creditors to vacate fraudulent transfers between related companies.
The court explained, “Property transfers between a judgment debtor and related business entities present the same risk of fraud as those between spouses. Examination of the alleged third-party recipient may be the only method available to a judgment creditor to ascertain whether a fraudulent transfer has occurred.”
The court next held that the circuit court properly exercised its discretion in ordering Orion Logistics to submit to a supplemental examination.
The court noted that Orion Construction had millions in sales in 2005 and 2006, but less than $200,000 in 2007. Orion Logistics, in contrast, had no apparent sales in 2005 or 2006, but more than $15 million in gross receipts in 2007. Based on this, the court held that the circuit court reasonably exercised its discretion in ordering the supplemental examination.
The court’s holding is clearly fair and equitable. It is, at a minimum, plausible to conclude that the judgment debtor transferred assets to a related company to evade execution of the judgment.
But while the result is fair, and Wisconsin statutes should permit a supplemental examination in this case, it is problematic for the court to conclude that they in fact do so.
The court is correct that the same rationale that permits examination of a debtor’s spouse also permits examination of a related business entity. However, the applicable statutes don’t fit as well in such a case.
First, in Courtyard Condo., the court noted that sec. 803.045(3) provides, “After obtaining a judgment, a creditor may proceed against either or both spouses to reach marital property available for satisfaction of the judgment.” Courtyard Condo., 244 Wis.2d at 159.
However, there is no comparable statute providing that a creditor of a corporation, or LLC, may proceed against the assets of parents, subsidiaries, or other related entities.
Admittedly, the law permits action to be taken against business entities who are the beneficiaries of fraudulent transfers. But the fraudulent transfer laws don’t contain any provisions comparable to sec. 803.045(3).
Second, sec. 816.03 uses the word, “shall.” If a creditor seeks a supplemental examination, the court or court commissioner “shall” order the debtor to appear. The statute does not allow for discretion in the matter.
In the case of a judgment debtor’s spouse, given the language in sec. 803.045(3), that language is not problematic; if the debtor can be ordered to appear, the spouse can be, too, and thus, the court “shall” order the spouse to appear, if requested.
In Courtyard Condo., the Court of Appeals did not weigh whether it would be a proper exercise of discretion to order the spouse to appear. Having concluded that the statute permits it, it held that the circuit court should have done so.
In the case at bar, however, after determining that the statutes include related entities, the court then turned to whether it was a proper exercise of discretion to do so.
But, the statutory scheme doesn’t contemplate any discretion. If it did, it would provide for evidentiary hearings prior to issuance of the order, at which the creditor would be required to show the necessity for examining a third party. The statutes do not.
Accordingly, while the court clearly reached an equitable result, a good argument can be made that the statutes don’t support it.
What the Court Held
Issue: Can a business entity that is related to a judgment debtor be compelled to submit to a supplemental examination?
Holding: Yes. The purpose of the law would be thwarted if it could not.
Attorneys: For Respondent: Nathan Moenck, Madison; For Appellant: Charles D. Koehler, Appleton.
David Ziemer can be reached at [email protected]