Utah Court of Appeals Allows Additional Remedy to Stop Judgment Debtor Hiding Behind Charging Order

Earthgrains Baking Companies, Inc. vs. Sycamore[1] involved a long-term attempt by Earthgrains Baking Companies, Inc. (“Claimant”) to collect a multi-million dollar judgment against Leland Sycamore (“Defendant”).

The defendant created a line of baked goods titled “Grandmother’s Sycamore Household Bread” which was sold to Metz Baking Company in 1998 for approximately $9.5 million. Although defendant retained a limited license to sell the line of baked goods in certain states, Utah was not among the permitted jurisdictions.

The defendant transferred the money received to Sycamore Family LLC (the “Company”). The founding members of the company included the defendant, his wife, Jeri Sycamore, and their four children. The defendant and his wife each owned a 48% interest in the company. Each of the four Sycamore children owned a 1% stake in the company. The company owned and managed the family’s assets, including a multi-million dollar mansion in Provo, Utah.

In 2008, the defendant purchased a bakery, known as Sycamore Family Bakery, by obtaining a $2,112,500 line of credit from Wells Fargo Bank. The Company has secured the line of credit by pledging the family mansion as security. In exchange, Leland gave the Company a promissory note for $2,112,500. Sycamore Family Bakery soon broke the earlier agreement with Metz Baking Company (which by then had subsequently merged with Sara Lee, who now owned all rights under the earlier agreement) by selling home baked goods under the name of Sycamore in Utah.

In 2009, Sara Lee filed claims against defendant and Sycamore Family Bakery for: (a) trademark infringement; (b) unfair competition; (c) cybersquatting; and (d) breach of contract. At this point, the plaintiff acquired the relevant interest in Sara Lee and replaced Sara Lee as the plaintiff. In 2012, the plaintiff was awarded over $2.3 million in damages, approximately 99% of which was awarded directly to the defendant. The District Court doubled the award against the Defendant and also tripled the remaining damages awarded to Sycamore Family Bakery, bringing the total damages awarded to $4,674,958 plus interest (the “Judgment”). The district court also awarded the plaintiff just under $1.1 million in attorney fees.

In 2014, the judgment remained completely unsatisfied, as the assets of the defendant were all in the company, remaining beyond the reach of the plaintiff. The plaintiff subsequently requested an “indictment order” against the defendant’s 48% stake in the company. The court approved the charging order against the company and included the following instruction:

Sycamore Family LLC. . . is ordered to pay directly to [Earthgrains] all assets, profits, proceeds, distributions, advances, drawings and any other remuneration due to [Defendant] because of his participation in [Company]including, without limitation, any transfer characterized or designated as payment for [Defendant’s] tax obligations, salaries, wages, reimbursements or loans, until the [Judgment] is fully satisfied.[2]

A charging order is a means created by law for a creditor of a judgment debtor who is a member with others to achieve the beneficial interest of the judgment debtor in a limited liability company. It is similar in its result to an assignment of income since future distributions that would otherwise be made to the debtor member must rather be made to the creditor who obtained the charging order.

At the end of 2018, the judgment still remained unsatisfied. At that time, the plaintiff sought: (a) to hold the defendant in contempt of court; (b) a court-appointed receiver to account for and transfer to Claimant any distribution wrongfully withheld by the Company; and (c) seize the defendant’s membership interest in society to the extent necessary to satisfy the judgment. The district court granted the plaintiff’s motion finding clear and compelling evidence that the defendant, his wife and the company willfully disregarded the court order. However, the district court also said the exact amount of contempt was unknown because the company failed to comply with the charging order’s requirements to turn over relevant financial information and because of its disregard for corporate structures or record keeping. The district court also appointed a receiver to inventory the Company’s assets and document all distributions made by the Company since the 2014 charging order.

In July 2019, the Receiver submitted its accounting of the distributions made by the Company and its calculation of the share due to the Claimant. According to the receiver, the company owed the plaintiff approximately $3.9 million. Based on the receiver’s report, the district court ordered the receiver to pay the plaintiff the $1.1 million in cash assets held by the company and “sufficiently liquidate [Company] real estate assets to allow the payment of the remaining distributions.[3]

On call at 10and Circuit Court of Appeals (the “Court of Appeals”), the company asserted that the District Court exceeded its jurisdiction under the Utah Revised Uniform Limited Liability Companies Act (the “Act”) by authorizing the receiver to liquidate certain real estate assets of the company. and transfer the proceeds to the claimant to account for distributions that the company wrongly withheld from the claimant.

In its analysis, the Court of Appeal stated that the charge order section of the law allows “a court to issue a charge order against the judgment debtor’s transferable interest. for the unexecuted amount of the judgment”.[4] According to the Court of Appeal, a charge order has two parts. “First, it ‘constitutes a lien on the transferable interest of a judgment debtor.’ Second, “after the limited liability company is served with the charge order”, “it obliges the limited liability company to pay to the person to whom the charge order was issued any distribution that would otherwise be paid to the judgment debtor.”[5]

The Court of Appeal further stated that the statute allows a court to appoint a receiver of the distributions subject to the indictment order, with the power to make any inquiries that the judgment debtor might have made. . In addition, a court may “make any other orders necessary to give effect to the charging order”.[6] The Court of Appeal indicated that the scope of this last provision, and as such, was the question which had to be decided; that is, whether the district court was correct in relying on this statutory provision to appoint a receiver to liquidate the company’s real estate assets to compensate for distributions the company failed to provide to the applicant.

In its decision, the Court of Appeal upheld the actions of the district court stating that “the district court was correct and [the Court of Appeals saw] no reason to draw a line, the plain language of the law does not.[7] The crux of the Court of Appeal’s decision was that the plaintiff had obtained a charging order against the company. Therefore, the company was liable to pay the plaintiff such a sum of money. “Because the charging order was frustrated by the [Company’s] failure to comply, however, the district court had to find a way to give effect to it.[8] Being authorized to make any orders necessary to give effect to the charging order, the Court of Appeal held that the district court was well within its power to appoint a receiver. As such, the district court’s adoption of the receiver’s recommendations to liquidate the company’s assets fell within the scope of the impeachment order provision.