Three Interesting Charging Order Opinions In The Estates Bid-Rigging Scheme

Forbes Money Personal Finance Three Interesting Charging Order Opinions In The Estates Bid-Rigging Scheme Jay Adkisson Contributor Opinions expressed by Forbes Contributors are their own. I cover Wealth Preservation in its legal permutations Following Oct 24, 2023, 10:27pm EDT | Press play to listen to this article! Got it! Share to Facebook Share to Twitter Share to Linkedin Auctions can be rigged by reducing the number of bidders, as in this case. getty In this article we consider three interesting charging order opinions that arise from the same judgment.

The genesis of the judgment is a scheme concocted by a fellow named Craig Brooksby that he ran primarily through a company called The Estates LLC and other business entities. How this scheme worked is related in one of the court opinions as follows. Members of The Estates paid a monthly subscription fee to access to its services, including exclusive access to its website.

Members could obtain information on properties that were available for purchase, or which were being foreclosed upon, and there was also information about the value of these properties, their locations, and whether they had any debt on them, etc. The members of The Estates were each required to have their own LLC, called a “bidding LLC”, to be used by them to purchase properties. Once a member had selected a property to be acquired, the member would then bid against other members by submitting the maximum amount they were willing to pay.

Either Brooksby or one of his assistants would then take the steps to buy the property, including showing up at auctions to bid and hopefully acquire the property. The members of The Estates had all agreed that only one member could bid at a public auction for a property and that they would not show up to bid against each other. If the bid submitted by Brooksby or one of his assistants was successful, the winning member would then pay The Estates an acquisition fee.

Curiously, the member of The Estate who offered the highest bid to be offered at the public auction was not always the winning bidder, but apparently Brooksby sometimes chose lower bidders if he thought he could make more money from them somehow. Also, Brooksby was also entitled to some cut of the profits made by a member when later they sold their property, although the court described the arrangements for paying Brooksby to be “complicated and opaque”. If a member’s bid at the public auction was successful, title to the property would be taken in an “equity share” LLC of which the winning member of The Estates was also the member of the equity share LLC.

But there could be other members in the equity share LLC as well, such as investors or lenders or contractors involved in renovations, etc. , and apparently Brooksby through one of his own myriad LLCs had his own thumb in this pie as well. Later, when the property was finally sold — “flipped” is a good description — the proceeds of the sale would then be distributed to the members of the equity share LLC.

Of these proceeds, The Estates and often one of Brooksby’s own LLCs would take somewhere around 40% to 50% of the profits. The key thing to know is that Brooksby took his share of the profits in any one of numerous LLCs and all which seemed to have been owned, directly or indirectly by the GG Irrevocable Trust and King Family Enterprises LLC, which Brooksby would later be alleged to own and control. MORE FOR YOU The Fed Is Worried About Commercial Real Estate And You Should Be Too Most Home Buyers Would Settle For A Haunted House As Sinking Affordability Proves Spookier Than The Paranormal Is The Atlanta Housing Market Going To Crash Anyway, The Estate scheme was a win-win deal for its members and for Brooksby.

By limiting the amount of bidders at the various foreclosure auctions, through their agreement not to bid against each other, the members of The Estates sometimes acquired properties at lower values than they might ordinary have if it were a bidding free for all. You know, like any other ordinary foreclosure auction. The thing about win-win deals is that is usually means that there is somebody who a loser in the deal, and this was true here as well.

The losers were the folks whose homes were being foreclosed, because they often still had equity in their properties even if they couldn’t make the payments. With lower winning bids at the foreclosure sale, this sometimes meant that these folks did not get their equity back ― or at least as much of their equity that they would have been returned had their been an ordinary number of competitive bidders. Eventually, four of these jilted homeowners sued The Estates for rig-bidding in violation of the Sherman Antitrust Act.

Eventually, three of the plaintiffs were awarded a little over $1. 28 million against The Estates and Brooksby, with the GG Irrevocable Trust, King Enterprises and another Brooksby entity, Avirta LLC, all being jointly liable for about $660,000 of that award. The court also entered a permanent injunction that basically shut down the members of the estates from refraining from bidding against each others as well as terminated information about bidding that had been provided by The Estates.

If you are further curious about the background, I have downloaded the Amended Complaint as well as the Judgment and the Permanent Injunction entered in this case. The defendants did not pay the judgment, and so the plaintiffs began judgment enforcement proceedings. These eventually lead to the plaintiffs seeking the appointment of a receiver and a plethora of charging orders against all the various LLCs that were owned by Brooksby, directly or indirectly.

It was the resolution of the plaintiffs’ motions for a receiver and charging orders that lead to the three opinions that will now be related in Williams v. The Estates LLC , Case No. 19-CV-1076 (M.

D. N. C.

). Because these opinions are long and complicated, we shall forego a review in the normal style and instead just focus on the highlights. We will start with the August 10, 2022 opinion and order where the plaintiffs have sought charging orders against a bunch of the Brooksby entities.

Brooksby and his entities objected to the court entering the charging orders for the reason that the court sits in North Carolina, but the LLCs were formed elsewhere (known as “foreign LLCs” although that really means in another state in this instance). The court rejected this argument on the grounds that the North Carolina Uniform Limited Liability Act (ULLCA) authorizes a court to place a charging order on any interest in an LLC held by a judgment debtor before the court without regard to where the LLC was formed or domiciled. The court then moved on to the issue of whether Brooksby and the other judgment debtor entities held interests in other LLCs.

The court found that there was proof that Avirta LLC held interests in 26 LLCs and thus granted charging orders as to those entities (but not as to two others for lack of proof that Avirta held an interest in them). Similarly, the court found that there was evidence that King Family Enterprises held interests in five LLCs (including Avirta LLC), and granted charging orders to those as well. Because the GG Irrevocable Trust as a judgment debtor held an interest in King Family Enterprises, a charging order would be granted in that instance too.

This now brings us to Brooksby’s own interests in LLCs, which gets more complicated. The plaintiffs argued that Brooksby had some right to the profits in numerous LLCs, including The Estates, King Family Enterprises and Avirta, plus some 80 to 100 other of the “equity share” LLCs owned by other members of The Estates. But some rights to the profits does not equate to the type of membership interest contemplated by the North Carolina ULLCA.

Recall that Brooksby’s deal allowed him to participate in the profits of the “equity share” LLCs when they finally sold their properties. Brooksby was not a member per se , but instead he had what amounted to a contractual right to those profits. Was that enough to make Brooksby a member in those LLCs such that a charging order could issue against his interest? The court thought not: “This evidence is insufficient to show that Mr.

Brooksby has an economic interest in these LLCs. The evidence shows The Estates receives distributions from the equity share LLCs, and there is no evidence that Mr. Brooksby receives those distributions.

The fact that Mr. Brooksby later is paid by The Estates, by inference for his work as manager, does not by itself establish that Mr. Brooksby has a “proprietary interest .

. . in the capital, income, losses, credits, and other economic rights and interests of a limited liability company, including the right .

. . to receive distributions” from the ‘equity share’ LLCs.

” Thus, the court denied the plaintiffs’ motions for charging order as to Brooksby for those entities in which Brooksby was not a member. It simply didn’t matter that Brooksby eventually received money from them. This now brings us to the second opinion, which is the Opinion and Order for December 7, 2022 .

Despite the permanent injunction which forbade him from selling properties, including through an LLC, Brooksby sold two properties through an entity called Biscay LLC. When they found out about this activity, the plaintiffs brought a motion to have Brooksby held in contempt. Interesting, one of the other defendants, Carolyn Souther, had filed her own declaration of compliance in which she described how Brooksby had violated the injunction.

The court agreed with the plaintiffs, and ordered Brooksby to provide copies of closing documents so as to allow the plaintiffs to begin tracing the proceeds of those sales for collection. The plaintiffs also sought the appointment of a receiver (Lanik) to be appointed as a receiver over The Estates, Brooksby, the GG Irrevocable Trust, King Family Enterprises and Avirta. Although initially contesting the receiver motion, the defendants ultimately withdrew their opposition and consented to the appointment of a receiver.

In considering whether to appoint the receiver, the court noted: “The evidence of record supports the inference that Mr. Brooksby and the entities he controls are engaged in a plan to hide their assets and to avoid paying the judgment. Mr.

Brooksby, acting with and on behalf of an entity and in direct violation of the permanent injunction, has sold property obtained through public foreclosure auctions on at least two occasions. [] For at least some of these sales, some of the profits should have been paid toward satisfying the judgment. Yet the record does not show that the Clerk has received any money from any defendant or any entity subject to the charging order towards satisfying the judgment.

Neither Mr. Brooksby nor any other defendant has explained what happened to the proceeds of these sales. ” The court further noted that Brooksby had not paid on a multi-million Nevada judgment previously entered against him, and had not made any attempts to pay the instant judgment either.

Taking into account the complexity of all the Brooksby entities, the court granted the receiver application. Finally, we come to the third opinion, which was the Opinion and Order of October 19, 2023 . This opinion is different in that it considers Carolyn Souther who was also a defendant and a judgment debtor.

The plaintiffs also sought charging orders against various LLCs in which Souther was a member. Souther’s defense was similar to Brooksby in that she denied that she was a member of other LLCs, even though she had some legal interest in them that she contended did not rise to the dignity of a membership interest. There were a few LLCs in which Souther admitted in her answers to interrogatories that she was a member and owner, and the court with little discussion granted the charging orders as to these LLCs.

There were a couple of other LLCs in which Souther admitted that she had an interest in her interrogatory answers, but she claimed that her answers were inaccurate insofar as she only held some legal interest and not a membership, and the term “economic interest” was not well-defined in the interrogatories. The court didn’t buy the excuse and granted the charging orders anyway. The next 24 LLCs were dissolved or had been suspended for lack of payment of fees, and the court could not see how any of these entities could even have members, so the charging orders were denied as to these entities.

For another 24 entities, the plaintiffs had not presented sufficient proof that Souther held a membership interest, and so the court denied charging orders as to these entities. Finally, there was one more LLC which Souther used for her self-directed IRA, and the court took the charging order issue as to that LLC under advisement. This concludes the three results of the three opinions issued by the court so far in the case.

ANALYSIS None of these three opinions break any new ground in the area of charging order law, but they are quite illustrative of the nuts-and-bolts of charging order motions. To win a charging order against a debtor’s interest in an LLC, a creditor must prove that the debtor is a member of the LLC, and a person can only be a member if they have an economic interest in the LLC under the LLC laws. An economic right is basically defined in the ULLCA as a right to distributions, such as profit distributions while the entity is operating of liquidating distributions when it is wound up.

Otherwise stated, it is the distributional rights which makes a membership interest, at least as it relates to charging orders. Distributional rights and economic interest are, for this purpose at least, essentially the same thing. Perhaps smarter folks than me can point out where they are different in other contexts if at all.

It is indeed possible that a person might have other rights in an LLC but not economic rights. A person’s right to a salary from an LLC is not, standing alone, an economic right. Similarly, that a person might get a percentage from the sale of certain of the LLC’s assets, such as a brokerage fee, does not make them a member.

This case also demonstrates that creditors need to conduct sufficient discovery to be able to establish with admissible evidence that a debtor indeed has a membership interest in an LLC. In my day job, I watch other creditors’ attorneys whiff on this all the time. A person may have some legal relationship to an LLC, such as that they originally formed it, but that standing alone doesn’t mean that they have the requisite economic interest now to make them a member such that their distributional rights can be made subject to a charging order.

Same thing with signatory authority of a bank account, which does not ipso facto make that person a member. Perhaps the easiest way to establish that a debtor is a member of an LLC is to obtain the debtor’s tax returns, as only an LLC or partnership member will get a K-1 to attach to their return. But, as with Souther, it is also possible to examine the debtor or propound interrogatory questions to the debtor asking them about any LLCs or partnerships they are members of or have economic interests in.

Many jurisdictions will also allow a creditor to subpoena an LLC to appoint the “person most knowledgeable” (referred to as the PMK) to answer the singular question about whether the debtor is a member of the LLC or partnership. The point is — and as these opinions so starkly illustrate — the creditor needs to conduct this discovery before they apply for a charging order, or else they risk it being denied. “Ready, Shoot, Aim” is a bad strategy here since it will only waste the creditor’s own time.

This is the reality of charging order practice. I would argue that it is wrong for the reason that all a charging order does is to place a lien on the debtor’s interest and redirect distributions to the creditor. If the debtor doesn’t have an interest, however, it is a “no harm, no foul” situation and the creditor simply gets nothing.

Other forms of legal liens, such as abstracts on judgments, can be effective even if the debtor doesn’t have any interest to which any lien attaches, and it is difficult to discern why that result should be any different here. But as long as courts are requiring proof that the debtor has an interest, that is what creditors will have to show. Finally, it should be noted that courts almost never refuse to issue charging orders because the LLC was formed in another state.

This argument has died so many times already that I’m frankly surprised that debtors keep raising it, but then there really are very few defenses to a charging order to begin with so a desperate grab at a non-existent straw is somewhat understandable. That really is a frivolous argument though. A charging order doesn’t create a lien on the LLC, it creates a lien on the debtor’s economic interest in the LLC, which is very different.

Since the debtor is already before the court, it is entirely appropriate for the court to issue the charging order against that debtor’s interest, without any regard to where the LLC was formed or conducting business. Fundamentally, it is no different than a creditor levying upon a debtor’s shares of Microsoft; the creditor doesn’t have to go to Washington state or Delaware to do the levy. My guess is that this is not the last that we will hear about The Estate and Brooksby, so stay tuned.

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