Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).
Opinion 2015 California Procedure 2015CaliforniaTextronFinancial
Related Article: None.
AI Synopsis
♦ The United States District Court for the Southern District of California addressed a motion by SPE LO Holdings, the assignee of Textron Financial Corporation, seeking a charging order against Michael S. Gallegos membership interest in two limited liability companies, Pacific Pearl Hotels, LLC and Pacific Pearl Hotel Management, LLC. Textron held a judgment exceeding twenty-one million dollars against Gallegos but had recovered only a minute fraction of the debt. The plaintiff relied on California Secretary of State documents to establish Gallegos involvement with the LLCs, noting that he was explicitly listed as a manager in those public records. Gallegos opposed the motion on three primary grounds: the alleged inadmissibility of the government records, insufficient service of process on the LLCs, and the failure of the plaintiff to prove he held a membership interest in the entities. Regarding admissibility, District Judge Larry Alan Burns took judicial notice of the Secretary of State filings, asserting they are public records whose accuracy cannot be reasonably disputed. On the issue of service, the court clarified that under the California Code of Civil Procedure, a judgment creditor can obtain a charging order without making the LLC a party, and service by mail on the debtor and the LLC is legally sufficient. However, the court found that the evidence regarding Gallegos membership interest was insufficient to meet the required substantial evidence standard. The court highlighted that while the records confirmed Gallegos served as a manager, the California Corporations Code allows for LLCs to be managed by non-members. Because statements made in legal briefs do not constitute evidence and the plaintiff offered no other proof of membership, the court denied the motion without prejudice. To prevent the debtor from avoiding the order, the court authorized SPE LO to pursue postjudgment discovery to ascertain Gallegos membership status. ♦
Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).
TEXTRON FINANCIAL CORPORATION, Plaintiff,
v.
MICHAEL S. GALLEGOS, Defendant.
Case No. 15cv1678-LAB (DHB).
United States District Court, S.D. California.
October 7, 2015.
ORDER DENYING TEXTRON'S MOTION TO CHARGE GALLEGOS' MEMBERSHIP INTEREST
LARRY ALAN BURNS, District Judge.
Textron obtained a $21,921,165.45 judgment against Gallegos in the U.S. District Court for the District of Rhode Island, but has only collected $10,484.99. (Docket nos. 40-1 and 40-6.) Its assignee, SPE LO Holdings, seeks a charging order against Gallegos' interest in two entities: Pacific Pearl Hotels, LLC and Pacific Pearl Hotel Management, LLC. (Docket no. 40.) SPE LO relies on California Secretary of State documents to establish Gallegos' interest in the LLCs. (Docket nos. 40-2, 40-3, and 40-4.) Gallegos' name is listed on line 9 of the Secretary of State documents, which require the "name . . . of any manager . . ., or if none have been appointed or elected, . . . the name . . . of each member." (Docket nos. 40-2 and 40-3.) His name is also listed on line 15, where he's identified as the "manager" of both LLCs. SPE LO served the motion by mail on Gallegos and the LLCs. (Docket nos. 40-9 and 41.)
Gallegos opposes the motion, arguing: (1) the Secretary of State records aren't admissible; (2) Textron failed to serve the LLCs; and (3) Textron hasn't shown that he is a member of the LLCs. (Docket no. 47.) He doesn't contend that the Secretary of State records are inaccurate. Nor does he deny that he's a member of the LLCs. He just argues that SPE LO hasn't proved it.
Admissibility of Secretary of State Records
The Secretary of State filings are matters of public record whose accuracy cannot be reasonably disputed. Potocki v. Wells Fargo Bank, NA, 2014 WL 2949286, at PAGE_1 n.1 (E.D. Cal. June 30, 2014). The Court takes judicial notice of them.
Sufficiency of Service
When there's a money judgment against an LLC member personally, but not against the LLC, the member's interest may be reached by a charging order. Cal. Code of Civ. P. sec. 708.310. A charging order is a lien on the member's distributional interest. 51 Am. Jur. 2d Limited Liability Companies sec. 23. It only allows the judgment creditor to receive distributions to which the member would otherwise be entitled; it doesn't entitle the creditor to participate in the LLC's management or exercise the rights of a member. Cal. Corp. Code secs. 17701.02(aa), 17705.02, and 17705.03. It thereby "protect[s] other members of an LLC from being forced to involuntarily share governance responsibilities with someone they did not choose, or from being forced to accept a creditor of another member as a co-manager." In re First Prot., Inc., 440 B.R. 821, 829-30 (B.A.P. 9th Cir. 2010).
Because the other LLC members are protected, a judgment creditor can obtain a charging order under sec. 17705.03(a) without serving the LLC or making it a party. See Bank of Am., NA v. Freed, 983 N.E.2d 509, 522 (Dec. 28, 2012) ("[C]harging orders on distributional interests do not affect the rights or interests of the LLC to the degree necessary to require that it be made a party. . . . It would be impractical and unnecessarily costly to require a lender seeking charging orders to serve all of the entities in which a borrower has an interest."). But, to obtain a lien on a judgment debtor's interest in an LLC before the court issues a charging order, the judgment creditor must serve a notice of motion for charging order on (1) the debtor and (2) the LLC or all of its members. Cal. Code of Civ. P. sec. 708.320(a). Service by mail is sufficient to satisfy sec. 708.320(a); personal service isn't required. See, e.g., Choice Hotels Int'l, Inc. v. Penta Denver LLC, No. 3:13-mc-80249, 2014 WL 458069, at PAGE_4 (N.D. Cal. Jan. 27, 2014); see also id. at Docket no. 8. Textron adequately served Gallegos and the LLCs.
Gallegos' Interest in the Pacific Pearl Entities
Entry of a charging order requires "substantial evidence" that the debtor is a partner or member of the entity. See Ribero v. Callaway, 87 Cal. App. 2d 135, 139 (1948); Cf. Regions Bank v. Alverne Associates, LLC, 456 S.W.3d 52, 58 (Mo. Ct. App. 2014). "Substantial evidence" means "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Braewood Convalescent Hosp. v. Workers' Comp. Appeals Bd., 34 Cal. 3d 159, 164 (1983). It has been found where the debtor's interest was evidenced by a certificate of limited copartnership, Ribero v. Callaway, 87 Cal. App. 2d at 137, and by previous declarations of the debtor and his partner, Safeco Ins. Co. of Am. v. Raisch Co., 2013 U.S. Dist. LEXIS 39658, PAGE_2 (N.D. Cal March 20, 2013).
Here, the Secretary of State documents establish that Gallegos is a manager of the LLCs. But, an LLC can be managed by a non-member. Cal. Corp. Code secs. 17701.02 and 17704.07. While Gallegos' name is listed on line 9 of the Secretary of State documents, where the LLCs could have listed a member if no manager had been appointed, line 15 establishes that a manager was appointed. Thus, the Secretary of State documents don't prove Gallegos' membership interest in the LLCs, and SPE LO offers no other evidence that Gallegos is a member. While they argue that he is a member in their motion, "statements made in briefs are not evidence"—let alone substantial evidence. In re Heritage Bond Litig., 2004 WL 1970058, at PAGE_4 (C.D. Cal. July 23, 2004).
Conclusion
SPE LO's motion for a charging order is DENIED WITHOUT PREJUDICE. It may bring the motion again once it has substantial evidence of Gallegos' membership interest in the LLCs. To avoid the possibility that Gallegos has avoided entry of a charging order by playing coy, the Court authorizes SPE LO to pursue postjudgment discovery to determine whether Gallegos is, in fact, a member of the LLCs.
IT IS SO ORDERED.