By: Eric R. Kaplan, Esq.
Earthgrains Baking Companies, Inc. v. Sycamore [1] involved a long-term attempt by Earthgrains Baking Companies, Inc. (“Plaintiff”) to collect upon a multi-million dollar judgment against Leland Sycamore (“Defendant”).
Defendant created a baked goods line entitled “Grandma Sycamore’s Home-Maid Bread” that was sold to Metz Baking Company in 1998 for approximately $9.5 million. While Defendant retained a limited license to sell the baked goods line in certain states, Utah was not among the permitted jurisdictions.
Defendant transferred the money received into Sycamore Family LLC (the “Company”). The Company’s founding members included Defendant, his wife, Jeri Sycamore, and their four children. Defendant and his wife each owned a 48% member interest in the Company. Each of the four Sycamore children owned a 1% member interest in the Company. The Company held and managed the family’s assets, including a multi-million dollar mansion in Provo, Utah.
In 2008, Defendant bought a bakery, known as the Sycamore Family Bakery, by obtaining a $2,112,500 line of credit from Wells Fargo Bank. The Company secured the line of credit by pledging the family mansion as collateral. In exchange, Leland gave the Company a promissory note for $2,112,500. Sycamore Family Bakery soon breached the prior agreement with Metz Baking Company (which by this time had subsequently merged with Sara Lee, who now held all rights under the prior agreement) by selling homemade bread products under the Sycamore name 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, Plaintiff acquired the relevant interests in Sara Lee and replaced Sara Lee as Plaintiff. In 2012, Plaintiff was awarded over $2.3 million in damages, approximately 99% of which was directly attributed to Defendant. The district court doubled the award against Defendant and also tripled the remaining damages attributed to Sycamore Family Bakery, bringing the total damages awarded to $4,674,958 plus interest (the “Judgment”). The district court also awarded Plaintiff just under $1.1 million in attorneys’ fees.
By 2014, the Judgment remained wholly unsatisfied, as Defendant’s assets were all in the Company, remaining beyond Plaintiff’s reach. Plaintiff thereafter sought a “charging order” against Defendant’s 48% member interest 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, draws, and any other remuneration due to [Defendant] as a result of his ownership interest in [Company], including without limitation any transfers characterized or designated as payment for [Defendant’s] tax liabilities, salary, wages, reimbursements, or loans, until the [Judgment] is satisfied in full.[2]
A charging order is a statutorily created means for a creditor of a judgment debtor who is a member with others to reach the debtor’s beneficial interest in a limited liability company. It is similar in result to an assignment of income because future distributions that would otherwise be made to the debtor-member are instead to be made to the creditor who obtained the charging order.
By late 2018, the Judgment still remained unsatisfied. At this time, Plaintiff sought: (a) to hold Defendant in contempt of court; (b) a court-appointed receiver to account for and transfer to Plaintiff any wrongly withheld distributions from the Company; and (c) to foreclose on Defendant’s member interest in the Company to the extent necessary to satisfy the Judgment. The district court granted Plaintiff’s motion by finding clear and convincing evidence that Defendant, his wife and the Company were in willful contempt of the court’s order. However, the district court also stated that the exact amount of the 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 recordkeeping. 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 his accounting of the distributions made by the Company and his calculation of the share owed to Plaintiff. According to the receiver, Company owed Plaintiff approximately $3.9 million. Based upon the receiver’s report, the district court ordered the receiver to pay Plaintiff the $1.1 million in cash assets owned by the Company and to “liquidate sufficient [Company] real estate assets to allow for the payment of the remaining distributions.”[3]
On appeal to the 10th Circuit Court of Appeals (the “Court of Appeals”), the Company asserted that the district court exceeded its authority under the Utah Revised Uniform Limited Liability Company Act (the “Act”) by authorizing the receiver to liquidate some of the Company’s real estate and transfer the proceeds to Plaintiff in order to account for the distributions the Company wrongfully withheld from Plaintiff.
In its analysis, the Court of Appeals stated that the Act’s charging order section permits “a court to enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment.”[4] According to the Court of Appeals, a charging order has two parts. “First, it ‘constitutes a lien on a judgment debtor’s transferable interest.’ Second, ‘after the limited liability company has been served with the charging order,’ ‘it requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor.’”[5]
The Court of Appeals further stated that the Act permits a court to appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made. Additionally, a court may “make all other orders necessary to give effect to the charging order.”[6] The Court of Appeals indicated that the scope of this last provision, and as such, was the question that needed to be decided; that is, whether the district court was correct to rely on such statutory provision in order to appoint a receiver to liquidate the Company’s real estate assets to make up from the distributions the Company failed to provide Plaintiff.
In its ruling, the Court of Appeals upheld the district court’s actions by stating that “the district court was correct and [the Court of Appeals saw] no reason to draw a line the plain language of the statute does not.”[7] The crux of the Court of Appeals’ ruling was that Plaintiff obtained a charging order against Company. Therefore, Company was required to pay to Plaintiff such a certain amount 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 it effect.”[8] Being permitted to make all orders necessary to give effect to the charging order, the Court of Appeals held the district court was well within its authority to designate a receiver. As such, the district court’s adoption of the receiver’s recommendations to liquidate the Company’s assets fell within the bounds of the charging order provision.
[1] No. 19-4174 (D. Utah, 10th Cir., February 14, 2022).
[2] Id . at 5.
[3] Id . at 12.
[4] Id . at 16.
[5] Id .
[6] Id ., quoting Utah Code Section 48-3a-102(29).
[7] Id . at 17.
[8] Id .
