Morgan Stanley Smith Barney LLC v. Johnson

Background

A Financial Industry Regulatory Authority arbitration found Christopher Johnson liable for $1,502,000 in compensatory damages to Morgan Stanley Smith Barney and related entities. The court later confirmed the arbitration award, and the Clerk entered judgment against Johnson.

Morgan Stanley moved for a receiver and a charging order to enforce that judgment. It reported that Johnson had not produced less than $3,000 through collection efforts and sought a receiver who could examine payments from Johnson’s limited liability companies, investigate his assets, and direct payments to Morgan Stanley. Morgan Stanley also sought foreclosure and sale of Johnson’s transferable interests in the companies.

Johnson argued that a receiver was not warranted because he was cooperating with discovery. He conceded that a charging order was appropriate against his transferable company interests, directing the companies to pay Morgan Stanley distributions otherwise payable to him. Morgan Stanley responded that Johnson received interest payments on loans to the companies rather than distributions; it stated that the companies had paid him more than $200,000 in interest during 2017.

Charging order and foreclosure

Under Minnesota law, a charging order requires a limited liability company to pay a judgment creditor distributions that otherwise would be paid to the judgment debtor. The statute also permits a receiver to examine matters the debtor could have examined. If distributions under the charging order will not pay the judgment within a reasonable time, the court may foreclose the lien and order the sale of the debtor’s transferable interest.

The court entered a charging order against Johnson’s transferable interests for the unsatisfied amount of the judgment. It also determined that a receiver was warranted because the receiver could evaluate the companies’ payment arrangements with Johnson and determine whether they were being used to avoid the debt.

The court did not order foreclosure at that stage. It found that one year after entry of judgment was insufficient, in this case, to justify that relief. The court stated that Morgan Stanley could renew its foreclosure request if the receiver found that Johnson was hiding funds or could not secure payments toward the judgment.

Receiver over other property

The court also appointed a receiver over Johnson’s non-company property and assets. It found that Morgan Stanley had a valid claim, that ordinary collection efforts had largely failed, and that appointing a receiver would do more good than harm. The court stated that fraudulent concealment was not required because it was only one factor relevant to the appointment decision.

Timothy G. Becker of Lighthouse Management Group, Inc., was appointed receiver over Johnson’s company and non-company property and assets. The receiver was authorized to investigate Johnson’s assets, examine the companies’ financial transactions since January 1, 2015, use the powers available to receivers under Minnesota law, report the results to the court, and recommend how assets should be liquidated to pay the judgment. The receiver’s compensation would be paid from assets recovered in the matter, and he was required to post a $250,000 bond within 14 days.

Disposition

Judge Paul A. Magnuson ordered that the plaintiffs’ motions to appoint a receiver and for a charging order were granted in part and denied without prejudice in part. He entered the charging order and appointed Becker as receiver, while leaving foreclosure unavailable at that stage and allowing Morgan Stanley to renew that request later.