JAMES W. FARMER, Plaintiff and Appellant, v. LORI A. FARMER, Defendant and Appellee. FIRST WESTERN FEDERAL SAVINGS BANK, Plaintiff, v. LAKOTA LAKE CAMP, LLC and JAMES W. FARMER, Defendants and Appellants.
#29624, #29685
IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA
OPINION FILED 08/10/22
2022 S.D. 47
THE HONORABLE HEIDI LINNGREN (#29624); THE HONORABLE JANE WIPF PFEIFLE (#29685)
APPEAL FROM THE CIRCUIT COURT OF THE SEVENTH JUDICIAL CIRCUIT, PENNINGTON COUNTY, SOUTH DAKOTA
JAY C. SHULTZ, Rapid City, South Dakota, Attorney for appellants James W. Farmer and Lakota Lake Camp, LLC.
PATRICIA A. MEYERS, Rapid City, South Dakota, Attorney for appellee Lori A. Farmer.
CONSIDERED ON BRIEFS JANUARY 10, 2022
[¶1.] In this consolidated appeal, James Farmer challenges orders entered by two different circuit court judges related to his distributional interest in Lakota Lake Camp, LLC. James and Lakota Lake also
Factual and Procedural Background
[¶2.] During their marriage, James and Lori acquired a significant amount of land in the Black Hills and formed multiple legal entities for the development and sale of the land. In 2014, James and Lori obtained a divorcе, and the judgment and decree of divorce incorporated the parties’ property settlement agreement (Agreement). The Agreement addressed, among other matters, the division, management, and sale of the properties owned by their companies.
[¶3.] In July 2016, Lori filed the first of many motions with the circuit court (divorce court) seeking to compel James‘s compliance with the judgment and decree of divorce. For example, she alleged that James failed to pay their joint debts with proceeds of land sales, improperly diluted her membership interest in their company Lakota Lake, exceeded the limits under the Agreement that he could spend on expenses, overpaid his management fees, and denied her access to the companies’ financial records. After an evidentiary hearing in October 2016, the divorce court found James in contempt and compelled his compliance with the judgment and decree of divorce. However, James continued to refuse to comply with the terms of the parties’ Agreement and further refused to comply with the directives as stated in the court‘s order. James and Lori returned to court frequently for hearings related to James‘s actions or inactions.
[¶4.] Ultimately, in January 2018, the divorce court held an evidentiary hearing to address James‘s contempt and the remaining division of the parties’ property. In April 2018, the court issued findings of fact and conclusions of law, and after considering objections and proposals by the parties, the court issued amended findings and conclusions in July 2018. The court valued the parties’ remaining real estate equity at $870,150 and divided it equally, resulting in $435,075 being allocated to each party.
[¶5.] However, the court noted that James had refused to pay amounts owed to Lori for items such as unauthorized travel expenses, overpayment of fees to himself, and Lori‘s share of the proceeds from the sale of certain real estate. The court found that James‘s refusal to pay the amounts owed was willful and contumacious and continued to constitute contempt of the court‘s orders. The court identified that in total James owed Lori $331,184.81 for his contemptuous acts, and the court awarded Lori that amount. The court determined that for James “[t]o purge himself of contempt the [c]ourt will allow the satisfaction of the judgment by a division of the remaining properties so that [Lori] is awarded property” reflecting her share of $435,075 plus $331,184.81, for a total of $766,259.81. In particular, the court awarded Lori a property owned by Lakota Lake named Big Granite, property the parties referred to as the “cabin property,” and other parcels. To account for what was left of James‘s equal share of the property division after subtracting the $331,184.81 he owed to Lоri, the court awarded James the value of the other property owned by Lakota Lake named Granite Perch, the property at issue in this appeal.
[¶6.] In August 2018, the divorce court entered a separate judgment in favor of Lori for $331,184.81 and ordered James to satisfy this contempt judgment by transferring to Lori the real estate interests identified in its findings and conclusions.
[¶7.] James appealed the circuit court‘s contempt order and one of his arguments was that the circuit court “erred in conveying title to the real property because the legal entities holding title to those assets are indispensable parties who were not joined in this action, and thus, the court had no authority to require a non-party legal entity to transfer Big Granite (albeit indirectly) to Lori.” Farmer v. Farmer, 2020 S.D. 46, ¶ 46, 948 N.W.2d 29, 42. He also asserted that the circuit court‘s order directing him to transfer Lakota Lake property impermissibly modified the parties’ property settlement agreement. Id. ¶ 49.
[¶8.] This Court rejected James‘s first argument because the circuit court did not order Lakota Lake to transfer real property; it ordered James to transfer Big Granite to himself in his capacity as managing member of Lakota Lake and then ordered James, personally, to transfer title to Lori. We noted that “James does not assert that he was without authority under Lakota Lake‘s oрerating agreement to take the specific actions ordered by the court.” Id. ¶ 46.
[¶9.] In regard to James‘s second argument, this Court noted that “it is clear under Lakota Lake‘s operating agreement that James, as the managing member, has the exclusive authority to dispose of company assets and thus convey Big Granite to whomever he chooses so long as he makes other necessary distributions to the rest of the Lakota Lake members.” Id. ¶ 47. Therefore, we concluded that although the circuit court “modified the method of distribution of this marital property, the court did not modify the equal division of the property required by the Agreement.” Id. ¶ 49. We observed that “the record reflects that modifying the method of distribution was necessary in this case to prevent James from further dissipating the value of Lori‘s interest in the Lakota Lake property in a manner that benefited only James.” Id. Ultimately, this Court affirmed the circuit court‘s contempt decision and awarded Lori an additional $29,172.62 in appellate attorney fees. Id. ¶¶ 54, 58, 948 N.W.2d at 44-45.
[¶10.] While James‘s appeal was pending, First Western Bank instituted a lawsuit against Lakota Lake and James, requesting a judgment of $40,757.15, plus attorney fees and costs, after Lakota Lake defaulted on a note personally guaranteed by James. The circuit court (collection court) granted First Western‘s motion for summary judgment in December 2018 and awarded First Western a judgment against Lakota Lake and James for $44,603.93, which included costs and attorney fees. In May 2019, after Lori learned of First Western‘s judgment, she paid the bank $50,000 for an assignment of its judgment against Lakota Lake and James. She claimed that she did so because First Western‘s judgment attached to properties she owned personally—Big Granite and the cabin property—and she wanted to avoid an execution sale on the cabin by First Western.1
[¶12.] On February 19, 2020, Lori, “individually and as a member of Lakota Lake[,]” filed an application with the collection court for a charging order against James‘s distributional interest in Lakota Lake. She noted that she had obtained an assignment of First Western‘s judgment against Lakota Lake and James and further noted that she had individually obtained three separate judgments against James in their divorce action. Lori filed documentation showing these debts and requested that the collection court enter a charging order attaching a liеn to James‘s distributional interest in Lakota Lake. Lori also requested that the court direct the clerk of courts to release the excess sale proceeds from the execution sale to her. James filed a brief in opposition, claiming that the collection court was without jurisdiction and authority to charge James‘s distributional interest in Lakota Lake. He also asserted that the excess sale proceeds belong to Lakota Lake.
[¶13.] The record reflects that the collection court held a hearing on Lori‘s application. There is no transcript of this hearing in the record. On May 12, 2020, the collection court granted Lori “a continuing lien against Defendant James Farmer‘s distributional share.” The court further ordered that the excess sale proceeds “will remain with the [c]ourt until such time as the divorce court makes a determination as to Defendant James Farmer‘s distributional interest.”
[¶14.] On August 12, 2020, this Court issued its deсision in the appeal of the contempt decision issued in the divorce proceeding. See Farmer, 2020 S.D. 46, 948 N.W.2d 29. Lori then filed a motion in the divorce file on November 23, 2020, requesting that the divorce court issue an order releasing the excess sale proceeds held by the Pennington County Clerk of Courts to her. Lori informed the divorce court that the collection court had issued an order leaving the excess sale proceeds with the clerk of courts “until the South Dakota Supreme Court Appeal was completed and further providing that the divorce court would determine the appropriate disposition of the remaining funds.” In her affidavit in support of her motion, Lori alleged, without citing any record evidence or attaching supporting documentation, that “[t]o the best of [her] information and belief Lakota Lake Camp, LLC has been administratively dissolved.”2 Lori requested that “any
remaining funds, that James may be entitled to, be paid to [her] and that thеy be applied to the monies owed to [her] by James.”
[¶15.] James filed a brief in opposition, asserting that the collection court‘s order did not “authorize or empower” the divorce court to determine how the excess sale proceeds should be applied. He also
[¶16.] Lori‘s reply brief contained a request that the divorce court determine James‘s distributional interest. She then proposed a specific calculation and asserted that the divorce court could, as part of its contempt powers, issue an order directing James, in his capacity as managing member of Lakota Lake, to make a distribution of the excess proceeds from the sale of Granite Perch and any checking account funds to himself, Lori, and the remaining members. She further claimed that the court could direct that James turn over his distributional interest to Lori. Of note, however, Lori‘s reply brief made no mention of the divorce court‘s specific findings and directives in its prior contempt ruling wherein the value of Granite Perch was awarded to James.
[¶17.] After holding a hearing on January 19, 2021, of which there is no transcript in the record, the divorce court issued a letter decision on March 8, 2021. The court noted that the collection court had granted Lori‘s application for a charging order and ordered that the excess sale proceeds be held by the clerk of courts until the divorce court made a determination as to James‘s distributional interest. However, instead of determining James‘s current distributional interest in Lakota Lake, the divorce court referred to its prior contempt decision modifying the method of distribution of the parties’ property. In particular, the court referred to the process whereby it had ordered James, as managing member of Lakota Lake, to transfer property owned by Lakota Lake to himself and then to Lori. The court concluded in regard to Lori‘s current request “that it would not be improper to release the funds being held to [Lori] pursuant to its previously ordered distribution.” The court further noted that “releasing the funds is within [its] discretion to enforce the underlying objectives of the parties’ property settlement as set forth in the Agreement” and that “the release is proper to satisfy the [c]ourt‘s order that has since been affirmed by the South Dakota Supreme Court.” The divorce court then granted Lori‘s motion for release of funds and issued an order directing that the funds held by the Pennington County Clerk of Courts as part of the collection action be released to Lori “in further satisfaction of the funds owed by [James] to [Lori].”
[¶18.] On April 23, 2021, James filed his notice of appeal of the divorce court‘s order. On the same day, he filed a motion with the collection court to dismiss Lori‘s application for a charging order—the application the collection court had previously granted. James claimed that the collection court did not have jurisdiction to consider or grant the application because Lori, who was never a party to the underlying suit initiated by First Western, lacked standing to file the application.
[¶19.] Also on April 23, 2021, Lakota Lake, via the same counsel representing James, filed a motion with the collection court requesting an order releasing the excess sale proceeds to Lakota Lake. It claimed that the collection court‘s order granting Lori‘s application for a charging order “acknowledged that the excess funds belong to the judgment debtor, Lakota Lake Camp LLC.” It further asserted that the collection court was required to release the funds to Lakota Lake because its debt with First Western had been satisfied by the sale and no outstanding executions existed against Lakota Lake.
[¶21.] James and Lakota Lake filed a joint reply, directing the collection court to the language in
[¶22.] The collection court held a hearing on June 3, 2021, and at the conclusion of the hearing, the court issued an oral ruling denying James‘s motion. The court found that it had jurisdiction to consider Lori‘s application for a charging order and alternatively determined that, if necessary, it would treat Lori‘s application as a constructive motion to intervene based on the factors relevant to intervention. The collection court also denied Lakota Lake‘s motion for the release of the excess sale proceeds, concluding that “it is appropriate that those funds go to Lori[.]” The collection court entered a written order dismissing both motions on June 8, 2021, and on June 14, James appealed this order.
[¶23.] The issues asserted by James and Lakota Lake in the appeals from the divorce court and collection court decisions are consolidated and restated as follows:3
- Whether the collection court could hear and determine Lori‘s application for a charging order.
- Whether the divorce court erred in ordering the release of the excess sale proceeds to Lori.
- Whеther the collection court erred in denying Lakota Lake‘s motion to release to the company the excess proceeds from the sale of Granite Perch.
Analysis and Decision
1. Whether the collection court could hear and determine Lori‘s application for a charging order.
[¶24.] James notes that the judgments Lori seeks to satisfy via her application for a charging order and the corresponding lien on James‘s distributional interest in Lakota Lake are outside the subject matter addressed in First Western‘s lawsuit against James and Lakota Lake. He further notes that beyond her standing to collect the judgment owed to First Western as its assignee, Lori was never a party to the underlying lawsuit (or the ancillary collection proceedings) in her own right. In his view, therefore, after the execution sale satisfied First Western‘s judgment in full (and likewise James‘s secondary liability as a personal guarantor), Lori, as First Western‘s
[¶25.] “A challenge to the subject matter jurisdiction of a court is a question of law that we review de novo.” Estate of Ducheneaux v. Ducheneaux, 2015 S.D. 11, ¶ 7, 861 N.W.2d 519, 521. Similarly, “[w]hether a party has standing to maintain an action is a question of law reviewable by this Court de novo.” Arnoldy v. Mahoney, 2010 S.D. 89, ¶ 12, 791 N.W.2d 645, 652. Under
[¶26.] Here, Lori filed her application with the collection court, not just as an assignеe of First Western‘s judgment against Lakota Lake and James (both of whom were judgment debtors in the collection action), but also as a judgment creditor of James (a member of Lakota Lake) against whom Lori, personally, had three outstanding judgments entered in the divorce proceeding. It is undisputed that both Lakota Lake and James were parties to the collection action and had notice of Lori‘s application filed with the collection court. Thus, the question is whether, after the extinguishment of the underlying debt to First Western, Lori must have party status in the collection action in her own right (as opposed to her participation as an assignee of First Western‘s debt) in order to invoke the court‘s statutory authority to grant her a charging order pertaining to unsatisfied executions from a separate proceeding.
[¶27.] James does not cite statutory authority or case law to support his contention that Lоri needed to be a named party to the civil lawsuit initiated by First Western in order to file an application for a charging order during the ancillary collection proceedings associated with First Western‘s suit. Notably, the language in
[¶28.] For example, in a case from a Texas court of appeals, the Office of the Attorney General, Child Support Division (AGO) filed an application for a charging order against Christopher Spates‘s distributional interest in a limited liability company (LLC) in a lawsuit filed by the LLC against a third party for breach of contract and tortious interference with a contract. See Spates v. Office of Att‘y Gen., Child Support Div., 485 S.W.3d 546, 549 (Tex. App. 2016).5 Ultimately, the LLC settled
AGO‘s application (as a judgment creditor of a member of the LLC) for a charging order against the member‘s distributional interest in the company.
[¶29.] On appeal, the LLC asserted a claim similar to the one James asserts here. The LLC claimed that because the AGO had obtained its judgments in a separate proceeding before different courts, “only those courts and not the [current court], had jurisdiction to grant the [AGO‘s] request for a charging order.” Id. at 554. The Texas court quoted its charging order statute, which is nearly identical to
[¶30.] Here, it is undisputed that the collection court had subject matter jurisdiction over the disposition of the excess sale proceeds. The court also had personal jurisdiction over James and Lakota Lake, both parties to the underlying lawsuit, at the time Lori filed her application seeking a charging order and the release of the excess sale proceeds.8 Moreover, the statutes
[¶31.] We conclude that the collection court could, under
2. Whether the divorce court erred in ordering the release of the excess sale proceeds to Lori.
[¶32.] James asserts that the divorce court had no authority to order the release of the excess sale proceeds because the collection court did not authorize the divorce court to determine how and to whom the excess sale proceeds held by the Pennington County Clerk of Courts in a separate civil case file should be applied. In his view, the collection court had the sole authority to apply the excess proceeds based on the laws governing execution sales. He further claims that the divorce court erred in ordering the release of the excess sale proceeds to Lori because the proceeds belong to Lakota Lake, not James; and Lori, as a judgment creditor of James‘s distributional interest in Lakota Lake, could not levy upon or seize property belonging to Lakota Lake.9 He contends that Lori‘s remedies were limited to those available to judgment creditors under
[¶33.] In response, Lori does not address whether her remedies as a judgment creditor of James‘s distributional interest are limited to those stated in
[¶34.] Whether the divorce court had authority to order the release of the excess sale proceeds requires an interpretation and application of statutory provisions. “Questions of statutory interpretation and application are reviewed under the de novo standard of review with no deferеnce to the circuit court‘s decision.” McKie Ford Lincoln, Inc. v. Hanna, 2018 S.D. 14, ¶ 10, 907 N.W.2d 795, 798 (citation omitted).
[¶35.] It is unclear from the language of the divorce court‘s letter decision on what factual or legal basis it ordered the release of all the excess sale proceeds to Lori. The divorce court declared, without entering any orders modifying its prior contempt order or directing that James take any action with respect to the excess proceeds from the sale of Granite Perch, that releasing the excess sale proceeds “is proper to satisfy the [c]ourt‘s order that has since been affirmed by the South Dakota Supreme Court.” Cf. Farmer, 2020 S.D. 46, ¶ 27, 948 N.W.2d at 37 (“as a general rule, courts retain jurisdiction to make such further orders as are appropriate to compel compliance with its judgment“). In so ruling, the court also indicated that “[t]his property transfer is no different” than what had been ordered in the prior divorce proceeding. On the contrary, the cоurt‘s order releasing the proceeds of the sale of Granite Perch to Lori is unlike the specific directives in the court‘s prior contempt order and amended findings and conclusions relating to Big Granite, the other Lakota Lake property.
[¶36.] Moreover, in the prior order, the court “awarded” Granite Perch to James “free and clear without any further cash disbursements made to Lori” and directed that Lori “shall not prevent or seek any interest in the Granite Perch Property if [James] causes the distribution of [the] Granite Perch Property to himself in accordance with applicable law.”10 Importantly, the divorce court‘s current letter decision does not identify any evidence that James, as managing member of Lakota Lake, ever caused the distribution of Granite Perch to himself in accord with applicable law. Rather, it appears from James‘s and Lori‘s written submissions to the collection court thаt Lakota Lake held title to Granite Perch when it was sold at the execution sale.
[¶37.] Lori‘s motion for release of these funds filed with the divorce court refers solely to her status as a judgment creditor of James with a continuing lien on
James‘s distributional interest in Lakota Lake as a result of the collection court granting her application for a charging order. Therefore, her rights and remedies before the divorce court were governed by
(a) On application by a judgment creditor of a member of a limited liability company or of a member‘s transferee, and following notice to the limited liability company of such application, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment
. (b) A charging order constitutes a lien on the judgment debtor‘s distributional interest.
(c) A distributional interest in a limited liability company which is charged may be redeemed:
- By the judgment debtor;
- With property other than the comрany‘s property, by one or more of the other members; or
- With the company‘s property, but only if permitted by the operating agreement.
. . .
(e) This section provides the exclusive remedy that a judgment creditor of a member‘s distributional interest or a member‘s assignee may use to satisfy a judgment out of the judgment debtor‘s interest in a limited liability company. No other remedy, including foreclosure on the member‘s distributional interest or a court order for directions, accounts, and inquiries that the debtor, member might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor‘s interest in the limited liability company.
(f) No creditor of a member or a member‘s assignee has any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the company.
[¶38.] In Mahalo Investments III, LLC v. First Citizens Bank & Trust Co., Inc., 769 S.E.2d 154, 158 (Ga. Ct. App. 2015), the Court of Appeal of Georgia aptly explained the scope оf a charging order.
We glean from these provisions that the charging order is a mechanism by which a judgment creditor can attach a member‘s limited liability company interest to satisfy an unpaid judgment, but that the charging order does not permit the judgment creditor to replace the member or otherwise interfere in the governance of the limited liability company. Moreover, it is the judgment debtor‘s right to possession of distributions in the future that is essentially being levied or charged. Thus, from the limited liability company‘s standpoint, it is business as usual except that any distributions to the member subject to the charging order are diverted to the judgment creditor.
Id. Secondary sources have also explained charging orders. See, e.g., 51 Am. Jur. 2d Limited Liability Companies § 23; Mark Sargent and Walter Scheidetzky, Limited Liability Company Handbook § 3:104; 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:2. The purpose of a charging order is to provide “a special remedy that enables the judgment creditor to realize the value of the judgment debtor-member‘s distributional interest, while at the same time protecting both the LLC‘s ability to continue to operate and the interests of the other members.” 51 Am. Jur. 2d Limited Liability Companies § 23.
[¶39.] The charging order becomes a lien on the member‘s distributional interest and “requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.” Id.; accord 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:2 (“The charging order is a remedy provided to the judgment-creditor of a member or assignee by which the distributions (interim and liquidating) made to a member or assignee are attached and diverted to the judgment-creditor in satisfaction of the judgment.“). As one secondary source explained, although the creditor has a lien on the member‘s share of distributions, “[i]n many states a receiver may be appointed to safeguard
[¶40.] Assuming Lakota Lake held title to Granite Perch at the time of the execution sale, the divorce court could not, under
3. Whether the collection court erred in denying Lakota Lake‘s motion to release to the company the excess proceeds from the sale of Granite Perch.
[¶41.] Connected to James‘s claim that the divorce court was without authority to order the release of the excess sale proceeds from the sale of Granite Perch to Lori, Lakota Lake (represented by James‘s counsel) asserts that the collection court erred in denying its motion to release the excess sale proceeds to the company. Lakota Lake contends that it is undisputed that it was the record owner of Granite Perch at the time of the execution sale. It then contends that once First Western‘s judgment lien was satisfied in full, James‘s liability as a guarantor “was extinguished” and First Western (or Lori as its assignee) was no longer a judgment creditor of Lakota Lake. In its view, under
[¶42.] There is no dispute that in accord with
[¶43.]
[¶44.] Similar statutory language is contained in
Every officer or person who conducts an execution sale shall apply the proceeds of such sale:
- To the payment of the costs and expenses of the sale, including any actual out-of-pocket expenses and reasonable costs incurred by a sheriff;
- To the satisfaction of the execution under which the sale is made;
To the satisfaction of any other execution in the officer‘s or person‘s hands, to which such proceeds may be lawfully applied; - To pay the surplus, if any, to the defendant, or into court for the use of the defendant or the person entitled thereto, subject to the order of the court. If such surplus or any part thereof remains in the court for the term of thrеe months without being applied for, the court may direct the same to be put out at interest for the benefit of the defendant, the defendant‘s representatives, or assigns, subject to the order of the court.
[¶45.] Given the circumstances here, the sheriff took all four steps, and on the fourth step, paid the surplus into the court. The day after the execution sale, Lori filed her application with the collection court for a charging order and requested that the collection court release to her the excess sale proceeds. While James and Lakota Lake filed an objection to Lori‘s request, neither requested that the court release the excess sale proceeds to Lakota Lake. But even if they had made such a request, the collection court could not have simply ordered the release of the excess proceeds (presumably Lakota Lake‘s prоperty) to Lori via granting Lori‘s application for a charging order on James‘s distributional interest in Lakota Lake. As previously explained, Lori‘s lien only attaches to James‘s (an LLC member‘s) distributional interest in these proceeds, and the charging order alone does not give an issuing court (here, the collection court) authority to dictate when a limited liability company makes distributions to its members.11 The company‘s operating agreement would control, and there may be other members of Lakota Lake who retain a membership interest, albeit small, that must be accounted for.12
[¶46.] However, contrary to Lakota Lake‘s claim, the circuit court was not required to release the funds to Lakota Lake simply because First Western‘s judgment lien against James was satisfied in full. Under
[¶47.] Nevertheless, we need not decide at this juncture whether the collection court erred in denying Lakota Lake‘s motion for release of funds because at the time Lakota Lake filed the motion with the collection court, the divorce court had already ordered that the funds be released to Lori. Having now concluded that the divorce court erred in ordering the release of the funds, the proper disposition of the excess sale proceeds remains to be determined.13 We therefore vacate the collection court‘s order denying Lakota Lake‘s motion and remand for further proceedings before the collection court related to the proper disposition of the funds at issue.
[¶48.] Affirmed in part, reversed in part, and remanded.
[¶49.] JENSEN, Chief Justice, and KERN, SALTER, and MYREN, Justices, concur.