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Securities and Exchange Commission v. Mulholland

United States District Court, E.D. Michigan, Northern Division

November 17, 2017

SECURITIES AND EXCHANGE COMMISSION Plaintiff,
v.
THOMAS S MULHOLLAND, et al, Defendants. and REGIONS BANK, and its successors or assigns, Garnishee.

          ORDER GRANTING MOTION FOR LEAVE TO FILE A REPLY BRIEF, DENYING MOTION TO STRIKE PARTIAL TRANSCRIPTS, OVERRULING UTR 2 LLC'S AND MELANIE MULHOLLAND'S OBJECTION TO GARNISHMENT, AND DIRECTING DISBURSEMENT OF FUNDS

          HONORABLE THOMAS L. LUDINGTON UNITED STATES DISTRICT JUDGE.

         On October 14, 2013, judgment was entered for Plaintiff and against Defendants Thomas and James Mulholland in the amount of $910, 718. ECF Nos. 25, 26. On June 27, 2016, Plaintiff submitted an application for a writ of continuing garnishment as to Defendant James Mulholland and garnishee Regions Bank. ECF No. 33. The requested writ of continuing garnishment was issued against Defendant James Mulholland, Jr., and garnishee Regions Bank the same day. ECF No. 34.

         Melanie Mulholland and UTR 2 LLC (“the Objectors”) filed an objection to that writ of garnishment on July 18, 2017. ECF Nos. 35, 36. Melanie Mulholland contends that she is the sole member of UTR 2 LLC, a New Mexico LLC “incorporated on July 29, 2014, ” and thus Plaintiff may not garnish UTR 2 LLC's bank accounts. Objs. at 2, ECF No. 36. On July 24, 2017, the Court issued an order adjourning the hearing to July 31, 2017, converting the hearing to a telephonic proceeding, and directing the parties to submit documentation of certain positions advanced in the application for and objection to garnishment. On July 27, 2017, the Court entered a stipulated proposed order which released $10, 000 dollars of UTR 2 LLC's funds for daily operations. ECF No. 44. After the telephonic hearing on July 31, 2017, the Court directed supplemental briefing on two issues: one, whether federal law allows the SEC to enforce its judgments without regard for certain state law protections that apply to private judgment-creditors; and, two, whether allegations of fraudulent transfer must be advanced in a separate action or may be resolved in a garnishment proceeding.

         The parties have submitted responsive supplemental briefing. On September 5, 2017, the SEC filed a motion seeking leave to file a reply to the Objectors' response brief. ECF No. 52. On September 21, 2017, the Objectors filed a motion to strike transcripts, ECF No. 55, which the SEC filed as part of its response to the objection to garnishment, ECF No. 43.

         I.

         A.

         On October 22, 2012, the SEC filed a complaint naming Thomas S. Mulholland and James C. Mulholland, Jr., as Defendants. ECF No. 1. In the complaint, the SEC alleged that the Mulhollands operated a real estate business in Michigan beginning in the 1990s. Defendants allegedly financed that real estate business by raising money from “individual investors through the offer and sale of securities in the form of demand notes.” Compl. at 1, ECF No. 1. Beginning in January 2009, Defendants' real estate business began struggling financially. In response, Defendant raised approximately $2 million from approximately 75 investors.

         According to the SEC, the “Mulhollands defrauded these investors.” Id. at 2. Specifically, Defendants “told investors that they would earn 7% per year on their investment and that the returns would be generated by profits of the real estate business.” Id. Defendants also “told investors that their principal and interest were guaranteed and that they could get their money back upon 30 days' written notice.” Id. The SEC contended that those statements were false and misleading: the real estate business was experiencing negative monthly cash flow during most of the relevant period and so Defendants did not have the financial resources to refund investors' principal even if only a small number attempted to redeem their notes. In February 2010, Defendants sought bankruptcy protection.[1]

         The SEC's complaint identified five counts: violations of Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) and (c); violations of Section 17(a)(1) of the Securities Act; violations of Sections 17(a)(2) and (a)(3) of the Securities Act; violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5; and violations of Section 15(a)(1) of the Exchange Act. The SEC requested that the Court order Defendants “to disgorge, jointly and severally, their ill-gotten gains, derived directly or indirectly from the conduct complained of herein.” Id. at 16.

         B.

         On January 4, 2013, Defendants filed a motion to dismiss the complaint, arguing that the promissory notes which Defendants allegedly issued are not “securities” as defined by federal statutes governing securities. ECF No. 11. The Court rejected that argument and denied the motion to dismiss. ECF No. 15. On July 22, 2013, the SEC filed a motion for entry of final judgment against Defendants. ECF No. 21. The SEC explained that it had “reached a settlement” with Defendants which resolved all claims against them. Id. at 1. Pursuant to the settlement, Defendants consented to entry of an order of disgorgement “in the amount of $690, 370, representing profits gained as a result of the conduct alleged in the Complaint plus prejudgment interest thereon on the amount of $70, 348 for a total of $760, 718.” Id. at 1-2. The settlement agreement further contemplated an order that each Defendant “pay a civil penalty in the amount of $150, 000.” Id. at 2.[2]

         After a hearing on October 1, 2013, final judgment was entered against both Defendants. ECF Nos. 25, 26. Both Defendants were ordered to jointly and severally disgorge $690, 370 in profits from the misconduct identified in the complaint, plus $70, 348 in prejudgment interest, and were further independently ordered to each pay a civil penalty of $150, 000. Id. at 5. In January 2016, the SEC filed numerous abstracts of judgment as to Thomas S. Mulholland. ECF No. 27, 28, 29. In September 2016, the SEC filed additional abstracts of judgment, this time against James C. Mulholland. ECF No. 30, 31. Each abstract provided the following operative language:

Pursuant to Title 28 United States Code, Section 3201, this judgment, upon the filing of this abstract in the manner in which a notice of tax lien would be filed under paragraphs (1) and (2) of 26 U.S.C. 6323(f), creates a lien on all real property of the defendant(s) and has priority over all other liens or encumbrances which are perfected later in time. The lien created by this section is effective, unless satisfied, for a period of 20 years and may be renewed by filing a notice of renewal.

See, e.g., ECF No. 27 at 1.[3]

         On June 27, 2017, the SEC filed a request for issuance of a continuing writ of garnishment. ECF No. 33. The application, listing James Mulholland as the Defendant and Regions Bank as the Garnishee, indicated that James Mulholland has made no payments toward the judgment previously entered. In the application, the SEC alleged that Regions Bank possesses money that is the “property of the Debtor, in his individual capacity and/or doing business as UTR 2 LLC.” App. Cont. Garnishment at 2, ECF No. 33. The Clerk of Court issued the writ of continuing garnishment the same day. ECF No. 34. In response, Regions Bank indicated that it possesses $435, 757.91 belonging to UTR 2. Garnishee Answ., ECF No. 43, Ex. 2.

         On July 18, 2017, UTR 2 LLC and Melanie Mulholland, James Mulholland's wife, filed an objection to the writ of continuing garnishment. ECF No. 35. In the accompanying request for a hearing on that objection, the Objectors argued that James Mulholland does not own or otherwise have access to the bank accounts in question. Because the SEC does not have a judgment against either Melanie Mulholland or UTR 2 LLC, the Objectors argued that the writ of garnishment should be quashed. In response, the SEC argues that UTR 2 LLC and Melanie Mulholland are James Mulholland's “nominees” and thus “allow him to continue his business operations during his incarceration.” SEC Resp. Obj. at 7, ECF No. 42. The SEC further argued that even if a transfer of assets occurred, that transfer was fraudulent. Id. at 8.

         C.

         1.

         The SEC is seeking garnishment of assets held by UTR 2 LLC and Melanie Mulholland, alleging that the assets in question ($435, 757.91) are traceable to James Mulholland. UTR 2 LLC was formed on July 29, 2014, less than a year after judgment was entered against James Mulholland. UTR 2 LLC Art. Incorp., ECF No. 43, Ex. 24. The SEC alleges that “no business activity was conducted by or through UTR 2 until in or around April 2015. White Decl. at 6, ECF No. 43. UTR 3 LLC was formed on October 26, 2015. UTR 3 Art. Incorp., ECF No. 43, Ex. 25. James Mulholland is a 77% owner of UTR 3 LLC, while Melanie Mulholland is a 23% owner. See UTR 3 LLC Company Agreement at 2, ECF No. 46, EX. 5.

         On November 25, 2009, James Mulholland and Melanie Mulholland procured property known as “Water's Edge” for $4, 050, 000, located at 50651 Jefferson Avenue, New Baltimore, Michigan. 2009 Covenant Deed, ECF No. 43, Ex. 3. The Mulhollands bought the property as tenants in common, with James Mulholland receiving a 77% interest and Melanie Mulholland receiving a 23% interest. Id. Later, on November 10, 2015, Water's Edge was transferred to UTR 3 LLC for $10 consideration. 2015 Covenant Deed, ECF No. 43, Ex. 3.

         On April 3, 2015, a Regions Bank accounts (ending in x2425) was opened for UTR 2 LLC. UTR 2 Bank Account, ECF No. 43, Ex. 10. When opened, both James Mulholland and Melanie Mulholland were authorized signatories on the account. Id. On April 7, 2015, James Mulholland was eliminated as a signatory. Id. at 3-4. On the same day James Mulholland was eliminated as a signatory, the bank account began receiving rent payments from Water's Edge. Id. at 11-14.

         On October 24, 2016, Melanie Mulholland authorized the sale of Water's Edge from UTR 3 to a third party. Oct. 2016 Covenant Deed, ECF No. 43, Ex. 3; Melanie Mulholland Decl. at 4, ECF No. 46, Ex. 1. The SEC served a subpoena on the title company which was responsible for the sale. The title company's response revealed that the Water's Edge sold for $1, 923, 279.16. Water's Edge Check, ECF No. 43, Ex. 8. Melanie Mulholland alleges that “[o]ver $1, 000, 000 was used to pay federal income taxes owed primarily due to the sale of Water's Edge.” Melanie Mulholland Decl. at 4. The remaining funds from the sale were transferred from UTR 3's bank accounts to UTR 2's bank accounts. Id. The SEC contends that on November 17, 2016, one UTR 2 account received a $1.1 million deposit from a UTR 3 checking account. That assertion is supported by the bank records supplied by the SEC. See UTR 2 Bank Rec. Acc. x2425 at 23-27, ECF No. 43, Ex. 10. On March 22, 2017, a second UTR 2 bank account received a $222, 897.05 deposit from a UTR 3 account. That allegation is likewise supported by the record. See UTR 2 Bank Rec. Acc. x2057 at 3-7, ECF No. 43, Ex. 11.

         2.

         The SEC also identifies a number of other properties which James Mulholland exercised control over that it asserts were either nominally purchased in Melanie Mulholland's name or subsequently transferred to her. On September 14, 2009, Melanie Mulholland purchased a property located at 334 78th Avenue, St. Petersburg, FL. 78th Ave. Deeds at 6, ECF No. 43, Ex. 4. On the same day, James and Melanie Mulholland jointly executed a mortgage deed for the property. Id. at 8. Similarly, James and Melanie Mulholland purchased a property located at 415 64th Avenue, St. Pete Beach, FL on April 8, 2003. 64th Ave Deeds, ECF No. 43, Ex. 5 at 6. On July 15, 2004, the 64th Avenue property was transferred to Melanie Mulholland for $10 consideration. Id. at 7.[4]Despite that transfer, James Mulholland acknowledged (in a Notice of Commencement of improvements to the property) in June 2011 that he still considered himself a co-owner. Id. at 8- 9. On February 2, 2017, Melanie Mulholland transferred the 64th Avenue property to UTR 2 for $10 consideration. Id. at 10. Likewise, on May 21, 2009, James and Melanie Mulholland purchased property located at 7201 Boca Ciega Drive, St. Pete Beach, FL. Boca Ciega Deeds, ECF No. 43, Ex. 6. On February 2, 2017, the Mulhollands (via a document signed only by Melanie Mulholland) transferred the Boga Ciega property to UTR 2. Id. at 8-9.

         The Objectors characterize the creation of UTR 2 and the transactions identified by the SEC as innocent and unremarkable. Specifically, the Objectors describe Melanie Mulholland's decision to incorporate UTR 2 as follows:

In July of 2014, Ms. Mulholland had an ownership interest in various rental properties and decided to transfer her ownership interest in those rental properties into a limited liability company for various reasons, including tax planning, cost savings for insurance, liability protection, and, as a woman living by herself, to avoid tenants from finding personal information about her.

Objectors Supp. Br. at 3, ECF No. 46.

         As regards the 78th Avenue, 64th Avenue, and Boca Ciega properties, the Objectors argue that the SEC has no right to attach on or garnish those properties: “Paragraph 17 of Plaintiff counsel's declaration fails to disclose that the properties listed that were owned by James Mulholland and Melanie Mulholland were owned expressly as husband and wife, and therefore owned by the entirety. Consequently, the SEC has no right to attach on or garnish property owned by the entirety.” Id. at 5 n. 3.[5]

         3.

         The SEC also relies upon statements made in a series of jail telephone calls between James and Melanie Mulholland.[6] On August 6, 2016, the Mulhollands discussed Water's Edge. August 6, 2016, Tr., ECF No. 43, Ex. 14. Melanie Mulholland told her husband: “You left me in good shape, so I'm ok. I can - I can tell everybody. I'm good.” Id. at 3. In response, James Mulholland stated: “I'm just worried. Concerned most about water's edge, because I want to make sure that everything's cool there.” Id. They then discussed the sale of Water's Edge:

[Melanie:] I'm going to call Dan Forhan (phonetic) on Monday or whenever and let him know. I guess I'm just going to say you're out of the picture and just leave it at that, and he needs to get this cranking to sell the property. . . .
[James:] Well, Melanie, just hold on. Let me - let's think this through. I've thought about it a lot. . . .He doesn't need to know about it. . . . He doesn't need - just communicate via email. He doesn't need to know about anything, because that will just probably complicate things.
[Melanie:] Okay.
[James:] So don't tell him, don't tell him.
[Melanie:] Okay. All right.
[James:] And then you know, when it comes down to the closing, then you could just say, “Well Jim is, you know” . . . “laid up.” Just say, “laid up” or something. And can't make the closing.

Id. at 3-4.

         On August 9, 2016, the Mulhollands talked again. August 9, 2016, Tr., ECF No. 43, Ex. 15. As before, the Mulhollands discussed a number of personal matters. Eventually, James brought up Water's Edge: “Hey, you know, on water's edge, I really want to like streamline that. I - either - and I want you to go out there and be with Donna for a full day or a couple of days and get her . . . straightened out or fire her.” Id. at 8. Melanie agreed. James continued: “All right. Well, one thing too, I don't want Donna knowing - I don't want Donna knowing about my situation.” Id. Melanie responded: “That's what I told Mark. I said, I'm just going to say that right now you're not going to be involved for a while. And I don't want any gossip. If I hear anything, I hear anything, then that's going to be a problem.” Id. The conversation continued:

[James:] She doesn't even know. But I don't know if she does, if she doesn't get straightened out and do a better job, you should probably get somebody else.
[Melanie:] Right.
[James:] If Mark - if Mark wants to fire that guy, whatever.
[Melanie:] Okay.
[James:] But I don't - I'm going to write Mark a letter. I want him to like, make sure he takes care of it.
[Melanie:] He will. He's told me that he wanted to make sure that you knew that he will in your absence take care of stuff. So he does not want you to worry about it.

Id. at 9.

         The next day, Melanie called James and informed him that his conviction and sentence was being widely reported in Michigan newspapers. August 10, 2016, Tr., ECF No. 43, Ex. 16. Melanie also told her husband that she had received several communications from friends and business associates regarding the news.

         On August 12, 2016, the Mulhollands discussed potential financial penalties over the phone:

[Melanie:] Will you just - will you just ask Andrew about that too? Like restitution, can they go after like our properties and stuff?
[James:] Well, they could go after anything that's in my name, but I don't have anything in my name, right?
[Melanie:] Well, as long as - as long as Water's Edge isn't. But - [James:] It's an LLC.
[Melanie:] I know, but when you look at the tax bill, it has your name on it.

August 12, 2016, Tr. at 9-10, ECF No. 43, Ex. 17.

         The Mulhollands then discussed whether to sell Water's Edge. James recommended that Melanie try to refinance the property, and sell it if unable to refinance. Id. at 15.

         On August 13, 2016, the Mulhollands again discussed Melanie's attempts to procure a loan:

[James:] Hey, let's talk some business. What exactly did Dan Forham (phonetic) say to you. I want to get his phone number and call him and say, come on, dude, you got to be able to find some money. . . . What was he saying to you?
[Melanie:] That his agreement was with you, not with me. So if they had to do anything, they'd have to do a whole other agreement with me and it just doesn't seem - it's not feasible. And second - he has to be able to get me a loan in that amount of time and all that kind of shit. He absolutely doesn't want anything to do with me, okay? Nothing.

August 13, 2016, Tr. at 6.

         Later in the conversation, James advised Melanie to “get ahold of Blanton (phonetic) and see what's he's got. Because he had this guy that you could maybe do an equity position or something with him, give him a piece of the action or something.” Id. at 8. And, when Melanie indicated that she wanted to stop talking business, James replied:

[James:] Let's talk about it. That's what's on my mind. I want to make sure that you're okay.
[Melanie:] I am okay. I'm okay. And honestly, I'm working on it. I've got it - [James:] I know you are. I know you are. Don't shut me out of it.
[Melanie:] I'm not shutting you out of it. I just want you to know that I'm working on it. I don't want you to be stressed out about it.

Id. at 9.

         During August 14, 2016, and August 15, 2016, phone calls, James and Melanie discussed tenants in their rental properties. August 14, 2016, Tr., ECF No. 43, Ex. 19; August 15, 2016, Tr., ECF No. 43, Ex. 20. During the August 15, 2016, call, the Mulhollands also discussed the efforts to refinance or sell Water's Edge:

[James:] So I am going to call Dan Forhan and try to - he seems like the logical guy to help you get the loan. I don't get it. I mean, the fact that - I mean it's owning an LLC. I don't get it. And there's almost $3 million of equity. What am I missing? What did he say? Give me some help here. What did he say?
[Melanie:] That because - just because it's - I don't know. I really ...

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