United States District Court, E.D. Michigan, Northern Division
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
HONORABLE THOMAS L. LUDINGTON UNITED STATES DISTRICT JUDGE.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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,
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.
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.
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.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.
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.
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.
also relies upon statements made in a series of jail
telephone calls between James and Melanie
Mulholland. 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
[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
[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
Id. at 3-4.
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.
[James:] If Mark - if Mark wants to fire that guy, whatever.
[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.
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
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.
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.
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?
August 13, 2016, Tr. at 6.
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:] 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.
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
[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 ...