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Transfirst Group Inc v. Magliarditi

United States District Court, D. Nevada

May 24, 2017

TRANSFIRST GROUP, INC., et al., Plaintiffs,
v.
DOMINIC J. MAGLIARDITI, et al., Defendants.

          ORDER GRANTING MOTION FOR PRELIMINARY INJUNCTION AND PRELIMINARY INJUNCTION (ECF No. 6)

          ANDREW P. GORDON UNITED STATES DISTRICT JUDGE

         Plaintiffs Transfirst Group, Inc.; Transfirst Third Party Sales, LLC; and Payment Resources International, LLC (“Transfirst”) obtained a judgment in the United States District Court for the Northern District of Texas against defendant Dominic J. Magliarditi based on fraud claims for which approximately $4 million remains unpaid. ECF No. 7-1 at 2, 5, 11; Pls.' Hrg. Exs. 1-3; ECF No. 105 at 17. Transfirst has been attempting to collect ever since, with little success. Following post-judgment collection efforts, Transfirst initiated this lawsuit against Dominic, his wife (Francine Magliarditi), and various entities associated with the Magliarditis, alleging that the entities are Dominic's alter egos and thus are liable on the judgment. Transfirst also asserts fraudulent transfer claims, alleging that transfers between the entities and to Francine were fraudulent.

         While this case was still pending in Texas, Transfirst moved for a temporary restraining order (“TRO”) precluding the defendants from transferring, concealing, or otherwise disposing of their assets. ECF No. 6. The Texas court granted that motion as to some defendants but denied it without prejudice as to others because the court concluded it lacked jurisdiction over those defendants. ECF Nos. 6, 33. In ruling on the TRO motion, the court stated Dominic had engaged in “postjudgment discovery abuses, as evidenced by Magistrate Judge Paul Stickney's order sanctioning him . . . .” ECF No. 33 at 9. The Texas court then transferred the action to this court. ECF Nos. 36, 37.

         After the case was transferred, I reinstated the TRO, expanded it to apply to all the defendants, and set the motion for preliminary injunction for an evidentiary hearing. ECF Nos. 53, 54. In the meantime, Transfirst filed a second amended complaint, again asserting claims for alter ego, fraudulent transfer, and unjust enrichment. ECF No. 75. The parties submitted their briefs and voluminous supporting exhibits in relation to the motion for a preliminary injunction. I held an evidentiary hearing on May 19, 2017, at which no live witnesses testified.

         I grant Transfirst's motion for a preliminary injunction. Transfirst has shown a likelihood of success on its claim that the entities are Dominic's alter egos and thus are liable on the judgment. Transfirst also has shown a likelihood of success on the merits that the entities have made fraudulent transfers between themselves and to Francine. Transfirst has shown a likelihood of irreparable harm because Dominic has engaged in tactics designed to frustrate collection of the judgment and he likely will continue to do so unless restrained. The balance of hardships favors Transfirst because it has been unable to collect on its judgment and the defendants have not shown they will be harmed by the injunction. Further, any harm has been caused by the defendants' own conduct. Finally, an injunction supports the public interest in ensuring valid judgments are enforced and not fraudulently evaded. I deny Transfirst's request to appoint a receiver and I deny the defendants' request to increase the bond.

         I. PRELIMINARY INJUNCTION STANDARD

         To qualify for a preliminary injunction, a plaintiff must demonstrate: (1) a likelihood of success on the merits, (2) a likelihood of irreparable harm, (3) the balance of hardships favors the plaintiff, and (4) an injunction is in the public interest. Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 (2008). Alternatively, the plaintiff must demonstrate (1) serious questions on the merits, (2) a likelihood of irreparable harm, (3) the balance of hardships tips sharply in the plaintiff's favor, and (4) an injunction is in the public interest. Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011).

         II. LIKELIHOOD OF SUCCESS ON THE MERITS

         A. Alter Ego

         Under Nevada law, [1] corporations “are generally to be treated as separate legal entities.” LFC Mktg. Grp., Inc. v. Loomis, 8 P.3d 841, 845 (Nev. 2000). But Nevada recognizes the “equitable remedy of ‘piercing the corporate veil' . . . in circumstances where it appears that the corporation is acting as the alter ego of a controlling individual.” Id. Nevada also recognizes “reverse piercing” where a creditor may reach a corporation's assets “to satisfy the debt of a corporate insider based on a showing that the corporate entity is really the alter ego of the individual.” Id. at 846. “Indeed, [i]t is particularly appropriate to apply the alter ego doctrine in ‘reverse' when the controlling party uses the controlled entity to hide assets or secretly to conduct business to avoid the pre-existing liability of the controlling party.” Id. (quotation omitted).

         The “‘essence' of the alter ego doctrine is to ‘do justice' whenever it appears that the protections provided by the corporate form are being abused.” Id. at 845-46. But “[t]he corporate cloak is not lightly thrown aside” and “the alter ego doctrine is an exception to the general rule recognizing corporate independence.” Id. at 846 (quotation omitted).

         1. Alter Ego is a Claim Under These Circumstances.

         As an initial matter, the defendants argue that alter ego is a remedy, not an independent claim. They thus contend Transfirst cannot obtain a preliminary injunction based on a likelihood of success of showing alter ego. Transfirst contends it may assert alter ego as an independent claim where, as here, it is a judgment creditor claiming the entities are liable on the judgment as the judgment debtor's alter egos.

         While it often will be the case that alter ego is a remedy for another claim, [2] the Supreme Court of Nevada has referred to alter ego as a “claim” in the context of a judgment creditor asserting alter ego in aid of execution of a judgment. In Callie v. Bowling, the Supreme Court of Nevada overruled a prior case that suggested that a judgment creditor could amend a judgment to make another entity liable as the alter ego of the judgment debtor. 160 P.3d 878, 880 (Nev. 2007) (en banc). The court “clarif[ied] that a motion to amend a judgment is not the proper vehicle by which to allege an alter ego claim.” Id. Instead, a “party who wishes to assert an alter ego claim must do so in an independent action against the alleged alter ego with the requisite notice, service of process, and other attributes of due process.” Id. at 881. Callie thus refers to alter ego as a “claim” and invites judgment creditors to file a separate action to assert it when they are attempting to collect the judgment debtor's assets that are in another party's hands whom the creditor contends is an alter ego.

         This is consistent with Mona v. Eighth Judicial District Court of the State of Nevada in and for The County of Clark, 380 P.3d 836, 841 (Nev. 2016) (en banc). There, the Supreme Court of Nevada similarly concluded that a judgment creditor who domesticates a judgment cannot attach a third party's assets as an alter ego through Nevada's procedures for judgment debtor exams and related sanctions. Instead, the court referred to Nevada's procedures governing execution on a judgment. Id. (citing Nevada Revised Statutes (“NRS”) §§ 21.010-.260). Under those procedures, a judgment creditor must bring a separate action if a third party claims an adverse interest in the property. Id. at 841-42 (stating that “NRS 21.330 permits a judgment creditor to institute [a separate] action against the third parties with adverse claims to the property of a judgment debtor”) (quotation omitted).

         Under Callie and Mona, a judgment creditor may not resort to summary procedures that do not afford due process to a third party claimant when seeking to attach the assets of an alleged alter ego. But those concerns are not at issue here because Francine and the entity defendants have been named and served in this lawsuit.[3] Transfirst thus is doing what the Supreme Court of Nevada has indicated a judgment creditor seeking judgment debtor assets in third party hands should do: file a separate action for alter ego and afford due process to the third party.

         2. Alter Ego Applies to Limited Liability Companies, Trusts, and Partnerships.

         The defendants argue alter ego does not apply to Francine, limited liability companies (“LLCs”), partnerships, or trusts. In short, they argue it applies solely to a corporation, which in this case would be only defendant DII Capital, Inc. Transfirst concedes alter ego does not apply to Francine but argues it applies to the other defendants.

         a. The LLCs

         The defendants argue alter ego does not apply to LLCs because under Nevada law a charging order is the exclusive remedy for a judgment creditor to attach an LLC member's interest in the LLC. Transfirst suggests I assume without deciding that an LLC can be pierced. Alternatively, it argues LLCs are subject to alter ego analysis.

         The Supreme Court of Nevada has twice assumed, without deciding, that alter ego can apply to LLCs. See JSA, LLC v. Golden Gaming, Inc., No. 58074, 2013 WL 5437333, at *5 (Nev. Sept. 25, 2013); Webb v. Shull, 270 P.3d 1266, 1271 n.3 (Nev. 2012). Because the Supreme Court of Nevada has not decided this issue of Nevada law, I must predict what it would do. Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119, 1126 (9th Cir. 2005).

         Federal courts applying Nevada law have ruled that the alter ego theory applies to LLCs. See Guy v. Casal Inst. of Nev., LLC, No. 2:13-cv-02263-APG-GWF, 2015 WL 56048, at *2 (D. Nev. Jan. 5, 2015); In re Giampietro, 317 B.R. 841, 845-46 (Bankr. D. Nev. 2004) (predicting that Nevada would extend alter ego to LLCs). Giampietro reasoned that the “varieties of fraud and injustice that the alter ego doctrine was designed to redress can be equally exploited through limited liability companies, ” so Nevada courts would extend the doctrine to LLCs. 317 B.R. at 846.

         However, these courts did not address the defendants' argument in this case that NRS § 86.401 statutorily provides that a charging order is the exclusive remedy for a judgment creditor against an LLC member's interest in the LLC. That statute states:

1. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member's interest with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member's interest.
2. This section:
(a) Provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member's interest of the judgment debtor, whether the limited-liability company has one member or more than one member. No other remedy, including, without limitation, foreclosure on the member's interest or a court order for directions, accounts and inquiries that the debtor or 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, and no other remedy may be ordered by a court.

         Under a charging order, a judgment creditor is entitled to only “the judgment debtor's share of the profit and distributions, takes no interest in the LLC's assets, and is not entitled to participate in the management or administration of the business.” Weddell v. H2O, Inc., 271 P.3d 743, 750 (Nev. 2012). The theory that the charging order is the exclusive remedy “reflects the principle that LLC members should be able to choose those members with whom they associate.” Id.

         I predict that, despite this statute, the Supreme Court of Nevada would hold that LLCs are subject to alter ego under the appropriate circumstances. It is questionable whether the statute even applies given the facts in this case. Dominic is not a member of any of the LLC defendants, so Transfirst is not seeking to satisfy the judgment out of a member's interest in the LLCs. Thus this situation does not fall within the statute's terms. Instead, Transfirst is asserting the LLCs are shams and thus essentially non-entities. Cf. Wood v. Elling Corp., 572 P.2d 755, 762 (Cal. 1977) (“If it were alleged and proven that the two trusts in question were themselves alter egos of the Wenckes, those trusts would essentially drop out as independent legal entities . . . .”).

         Moreover, alter ego is an equitable doctrine aimed at doing justice. LFC Mktg. Grp., 8 P.3d at 845-46. The defendants have not suggested any reason why Nevada would prohibit its citizens from abusing the corporate form and using a corporation as an instrumentality of fraud but allow that same conduct through an LLC. See Giampietro, 317 B.R. at 846. There may be situations where it would be inequitable to apply alter ego to an LLC, such as where the policy concerns expressed in Weddell about forced association would come into play. But here, if the LLCs are Dominic's alter egos, no such concerns arise. I therefore will apply alter ego analysis to the LLC defendants.

         b. The Partnerships

         The defendants argue the alter ego doctrine does not apply to partnerships because the general partner is always liable for the partnership's debts to third parties. But that does not address whether the partnership can be an alter ego for someone else entirely. As Dominic is neither a limited nor general partner for either partnership defendant, a ...


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