In last year’s episode about the long-running Larry Winget saga, Debtor’s Revocation Of Trust Allows Creditors A Window To Assets In Winget (July 11, 2022), we read about a person who had used his living trust to guarantee the assets of a loan, but when the deal went bad the guarantee was called, the settlor (Larry J. Winget) attempted to revoke his trust and thereby cancel the guarantee fait accompli. In this latest episode, we find Winget attempting to get a probate court to nullify 19 years of contributions that he made to that trust. To say that this upset creditors would of course be a colossal understatement. So, let’s dive into it.
As mentioned, Winget and his living trust entered into a personal guarantee of a loan that ultimately came to be administered by JP Morgan Chase (referred to by the Court as the “Agent” and so I will do so here as well). Winget’s personal liability on the guarantee was capped at $50 million, which he paid and therefore is himself not further liable for the debt. The problem for Wingert, however, is that his revocable living trust, the Larry J. Winget Living Trust, has been held to be liable for the balance which has since grown to more than $775 million.
As related in my previous article, when the Agent sued to recover against the Trust, Winget revoked the Trust and removed all of its assets — not disclosing this fact for over a year during the litigation. The Agent brought an action under the Michigan Uniform Fraudulent Transfer Act (MUFTA
FTA
The Trust’s property consisted of LLC interests. After Winget rescinded his revocation, the Agent obtained charging orders against those LLC interests. Winget made an argument that the Trust really didn’t own the interests but instead he personally did as the settlor of the Trust; that argument made it all the way to the U.S. Sixth Circuit Court of Appeals, where it flopped and Winget again lost.
Meanwhile, the Agent obtained a Writ of Execution against the corporate stock owned by the Trust and what amounts to a turnover order requiring that, well, the Trust’s shares of corporate stock be turned over to the U.S. District Court so that they could be liquidated by the U.S. Marshal’s office. Importantly, the Agent also obtained an injunction order from the District Court which restrained Winget from transferring the Trust’s assets:
“Larry J. Winget and the Larry J. Winget Living Trust, and anyone acting as their agents or on their behalf, are enjoined from selling, transferring, assigning, encumbering, destroying, concealing, or otherwise disposing of the assets owned, titled in the name of, or otherwise held by the Trust or its trustee outside of the ordinary course of business. For avoidance of doubt, this Order allows Larry J. Winget and the Larry J. Winget Living Trust to take such actions as are reasonable and necessary to the ongoing and continued operations of their businesses.”
Winget again appealed to the Sixth Circuit, this time against the injunction order. Winget again lost.
In the meantime, Agent discovered that in the short period between the time that Winget revoked his Trust and the time that he rescinded that revocation, the LLCs temporarily owned by Winget had distributed hundreds of millions to Winget and he used a portion of that, being $79 million, to pay the taxes owed on the LLC’s income. Thus, the Agent sued Winget for unjust enrichment and ultimately won a judgment directly against Winget for nearly $105 million in cash and another $150 in promissory notes.
Again, Winget appealed. Again, Winget lost. This was the Sixth Circuit decision which held that Winget’s revocation of the trust constituted a fraudulent transfer and also affirmed that Winget was unjustly enriched by the LLCs. That was on July 1, 2022, and was the subject of our previous episode. Only now can we start to see what happened since.
On September 22, 2022, two months after Winget’s latest defeat, Winget started on what would be his attempt to circumvent the Sixth Circuit’s ruling. This time, Winget filed a new lawsuit in the Michigan state probate court seeking to nullify all the contributions that Winget made to his Trust since 2003, i.e., take back all the money that Winget had placed in the Trust. Winget’s theory, such as it was, can be summarized thusly: The Sixth Circuit’s ruling that Winget could not revoke his Trust without violating the fraudulent transfer laws meant that the Trust was really an irrevocable trust, and if Winget had known that the trust was irrevocable and he could not revoke it, then he never would have put money into it in the first place.
Winget, as the Trustee of his Trust, also sought instructions from the state probate court as to what he was allowed to do, or not to do, in relation to the Trust because of the Sixth Circuit’s ruling. In an amended petition, Winget was clear that he did not seek to set aside any orders of the federal courts and noted that his request was subject to the Agent’s charging orders against the Trust’s interests in the LLCs. But he did want back all the money that he had transferred to the Trust since 2003.
Seeing this new state probate court lawsuit for what it was — and attempt to circumvent the decisions of the federal courts and empty the money out of the Trust — the Agent filed a motion with the U.S. District Court asking that Winget be held in contempt of court and requiring him to withdraw his probate court petition. The Agent asked that Winget be fined $5,000 per day until he withdrew his petition, and also that Winget pay the Agent’s attorney’s fees and expenses incurred in relation to the motion.
While the Agent was trying to get a contempt ruling against Winget, the state probate court took a hard look at Winget’s petition and poured it out of court. The probate judge rejected all of Winget’s arguments for nullifying his contributions to the trust and further held that Winget’s arguments had already been decided (were res judicata) by the Sixth Circuit. Winget appealed that ruling, and at the time of this writing that appeal had not been decided.
Now back to the Agent’s motion for contempt against Winget back in the U.S. District Court. That court began its opinion by pointing out that Winget’s principal argument was simply wrong: Winget took the position that the Sixth Circuit’s ruling had converted his Trust from a revocable trust to an irrevocable trust, but of course that ruling did nothing of the sort. What the ruling did accomplish was to avoid Winget’s attempt to transfer assets (by way of the revocation) in defraud of the Trust’s creditors. After those creditors are paid, Winget can of course do whatever he likes with the remaining assets of his Trust, including revoke the Trust at that time.
The District Court did not, however, find any problem with Winget asking the state probate court for instructions on how to administer his Trust, since merely making that request did not violate the District Court injunction against the Trust dissipating its assets.
On the other hand, the District Court did find that Winget’s attempt to nullify his contributions to his Trust going back to 2003 did violate the injunction against the Trust dissipating its assets:
“Winget’s request that the probate court nullify 19 years of LLC contributions he made to the Trust and impose a constructive trust over those interests for his own benefit plainly violates the injunction issued in the Status Quo Order. An order from the probate court granting Winget his requested relief would result in a transfer of assets out of the Winget Trust, the precise outcome the Court sought to prevent when it entered the Status Quo Order broadly enjoining Winget from disposing of assets held by the Trust.”
For his part, Winget tried to claim that the asset freeze injunction applied only to the corporate stock shares held by his Trust, and not to the LLC interests, which argument the District Court characterized as “specious” since all the Trust’s assets were included in the injunction. Next, Winget tried to argue that the asset freeze injunction was a “remedial order” that violated the charging order exclusivity of Michigan’s LLC Act, i.e., which Act restricted a creditors remedy to a charging order. The District Court held this argument to be “illogical” for the simple reason that the injunction was meant to effectuate the charging orders, not replace them. Likewise, Winget’s argument that he did not violate a “definite and specific” order likewise was easily turned away by the District Court because injunctions do not have to be so specific that they detail every act that a person might do to circumvent the purpose of the injunction.
To the contrary, the District Court found that Winget knew exactly what he was doing, knew that it would violate the injunction, and was in fact just another chapter in Winget’s attempt to keep the Trust from paying on the judgment. There was clear and convincing evidence presented by the Agent that Winget had knowingly and willfully violated the injunction, and the burden then turned to Winget to try to prove some defense for his noncompliance, which he could not do. So, Winget was in contempt of court and it was then up to the District Court to fashion an appropriate remedy.
As an aside, there are generally two forms of contempt. Coercive contempt merely seeks to force a person to do something or not do something in the future, but not to punish. Criminal contempt, which is sometimes referred to as punitive contempt, seeks to punish somebody for something that has already happened in the past in terms of violating a court order. There are very different standards for coercive contempt and criminal contempt, and the latter requires a trial. Here, we are dealing with coercive contempt in relation to Winget. Now, back to the opinion.
It will be recalled that the Agent asked for fines of $5,000 to be assessed against Winget unless he dismissed his state probate petition. The District Court did not think that was necessary, however, since Winget had already volunteered that he would withdraw his petition (and presumably his appeal as well) as it related to his attempt to nullify his contributions to his Trust, if the District Court so ordered (and it did).
The Agent also asked for an injunction against the state probate court, but that sort of remedy fell afoul of the Anti-Injunction Act that prohibits a federal court from interfering with a state proceeding. While there are more holes in this prohibition than in Swiss cheese, the District Court did not think that any of these exceptions were met. Plus, the District Court recognized the possible need for Winget to obtain certain instructions from the probate court on certain issues. So, Winget could continue with his appeal in the state action, so long as whatever it was that he was doing did not defeat the Agent’s rights as a creditor.
Finally, the District Court stated that it would consider an award of attorney’s fees and expenses incurred by the Agent as a result of having to bring its contempt motion after the Agent submitted an appropriate accounting of those fees and expenses.
The bottom line was that Winget was held in contempt of court, but he could purge the contempt by withdrawing the part of his petition that related to his attempt to nullify his contributions to his Trust.
ANALYSIS
Without knowing, my guess is that Winget probably could have settled with the JPMorgan Chase a long time ago for a fraction of what he’ll end up losing through this litigation. I have no way of knowing if that is true or not — only the parties to this case would know and I haven’t talked with any of them — but that’s just my feeling. Too often I have seen folks try to squirm out of liability, but then they get stuck in litigation and the liability grows and grows to where it becomes many multiples of the original liability that itself usually could have been settled for a discount. Sometimes this isn’t a big deal because a debtor doesn’t have the money to pay the judgment whatever it is, but then occasionally cases come along like this one where a guy like Winget probably does have the assets to satisfy the judgment.
The lesson of this case goes to an attempt by a debtor to end-around the actions of the court of judgment by filing a new lawsuit with some other court. By this process, a debtor seeks to change the playing field itself by getting in front of a new judge who doesn’t have the same (usually bad) history with the debtor that the court of judgment. Sometimes these efforts succeed, but usually they flop. Judges do not like to see their own judgments and orders dodged, of course, but they seem to get even more incensed when they see a debtor trying to misuse their court to dodge a judgment or order from another court. One gets the feeling that there was no little dose of that going on with the state probate court when confronted with Winget’s attempt to nullify his contributions to his Trust going back to 2003.
Then, after the end-around fails, the person who made the attempt ends up back before the judge who enters the judgment or order in the first place, and suffice it to say that is not going to be a pleasant experience. Good luck ever getting anything like a decent break from that judge ever again. A debtor who gets to that place with a particular judge is done. The same goes for the appellate courts: One gets the unmistakable impression that the Sixth Circuit is verily tired of Winget, and he’ll likely never get a break from their either.
All this is why strategy is so important in creditor-debtor cases, and thinking through one’s possible moves — either creditor or debtor — to the very end of the litigation. It is actually easier for a creditor, because they can make numerous serious mistakes and still bring enough pressure to force a good settlement. From the debtor’s perspective, it is much more difficult. A debtor starts with many fewer cards, and basically has to win all of those that are played. What a debtor absolutely cannot do is to be content playing “prison chess” and thinking just one move ahead. That will get the debtor in front of a particular judge many times, and eventually the judge will turn on the debtor for wasting the court’s time. Conversely, a savvy creditor will strategize so as to cause that very result.
Many times when representing creditors, I have stood up in court and started my presentation with “The reason we are here today, Your Honor, is because the debtor refuses to pay the judgment.” It may not have much effect the first few times with a particular judge, but after a while they adopt the sentiment and turn hard against the debtor for wasting their time. Good luck to a debtor getting any favorable rulings when the judge starts out thinking like that.
So here we have Winget, who seems to be long past that point. He’s played prison chess, he’s tried this, that, and the other thing, and now the judges all seem to be thoroughly fed up with him and his antics and no judge at any level is willing to cut him a break. That’s really the lesson here: A debtor may thinking they are “winning” at some superficial level by dragging out the litigation, but they don’t realize that meanwhile the courts are turning hard against them.
Perhaps the easiest prediction that can be made is that we haven’t heard the last of this case. There will probably be a fight over the liquidation of the LLCs, and we haven’t heard anything yet about the Agent’s attempt to collect on its unjust enrichment judgment for the $105 million in cash and $150 million in promissory notes against Winget personally. Stay tuned for the next episode.
Read the full article here
