United States v. Stabl Inc.

          AMENDED ORDER

          Michael D. Nelson, United States Magistrate Judge

         This matter is before the Court on Defendants' motion to quash the prejudgment writ of garnishment issued ex parte by this Court for Defendants' investment account at Waddell & Reed. (Filing No. 154 in the Lead Case).^[1] A hearing on the motion pursuant to 28 U.S.C. § 3101(d)(2) was held before the undersigned magistrate judge on September 6, 2018.^[2] In addition to the briefs and evidence submitted prior to the hearing, (Filing Nos. 155, 156, 159, 161, 162), the parties also submitted post-hearing briefs and evidence, (Filing Nos. 172, 177, 180, 181). A transcript (TR.) of the hearing was prepared and filed on September 16, 2018. (Filing No. 170). After careful consideration of the parties' arguments and evidence, the Court will grant Defendants' motion to quash because the undersigned concludes that there are adequate remedies alternative to prejudgment garnishment that will protect the United States' interests.

         PROCEDURAL BACKGROUND

         As recounted by the Court in several previous orders, the United States and the State of Nebraska filed these actions to recover their respective portions of a judgment awarded against Stabl Inc. (“Stabl”) in a prior action as civil penalties for violations of the Clean Water Act (“CWA”) and Nebraska Environmental Protection Act (“NEPA”). See United States of America et al. v. Stabl, Inc. f/k/a Nebraska By-Products, Inc., No. 8:11CV274. The United States and the State filed that action against Stabl on August 10, 2011, for violations of the CWA and NEPA, and, following a bench trial, on January 31, 2014, the Court entered a judgment against Stabl “in the amount of $2, 285, 874, payable to the Plaintiffs and to be divided equally between them, ” which judgment was affirmed by an Eight Circuit mandate issued October 21, 2015. (Filing Nos. 157 and 175 in No. 8:11CV274). Stabl has paid nothing towards the judgment.

         The United States and State allege that, beginning in August 2006, defendant Leon Johnson, the owner of Stabl, was notified by the Nebraska Department of Environmental Quality (“NDEQ”) that Stabl was not in compliance with the CWA and NEPA. Between 2006 and 2010, the NDEQ and Environmental Protection Agency (“EPA”) took steps to enforce Stabl's compliance with the CWA and informed Johnson of penalties for noncompliance. In July 2010, Stabl was notified by the United States Department of Justice of a potential civil enforcement action pursuant to the CWA, including monetary penalties owed by Stabl in the amount of $2, 883, 414. (Filing No. 131-2 at p. 28). The United States alleges that, five days later, on July 13, 2010, Stabl transferred almost of all of its assets, approximately $8 million, to defendants Leon and Ann Johnson, via three wire transfers. (Filing No. 47).

         On May 26, 2016, the United States filed this action against Stabl, its holding company, Lant, Inc., and the Johnsons individually, alleging that the July 2010 wire transfers were fraudulent under the Federal Debt Collection Practices Act (“FDCPA”).^[3] The United States later added one claim entitled “Piercing Stabl's Corporate Veil” in its Amended Complaint. The State filed this action on July 15, 2016, asserting one claim for fraudulent transfers under the Nebraska Uniform Fraudulent Transfer Act (“NUFTA”).^[4]

         Following discovery in these cases, on June 21, 2018, the United States filed an Ex Parte Application for Prejudgment Writ of Garnishment pursuant to 28 U.S.C. §§ 3101 and 3104, seeking to garnish funds owned by defendants Leon and Ann Johnson to satisfy the 2014 judgment. (Filing No. 129). The United States provided the Affidavit of Joan K. Meyer and Daniel Leistra-Jones in support of its ex parte application. (Filing No. 131-1). Upon review of the United States' Ex Parte Brief (Filing No. 130), Ex Parte Index of Evidentiary Material (Filing No. 131), and Ex Parte Supplementary Index of Evidentiary Material (Filing No. 135), the Court found that the application had merit and entered an Order (Filing No. 136) granting the United States' motion and directing the Clerk of Court to issue the prejudgment writs of garnishment (Filing No. 129-1) as requested by the Unites States.

         On July 9, 2018, the prejudgment writs of garnishment were issued to the Johnsons' accounts at Edward Jones (Filing No. 137) and Waddell & Reed (Filing No. 138). The funds in Johnsons' two brokerage accounts with Edward Jones, one containing an estimated total market account value of $92, 470.49, and the other containing an estimated total market account value of $1, 046, 880.30, were garnished. (Filing No. 140). Waddell & Reed froze the assets in the Johnson's investment account with a net asset value of $3, 395, 924.70. (Filing No. 141).

         Defendants received notice of the above filings and prejudgment writs on July 18, 2018, and thereafter filed an objection and requested that the Court set a hearing and a deadline to file a motion to quash the prejudgment writs. (Filing No. 142). After a telephonic hearing with the Court, the parties met and conferred and agreed to dismiss the prejudgment writ as to the Edward Jones accounts. (Filing Nos. 150 and 151). Defendants have now moved to quash the remaining prejudgment writ to Waddell & Reed, the Court's sealed order for prejudgment writ, and the United States' application for prejudgment writ. (Filing No. 154).

         Defendants objected to the prejudgment writ on several grounds. First, Defendants assert that the procedure utilized by the United States violated the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution and did not comply with the requirements set forth in 28 U.S.C. §§ 3301-3407. Next, Defendants assert that the United States improperly garnished funds in excess of the entire underlying judgment against Stabl, and also improperly garnished funds on behalf of the State. Defendants further argue that the garnished funds are solely owned by parties other than Stabl, which is the only judgment debtor. Defendants additionally argue that the United States' ex parte actions were unconscionable and unnecessary because Defendants “have not acted intentionally to hinder, delay, or defraud the United States, and Defendants' actions have not had the effect of hindering, delaying, or defrauding the United States.” (Filing No. 154). Finally, Defendants argue less restrictive alternative remedies are available. (Filing No. 155 at pp. 19-20).

         STATUTORY FRAMEWORK

         The United States applied for the prejudgment writs of garnishment pursuant to 28 U.S.C. § 3101, which permits the United States to petition the court for a prejudgment remedy “at any time after the filing of a civil action on a claim for a debt[.]” 28 U.S.C. § 3101(a)(1). The United States' application must “set forth the factual and legal basis for each prejudgment remedy sought, ” “state that the debtor against whom the prejudgment remedy is sought shall be afforded an opportunity for a hearing, ” and “set forth with particularity that all statutory requirements under this chapter for the issuance of the prejudgment remedy sought have been satisfied.” 28 U.S.C. § 3101(a)(2)-(3). The Court may grant a prejudgment remedy “if the United States shows reasonable cause to believe” that the debtor:

(A) is about to leave the jurisdiction of the United States with the effect of hindering, delaying, or defrauding the United States in its effort to recover a debt;

(B) has or is about to assign, dispose, remove, conceal, ill treat, waste, or destroy property with the effect of hindering, delaying, or defrauding the United States;

(C) has or is about to convert the debtor's property into money, securities, or evidence of debt in a manner prejudicial to the United States with the effect of hindering, delaying, or defrauding the United States; or

(D) has evaded service of process by concealing himself or has temporarily withdrawn from the jurisdiction of the United States with the effect of hindering, delaying, ...