Larry Winget, acting through his holding company called Venture, was attempting to purchase a European company. Venture obtained a $450 million loan from a consortium of lenders, with JP Morgan acting as the administrative agent from the lenders. The European company became insolvent, which triggered an acceleration of the debt unless Venture could put up new collateral. Thus, Winget stepped in to guarantee the loan up to $9 million, but — and this is critically important — had the Larry J. Winget Living Trust also guarantee the debt, but ultimately the guarantees were drafted (apparently as a result of oversight than any conscientious decision) without any limit on the Trust’s liability.
In 2003, which should give an idea of just how old this litigation is, Venture itself failed and filed for bankruptcy. This triggered a default of the guarantees by Winget and his Trust, and JP Morgan sued the two for recovery. Winget ultimately paid $50 million to JP Morgan and was released from personal liability. However, the Trust with its unlimited guarantee was still on the hook for damages, which by the time this case comes to our attention in 2022, has grown to over $750 million.
By this time, JP Morgan had itself gone through its own catharsis of sorts as a result of the 2008 financial crisis, and had merged with Chase Bank to become JP Morgan Chase Bank (we’ll call it “Chase” from here on out). Meanwhile, Winget, who was the trustee of the Trust, was doing whatever he could to keep the Trust from paying the judgment.
In 2014, acting as the trustee, Winget secretly revoked the Trust and removed all the Trust’s assets. Eventually, however, Winget had to disclose the revocation when he attempted to obtain a declaratory judgment that, because of the revocation, Chase had no further recourse against the Trust or its assets. But Chase wasn’t done either, and asserted a counterclaim claiming that the revocation amounted to a fraudulent transfer under the Michigan Uniform Fraudulent Transfer Act (MUFTA
The assets of the Trust included interests in various LLCs which held hundreds of millions of dollars of promissory notes and cash. Before Winget rescinded his earlier revocation of the Trust, but while the LLCs were still titled in his own name, Winget caused the LLCs to distribute out the promissory notes and cash to himself personally, recalling that Winget himself was no longer liable on the judgment. The effect was that the LLCs left the Trust upon its revocation full of promissory notes and cash, but when they returned to the Trust they were mostly (if not completely) empty of their assets.
Upon learning of these distributions, Chase then sued Winget personally for unjust enrichment and the imposition of a constructive trust. The U.S. District Court, doubtless by this time exasperated by Winget’s shenanigans, granted the relief requested by Chase and imposed a constructive trust over the promissory notes and cash. That court then entered judgment for all of this, including its earlier fraudulent transfer ruling regarding the revocation of the Trust. Winget then appealed, leading to the opinion of the U.S. Sixth Circuit Court of Appeals that I shall next relate, in the case of JPMorgan Chase Bank, N.A. v. Winget, 2022 WL 2389287 (6th Cir., July 1, 2022).
The Sixth Circuit first took up the fraudulent transfer issues, noting that under the MUFTA a transfer includes pretty much any method that a debtor can think of for disposing of assets, and this would include a revocation of the Trust. For his part, Winget argued that it was he as the trustee, and not the Trust itself, which owned the assets — and because Winget himself was no longer a debtor, he could do with the Trust’s assets whatever he wanted. However, Winget had previously lost that very same argument in a previous appeal where the Sixth Circuit. We’ll revisit this issue in greater depth when we come to the dissent filed in the case, but for now it is only important to know that Winget lost this argument because he lost it in a previous appeal.
The Sixth Circuit then moved on to whether the transfer was a fraudulent transfer under the MUFTA. Here, Chase asserted the insolvency test, which basically has two elements: First, the debtor was insolvent (or rendered insolvent by the transfer); and, second, the transfer was not for reasonably equivalent value (known as “REV”). There is arguably a third element, depending on how one wants to characterize it, which is that the creditor’s claim must have arisen before the transfer took place. This latter requirement was easily met because the Trust was liable on the guarantee for more than a decade before the revocation took place.
Otherwise, after the revocation the Trust apparently (the opinion is not at all clear on this point) did not have any other significant assets to satisfy Chase’s huge judgment and thus was insolvent. As far as REV goes, the Trust got nothing back in return so there wasn’t any value, much less that which was reasonably equivalent. It was thus an easy analysis for the Sixth Circuit that the revocation of the Trust was a fraudulent transfer under the insolvency test. Nonetheless, Winget made a variety of arguments to attempt to dodge this result.
First, Winget argued that if this was fraudulent transfer, then it interfered with his right to revoke the trust at any time. The Sixth Circuit disagreed, noting that Winget’s right to revoke “is not unlimited”, and that Winget had no right to revoke the Trust until the Trust’s creditor (Chase) was paid.
Second, Winget argued to the effect that because Winget himself was no longer subject to liability, his own legal right to revoke the Trust was unlimited by Chase’s judgment. The Sixth Circuit similarly dispensed with this by holding that whatever right Winget himself had to revoke the Trust, the Trust itself could not be revoke if that would be to the detriment of the Trust’s creditors.
Third, Winget argued that his right to revoke was superior to Chase’s right to recover against the Trust assets, and that Chase should have known about Winget’s right of revocation at the time that Chase accepted the guarantee. ” The Sixth Circuit disagreed, noting that “this makes no difference to whether a fraudulent transfer occurred. MUFTA was enacted in large part to protect unsecured creditors like Chase.  And here, it appears Winget revoked the Trust just so Chase (an unsecured creditor) could not reach the trust assets. That’s exactly the type of conduct MUFTA aims to prevent.”
Finally, Winget argued that there were factual issues as to whether he intended allow the Trust’s guarantee to negate his revocation rights. No sale, wrote the Sixth Circuit, since “that’s not relevant. Winget’s intent is not part of the analysis for a constructive-fraudulent-transfer claim.  And nothing in the terms of the guaranty agreement suggests that was the case. In fact, the agreement implicitly recognizes that Winget and the Trust are separate legal entities and that both Winget and the Trust are bound by the agreement. That should have been enough to put Winget on notice that Chase could recover from the Trust upon default.
Having affirmed the U.S. District Court’s ruling on the fraudulent transfer issue in favor of Chase, the Sixth Circuit next addressed Winget’s appeal of the unjust enrichment finding and the order imposing a constructive trust over the promissory notes and cash of the LLCs owned by the Trust.
To establish an unjust-enrichment claim against Winget, Chase had to prove two things: First, that Winget received a benefit from Chase, and, second, that the result was inequitable to Chase. For his part, Winget argued that he had loaned the one of the LLCs about $100 million once upon a time, and that the promissory notes that he received from that LLC were in repayment of that loan, and not by way of a distribution from the LLCs. Winget called the LLC’s manager to testify in support of his loan contention, which was apparently backed by promissory notes given by the LLC to repay Winget $150 million. However, the Sixth Circuit was quick to pick up on the fact that the promissory note given by the LLC was dated June 29, 2017, which was two years after Chase was granted judgment, and the promissory notes themselves disclaimed any “conditions or understandings” not contained on the face of the promissory notes. Moreover, but for the revocation the Trust would have been the owner of the LLC and not Winget, and any distribution of the LLC’s assets would have been made to the Trust as the judgment debtor.
Now we come to something really interesting, which is that Winget claimed that he should not be liable for about $79 million of the LLCs’ assets that were used to pay income tax, since he was not unjustly enriched by that amount. In weighing this argument, the Sixth Circuit first noted that the LLCs were simply passthrough entities, i.e., they were not themselves liable for their taxes, but instead that tax liability went (“passed through”) to their owner. Since the owner here as the Trust, at least until Winget attempted to revoke it, that meant that the LLCs’ tax liability passed through to the Trust. But it is at this stage that Winget’s argument started to fall apart, since under LLC law an LLC is not liable for the liabilities of a member, including tax liability. Thus, as the Sixth Circuit noted:
“Rather, the Trust would typically seek a distribution to cover the taxes. But a member with a charging order on its membership interest—like the Trust—can’t seek a distribution. That’s because, under Michigan’s charging-order statute, judgment creditors (here, Chase) are entitled to all distributions regardless of the distribution’s purpose.  So any distribution here would have gone directly to Chase rather than the Trust.”
This does not mean that because of the charging order that the Trust was not still that member of the LLC and that Chase took its place, but rather the creditor (Chase) gets the distribution, but the debtor (Trust) is still liable for taxes on the distribution. Or, as the Sixth Circuit put it: “To pay the taxes on the LLCs’ income, then, the Trust would have had to come up with the money itself.”
That then brought the Sixth Circuit to confront the issue of whether Winget was personally liable for the taxes or the Trust was liable for the taxes. If here you are thinking that this shouldn’t be much of an issue because a revocable trust (such as the Trust here) is a grantor trust, and a grantor trust is a passthrough much in the same was as the LLCs, and thus Winget was personally liable for the taxes, you would be, well, wrong. As the Sixth Circuit noted, the settlor of a revocable trust is only liable for the taxes of the trust so long as it remains revocable. However, because the Trust was liable to Chase, the Trust was no longer revocable as long as that liability remained outstanding. “So,” in the words of the Sixth Circuit, “the typical rules for revocable trusts may not apply.”
However, the Sixth Circuit didn’t have to address that issue because it was here that Chase couldn’t point to another provision of the Internal Revenue Code that might lead to an alternative result than that Winget was liable for the taxes, and thus Chase failed to meet its burden that Winget was unjustly enriched by having the LLCs pay his tax liability for their (and the Trust’s) taxable income. The Sixth Circuit would then reverse the U.S. District Court’s judgment to the extent of the $79 million paid to the IRS.
We now come to the remedy that was afforded to Chase by the U.S. District Court in the form of a constructive trust over the promissory notes and cash that were transferred by the LLCs to Winget personally. Here, the Sixth Circuit gives an excellent common-sense description of what a constructive trust is and does:
“A constructive trust is ‘not a real trust’ like Winget’s Trust.  Rather, it is an equitable remedy that comes into existence after a court determines that the plaintiff is entitled to specific property in the defendant’s possession.  The ‘trust’ language is merely a metaphor: The defendant (here, Winget) holds the designated property ‘in constructive trust’ for the plaintiff (here, Chase).  Translation: The plaintiff has a superior claim to property in the defendant’s possession, so the defendant is simply “holding” the property for the plaintiff until it is returned. The practical result is a ‘mandatory injunction’ directing the defendant to surrender the property to the plaintiff.
“And that’s exactly what happened here. Winget obtained the promissory notes and cash distributions only because of his fraudulent revocation—precisely the behavior that justifies a constructive trust.”
When Winget rescinded his revocation of the Trust, Winget represented to the U.S. District Court that he had restored the Trust to the same condition that it was in prior to his attempted revocation. This wasn’t true, of course, because Winget personally retained the promissory notes and cash of the LLCs, and so therefore when all the dust had settled the Trust was worth much less than it had been previously, as was Winget’s intention. Thus, the imposition of the constructive trust was appropriate. But the Sixth Circuit also pointed out an alternative reason why the constructive trust remedy was appropriate, since ” there was reason to believe that Winget—after secretly revoking the Trust — might try to pull another fast one on Chase. A constructive trust ensures he can’t.”
Winget argued that the constructive trust should not direct that the promissory notes and cash go directly to Chase, but instead those assets should go back into the LLCs from whence they came. Not so, the Sixth Circuit ruled, since Chase is the wronged party and it is appropriate for the assets to go to it to pay the judgment, less of course the $79 million that Winget could appropriately deduct for payments to the IRS as discussed above.
Finally, Winget argued that a constructive trust is an equitable remedy, and an equitable remedy should not be imposed where there is a legal remedy available to Chase in the form of a fraudulent transfer claim under the MUFTA. The problem here is that the MUFTA itself specifically provides that it does not supplant other remedies, including common law and equitable remedies, but rather supplements. Prior Michigan opinions had also established that equitable remedies could be granted even where a legal remedy exists. Thus, the Sixth Circuit: “So in this regard, Winget’s gripe with the district court’s ruling rings hollow.”
The last part of the Sixth Circuit’s opinion is a rebuttal to the dissent that was filed in the case, and so we will come back to it after we discuss the dissent. At this point, what is important is that the Sixth Circuit affirmed the judgment of the U.S. District Court, meaning that the promissory notes and moneys had been in the LLCs but were taken by Winget after the attempted revocation, would go directly to Chase — less the $79 million paid to the IRS as discussed.
Now let us consider the dissent by Judge Batchelder. The gist of the dissent was that the Trust should never have had unlimited liability on the guarantee given to JP Morgan in the first place, but rather (and I paraphrase for brevity) the Trust and Winget were to have been treated the same, but in a later draft where Winget’s liability was capped at $50 million, a similar provision for the Trust was overlooked in the drafting. and “Judge Cohn issued a thorough and meticulous opinion finding as a factual certainty and explaining beyond any doubt that the final version’s failure to include the Trust in the limitation provision was a mistake”. The Sixth Circuit then compounded this error by treating the Trust as a separate legal entity from Winget himself, which a revocable trust is not since the assets of a revocable trust are available to creditors. From this bad ruled then flowed a number of flawed rulings which treat the Trust as something different than Winget, when it is not. Thus, the correct result would be for the Sixth Circuit to recognize its initial mistake and treat the Trust as having been released from liability when Winget was released.
Now back to the rebuttal of the dissent found in the main opinion. That rebuttal was basically that the determination that the Trust and Chase have a binding contract was unchallenged, that Winget did attempt to bring it up on a petition for certiorari to the U.S. Supreme Court, but that court denied the petition, and otherwise the parties have for years treated that decision as the law of the case. Thus, it would be improper for the Sixth Circuit at this late date to reconsider its decision.
I’m not going to spend much time on the dissent or the majority’s rebuttal for the reason that the issue is fact-specific and implicates a body of law relating to drafting mistakes that is well-settled. I will take issue, however, with one point of Judge Batchelder which is that a revocable (“living”) trust is not a trust for creditor purposes. This isn’t exactly right. It is true that a creditor of the settlor may effectively ignore the Trust because of a statutory exception to the otherwise legal person separateness of a revocable trust, but that doesn’t make it any less of a trust. Moreover, when the settlor dies, any spendthrift provisions in the trust will be respected — just like any other trust — to protect the trust assets from the creditors of beneficiaries. Finally, the parties themselves treated the Trust as a separate legal person by having the Trust sign off on the guarantees.
Again, whether the Trust was every really meant by anybody to be an unlimited guarantor is a separate legal issue and I will not spend time with that because it is not pertinent to our examination of this opinion (as least as I see it). Instead, let’s back up and take a broader view of this case in the judgment enforcement context.
A problem presented by this opinion is that it is not particularly well drafted and cuts not just a few corners. One gets the impression that the Sixth Circuit was simply tired of dealing with this mess and wanted to put it to bed once and for all. This is evident from the opening two paragraphs of the opinion:
“A tale as old as time? Not quite. But for the past fifteen years JPMorgan Chase Bank has been trying to collect a nearly half-a-billion-dollar debt that Larry Winget and the Larry J. Winget Living Trust guaranteed. Unsurprisingly, they don’t want to pay. And as a result, we’ve already handled eight appeals arising out of this case and related litigation.
“Today, we address whether Winget can revoke the Trust, making the trust assets unreachable to Chase. He cannot.”
Courts usually don’t write opinions with that tone until they are fed up with a debtor, and the Sixth Circuit seems to have finally been fed up with Winget. This is not particularly surprising since Winget’s move in attempting to revoke the trust was sophomoric — a tactic that would look terrible even in regard to a $500 debt, much less one that supposedly was in the hundreds of millions. Since it is almost impossible to imagine any sober attorney giving advice to try such a maneuver, one may muse that the idea came from Winget himself.
The 41,000 foot view of the situation is quite simple despite the large numbers involved. The Trust owned the LLCs, and the LLCs held the assets. The Trust was liable to Chase, but the LLCs were not. At best, or at least until Chase could assert an alter ego theory to pierce the entity separateness of the LLCs, Chase would have been stuck with a charging order against the LLCs. As I have written many times, a charging order does little more than to place a lien on the debtor/member’s (here, the Trust’s) interest in the LLCs, plus an order directing that any distribution that are made to the debtor/member be instead re-directed to the creditor.
For this reason, charging orders are generally crappy remedy for creditors since creditors have no right to either access the assets directly or to exercise any management rights over the LLCs. Charging orders do offer one unintended benefit to creditors, however, which is that the assets are essentially trapped in the LLCs so that the debtor cannot get any beneficial enjoyment of those assets. In other words, the creditor can’t get the assets, but in a very real sense the debtor can’t get the assets either. This usually creates a standoff between the creditor and the debtor that results in a settlement.
As an aside, where the ultimate beneficial owner (UBO) of the assets, via the trust and the LLCs, is an investor, and particularly a real estate investor or developer, it just emotionally kills them to have assets locked up that they can’t access as that severely restricts their ability to do deals. Thus, we see in this case, as in so many similar cases, where the UBO is willing to try just about anything to get those assets back in his position and working. By the way, creditors are aware of this phenomena and can get some enjoyment out of watching the UBO squirm, even if they themselves can’t get anything until distributions are made.
So, this particular case starts off with a situation where Chase has its charging order against the Trust’s interests in the LLCs, but can’t get at the assets, and Winget can’t get the assets out to do other deals. It’s a standoff, one where the parties would normally work out a settlement that leaves each about equally happy and yet miserable (which of course could describe about any settlement).
Instead of biting the bullet and settling with Chase, Winget at this point instead decided to attempt a crazy maneuver: He simply revoked the trust, became the member of the LLCs in his own name, and then distributed their assets out to himself. This might have worked, except that it was an obvious fraudulent transfer as the Sixth Circuit’s opinion describes. Apparently deciding that revoking the Trust wasn’t such a hot idea after all, Winget then attempted to rescind his revocation of the Trust — but kept the assets nonetheless.
The upshot of all this is that the assets went from a condition of being protected within the LLCs, because of the shortcomings of a charging order as a remedy, to being unprotected in his own name. Winget doubtless thought that this wasn’t a problem because his own liability on the guarantee had long been extinguished and he at that point wasn’t liable to Chase for anything; he was wrong. What Winget did not anticipate was that Chase would come up with an alternative remedy in the form of an unjust enrichment claim, which are commonly used in post-judgment enforcement proceedings, to divest him of the assets.
The bottom line is that Winget’s revocation of the Trust allowed Chase to circumvent the restrictions of the charging order remedy and get at the assets directly. If Winget had settled with Chase on the Trust’s liability, he probably would have kept something, but as it worked out he lost all the assets that were distributed to him, less of course the $79 million used to pay taxes. Or think of it this way: Winget’s revocation maneuver changed the status quo in a way that ultimately proved to be extremely improvident for him.
Let’s now consider that $79 million. This is a place where arguably the efforts of Chase’s lawyers fell short.
The way this works, and as the Sixth Circuit held, is that a creditor who holds a charging order gets the distribution, but the debtor still retains the tax liability for the distribution. If a creditor forecloses on a charging order, then the purchaser at the ensuing judicial sale (who might be the creditor through “credit bidding”) becomes an assignee of the interest, and at that point becomes liable for the taxable distributions of the entity, and not the debtor — but this latter never happened in this case, so we don’t have to worry about it.
When a passthrough entity, such as LLC or partnership, generates taxable income the liability for that income goes to its members by way of a Form K-1. However, the entity might not actually distribute cash to the member, in which case the tax liability is said to be phantom income. Here, the LLC paid Winget’s taxes on this phantom income to the tune of the $79 million, and the Sixth Circuit ruled that in the absence of any theory by Chase as to why this was improper it would be allowed
But what really happened is this: The payment of the $79 million was itself actually a distribution to Winget, albeit the money ended up with the IRS. This is known as an imputed distribution. In other words, when the LLCs paid the tax liability, they actually were making a distribution to Winget (via the Trust) who benefitted from the tax payment. Because this distribution was routed through the Trust for the benefit of Winget, and because Chase held a charging order that would have caught the distribution had it been made in the normal course, Chase should have been able to assert direct liability against LLCs for the $79 million. Presumably, this would have then resulted in a $79 million judgment for avoidance against Winget personally on yet another fraudulent transfer theory.
I can’t really fault Chase’s lawyers too much for this, since it was a difficult fact pattern, there was a lot going on, and they did an excellent job in asserting the unjust enrichment theory to hit the biggest part of the assets. But the imputed distribution theory should always be in every judgment enforcement attorney’s back pocket because it can be very useful in situations like these.
A final word that the fraudulent transfer finding in this case as a result of Winget’s revocation of the Trust illustrates just how broad the ambit of the term transfer is within fraudulent transfer law. The term essentially encompasses just about anything that anybody can think of for getting the title to an asset from A to B. Mechanisms for changing title that one might not ordinarily think of as even being a transfer will almost always fall within the UFTA/UVT
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