Disobedience of Ohio Court Order Lands LLC's Controller and Single Member in Jail

Sometimes pushing the envelope is not a good strategy, and that’s clearly the case when your litigation strategy ends you up in jail. In an Ohio case the judge found an after-the-fact excuse for disobedience of the court’s order to be insufficient, held the LLC’s owner and its controller in contempt of court, and sentenced them to seven days in the county jail. Spero v. Project Lighting, LLC, No. 2011-P-0002, 2011 WL 6371881 (Ohio Ct. App. Dec. 19, 2011).

Background. Spero involved a dispute over a joint venture made up of several limited liability companies. Two were owned 50-50 by defendant Sam Avny and plaintiff Mitchell Spero. One of the LLCs was owned by Avny and ownership of the fourth was disputed. Id. at *1.

In the course of the litigation a receiver was appointed to take possession of all the assets of the three LLCs other than the one owned by Avny, Project Light, LLC. Two months later the trial judge entered a detailed order calling for the funds in all bank accounts controlled by the three LLCs “to be transferred immediately to the exclusive control of the Receiver,” and directing that “[a]ll funds derived from the sale of any Prospetto inventory will be deposited with the Receiver and remain under his control pending further order of the Court.” Id. (Prospetto was one of the three LLCs.)

When the plaintiffs learned that the court’s order had not been complied with, they filed a motion requesting that the defendants be held in contempt of court. After an adversarial hearing, the trial court found beyond a reasonable doubt that Sam Avny and Anthony DeAngelis, the controller of the three LLCs, had disobeyed the court’s order by causing at least $89,000 of proceeds from the sale of Prospetto’s inventory to be deposited in Project Light’s bank account. Id. at *2.

The court found DeAngelis, Avny, and Project Light to be in contempt of court. They were each fined $250, and DeAngelis and Avny were sentenced to serve seven days in the county jail.

Analysis. DeAngelis and Avny argued unsuccessfully on appeal that the trial court lacked jurisdiction because (1) a notice of appeal was filed before the contempt hearing, and (2) a subsequent settlement agreement disposed of the contempt issue.

The Court of Appeals held that when a case goes up on appeal, the trial court retains jurisdiction over collateral matters such as contempt of court. In considering the effect of the settlement, the court distinguished civil contempt, which is remedial in nature, from criminal contempt, which is intended to punish the offender for acts in disregard of the court’s authority. The sanctions in Spero were for criminal contempt and could therefore be pursued even after the underlying action was no longer pending. Id. at *3.

DeAngelis and Avny’s central argument was that there was not a clear violation of the trial court’s order because of the way the funds were handled. DeAngelis testified that although the money in question was deposited into Project Light’s bank account, “it was clearly earmarked on the books as payable to Prospetto Light so that all of that money could be segregated and any time that it was called for, it could be turned over.” Id. at *5.

The court didn’t buy it. First, the trial court’s order was clear: “all funds derived from the sale of any Prospetto inventory will be deposited with the Receiver and remain under his control pending further order of the Court.” Id. at *6. Second, the earmarking procedure was inadequate and plainly contravened the court’s order. And third, DeAngelis testified that he believed Project Light had paid for the inventory sold by Prospetto and therefore was entitled to be paid for it, although he never informed the receiver of his belief and the receiver was not aware until later that the funds had been diverted. Without saying so, the court implied that DeAngelis’s motivation was for Project Light to retain the funds notwithstanding the court’s order.

DeAngelis and Avny also argued that the seven-day jail term was unreasonable and disproportionate to their acts. The Court of Appeals pointed out, however, that under the Ohio statute that authorizes criminal contempt sanctions, a first offense may be punished by a fine of up to $250, and up to 30 days in jail. Ohio Rev. Code § 2705.05(A)(1). In light of the statutory potential for a 30-day sentence and the discretion accorded the trial court, the Court of Appeals found seven days not to be disproportionate to the conduct. Spero, 2011 WL 6371881, at *6. The trial court’s ruling was affirmed. Id. at *7.

Comment. Although this case involved LLCs, the issues were not LLC-specific. But LLC dissolutions and court-ordered receivers are not uncommon, and the lessons of the case are worth considering.

The result here underscores the importance of paying attention to the wording of a court order. Unilaterally implementing a non-compliant procedure (here, depositing the funds to the wrong company’s account but earmarking the source of the funds), which might have been allowed by the court if properly requested, is simply asking for trouble. Failing to disclose the process to the court-appointed receiver compounded the difficulty. Placing the funds in the wrong account and not disclosing the situation to the receiver could have led to the receiver’s filing of inaccurate reports to the court, and conceivably could have led to the receiver’s having inadequate funds to carry on the operations of the three jointly owned LLCs.

The maxim “It’s easier to ask forgiveness than it is to get permission” (generally attributed to U.S. Navy Rear Admiral Grace Hopper) is bad advice when it comes to a court order.