Virginia Lawyers Weekly //June 3, 2024//
Where three corporate defendants repeatedly failed to respond to post-judgment discovery regarding its financial operations, even after the appointment of a special master, they were placed in receivership under a qualified forensic accountant.
Background
This matter is before the court on the special master’s report and responses filed by plaintiff RLI Insurance Company and defendants Nexus Services Inc., Libre by Nexus Inc. and Homes by Nexus Inc. In his report, the special master recommends appointment of a receiver for Nexus.
This is the fifth occasion in the past three years in which the court has been called upon to consider appropriate remedies for Nexus’s post-judgment civil contempt. The appointment of a special master was an important component of the court’s order, which sought to focus Nexus and the Entities “on their legal obligation to exhaustively complete their discovery responses” and was “intended to resolve the matter” of RLI’s post-judgment discovery difficulties in this case.
While Nexus provided supplemental answers to interrogatories and requests for production of documents, the special master identified Nexus’s administrative transfer of its financial operations to Subversivo LLC as a substantial stumbling block to discovery as to Nexus’s present financial condition. The special master recommended that the court suspend or terminate the special master appointment and place Nexus in receivership under a qualified forensic accountant.
Analysis
The court agrees with the special master that a receiver be appointed for the limited purpose of facilitating post-judgment discovery. In the court’s view, Nexus’s years-long pattern of noncompliance and deception, evident most recently in the Subversivo shell game, leaves it no choice but to appoint a limited receiver.
While Nexus excuses its transfer of all of its financial operations to Subversivo because of an inability to maintain banking or credit relationships, that does not explain why no records have been provided to RLI as to Nexus’s financial operations handled by Subversivo during the two-year existence of their contractual arrangement. While Nexus claims to have demanded on its own that Subversivo provide documents as to its financial management of Nexus’s affairs both under its contractual rights and by subpoena, the record is devoid of any suggestion that Subversivo has produced anything.
Under such circumstances, RLI’s characterization of these efforts as “mere theatre” rings true. While Nexus may be reluctant to do so, a receiver will be authorized to bring suit on its behalf against Subversivo to gain access to records relating to Nexus’s financial operations as administered by Subversivo. Accordingly, Nexus’s historic failures demonstrate that nothing short of the appointment of a receiver will provide RLI with information regarding Nexus’s current financial picture.
Moreover, not only has the Subversivo charade prevented RLI from obtaining an idea of Nexus’s revenues and expenses, it has also served to shield Nexus from any efforts to collect on its judgment out of ongoing operations. Subversivo collects Nexus’s revenue, pays Nexus’s bills and keeps the rest for itself to repay a loan made to Nexus. This arrangement leaves no room for judgment creditors such as RLI. Whatever revenues are due Nexus, Subversivo diverts them to others and itself, diminishing on an ongoing basis any revenue that RLI could otherwise access.
While Nexus argues that the appointment of a receiver is not necessary because RLI has other avenues available to it to obtain the requested discovery, such as physical inspection of Nexus’s offices and files, depositions of its principals and a subpoena to Subversivo, these remedies have no prospect of success. Nexus’s responses have been anything but fulsome and complete, and consist largely of bare bones lists and excuses. It is difficult to see how, given the scant nature of the information provided about Nexus’s assets, real estate and payments to its principals, a deposition on those topics could be fruitful.
Likewise, a deposition or opportunity to rummage through Nexus’s Virginia files would provide RLI with no information as to Nexus’s current financial position, as it has over the past two years outsourced its financial operations to Subversivo, a Delaware based in Texas, which Nexus claims is unwilling to respond to requests or a subpoena for information about its own operations. Accordingly, the court concludes that the legal remedies suggested by Nexus are inadequate given the Subversivo scheme.
So ordered.
RLI Insurance Company v. Nexus Services Inc., Case No., 5:18-cv-066, May 17, 2024. WDVA at Harrisonburg (Urbanski). VLW 024-3-279. 16 pp.