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Compliance With Charging Orders

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♦ Compliance Remedies For Violation Of Charging Order

Introduction

Charging orders represent a specialized creditor remedy that allows judgment creditors to reach a debtor's membership interest in limited liability companies or partnership interests while protecting the business entity and non-debtor members. The legal framework governing charging order violations, contempt procedures, and available remedies varies significantly between federal and state jurisdictions, with substantial differences in exclusivity provisions, enforcement mechanisms, and available sanctions.

Federal courts apply state law to determine charging order availability and scope but use federal standards for contempt proceedings. State approaches fall into two primary categories: strict asset protection jurisdictions like Texas, Delaware, and Nevada that establish charging orders as exclusive remedies with foreclosure prohibitions, and more creditor-friendly states like California and Oregon that permit ancillary orders and broader enforcement mechanisms.

Violations of charging order provisions can result in both civil and criminal contempt sanctions, with civil contempt requiring proof by clear and convincing evidence and criminal contempt requiring willful violation of specific court orders. Available remedies include compensatory damages, attorney fees, protective orders, injunctive relief, and in some jurisdictions, receivership appointments and turnover orders for already-distributed funds.

Federal Legal Framework for Charging Orders

Federal courts consistently recognize that charging orders are state law remedies governed by state statutes rather than federal law. In Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024). , the Tenth Circuit examined Colorado's charging order statute and noted that "other states and the model Uniform Limited Liability Company Act make charging orders an exclusive remedy to protect non-judgment-debtor members in a multi-member LLC," but emphasized that Colorado had not adopted the ULLCA and the exclusivity argument was "more appropriately directed to the Colorado legislature."

Federal Rule of Civil Procedure 69 establishes the framework for execution procedures in federal courts, providing that judgment creditors may "obtain discovery from any person--including the judgment debtor--as provided in these rules or by the procedure of the state where the court is located" FRCP Rule 69. This rule effectively incorporates state charging order procedures into federal practice while maintaining federal oversight of the process.

The intersection of federal bankruptcy law and state charging order protections creates additional complexity. In Pettine v. Direct Biologics, LLC (In re Pettine), 2023 WL 7648619 (BAP 10th Cir., Nov. 15, 2023). , the Tenth Circuit Bankruptcy Appellate Panel held that under Wyoming law, charging orders constitute judicial liens within the meaning of the Bankruptcy Code. The court explained that "A charging order granted under Wyoming law is a type of a judicial lien, as that term is defined by the Bankruptcy Code.... A charging order is a charge against property to secure payment of a debt and is obtained by judgment or a legal or equitable process or proceeding."

Federal courts have also addressed the distinction between single-member and multi-member LLCs in charging order contexts. The Eleventh Circuit in F.T.C. v. Olmstead, 528 F.3d 1310 (2008) examined whether Florida's LLC Act established charging orders as exclusive remedies for single-member LLCs, noting that "the charging order remedy originated in common law to protect nondebtor partners from being forced unwillingly into partnership with a creditor" and that "this rationale is lost in the context of single-member LLCs where no nondebtor members exist whose interests need protection."

State Statutory Frameworks and Exclusivity Provisions

State approaches to charging order exclusivity vary dramatically, creating a complex patchwork of creditor protections and enforcement mechanisms. Texas Business Organizations Code § 101.112(d) provides that "the entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of any other owner of a membership interest may satisfy a judgment out of the judgment debtor's membership interest" TX BUS ORG § 101.112. The statute prohibits foreclosure in subsection (c), stating that "the charging order lien may not be foreclosed on under this code or any other law," and in subsection (f) prevents creditors from obtaining "does not have the right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company" TX BUS ORG § 101.112.

Delaware's Limited Liability Company Act provides similarly strong protections, with Delaware Code Title 6 § 18-703(d) stating that "the entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member's assignee may satisfy a judgment out of the judgment debtor's limited liability company interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member" DE ST TI 6 § 18-703.

Nevada has enacted perhaps the most restrictive charging order statute, with Nevada Revised Statutes § 86.401(2)(a) providing that charging orders constitute "the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member's interest of the judgment debtor, whether the limited-liability company has one member or more than one member" and explicitly stating that "no other remedy, including, without limitation, foreclosure on the member's interest or a court order for directions, accounts and inquiries that the debtor or member might have made, is available to the judgment creditor" NV ST 86.401.

In contrast, some states have adopted more creditor-friendly approaches. The Georgia Court of Appeals noted in Gaslowitz v. Stabilis Fund I, LP, 2015 WL 1059575 (Ga.App., 2015). that Georgia Code § 14-11-504(b) provides that the charging order remedy "shall not be deemed exclusive of others which may exist," allowing for broader creditor enforcement mechanisms.

Florida presents a mixed approach, with exclusivity provisions for partnerships but not for LLCs. The Florida Supreme Court in Olmstead v. F.T.C., 44 So.3d 76 (2010) distinguished between the state's partnership and limited partnership statutes, which contain express exclusive-remedy provisions, and the LLC Act, which does not contain such limitations. The court reasoned that "the Legislature has shown—in both the partnership statute and the limited partnership statute—that it knows how to make clear that a charging order remedy is an exclusive remedy."

Judicial Interpretations and Enforcement Variations

Courts have developed various approaches to interpreting charging order exclusivity provisions, leading to significantly different enforcement outcomes across jurisdictions. The Texas Court of Appeals in Pajooh v. Royal West Investments LLC, Series E, 2017 WL 1173892 (Tex.App., March 30, 2017). held that charging orders were the exclusive remedy for satisfying judgments from partnership and membership interests, reversing the trial court's receivership order to the extent it extended to the debtor's partnership interest in County Investment LP and membership interest in U.S. Capital Investments LLC. However, the court affirmed the receivership over the judgment debtors themselves as an appropriate mechanism for monitoring distributions and effectuating the charging order.

Courts have recognized important distinctions between charging orders against membership interests and remedies for already-distributed funds. In Stanley v. Reef Securities Inc., 314 S.W.3d 659 (Tex.App., 2010)., a Texas court held that charging orders against a partnership whose sole limited partner was judgment debtor were not the judgment creditor's exclusive remedy to obtain from judgment debtor payments that partnership had made to judgment debtor, reasoning that "once a partnership distribution has been made to a partner, it ceases to be the partner's "partnership interest" (i.e. the partner's right to receive his share of the profits) and becomes that partner's personal property."

The Oregon Supreme Court in Law v. Zemp, 362 Or. 302 (Jan. 11, 2018). adopted a more nuanced approach, holding that "even if the charging order remedy provided in ORS 70.295 is in some respect exclusive, that exclusivity would not affect a court's authority under 'ordinary rules', including ORS 67.205, to issue ancillary orders that are not themselves traditional creditor's remedies." The court distinguished between traditional creditor remedies like "attachment, garnishment and levy" and ancillary orders designed to "assist or enforce the charging order remedy."

California courts have been receptive to creditor arguments seeking equitable relief beyond charging order limitations. In Blizzard Energy, Inc. v. Schaefers, 2021 WL 5366815 (Cal.App., Distr. 6, Nov. 18, 2021). , the California Court of Appeal held that charging orders are not necessarily the exclusive remedy for judgment creditors seeking to collect from LLC members, and that outside reverse veil-piercing may be available as an equitable remedy in limited circumstances. However, the court reversed the trial court's order adding the LLC as a judgment debtor and remanded for further proceedings, emphasizing that this remedy requires: (1) lack of adequate legal remedies, (2) unity of interest and ownership between the LLC and judgment debtor, (3) an inequitable result if the LLC is treated separately, and (4) careful weighing of competing equities, including potential harm to innocent third parties such as co-owners of the LLC. The court noted that the trial court must exercise sound discretion in balancing these factors.

Charging Order Violations Under Federal and State Law

Violations of charging order provisions can take several forms, each triggering different enforcement mechanisms and potential sanctions. Federal courts have addressed attempts to bypass charging order exclusivity through alternative legal theories. In Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021). , the Delaware Chancery Court explained that while veil-piercing claims that seek to define which entities are subject to a charging order are permissible, "if a judgment creditor seeks to bypass its charging order to enforce its judgment through 'other legal or equitable remedies,'" such as unjust enrichment, "that action is barred by statute and must be dismissed." The decision established clear boundaries for when creditors improperly seek to circumvent statutory limitations through claims like unjust enrichment while recognizing that reverse veil-piercing theories may provide legitimate avenues for expanding enforcement beyond basic membership interests.

Common violations include attempting foreclosure where prohibited by statute, seeking attachment or garnishment of LLC property directly, pursuing collection remedies beyond the scope of charging order protections, and violating court orders related to charging order enforcement. The Universitas Education, LLC v. Avon Capital, LLC, 124 F.4th 1231 (10th Cir., 2024). decision illustrates the distinction courts draw between proper charging order enforcement and improper attempts to reach entity assets, with the Tenth Circuit holding that under Oklahoma law, "the typical remedy for collecting on membership interest in an LLC is a charging order. But the charging order limitation applies only to membership interests, meaning the interest that a member of the LLC has in the LLC itself. Those interests are distinct from the LLC's own assets." The court held that charging order statutes do not restrict garnishment of the LLC's own assets.

State law violations often involve creditor overreach in attempting to enforce judgments beyond the scope permitted by charging order statutes. Courts have identified violations where creditors seek to compel distributions from entities, attempt to participate in management rights, or pursue remedies explicitly prohibited by state exclusivity provisions. The Texas Business Organizations Code § 101.112 prohibits creditors from seeking foreclosure rights and from exercising legal or equitable remedies with respect to the property of the limited liability company.

Federal Contempt Procedures and Standards

Federal courts possess broad authority to enforce charging orders and related court orders through both civil and criminal contempt proceedings under 18 U.S.C. § 401. The federal standard for civil contempt requires proof by clear and convincing evidence. See U.S. v. Rizzo, 539 F.2d 458, 465 (5th Cir. 1976).

Criminal contempt in federal court requires proof of more stringent elements. As the Northern District of Alabama explained in E.A. Renfroe & Co., Inc. v. Moran, 508 F.Supp.2d 986 (2007), "The essential elements of criminal contempt are that the court entered a lawful order of reasonable specificity, it was violated, and the violation was willful." The court emphasized that criminal contempt serves to "protect the institutions of our government and enforce their mandates" and requires proof of willful violation rather than mere non-compliance.

Federal courts distinguish between the purposes and procedures for civil versus criminal contempt. The Southern District of Texas noted in Burdine v. Johnson, 87 F.Supp.2d 711 (2000) that "federal court may elect to address violation of its order as civil contempt, criminal contempt, or both," providing courts with flexibility in addressing violations based on the specific circumstances and remedial needs.

The procedural requirements for federal contempt proceedings include specific notice and hearing requirements, particularly for criminal contempt. In U.S. v. Robinson, 922 F.2d 1531 (1991), the Eleventh Circuit held that "if court opts to use summary procedure permitted by rule for punishing criminal contempt instead of procedure requiring notice and hearing, then court must specifically recite in contempt order circumstances leading to finding of contempt."

Federal courts also possess inherent authority to impose sanctions beyond formal contempt proceedings. The Southern District of New York explained in SGM Holdings LLC v. Andrews, 743 F.Supp.3d 545 (2024) that when the three main federal sources of sanctioning authority (Rule 11, Section 1927, and the court's inherent power) cannot sufficiently deter or punish "more drastic" attorney misconduct, federal courts are "additionally empowered to address such misconduct by initiating contempt proceedings, provided appropriate procedural guarantees are in place."

State Contempt Procedures and Enforcement Mechanisms

State contempt procedures vary significantly across jurisdictions, though most apply federal due process standards to contempt proceedings. Illinois courts have developed clear distinctions between civil and criminal contempt purposes and procedures. In Windy City Limousine Company LLC v. Milazzo, 2018 IL App (1st) 162827 (2018), the Illinois Appellate Court explained that "A civil contempt charge is generally brought to compel compliance with a court order, whereas a criminal contempt charge is brought to punish past conduct, i.e., punishing conduct that a court order prohibited," noting that "civil contempt concerns future conduct while criminal contempt concerns past conduct."

Tennessee courts have recognized broad authority to award attorney fees as compensatory damages in civil contempt proceedings. The Tennessee Court of Appeals held in St. John-Parker v. Parker, 638 S.W.3d 624 (2020) that "attorney fees are among the types of compensatory damages that may be awarded in a civil contempt proceeding," though such awards require proper documentation and causal connection to the contemptuous conduct.

New York has developed specific procedural requirements for contempt motions, including service requirements and jurisdictional considerations. In Ballek v. First Media Marketing, 24 Misc.3d 532 (2009), the New York Supreme Court held that a judgment creditor improperly served a motion for an order of contempt against a judgment debtor where the creditor served the motion only upon the debtor's attorney. The court explained: "The branch of plaintiff's application for an order of contempt against FMM is denied, due to improper service.... Because the application for contempt was served only upon FMM's attorney, service of the application did not comply with Judiciary Law § 761."

State courts also recognize the distinction between civil and criminal contempt in terms of available procedures and constitutional protections. The Missouri Court of Appeals addressed this in various contexts, noting in City of Pagedale v. Taylor, 831 S.W.2d 723 (1992) that "The July 5, 1989 order was not included in the charging documents as an order which Taylor was disobeying. The judgment of contempt therefore cannot be based on violation of that order."

Federal and State Remedies for Charging Order Violations

Federal courts possess broad remedial authority for charging order violations, including both compensatory and punitive measures. Compensatory remedies are well-established in federal practice, with attorney fees being a primary form of relief. In Halderman v. Pennhurst State School and Hospital, 533 F.Supp. 649 (1982), the Eastern District of Pennsylvania awarded attorney fees to compensate plaintiffs' counsel for costs and fees incurred in preparing and trying contempt proceedings against state officials who refused to comply with court orders. The court noted: "It was not until June 25, 1981 that the Commonwealth defendants formally notified this Court that they would pay only $35,000.00 of the $67,746.08 ordered deposited in the Registry of this Court pursuant to the Court's Orders of June 4, 1981. While events throughout the Spring and Summer suggested to plaintiffs that the Commonwealth defendants might cease funding the Masters' offices, the Court must establish some demarcation point signifying the beginning of the contempt situation. The Commonwealth defendants' letter of June 25 provides this boundary. Therefore, hours claimed by Mr. Ferleger-and all plaintiffs' counsel-prior to June 25, 1981 will be disallowed."

Federal courts also have authority to issue protective orders with damage clauses to deter violations. The Northern District of Illinois in Culinary Foods, Inc. v. Raychem Corp., 151 F.R.D. 297 (1993) included a damage clause in a protective order, explaining that "in light of the previous violations of protective orders issued by other courts in cases against Raychem, we feel that a damage clause may help to serve a deterrent effect."

Injunctive relief represents another significant federal remedy for charging order violations. The Northern District of California in On Command Video Corp. v. LodgeNet Entertainment Corp., 976 F.Supp. 917 (1997) issued injunctive relief to enforce a protective order, holding that federal courts may issue "injunctions to protect the integrity of their rulings, including pretrial rulings like discovery orders."

State remedies vary considerably based on statutory frameworks and judicial interpretations. Washington courts have authorized attorney fees for contempt proceedings, including appeals. See R.A. Hanson Co. v. Magnuson, 79 Wash. App. 497, 903 P.2d 496 (1995) (interpreting Washington Revised Code § 7.21.030(3) to authorize attorney fees incurred in defending an appeal of a contempt order).

Texas courts have developed sophisticated enforcement mechanisms including turnover orders and receivership appointments. In Pajooh v. Royal West Investments LLC, Series E, 2017 WL 1173892 (Tex.App., March 30, 2017). , the Texas Court of Appeals upheld a receivership and turnover order as an appropriate mechanism for monitoring distributions and effectuating the existing charging order. The court explained that "A Chapter 31 turnover and receivership order is an appropriate order for monitoring distributions and effectuating the existing charging order in favor of Royal West."

Arguments and Rebuttals

Arguments Supporting Strict Charging Order Enforcement

Asset Protection Integrity
  • Charging order statutes with explicit exclusivity provisions must be strictly enforced to maintain legislative intent and protect non-debtor members from unwanted business relationships with creditors.
  • Allowing creditors to circumvent exclusivity through alternative theories undermines the fundamental purpose of limited liability structures and asset protection planning.
  • Anticipated Rebuttals: Courts may distinguish between membership interests subject to charging orders and other assets or claims that fall outside statutory protections.
Judicial Authority Protection
  • Violations of court orders, including charging order limitations, require robust contempt sanctions to preserve judicial authority and ensure compliance with lawful court directives.
  • Both civil and criminal contempt procedures provide necessary tools to compel compliance and punish willful disobedience of charging order provisions.
  • Anticipated Rebuttals: Contempt sanctions must be proportionate to violations and cannot be used to create remedies not available under substantive law.
Creditor Remedy Limitations
  • State legislatures have deliberately limited creditor remedies through exclusive charging order provisions to balance creditor collection rights with debtor protection and business entity integrity.
  • Courts should not create equitable exceptions that effectively nullify statutory exclusivity provisions.
  • Anticipated Rebuttals: Equity may require broader remedies when charging orders prove inadequate to address fraudulent conduct or when debtors manipulate entity structures to defeat legitimate creditor rights.

Arguments Supporting Broader Creditor Rights

Fraud and Abuse Prevention
  • Charging order exclusivity should not protect debtors who use business entities fraudulently or manipulate distributions to defeat creditor collection efforts.
  • Courts possess inherent equity powers to prevent abuse of corporate forms and ensure creditors have meaningful collection opportunities.
  • Anticipated Rebuttals: Statutory exclusivity provisions represent legislative policy choices that courts cannot override based on general equity principles absent specific statutory exceptions.
Economic Reality Recognition
  • Courts should focus on economic substance over legal form, particularly in single-member LLCs where no non-debtor members require protection.
  • Charging order exclusivity makes little sense when applied to entities that function as mere alter egos of individual debtors.
  • Anticipated Rebuttals: Many state statutes explicitly apply charging order protections to both single-member and multi-member entities, indicating legislative intent to protect these structures regardless of membership composition.
Remedial Flexibility
  • Ancillary orders and turnover relief for distributed funds represent proper judicial tools that complement rather than violate charging order exclusivity.
  • Courts must retain flexibility to address novel collection scenarios and prevent manipulation of charging order limitations.
  • Anticipated Rebuttals: Ancillary orders that effectively provide creditors with remedies beyond charging order scope violate statutory exclusivity regardless of their characterization as supplemental relief.

Cases on Both Sides

Pajooh v. Royal West Investments LLC, Series E, 2017 WL 1173892 (Tex.App., March 30, 2017). — The Texas Court of Appeals held that charging orders were the exclusive remedy for LLC membership interests and partnership interests, reversing the trial court's receivership order to the extent it extended to the debtor's partnership interest in County Investment LP and membership interest in U.S. Capital Investments LLC. The court emphasized that the exclusivity provision of the charging statute was plain and unambiguous, requiring strict enforcement even when all partners were judgment debtors. However, the court affirmed the receivership over the judgment debtors themselves as an appropriate mechanism for monitoring distributions and effectuating the charging order.

Stanley v. Reef Securities Inc., 314 S.W.3d 659 (Tex.App., 2010). — The Texas Court of Appeals held that charging orders were not the exclusive remedy when partnership distributions had already been made to partners, allowing turnover orders for distributed funds. The court reasoned that once distributions were made, they ceased to be partnership interests and became the partner's personal property subject to traditional collection methods.

Pansky v. Barry S. Franklin & Assoc., 2019 WL 581620 (Fla.App., Feb. 13, 2019). — The Florida District Court of Appeal determined that the exclusive statutory remedy available to judgment creditors regarding multi-member LLC interests was a charging order (though for single-member LLCs, courts may order foreclosure sales under § 605.0503(4)), holding that the trial court's order transferring right, title and interest in the LLC exceeded the allowable scope where the factual record did not establish that the debtor was the sole member.

Blizzard Energy, Inc. v. Schaefers, 2021 WL 5366815 (Cal.App., Distr. 6, Nov. 18, 2021). — The California Court of Appeal held that charging orders are not necessarily the exclusive remedy for judgment creditors seeking to collect from LLC members, and that outside reverse veil-piercing may be available as an equitable remedy in limited circumstances. However, the court reversed the trial court's order adding the LLC as a judgment debtor and remanded for further proceedings, emphasizing that this remedy requires: (1) lack of adequate legal remedies, (2) unity of interest and ownership between the LLC and judgment debtor, (3) an inequitable result if the LLC is treated separately, and (4) careful weighing of competing equities, including potential harm to innocent third parties such as co-owners of the LLC.

Madison Hills LTD v. Madison Hills, Inc., 644 A.2d 363 (Conn.App. 06/06/1994). — The Connecticut Appellate Court ruled that charging orders constitute the sole remedy available to judgment creditors of partners since partner rights in specific partnership property cannot be attached or made subject to execution. The court reasoned that charging orders protect partnership integrity by preventing creditors from interfering with partnership operations while still providing collection opportunities.

Law v. Zemp, 362 Or. 302 (Jan. 11, 2018). — The Oregon Supreme Court held that charging order exclusivity does not affect a court's authority to issue ancillary orders that are not themselves traditional creditor remedies. The court distinguished between core creditor collection mechanisms and supplemental judicial tools designed to support and enforce charging order effectiveness.

Practical Implications

For judgment creditors, the jurisdictional variations in charging order law create significant strategic considerations. Creditors must carefully research state-specific exclusivity provisions before pursuing collection efforts, as violations of statutory limitations can result in sanctions and dismissal of collection actions. The choice of forum becomes critical, particularly in cases involving multi-state business operations or entities formed in asset protection jurisdictions. Creditors should also distinguish between membership interests subject to charging order limitations and already-distributed funds or other assets that may be subject to traditional collection methods.

For LLC and partnership members seeking asset protection, the selection of formation jurisdiction significantly impacts the level of protection available. States like Nevada and Delaware provide the strongest protections with explicit foreclosure prohibitions and comprehensive exclusivity provisions, while states like California and Oregon offer more limited protections that may be subject to judicial override based on equitable considerations. Members should also be aware that charging order protections are not absolute and may be circumvented through fraud theories, alter ego claims, or reverse veil-piercing in appropriate circumstances.

For courts handling charging order disputes, the need to balance creditor collection rights with debtor protections requires careful analysis of both state statutory frameworks and federal constitutional requirements. Courts must distinguish between proper charging order enforcement and impermissible attempts to circumvent legislative protections while ensuring that contempt sanctions are appropriately tailored to the nature and severity of any violations. The intersection of federal and state law in this area requires courts to apply state substantive law while maintaining federal procedural standards for contempt proceedings.

Recent Developments

Recent federal appellate decisions have highlighted the continuing evolution of charging order law and the persistent split between jurisdictions regarding exclusivity enforcement. Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024). represents a significant 2024 decision from the Tenth Circuit predicting that Colorado charging orders are not exclusive remedies for LLC interests, adding Colorado to the list of states providing more limited asset protection. The decision emphasized the importance of specific statutory language in determining exclusivity, noting that Colorado's legislature could have specified exclusivity but chose not to do so.

Universitas Education, LLC v. Avon Capital, LLC, 124 F.4th 1231 (10th Cir., 2024). from the Tenth Circuit in 2024 clarified the distinction between charging orders against membership interests and garnishment of LLC assets themselves under Oklahoma law. The court held that charging order statutes apply only to membership interests and do not restrict creditors from garnishing assets in the LLC's possession, providing important guidance on the scope of charging order protections.

The Delaware Chancery Court's 2021 decision in Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021). has become increasingly influential in addressing creditor attempts to bypass charging order exclusivity through alternative legal theories. The decision established clear boundaries for when creditors improperly seek to circumvent statutory limitations through claims like unjust enrichment while recognizing that reverse veil-piercing theories may provide legitimate avenues for expanding enforcement beyond basic membership interests.

Pettine v. Direct Biologics, LLC (In re Pettine), 2023 WL 7648619 (BAP 10th Cir., Nov. 15, 2023). from the Tenth Circuit Bankruptcy Appellate Panel in 2023 has significant implications for the intersection of federal bankruptcy law and state charging order protections. The decision's characterization of charging orders as judicial liens under federal bankruptcy law affects how these interests are treated in bankruptcy proceedings and provides guidance for trustees seeking to obtain or challenge charging orders.

Related Issues

Fraudulent Transfer and Asset Protection Planning: Creditors frequently challenge the timing and circumstances of LLC and partnership formations to determine whether transfers to these entities constitute fraudulent conveyances under state and federal law, particularly when charging orders provide limited collection opportunities.

Veil Piercing and Alter Ego Liability: Courts increasingly examine whether single-member LLCs and closely-held partnerships warrant charging order protection or should be subject to traditional veil-piercing analysis, especially when entities lack operational independence or serve primarily as asset protection vehicles.

Operating Agreement Provisions and Creditor Rights: Disputes arise over the enforceability of operating agreement provisions that further limit creditor rights beyond statutory protections, including distribution restrictions, transfer limitations, and dissolution triggers that may defeat charging order effectiveness.

Discovery Rights and Information Access: Creditors with charging orders often seek broader discovery rights regarding entity operations, financial records, and distribution decisions, leading to conflicts over the scope of information available to charging order holders versus traditional creditors.

Courts distinguish civil and criminal contempt primarily by the nature, purpose, and remedies of the sanctions. Civil contempt is coercive or remedial, intended to compel compliance with a court order or compensate the injured party, and is purgable by the contemnor’s obedience to the order. Criminal contempt is punitive and designed to vindicate the court’s authority, entailing unconditional fines or fixed jail terms without an option to purge. The power to impose criminal contempt sanctions is limited, often requiring explicit statutory authority, and constitutional protections apply, including notice and sometimes jury trials. Bankruptcy courts possess broad equitable powers to enforce their orders through civil contempt but generally lack authority to punish criminal contempt except for direct contempts committed in court. The automatic stay under 11 U.S.C. § 362(k) authorizes actual, compensatory, and sometimes punitive damages for willful stay violations. Contempt proceedings must be brought in the issuing court, with bankruptcy courts holding core jurisdiction over related contempt claims. The contemnor’s knowledge of the order and the specificity of the order’s terms are essential for contempt findings. Willfulness is relevant but not always required for civil contempt, which can be based on gross negligence or intentional violation. 133 AMJUR POF 3d 273, 130 AMJUR POF 3d 193, 107 AMJUR POF 3d 97.

Specific remedies include coercive fines, imprisonment until compliance, and compensatory damages. Punitive sanctions for criminal contempt cannot be conditioned on future compliance and are imposed to preserve court dignity. Attorney fees are recoverable in remedial contempt but not in punitive contempt proceedings, with some variations under state law. The contemnor’s present ability to comply is vital for remedial sanctions; potential future financial capability is insufficient. Remedies for contempt are tailored to the needs of enforcement and deterrence, especially in bankruptcy and securities enforcement contexts, where civil contempt is favored due to procedural complexities inherent in criminal contempt. ♦

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