2011 Opinions

2011 Site.Year2011ChargingOrderOpinions

2011 Charging Order Opinions

In re Dixie Mgt. & Invest., 2011 WL 1753971 (Bk.W.D.Ark., 2011).

♦ The United States Bankruptcy Court for the Western District of Arkansas addressed a critical dispute regarding whether a debtor’s 62 percent membership interest in Moberly Investment Group, LLC was terminated upon its filing for bankruptcy. Plaintiffs Ralph Duncan and Lisa Cantrell sought a declaratory judgment that Dixie Management and Investment had become a disassociated member of the LLC under the specific terms of the company's operating agreement and Arkansas Code section 4-32-802(a)(4)(B), both of which mandated that a bankruptcy filing triggers an automatic event of disassociation. The debtor contested this, arguing that the operating agreement functioned as an executory contract protected by section 365(e)(1) or, alternatively, as a property interest protected by section 541(c)(1) of the Bankruptcy Code. The court observed that the parties provided no evidence to establish the agreement met the Countryman definition of an executory contract and noted that Dixie had not listed the agreement on its schedules for assumption. However, the court primarily focused on the broad scope of the bankruptcy estate under 11 U.S.C. section 541, which includes all legal and equitable interests of the debtor. Judge Ben Barry held that section 541(c)(1)(B) renders ineffective any provision in an agreement or state law that purports to terminate or modify a debtor’s interest in property based solely on the commencement of a bankruptcy case. Under the Supremacy Clause of the United States Constitution, the court determined that federal bankruptcy law overrides conflicting state statutes and contractual clauses. Ultimately, the court ruled that the disassociation provisions were invalid, meaning Dixie remained a full member of the LLC with its economic and non-economic rights intact. This ruling confirmed that a debtor’s membership status is a protected property interest that cannot be stripped by ipso facto clauses. ♦

Buckeye Retirement Co. v. Buffa, 2011 WL 6299681 (D.Conn., Dec. 16 2011).

♦ The United States District Court for the District of Connecticut addressed a contentious post-judgment discovery dispute following a 2006 stipulated judgment of 180,000 dollars against defendant Anthony Buffa. Since the judgment, the plaintiff, Buckeye Retirement Co., had engaged in extensive efforts to collect the debt, including obtaining writs of execution, charging orders against Buffa's company, Endeavor Capital Management, LLC, and wage executions. The current ruling centered on the plaintiff's motion for supplemental discovery and contempt findings, alongside the defendant's cross-motion to terminate discovery. The primary point of contention arose from Buffa's 2011 deposition testimony, where he stated that despite working over fifty hours per week as the ninety-nine percent owner and managing member of Endeavor, he received a minimal annual salary while his wife, Nancy Haar, who worked significantly fewer hours and held only a one percent interest, received a salary between 75,000 and 120,000 dollars. Buffa admitted this arrangement was intended to ensure family expenses were covered and to shield income from numerous creditors, including the plaintiff. However, these statements contradicted several years of tax filings which showed Buffa receiving wages while Haar received none. The plaintiff further alleged that Endeavor's tax returns revealed suspicious professional fees and deductions that potentially disguised fraudulent transfers. Magistrate Judge Joan Glazer Margolis found that Buffa's clear and unequivocal testimony regarding the salary allocation warranted further limited discovery to investigate the potential diversion of labor fruits. The court ordered Buffa to produce specific tax returns and financial documents, allowed for the potential deposition of Haar under restricted conditions, and awarded the plaintiff 1,500 dollars in attorney's fees. However, the court also granted the defendant's motion in part by ruling that no further post-judgment discovery would be permitted beyond these specific orders without express leave of the court. ♦

American Institutional Partners, LLC v. Fairstar Resources, Ltd., 2011 WL 1230074 (D.Del., Mar. 31, 2011).

♦ The United States District Court for the District of Delaware addressed a complex jurisdictional and corporate dispute arising from a Utah state court judgment. The litigation began when Fairstar Resources and Goldlaw Pty Ltd, acting as judgment creditors against Mark Robbins and several affiliated Delaware limited liability companies, obtained charging orders in Utah that led to the foreclosure and constable sale of various membership interests. The plaintiffs, including Robbins and entities like Peninsula Advisors and AIP Resort Development, sought a declaratory judgment in Delaware asserting that these foreclosures were invalid under Delaware law. In its March 2011 memorandum opinion, the court partially granted the defendants' motion to dismiss. It dismissed Goldlaw for lack of personal jurisdiction and barred the claims of Robbins, AIP, and AIP Lending under the doctrine of res judicata, noting they had already unsuccessfully challenged the sales in Utah. However, the court allowed the claims of Peninsula Advisors and AIP Resort Development to proceed against Fairstar, finding they were not privies to the Utah action and that Delaware had a significant interest in the governance of its domestic LLCs. Years later, in February 2014, the case reached a final resolution after the Utah state court reversed its earlier position. The Utah court issued an order setting aside the constable sales as void due to procedural failures, including improper service and Fairstar's lack of standing after selling the underlying judgment to a third party. Consequently, the Delaware District Court determined that the controversy over the validity of the membership transfers had become moot. Finding no remaining live issue or legally cognizable interest to adjudicate, the court denied the pending cross-motions for summary judgment as moot and ordered the case closed, effectively restoring the parties to their pre-foreclosure status. ♦

Sanders v. Ohmite Holding, LLC, 2011 WL 598436 (Del.Ch., Unpublished, 2011).

♦ The Delaware Court of Chancery resolved a dispute over a member's right to inspect books and records under Section 18-305 of the Delaware Limited Liability Company Act. Max Sanders, the plaintiff, acquired a security interest in the membership units of Ohmite president James Horne after providing a $2 million loan during the company's formation. After Horne assigned his remaining units to Sanders in 2007, Sanders discovered that his ownership stake was only 0.000775%, rather than the expected 7.75%. This massive dilution resulted from a 2003 unit issuance that Sanders suspected was a related-party transaction conducted at a significant discount. Sanders sought to inspect books and records to value his interest and investigate potential mismanagement. Ohmite denied the request, contending that Sanders had no right to information regarding events that occurred before he formally became a member in 2007. Vice Chancellor Laster rejected this temporal bar, ruling that if a member establishes a proper purpose, they are entitled to inspect records necessary to fulfill that purpose regardless of whether the documents pre-date their membership. The court noted that valuing an interest and investigating potential wrongdoing are well-established proper purposes. Sanders provided a credible basis for inferring mismanagement based on the extreme dilution and the lack of transparency regarding the 2003 capital raise. The court found the requested documents—including meeting minutes, financial reports, and tax returns—to be essential and sufficient for Sanders to investigate the legitimacy of the dilution and the performance of management. Ultimately, the court granted summary judgment for Sanders, ordering Ohmite to produce the requested books and records. This decision reinforces that the Delaware LLC Act's inspection rights are interpreted broadly to protect member interests from potential fiduciary breaches, even when those breaches may have occurred prior to the member's formal entry into the company. ♦

Matter of H&W Food Mart, LLC, 461 B.R. 904 (BK N.D.Ga., 2011).

♦ The United States Bankruptcy Court for the Northern District of Georgia addressed a motion to dismiss a Chapter 11 case filed by a convenience store and gas station operator. The primary legal issue was whether the bankruptcy petition had been properly authorized and signed according to Georgia law and the entity's operating agreement. The petition was signed by Jeffrey P. Hunt, acting as president and manager, with the purported unanimous consent of himself and Dewey Craig Welch as fifty percent members. However, the United States Trustee and CharterBank moved to dismiss, arguing that Hunt lacked the authority to file due to his own prior personal Chapter 7 bankruptcy. The court found that under the debtor’s operating agreement and Georgia law, a manager’s personal bankruptcy constitutes a bankruptcy event that automatically removes that individual from their management role. Because Hunt had filed for personal bankruptcy before the LLC’s filing, he was no longer the manager and therefore lacked the authority to sign the petition. Furthermore, the court examined the status of Hunt's membership interest, which had passed to his personal bankruptcy estate managed by trustee Griffin Howell. The court determined that the operating agreement was not an executory contract because it imposed no ongoing material obligations on the members. Consequently, under 11 U.S.C. section 541(c)(1), Hunt’s full membership rights, including the right to vote on a bankruptcy filing, vested in his personal bankruptcy estate. Since the trustee of Hunt's estate never authorized the LLC’s bankruptcy petition, and Hunt himself was no longer the manager with authority to act, the court concluded that the filing was unauthorized under state law. Accordingly, Judge W. Homer Drake, Jr. granted the United States Trustee's motion and dismissed the bankruptcy case for cause. ♦

Meyer v. Christie, 2011 WL 4857905 (D.Kan., Slip Copy, Oct. 13, 2011).

♦ District Judge Carlos Murguia addressed various post-judgment collection motions following a final amended judgment of $7,170,603 plus punitive damages in favor of plaintiffs Alan E. Meyer and John R. Pratt. The judgment was entered against defendants David J. Christie, Alexander Glenn, and D.J. Christie, Inc. A significant factor in the proceedings was the Chapter 11 bankruptcy filing by D.J. Christie, Inc., which initiated an automatic stay on collection actions against the corporation. The court held that while the stay protected the corporate debtor, it did not extend to the individual defendants or prevent enforcement actions against them. The defendants contended that enforcement should be delayed until the bankruptcy court resolved an adversary proceeding concerning potential offsets for other judgments owed by the plaintiffs. However, the court dismissed this argument, asserting that the plaintiffs were entitled to pursue their judgment from non-stayed parties and that the offset issue would be handled separately within the bankruptcy case. As a result, the court granted several enforcement measures. It ordered the surety to pay $1.125 million from a supersedeas bond and approved charging orders against the defendants' interests in Kansas limited liability companies (LLCs) under the Kansas Revised Limited Liability Company Act. The court specified that these charging orders would only apply to existing Kansas-based interests and would grant the plaintiffs rights to distributions rather than management control. Furthermore, the court authorized the issuance of writs of garnishment and general execution to assist in the collection of the judgment. A motion for a status conference was denied as moot since the court's rulings resolved the pending enforcement matters. This order allows the plaintiffs to continue their recovery efforts against the individual defendants despite the corporate bankruptcy. ♦

American Nat'l Bank v. Medved, 281 Neb. 799, 2011 WL 2586341 (2011).

♦ The Supreme Court of Nebraska addressed the enforcement of a judgment against an Arizona resident through charging orders and wage garnishment in Nebraska. The case originated from Michael Medved's default on a promissory note executed in Nebraska and governed by Nebraska law. Following a stipulated judgment, American National Bank (ANB) sought to reach Medved's interests in several Nebraska limited liability companies and his wages. Michael and his wife, Laura Medved, resisted these efforts, contending that the assets were community property under Arizona law and therefore exempt because Laura was not a party to the original litigation. Laura also attempted to intervene, arguing that Arizona statutes required her joinder to bind community assets. On appeal, the Nebraska Supreme Court affirmed the lower courts' rulings. The court determined that while the underlying note’s choice-of-law provision merged into the judgment, the enforcement actions were valid. Analyzing the potential conflict with Arizona law, the court found that the absence of Laura’s signature on the note did not bar enforcement, as Arizona law presumes debts incurred during marriage are community obligations unless proven otherwise. Furthermore, the court adopted the reasoning of recent Arizona appellate decisions, concluding that Arizona’s procedural requirement to sue spouses jointly does not invalidate a foreign judgment obtained in a jurisdiction where such joinder is not required. The court also held that Laura’s due process rights were satisfied because she received notice and a meaningful opportunity to be heard during the enforcement phase. Consequently, the court ruled that Laura was not an indispensable party to the original action and that her motion to intervene was properly denied because her community property arguments lacked legal merit. This decision confirms that valid Nebraska judgments may be enforced against the Nebraska-based community property of out-of-state residents even when local procedural joinder rules differ. ♦

Regions Bank v. Stewart, 2011 WL 1827453 (S.D.Ala., 2011).

♦ The United States District Court for the Southern Division of the Southern District of Alabama addressed a Renewed Application for Charging Order filed by Regions Bank. The bank, acting as successor trustee, sought to enforce a money judgment against the defendant, David Stewart. On November 8, 2010, the court had already determined that Stewart was liable for nearly seven hundred eighty-six thousand dollars due to a breach of contract by ZLM Acquisitions, LLC, which he had personally guaranteed. Seeking to satisfy this unpaid judgment, Regions Bank moved to attach Stewart's membership interests in three specific Alabama limited liability companies: ZLM Acquisitions, LLC, Shimmering Sand Development Company, and P & P Acquisitions, LLC. The motion was based on Federal Rule of Civil Procedure 69(a)(1) and Alabama Code Section 10-12-35. Under Alabama law, a judgment creditor may apply to a court to charge a member's interest with the unsatisfied portion of a judgment, although the creditor only acquires the rights of an assignee of financial rights rather than those of a participating member. Stewart opposed the application, arguing that the LLCs had not received proper notice and that granting the order would improperly allow the bank to participate in the management of the companies. However, Magistrate Judge Bert W. Milling, Jr. rejected these arguments. The court noted that because Stewart owned at least a fifty percent interest in each company, the entities were effectively on notice. Furthermore, the court clarified that the charging order would only permit the bank to collect financial distributions as an assignee, not to participate as a member. Consequently, the court granted the Renewed Application for Charging Order, concluding that both federal and state law supported the remedy as the exclusive means for a judgment creditor to reach a debtor's membership interest in an LLC. ♦