2012 Opinions

2012 Site.Year2012ChargingOrderOpinions

2012 Charging Order Opinions

P.B. Surf, Ltd. v. San Paloma Partners, L.P., 2012 WL 5511019 (N.D.Ala., 2012).

♦ The United States District Court for the Northern District of Alabama addressed a motion to intervene filed by American Fidelity Life Insurance Company. The underlying litigation was an interpleader action initiated by Grandbridge Real Estate Capital to determine the rightful owner of over 1.5 million dollars in escrowed proceeds from the sale of a Texas apartment complex. The primary claimants to these funds were P.B. Surf, Ltd. and Fredric Levin. American Fidelity sought to intervene based on a multi-million dollar Florida judgment it held against David Brannen and Poydras Holdings, LLC, as well as charging orders against Brannens interests in several other companies. The court denied intervention as of right under Federal Rule of Civil Procedure 24(a), concluding that American Fidelity failed to establish a direct, substantial, and legally protectable interest in the interpleaded funds. The court reasoned that American Fidelity did not have a judgment against any party currently claiming the funds, and the possibility of Brannen receiving any portion of the money was too speculative. Furthermore, the court found that the disposition of the case would not impair American Fidelitys ability to protect its interests, as it could still pursue the Florida judgment directly against Brannen if he were to receive funds in the future. Regarding permissive intervention under Rule 24(b), the court exercised its discretion to deny the request. It determined that allowing American Fidelity to join would unduly delay the adjudication of the rights of the original parties, P.B. Surf and Levin. Because Brannen himself did not claim an interest in the funds and P.B. Surf was not subject to the existing charging orders, the court held that the Florida judgment was irrelevant to the determination of fund ownership. Consequently, the motion to intervene was denied in its entirety. ♦

Wayfarer Aviation, Inc. v. The Halsey McLean Minor Revocable Trust, No. C 10-00165 (N.D.Cal., Sept. 18, 2012).

♦ A charging order was issued on September 18, 2012, to ensure the satisfaction of a substantial judgment. The judgment creditor, Wayfarer Aviation, Inc., which now operates as WAI Liquidating Co., Inc., sought to collect a total of $608,619.55 from the defendant trust following a March 2011 judgment. Under the authority of the California Code of Civil Procedure and the California Corporations Code, the court granted a motion to charge the trust’s membership interests in several limited liability companies. These entities include Fox Ridge Farms Holdings, LLC; Fox Ridge Farms Management, LLC; Fox Ridge Investments, LLC; Minor Management Services, LLC; Minor/O'Brien Ventures I, L.L.C.; Minor Stables, LLC; and Minor Ventures, LLC. This judicial order creates a formal lien on the trust's assignable membership interests within these businesses. Consequently, the court ordered that all income, revenue, profits, or proceeds from these entities that would otherwise be distributed to the trust must instead be paid directly to Wayfarer until the judgment, including accrued interest and legal costs, is fully satisfied. To protect the creditor's rights, the trust is legally restrained from transferring, pledging, or alienating its interests in these companies without the court's prior approval. Additionally, the trust is required to provide Wayfarer with a comprehensive accounting of its membership interests and any funds due upon request. The order effectively diverts the trust's economic benefits from these specific LLCs to the creditor as part of the enforcement of the court's earlier financial judgment. ♦

Hage v. Salkin, 2012 WL 718644 (S.D.Fla., Slip Copy, 2012).

♦ the United States District Court for the Southern District of Florida reviewed a bankruptcy court order compelling Henri Hage to turn over his membership interests in two limited liability companies (LLCs) and stock certificates in four corporations to the Chapter 7 Trustee, Sonya Salkin. Following a final judgment of over $1.3 million against Hage, the Trustee sought the turnover of these assets to satisfy the debt. Hage challenged the order on several grounds, including a due process claim regarding the denial of a fourth continuance for the evidentiary hearing and an assertion that the assets were held as tenancy by the entirety with his wife. District Judge Kenneth A. Marra affirmed the bankruptcy court's decision to proceed with the hearing, noting that Hage's counsel was present and that the denial of the fourth continuance was a reasonable exercise of discretion. The court also upheld the factual finding that the LLCs were single-member entities owned solely by Hage, rather than marital property, based on state filings and tax documents. However, the court remanded the case regarding the specific remedies ordered. For the LLC interests, the court noted that a 2011 amendment to Florida law requires a judgment creditor to establish that a charging order would not satisfy the judgment within a reasonable time before a foreclosure sale can be ordered. Because the bankruptcy court had not made these specific findings under the retroactive statute, the matter was remanded for further proceedings. Additionally, the court addressed Hage's argument that Florida law provides for levy and execution of corporate stock rather than direct turnover. Agreeing that the bankruptcy court should have followed statutory procedures for levy and sale, the court remanded this portion of the order to ensure the appropriate legal relief was granted. Ultimately, the court affirmed the procedural findings but remanded for further determination on the methods of recovery. ♦

In re Inman, 2012 WL 2309359 (Bkrtcy.S.D.Fla., Slip Copy, June 18, 2012).

♦ The United States Bankruptcy Court for the Southern District of Florida addressed a multi-count complaint filed by the debtor against his former wife, Carol A. Hearn. The primary conflict stemmed from a 2007 marital mediation agreement in which Inman committed to paying Hearn one million dollars as non-modifiable lump sum alimony. This obligation was intended to provide for Hearn's support and was explicitly designated as non-dischargeable in bankruptcy. To secure the payment, Inman agreed to grant liens on various real estate and business interests, including a third mortgage on Florida property. However, after Inman failed to execute the security documents, Hearn domesticated the Florida judgment in Colorado and obtained charging liens against Inman's interests in several Colorado entities. Upon Inman filing for Chapter 11 bankruptcy, he sought to avoid these liens, claiming the Florida judgment was not final for purposes of full faith and credit. He also sought the turnover of personal property and a declaration that the alimony debt was a dischargeable property settlement rather than a domestic support obligation. Judge Erik P. Kimball concluded that the one million dollar payment was indeed a domestic support obligation under Section 523(a)(5). The court based this on the clear language of the agreement, the fact that Hearn was unemployed and required support at the time of the divorce, and the parties' explicit intent to make the debt non-dischargeable. The court further ruled that the Colorado charging liens were valid and that Inman was precluded from challenging them under the doctrines of res judicata and collateral estoppel. While the court ordered the turnover of two rings and a promissory note to Inman, it denied his claims for damages, equitable subordination, and disallowance of Hearn's claim. Hearn's claim of 667,920.77 dollars was allowed as a secured and priority domestic support obligation. ♦

Bank of America, N.A. v. Freed, _ N.E.2d __, 2012 IL App (1st) 110749, 2012 WL 6725894 (Ill.App. 1 Dist., 2012).

♦ The Appellate Court of Illinois affirmed a trial court judgment against Laurance H. Freed and DDL LLC, the guarantors of a $205 million construction loan for the Block 37 development in Chicago. The core of the dispute involved a carve-out provision in the loan's limited guaranty, which specified that the guarantors would become liable for the full loan amount if they contested or hindered the appointment of a receiver or the foreclosure process. After Bank of America, the successor to the original lender, filed for foreclosure and the defendants opposed both the foreclosure and the appointment of a receiver, the trial court entered a judgment exceeding $206 million against them. On appeal, the court rejected the defendants' argument that this provision was an unenforceable penalty. The appellate court also upheld the trial court’s denial of the defendants' motion for a substitution of judge during subsequent asset discovery proceedings. The court determined that such supplementary proceedings are a continuation of the original litigation, meaning the defendants were not entitled to a new judge as of right after the presiding judge had already made substantial rulings. Finally, the appellate court addressed the trial court's entry of charging orders against distributional interests in 72 limited liability companies and limited partnerships associated with the defendants. The defendants argued these entities were necessary parties that should have been joined in the action. However, the court ruled that because a charging order only grants a creditor the right to receive distributions and does not convey management rights or ownership of the entity's assets, the entities themselves have no interest to protect and need not be formally joined. Ultimately, the court concluded that requiring a lender to serve dozens of such entities would be impractical and that jurisdiction over the judgment debtor is sufficient to impose charging orders on their interests. ♦

U.S. v. Zabka, 900 F.Supp.2d 864 (C.D.Ill., 2012).

♦ The United States District Court for the Central District of Illinois analyzed the government's motion to appoint a receiver to satisfy substantial unpaid federal income tax assessments against Robert and Debra Zabka for the 1996 through 1999 tax years. The government had previously secured summary judgment, which confirmed that federal tax liens attached to all of the defendants' property, most notably their 100 percent ownership of Brookstone Hospitality, Antiques, and ZFP Limited Partnerships. The court examined its authority under 26 U.S.C. sections 7402(a) and 7403(d), noting that these statutes grant district courts broad jurisdiction to issue orders necessary for the enforcement of internal revenue laws, including the discretionary appointment of receivers with the powers of a receiver in equity. The defendants challenged the motion by arguing that the government had not demonstrated that the underlying assets were in jeopardy and by asserting that the Illinois Uniform Limited Partnership Act mandated a charging order as the exclusive remedy. The court dismissed these objections, ruling that a jeopardy finding was inappropriate and unnecessary in this post-judgment phase because the tax liability was no longer in dispute. Additionally, the court found that federal law, rather than restrictive state statutes, governed the liquidation process. The court specifically noted that the Illinois charging order requirement was designed to protect innocent partners from the debts of a single partner, a concern that did not apply here since the Zabkas owned the partnerships entirely. Ultimately, the court granted the government's motion, empowering the receiver to marshal and liquidate the assets to resolve the tax debt exceeding 3.4 million dollars. The receiver was further ordered to prioritize the 1998 and 1999 liens and report any remaining surplus to the court before addressing the 1996 and 1997 assessments. ♦

Wells Fargo Bank, N.A. v. Continuous Control Solutions, Inc., 2012 WL 3195759 (Table) (Iowa App., Slip Copy, Table, Aug. 2012).

♦ The Iowa Court of Appeals examined whether a district court possesses the legal authority to compel limited liability companies to disclose internal financial documentation to judgment creditors as part of a charging order. The litigation arose after several judgment creditors obtained a legal judgment against Alex Shcharansky and others, subsequently seeking charging orders against the debtors transferable interests in three specific LLCs. While the district court granted the requested charging orders, it additionally mandated that the LLCs provide bi-annual cash flow statements to the creditors counsel or the court to verify that no distributions were being withheld or diverted. The LLCs challenged this disclosure requirement on appeal, asserting a lack of statutory basis under Iowa law. In its de novo review, the Court of Appeals focused on Iowa Code section 489.503, which governs charging orders against LLC interests. The court emphasized that a charging order functions strictly as a lien on a debtors economic rights, such as the right to receive distributions, and does not grant the creditor governance rights or the status of an LLC member. The appellate court distinguished between different subsections of the statute, noting that while subsection 489.503(2)(a) permits a court-appointed receiver to exercise an expanded right to information, subsection 489.503(2)(b)—which allows for orders necessary to give effect to a charging order—does not independently authorize the disclosure of financial records to creditors. The court further observed that because Iowa law explicitly restricts the access of transferees to company records, judgment creditors holding a lien should be similarly restricted. Ultimately, the Iowa Court of Appeals held that there is no statutory authority for ordering an LLC to disclose cash flow statements directly to creditors or the court without the appointment of a receiver. Consequently, the court vacated the disclosure provisions while affirming the underlying charging orders. ♦

Limbright v. Hofmeister, 2012 WL 5605437 (E.D.Ky., 2012).

♦ The United States District Court for the Eastern District of Kentucky considered a motion by the plaintiffs to appoint a receiver and grant injunctive relief to prevent the transfer of assets previously found to have been fraudulently conveyed to avoid creditor obligations. The assets involved a Florida condominium and ownership interests in AHD International, LLC and AMI, Inc. Senior District Judge Karl S. Forester denied the motion, characterizing the appointment of a receiver as an extraordinary equitable remedy of last resort that must be thoroughly justified by the facts. Applying the Steinberg factors, the court acknowledged the validity of the plaintiffs' claims and a documented history of fraudulent activity but concluded that the plaintiffs failed to provide evidence of imminent danger that the property would be lost or diminished in value. Additionally, the plaintiffs did not demonstrate the inadequacy of standard legal remedies or the absence of less intrusive equitable options. The court noted conflicting evidence regarding the actual value of the assets, with some testimony suggesting the companies were underwater with priority debts, which would mean a receiver would have no equity to protect. Legal constraints further influenced the decision, as Michigan law specifies that charging orders are the exclusive remedy for satisfying judgments from a member's interest in a limited liability company. The court also expressed concern that a receiver lacking specialized expertise might cause more harm than good by mismanaging ongoing business operations in the nutraceutical and automotive industries. Regarding the request for an injunction, the court found that the lack of evidence for imminent property loss or inadequate legal remedies precluded a finding of irreparable harm. Therefore, while a history of fraud was established, the motion was denied without prejudice because the plaintiffs had not met the high evidentiary burden required for such extreme judicial interventions. ♦

Weddell v. H2O, Inc., 128 Nev.Adv.Op. #9 (Nev., Mar. 1, 2012).

♦ The Supreme Court of Nevada addressed several legal issues arising from the dissolution of a business relationship between Rolland P. Weddell and Michael B. Stewart. The primary question concerned the scope of a judgment creditor's rights under a charging order against a member's interest in a limited liability company (LLC) pursuant to NRS 86.401. The Court held that a charging order only grants the creditor the rights of an assignee, which include economic interests such as profits, losses, and distributions. However, a charging order does not divest a member of their managerial duties or authority within the LLC. By limiting the creditor's reach to economic rights, the law prevents outside parties from interfering with the internal management and the right of members to choose their associates. Consequently, the Court reversed the district court's ruling that the charging order had stripped Weddell of his management rights in Granite Investment Group, LLC, and remanded the matter for further proceedings. Second, the Court examined the validity of a notice of pendency of action, or lis pendens, filed regarding an option to purchase membership interests in Empire Geothermal Power, LLC. The Court clarified that under NRS 14.010, a lis pendens is only appropriate for actions directly involving real property, such as foreclosure or title disputes. Since a membership interest in an LLC is classified as personal property under Nevada law, even when the LLC holds real assets, the underlying dispute did not involve a direct legal interest in real property. Therefore, the Court affirmed the cancellation of the notice. Finally, the Court reviewed the district court's finding that Weddell held no ownership interest in H2O, Inc. Based on evidence that Stewart provided the purchase funds and that Weddell had subsequently transferred any purported interest to Stewart's entities, the Court concluded that Weddell acted merely as Stewart's agent and affirmed the district court's judgment on this issue. ♦

Leonard v. Leonard, (N.J.Super.A.D., 2012).

♦ The Superior Court addressed a novel legal issue regarding whether a custodial parent can collect significant child support and alimony arrears by levying against an ex-spouse’s minority member interest in a limited liability company (LLC). The plaintiff, Keith Leonard, owed over $110,000 in unpaid support to the defendant, Cynthia Leonard, following their 2004 divorce. Seeking an order in aid of litigant’s rights, the defendant moved for a judgment on the arrears and a writ of execution against the plaintiff’s ten percent interest in Blydan Oak Group, LLC, which owned commercial real estate generating substantial rental income. The court examined N.J.S.A. 42:2B–45, a statute governing the rights of judgment creditors against LLC members. This statute permits a court to charge a member’s interest with the unsatisfied judgment amount, though it restricts the creditor’s rights to those of an assignee, explicitly prohibiting interference with company management, forced dissolution, or foreclosure. Finding no prior published opinions on the statute, the court determined that while the defendant could not control the LLC, she could legally charge the plaintiff’s interest. Furthermore, the court invoked Rule 1:10–3 and Rule 5:3–7, which grant broad authority to enforce support obligations through equitable remedies. The court concluded that issuing a writ of execution was a justified equitable solution to ensure that any future distributions or proceeds from property sales intended for the plaintiff would instead be prioritized to satisfy the long-standing debt. This decision aligns with New Jersey’s strong public policy favoring the enforcement of parental maintenance duties. Consequently, the court granted the defendant’s motion, entering judgment for the arrears and authorizing the writ against the plaintiff’s membership interest to secure the funds necessary for his children’s support. ♦

Wong v. Yoo, No. 04-CV-4569 (E.D.N.Y., July 20, 2012).

♦ This order resolves a persistent discovery dispute concerning the 2011 federal tax return of the Mangone Family Partnership. The plaintiff, Aaron Wong, sought this document in the aftermath of a jury verdict that awarded him substantial damages for civil rights violations committed by defendant James Mangone. Despite the Second Circuit affirming the judgment, the damages remained unpaid, prompting Wong to pursue partnership records to satisfy the award. Defendant Mangone moved to quash the request, relying on Florida Statute Section 620.1703(3), which provides specific protections for the activities and financial records of limited partnerships against judgment creditors. Florida case law, specifically Martineau v. Banco Popular North America, supported this position by suggesting that such records are generally shielded from production. However, Judge Gold determined that state law privacy concerns must be weighed against paramount federal interests. Drawing on the balancing test established in King v. Conde, the court highlighted that federal policy strongly favors the disclosure of relevant evidence in civil rights actions and disfavors privileges that would otherwise obstruct justice. Consequently, the court ordered that the tax return be delivered to Mangone’s counsel, who must then coordinate with the court for a formal conference. During this upcoming proceeding, the plaintiff's attorney is required to justify the necessity of the tax return with specificity, aided if necessary by an expert witness. The court will thereafter conduct an independent examination of the document to decide the appropriate scope of disclosure. This tiered resolution seeks to afford due deference to the privacy principles inherent in Florida law while simultaneously recognizing the significant federal weight placed on ensuring discovery remains effective for plaintiffs seeking to enforce civil rights judgments. ♦

In re Cowstone, LLC, 2012 WL 2205565 (Bkrtcy.E.D.N.C., Slip Copy, June 14, 2012).

♦ The United States Bankruptcy Court for the Eastern District of North Carolina held Nicholas A. Stratas, Jr., the debtor’s sole member-manager, in civil contempt for violating a previously established Consent Order. Cowstone filed for Chapter 7 bankruptcy in early 2012, identifying a residential property in Raleigh as its primary asset. Paragon Commercial Bank, holding a secured claim exceeding $2.2 million, obtained a Consent Order in April 2012 that granted relief from the automatic stay. Under this order, the debtor and Stratas explicitly agreed to cooperate with foreclosure efforts and waived their rights to notice and hearings, promising not to contest the proceedings while retaining the right to bid on the property. Following a May 2012 foreclosure sale where Paragon was the high bidder, Stratas filed an ex parte motion in state court to set aside the sale, alleging that the trustee’s unprofessional conduct and unclear verbal communication prevented him from placing a competing bid. Paragon subsequently filed a motion for contempt in the bankruptcy court. During the hearing, Stratas testified that he had been prepared to bid with cash and third-party financing, but he failed to provide any corroborating evidence or testimony from his alleged financier to support his claims. Judge Stephani W. Humrickhouse found Stratas’ testimony regarding his financial ability to bid not credible and determined that his actions constituted a clear violation of the Consent Order. Although the court initially directed Stratas to withdraw his state court motion to avoid being taken into custody, he filed a conditional withdrawal that the court deemed non-compliant with its directive. Consequently, the court ordered the United States Marshal to take Stratas into custody to be incarcerated until the foreclosure was successfully completed and a trustee deed recorded, and required him to pay $10,000 in damages to Paragon for the resulting delays and legal fees. ♦

In re Singh, Case No. 11-15433 (N.D.Ohio, Sept. 19, 2012).

♦ The United States Bankruptcy Court for the Northern District of Ohio was tasked with resolving a legal dispute between debtor Kashmir Singh and the bankruptcy trustee concerning the validity of a $15,000 exemption claim. The debtor sought to exempt his interest in the Airport Taxi Service partnership as well as his rights in specific partnership assets. The outcome of the case hinges on the interpretation of several provisions of the Ohio Revised Code, specifically sections 2329.66(A)(14), 1775.24(B)(3), and 1776.50. Section 2329.66(A)(14) allows for exemptions related to partnership property and interests, referencing the other sections to define the scope of these rights. The debtor argued for a broad exemption covering both categories, while the trustee contended that the debtor's economic interest in the partnership remained accessible to creditors. Judge Pat E. Morgenstern-Clarren examined whether section 1776.50 creates a standalone exemption for a partner's interest. Following the reasoning in In re Foos, the court concluded that section 1776.50 is not a protective exemption for debtors but rather a creditor's remedy. It provides for a charging order, which acts as a lien on a partner's economic interest and serves as the exclusive method for a judgment creditor or trustee to satisfy a claim from partnership distributions without forcing the dissolution of the entity. The court further addressed the trustee’s technical argument regarding the repeal of section 1775.24(B)(3), ruling that because it was incorporated by reference into the exemption statute, it remains legally operative for that purpose. Consequently, the court issued an order overruling the trustee's objection to the exemption of specific partnership property while sustaining the objection to the exemption of the debtor's partnership interest itself, effectively splitting the ruling between the two parties based on the statutory limits of Ohio law. ♦

Scottsdale Ins. Co. v. Tolliver, 2012 WL 524414 (N.D.Okla., 2012).

♦ The United States District Court for the Northern District of Oklahoma addressed a dispute involving the execution of a judgment for attorney fees. After prevailing in multiple trials concerning a homeowner insurance claim where a jury found the Tollivers had misrepresented their loss history with intent to deceive, Scottsdale was awarded 140,000 dollars in fees. Scottsdale subsequently discovered that the Tollivers had transferred various real properties and securities to two limited liability companies, SLT Properties, LLC and MST Properties, LLC, which the Tollivers wholly owned and controlled. Scottsdale moved for writs of execution, contending these transfers were fraudulent under the Oklahoma Uniform Fraudulent Transfer Act because they were intended to shield assets from legal execution. A magistrate judge recommended granting the motions, finding the Tollivers’ explanations for the transfers, such as tax benefits or capital contributions, to be non-credible and noting that the transfers were made to insiders without consideration shortly after the judgment was affirmed. However, the defendants and the LLCs objected, arguing that they were denied due process and that Scottsdale failed to prove the transfers were fraudulent by clear and convincing evidence. Upon de novo review, District Judge Claire V. Eagan examined the statutory requirements for proving a fraudulent transfer. While acknowledging that several factors suggested fraudulent intent, the court emphasized that the record lacked evidence establishing the Tollivers’ insolvency at the time of or as a result of the transfers. Under the relevant Oklahoma statutes, insolvency is a necessary element for a creditor whose claim arose before the transfer if they seek to invalidate it for lack of reasonably equivalent value. Because the current record was insufficient to conclude the Tollivers were insolvent, the court returned the matter to the magistrate judge for a supplemental report and recommendation specifically on the issue of insolvency. ♦

In re Warner, 480 B.R. 641, 644-58 (Bankr. N.D.W.Va. 2012).

♦ The United States Bankruptcy Court for the Northern District of West Virginia considered a motion for summary judgment filed by Chapter 7 Trustee Martin P. Sheehan against several members of the Warner family. The Trustee sought a judicial declaration that McCoy Farm, LLC, was dissolved according to its operating agreement, which stipulated that a member's bankruptcy would trigger dissolution. The court determined that the debtor's entire interest in the company, encompassing both economic distributional rights and non-economic management rights, became property of the bankruptcy estate upon filing. It rejected the defendants' post-petition attempts to disassociate the debtor and continue the company, noting these actions violated the automatic stay and exceeded the sixty-day contractual window for such a resolution. Despite these findings, the court ultimately denied the Trustee's request for summary judgment. The ruling centered on Section 541(c)(1)(B) of the Bankruptcy Code, which invalidates ipso facto clauses that modify or terminate a debtor's property interest due to a bankruptcy filing. The court held that the operating agreement's automatic dissolution provision was unenforceable because it would fundamentally change the debtor's interest from a participation in a viable business to a claim in a liquidated entity. The court further clarified that the Trustee steps into the debtor's legal shoes and does not acquire expanded powers to enforce dissolution provisions that are legally voided by the Code. However, the decision emphasized that the Trustee is not without options, as he maintains the right to pursue judicial dissolution under West Virginia state law if the company's economic purpose is frustrated or its continued operation is no longer practicable. The court concluded by denying the motion without prejudice, inviting the parties to explore mediation or further litigation under alternative legal theories to resolve the distribution of estate assets. ♦