2014 Opinions

2014 Site.Year2014ChargingOrderOpinions

2014 Charging Order Opinions

SE Property Holdings, LLC v. Unified Recovery Group, LLC, 2014 WL 5846388 (S.D.Ala., 2014).

♦ This opinion centers on an application for a charging order filed in the United States District Court for the Southern District of Alabama. The plaintiff, SE Property Holdings, LLC (Seph), sought this order to satisfy a massive final judgment previously rendered against defendant Jeff S. Green by the United States District Court for the Middle District of Louisiana and registered in the Southern District of Alabama in March 2014. The financial obligation is substantial, totaling over twenty-three million dollars in principal plus several million dollars in accrued interest, with additional interest continuing to accumulate daily. Seph identified numerous limited liability companies in which Green holds membership interests, spanning both Alabama and Louisiana jurisdictions. These entities include Placid Drive, LLC, Ashford Park, LLC, Green & Sons, LLC, and several others. Pursuant to Federal Rule of Civil Procedure 69(a)(1), the enforcement of a money judgment must align with the post-judgment procedures of the state in which the court sits, unless a specific federal statute applies. Accordingly, the court looked to Alabama Code section 10A-5-6.05, which provides that a court may charge a member's interest in an LLC to pay an unsatisfied judgment debt. This statutory mechanism is the exclusive remedy available to a judgment creditor against a debtor's membership interest, effectively granting the creditor the rights of an assignee regarding financial distributions. Presiding District Judge Kristi K. DuBose found that Seph's application was meritorious based on the outstanding judgment debt. The court ruled that the application would be granted automatically unless the defendants could provide valid legal authority or objections by November 21, 2014. A contemporaneously entered charging order was scheduled to become effective on November 26, 2014, absent any intervening court action or sustained objections from the defendants. ♦

Mack Film Development, LLC v. Benevolent Partners, L.P., 2014 WL 929702 (Conn.Super., Unpublished, 2014).

♦ The plaintiffs sought enforcement of a judgment from the California Superior Court totaling over $5 million, including $1.75 million in punitive damages. The judgment resulted from a breach of contract and fraud during a film development project where the defendant debtor, Grant Johnson, misrepresented his firm's assets. A California jury found Johnson to be the alter ego of Benevolent Partners, L.P., thereby piercing the corporate veil. The proceedings in Connecticut involved an application for a charging order against Johnson’s interest in JHJ Limited Partnership and for sanctions due to his persistent refusal to provide meaningful financial records. Despite claiming to have no income post-judgment and asserting that his assets had been eradicated, the court observed that Johnson maintained a lavish lifestyle through payments of high monthly credit card charges and club memberships by family members. Forensic accountant Karen Balmer testified to numerous accounting irregularities, such as heavily redacted documents, missing QuickBooks transaction data, and unexplained loan write-offs totaling $7 million. Johnson’s explanation that business records were lost in a foreclosure was deemed not credible. The court emphasized its wide discretion in post-judgment discovery to identify nonexempt assets and found that Johnson, Benevolent Partners, L.P., and Benevolent Capital Management, LLC functioned as a unified financial entity. Ultimately, the court concluded that Johnson failed to meet even a minimal burden of transparency and granted the charging order against his interest in JHJ Limited Partnership. This order was necessary both to secure potential payments toward the unsatisfied judgment and to facilitate further discovery into the true location and nature of the debtor’s assets. The decision underscores the court's authority to prevent the use of complex corporate structures to shield assets from lawful creditors following findings of fraudulent conduct. ♦

Shanghai Real Estate Ltd. v. Greenberg, 2014 WL 660624 (Conn.Super., Jan. 28, 2014).

♦ The Superior Court of Connecticut considered a legal application for charging orders against the membership interests of defendants Mark and Linda Greenberg in several limited liability companies to satisfy a formally registered foreign judgment. While the parties agreed to immediate orders for companies registered in Connecticut, the defendants challenged the court’s authority to issue orders for twelve specific companies registered outside the state, arguing a significant lack of jurisdiction over those foreign business entities. The defendants contended that the governing statute, General Statutes section 34-171, did not permit the court to legally interfere with the internal operations or the financial privacy of companies beyond its territorial reach. However, the court observed that the plaintiff’s requested order was strategically directed at the defendants individually rather than the foreign companies. Specifically, the carefully drafted order required the Greenbergs to disclose manager information, redirect all personal distributions and payments from the companies to the judgment creditor, and refrain from taking any personal loans from these entities until the judgment was fully paid. Additionally, the defendants were strictly prohibited from selling or encumbering their membership interests without providing prior written notice to the plaintiff. Judge John W. Pickard ruled that because the court possessed personal jurisdiction over the defendants as judgment debtors, it could validly charge their membership interests in the foreign companies without needing independent jurisdiction over the companies themselves. The court overruled the defendants’ objections and granted the charging orders, further mandating that the defendants provide historical tax returns and ongoing financial statements for the entities to ensure full compliance. This decision emphasizes that a judgment creditor can effectively reach a debtor’s economic interests in out-of-state limited liability companies by obtaining judicial orders that compel the debtor’s personal performance. ♦

Voll v. Dunn, 2014 WL 7461644 (Conn.Super., Nov. 10, 2014).

♦ The Connecticut Superior Court addressed a complex business dispute involving Macdaddy’s Macaroni and Cheese Bar restaurants. Plaintiff Joseph Voll brought derivative and individual claims against his business partner, Robert Dunn, alleging breach of statutory duties, civil theft, conversion, and violations of the Connecticut Unfair Trade Practices Act. The court found that Dunn systematically siphoned over one hundred thousand dollars from three limited liability companies—Management LLC, Monroe LLC, and Fairfield LLC—through unauthorized cash withdrawals, illegitimate draws, diverted Groupon receipts, and the barter of company assets for personal services like landscaping. The court described Dunn as exceptionally non-credible, noting his attempts to justify the defalcations as necessary for his family despite the excessive amounts taken. Consequently, the court held Dunn liable for breach of the statutory duty of good faith, civil theft, and conversion. Under the civil theft statute, the court awarded treble damages, resulting in significant judgments for the three LLCs: approximately three hundred forty-eight thousand dollars for Monroe LLC, seventy-three thousand dollars for Fairfield LLC, and seventy-six thousand dollars for Management LLC. Additionally, the court resolved a significant legal question of first impression regarding whether a judgment creditor can execute on a debtor’s full membership interest in an LLC rather than being limited to a charging order. The court concluded that because the LLCs' operating agreements permitted the transfer of full membership rights, the interests were property subject to execution and sale under Connecticut’s postjudgment procedure statutes. Therefore, the court declared the execution and subsequent auction of Dunn’s interests valid, granting Voll full ownership of the Management and Monroe entities and a fifty-percent stake in the Fairfield entity. This ruling effectively removed Dunn from the ventures while offsetting his debt to Voll. ♦

Lefkowitz v. Quality Labor Mgt., LLC, 2014 WL 5877850 (Fla.App., Distr. 5, 2014).

♦ Ivan Lefkowitz appealed a trial court order denying his post-judgment motion to intervene in a lawsuit brought by Quality Labor Management, LLC against Truckare I of Jacksonville, LLC and the Newtons. Quality had obtained a $450,000 stipulated final judgment and multiple charging orders against the Newtons ownership interests in several limited partnerships and a limited liability company. Lefkowitz sought to intervene by asserting that he held a perfected security interest in the same collateral, stemming from a 2010 business loan for $250,000. He alleged that the Newtons had pledged their ownership interests to him, which he perfected by filing a UCC-1 financing statement in September 2010. Furthermore, Lefkowitz had already initiated a separate lawsuit in 2011 to take ownership of the collateral following a default. The District Court of Appeal of Florida, Fifth District, determined that the trial court abused its discretion in denying the motion. The court explained that while Florida Rule of Civil Procedure 1.230 generally limits post-judgment intervention, such intervention is permitted when the ends of justice so require. The court noted that Lefkowitz was not attacking the merits of the underlying judgment but was instead defending his prior interest in the collateral. Since Lefkowitz had no basis to intervene until Quality sought the charging orders, and because a prior perfected security interest typically takes priority over a subsequent charging lien, the appellate court concluded that Lefkowitz must be allowed to protect his rights. Consequently, the court reversed the trial court's decision and remanded the case for further proceedings to allow Lefkowitz to prove his claims. This ruling underscores the principle that third parties with significant interests in property subject to post-judgment collection efforts must be afforded an opportunity to be heard when justice demands. ♦

Young v. Levy, 2014 WL 2741060 (Fla.App., June 18, 2014).

♦ The District Court of Appeal of Florida, Fourth District, considered whether a trial court erred by entering a writ of garnishment upon a member's interest in a limited liability company to satisfy a debt. This legal dispute arose between co-owners Darlene A. Young and Leslie Couture Levy regarding their business, Wear It's At, LLC. Following a series of contentious legal actions involving emergency injunctions and subsequent appeals, Levy was eventually awarded a judgment for attorneys' fees totaling over forty-one thousand dollars. To satisfy this outstanding judgment, the trial court granted Levy's motion for a writ of garnishment against the company, ordering the disbursement of specific monies owed to Young to satisfy the debt. Young appealed this decision, asserting that Florida law prohibits garnishment as a remedy in this particular context. The appellate court conducted a de novo review of Section 608.433(5) of the Florida Statutes, which governs the rights of judgment creditors against members of a limited liability company. The court found that the statute explicitly designates a charging order as the sole and exclusive remedy by which a judgment creditor may satisfy a judgment from a debtor's interest or rights to distributions within a limited liability company. Despite Levy's arguments that the funds in question constituted profits or dividends exempt from this restriction, the appellate court determined that the statutory definition of a member's interest clearly encompasses such distributions. Adhering to the judicial principle that the plain and ordinary meaning of clear statutory language must control without further interpretation, the court concluded that the trial court's issuance of the writ of garnishment was a fundamental error. Ultimately, the appellate court reversed the lower court's order and remanded for the dissolution of the writ, thereby affirming that a charging order is the only lawful mechanism available to creditors for reaching a member's distributions in a Florida limited liability company. ♦

In re Boone County Utilities, LLC, Adv.Proc. No. 12-50128 (Bk.S.D.In., Sept. 17, 2014).

♦ The United States Bankruptcy Court for the Southern District of Indiana addressed a discovery dispute between Boone County Utilities (BCU) and The Branham Corporation in an adversary proceeding stemming from Branham's ongoing efforts to collect a judgment against Newland Resources, BCU's sole member. Branham sought to depose a BCU representative and conduct broad discovery regarding corporate governance, post-confirmation operations, and various facts in BCU's amended complaint to identify assets for satisfaction of its judgment. BCU moved to quash the subpoena and sought a protective order, arguing the requests were irrelevant and burdensome. The court granted BCU's motion, holding that under the Indiana Business Flexibility Act, a judgment creditor of an LLC member is limited to a charging order, which provides only the right to receive economic distributions. Such a creditor does not acquire management rights, the right to participate in corporate actions, the right to inspect books and records, or the authority to challenge corporate governance. Furthermore, the court determined that the 2004 confirmation of BCU's Chapter 11 liquidating plan was res judicata as to the distribution of all BCU assets. The court rejected Branham's arguments that the plan was invalid for failing to include mandatory provisions under the Bankruptcy Code or that BCU violated procedural stay rules during initial distributions, noting that Branham was not even a creditor of BCU at the time of confirmation. Because Branham's rights are strictly limited to Newland's post-confirmation economic interests, discovery into pre-confirmation assets or internal corporate decision-making was deemed irrelevant to Branham's defense against BCU's request for sanctions. The court concluded that while Branham might pursue discovery regarding post-confirmation assets in state court proceedings, it was entitled to no such discovery in the bankruptcy court. Consequently, the court quashed the subpoena and issued a protective order shielding BCU from inquiries into its corporate governance and pre-confirmation activities. ♦

Fannie Mae v. Grossman, 2014 WL 4055371 (D.Minn., 2014).

♦ Fannie Mae sued Andrew Grossman and several LLC defendants—ABCO Research, Venerable Group, Ambient Consulting, and Grossman Investments—to recover over $10 million in unpaid judgments. Fannie Mae alleged that Grossman fraudulently transferred his membership interests in the LLCs to a Cook Islands Trust to evade creditors and that the LLCs subsequently distributed millions of dollars to that offshore trust. The defendants moved for partial summary judgment, arguing that the LLC defendants should be dismissed because, under Minnesota law, a creditor’s exclusive remedy against an LLC member is a charging order, which precludes traditional collection remedies and management interference. They further contended the LLCs were not debtors or transferees of Grossman’s personal assets and thus were not proper parties. The district court denied the motion, ruling that the charging order limitation does not prevent a court from voiding a fraudulent transfer ab initio to restore ownership. More significantly, the court applied the doctrine of outsider reverse veil piercing, which allows a creditor to reach the assets of an entity if it is the alter ego of the debtor. The court found a prima facie case that Grossman operated the LLCs as mere extensions of himself, noting he served as the primary manager without salary, controlled distributions to his own offshore trust where he was a beneficiary, and ignored corporate formalities. Consequently, the LLCs were deemed appropriate parties as de facto debtors to facilitate the restoration of assets and the voiding of subsequent distributions. Finally, the court rejected the argument that Fannie Mae’s claim for injunctive relief was moot, holding that the failure to seek a preliminary injunction does not bar a permanent injunction. By maintaining the LLCs as defendants, the court ensured that any relief granted could effectively reach assets funneled through the entities Grossman controlled. ♦

In re Cleveland, 2014 WL 4809924 (D. Nev. Sept. 29, 2014).

♦ The United States District Court for the District of Nevada addressed whether a Chapter 7 bankruptcy trustee possesses the legal authority to sell or take ownership of assets held by limited liability companies (LLCs) that are 100% owned by the debtors. Charles and Ellerie Cleveland filed for Chapter 7 relief and disclosed their total ownership of PFG Advisors, LLC and PFG Properties, LLC. The appointed trustee, Lenard Schwartzer, objected to the debtors' claims of exemptions, seeking control over the LLC assets. Initially, the Bankruptcy Court ruled that while the membership interests themselves were property of the bankruptcy estate, the trustee did not have the right to sell or take ownership of the underlying assets. This decision was based partly on the personal services nature of the business and the requirement for state licensing. On appeal, Chief Judge Gloria M. Navarro reviewed the matter de novo and reversed the lower court's decision. The District Court held that when a debtor holds a membership interest in a single-member LLC, the Chapter 7 trustee succeeds to all of the debtor’s rights, including the right to manage and control the entity. The court emphasized that state law limitations, such as charging orders, do not govern the administration of property that has become part of a bankruptcy estate. Furthermore, the court found that even if there are theoretical limits on a trustee’s ability to manage certain professional service practices, such limitations do not preclude a trustee from selling the assets of the LLC. Ultimately, the court concluded that the trustee is entitled to sell or take ownership of the assets of the debtors' LLCs to satisfy the estate's debts, leading to the reversal and remand of the Bankruptcy Court's order. ♦

P-C Palladio, LLC v. Nassi, 2014 WL 584315 (S.D.N.Y., Feb. 14, 2014).

♦ The United States District Court for the Southern District of New York addressed motions by a judgment creditor seeking to satisfy a judgment exceeding twenty million dollars against Craig Nassi. The judgment creditor requested the turnover of various assets, including cash and paintings, an accounting of the debtor's finances, and charging orders against his interests in several limited liability companies. District Judge Jesse M. Furman granted the application for summary relief in part and denied it in part, scheduling a trial for the unresolved issues. Regarding the alter ego motion, while the court noted strong evidence that Nassi dominated BCN Management LLC and Caffettino LLC to shield assets, it found material factual disputes regarding the companies' ownership and formalities, necessitating a trial. The court also denied summary turnover of two expensive paintings because their current possession and location remained unproven. However, the court ordered Nassi to immediately turn over cash, art, and jewelry listed in his most recent financial statement and commanded a full accounting of assets that were missing or significantly devalued between his June and November statements. Concerning Nassi's interests in entities managed by his father, Bijan Nassi, the court issued charging orders against his membership interests in four real estate companies, though it limited these to undisputed minimum percentages pending further factual determination. Additionally, the court ordered the turnover of over five hundred thousand dollars from specific capital accounts and sale proceeds where Nassi's interests were clearly established. Conversely, it denied summary relief concerning proceeds from other property sales because of contested claims regarding personal loans and rights of setoff involving the debtor's father. Ultimately, the court maintained existing restraints on corporate accounts and set a trial to resolve whether the debtor's companies were alter egos, the location of the paintings, and the exact extent of the debtor's ownership in the family-run entities. ♦

First Bank v. S&R Grandview, L.L.C., 2014 WL 846671 (N.C.App., 2014).

♦ The North Carolina Court of Appeals addressed the legal implications of a charging order on a member's interest in a limited liability company. First Bank obtained a monetary judgment exceeding 3.5 million dollars against Donald J. Rhine following his default on various loans. To satisfy this judgment, the bank sought a charging order against Rhine's membership interest in S&R Grandview, L.L.C. The trial court's initial order concluded that the charging order effectuated an assignment of Rhine's interest, thereby enjoining him from exercising his rights as a member and directing that his rights lie fallow until the judgment was satisfied. Rhine appealed, contending that the trial court erred in its interpretation of North Carolina General Statutes sections 57C-5-02 and 57C-5-03. Upon review, the Court of Appeals reversed the trial court's decision. The appellate court emphasized that under the plain language of the statutes, a charging order only grants a judgment creditor the rights of an assignee, which are limited to receiving distributions and allocations the debtor would otherwise receive. The court clarified that a charging order does not command a total assignment of membership interests nor does it terminate the debtor's status as a member of the LLC. Furthermore, the court noted that recent amendments to the North Carolina Limited Liability Company Act supported the view that a charging order acts as a lien or encumbrance rather than an outright transfer of management rights. Consequently, the court held that the trial court lacked the authority to strip Rhine of his participation in management or to order his membership rights to remain inactive. The case was remanded for the entry of a corrected charging order, affirming that membership control remains with the debtor-member despite the financial charge on their economic interest. ♦

Center Capital Corp., PRA Aviation, LLC, 2014 WL 1281060 (E.D.Pa., 2014).

♦ The United States District Court for the Eastern District of Pennsylvania addressed a motion by Glenwood Real Estate Group, LLC to protect assets intended to satisfy a substantial judgment. Glenwood, having been assigned a judgment of approximately 2.4 million dollars originally obtained against Joseph Pacitti and PRA Aviation, sought to restrain Pacitti and his entity, Front Street Development Associates, LP, from transferring assets that could be used for execution. Pacitti, who holds a 99 percent interest in Front Street, failed to appear at the relevant hearing or respond to the court's orders. Consequently, Judge Schiller issued a memorandum and order granting a temporary injunction that restrained Pacitti from receiving or transferring distributions from Front Street, transferring his own partnership interest, and causing the partnership to dispose of its various properties. The court's decision relied upon Pennsylvania Rule of Civil Procedure 3118, which permits enjoining the transfer of a debtor's property subject to execution, and the Pennsylvania Revised Uniform Limited Partnership Act, which classifies partnership interests as personal property. Additionally, the court invoked its general equity powers to prevent Pacitti from orchestrating the dissipation of Front Street’s assets, noting that such transfers would diminish the value of his interest and frustrate the plaintiff's collection efforts. The court found that Glenwood would suffer irreparable harm without the injunction, citing Pacitti's documented history of evading creditors through complex financial arrangements and property sales. However, the requested injunction against Front Street as a separate entity was denied because it was not a formal party to the case. This ruling demonstrates the court's commitment to preserving the status quo and ensuring that judgment debtors cannot easily circumvent their financial obligations through strategic asset depletion. ♦

Levy v. Carolinian, LLC, 2014 WL 4347503 (S.C., 2014).

♦ The Supreme Court of South Carolina addressed whether a limited liability company could compel judgment creditors to sell a distributional interest acquired through a foreclosure sale. The dispute arose after Shaul and Meir Levy obtained a 2.5 million dollar judgment against Bhupendra Patel, a member of Carolinian, LLC. The Levys subsequently obtained a charging order and foreclosed on Patel's distributional interest, purchasing it at a judicial sale for 215,000 dollars after outbidding Carolinian. Following the sale, Carolinian argued that its Operating Agreement allowed it to force the Levys to sell the interest because they had not obtained the required member consent for the transfer under Article 11. The circuit court ruled in favor of Carolinian, finding the Levys were subject to the Operating Agreement's transfer restrictions as transferees. However, the Supreme Court reversed this decision. The Court held that the transfer restrictions in Section 11.1 of the Operating Agreement applied only to members, and the Levys were never members. Furthermore, the Court noted that under the South Carolina Uniform Limited Liability Company Act, an operating agreement cannot restrict the rights of third parties who are not managers, members, or transferees. Since the Levys were mere judgment creditors until the foreclosure sale was completed, they were not bound by the consent requirements at the time of the transfer. The Court concluded that Carolinian's right to redeem or purchase the interest was governed by Section 3.5 of the Operating Agreement, which only permitted redemption prior to the foreclosure sale. Because Carolinian failed to redeem the interest before the sale and was outbid during the process, it could not later invoke Article 11 to bypass the results of the judicial foreclosure. This ruling clarifies that LLC operating agreements cannot retroactively restrict the statutory rights of judgment creditors once a foreclosure sale has concluded. ♦

Arvest Bank v. Byrd, Case No.10-02004 (W.D.Tenn., Aug, 19, 2014).

♦ The United States District Court for the Western District of Tennessee issued an order granting Arvest Bank's motion for a charging order against defendants Preston E. Byrd and Donette L. Byrd. This judicial decision stems from a 2011 jury trial where Preston Byrd was found to have defrauded the bank by converting funds for personal use and engaging in fraudulent conveyances, while Donette Byrd was found to have knowingly ratified these acts and accepted the resulting benefits. The jury assessed substantial damages, leading to judgments of over six point five million dollars against Preston Byrd and six hundred fifty-nine thousand dollars against Donette Byrd. With these judgments remaining completely unsatisfied and all appeals exhausted, Arvest Bank sought to secure payment through the financial interests the defendants held in three Tennessee entities: Horizon Financial Group, LLC, Horizon Companies, LLC, and Horizon Holding Company, LLC. In his analysis, District Judge Samuel H. Mays, Jr. explained that under Federal Rule of Civil Procedure 69 and Tennessee state law, a charging order serves as the exclusive remedy for a judgment creditor to reach a debtor's membership interest in a limited liability company. While the order does not grant the creditor rights to the LLC's physical assets, it functions as a garnishment of the debtor's transferable financial rights and distributional interests. Despite evidence of conflicting ownership disclosures in tax returns and interrogatories, the court held that Arvest Bank's request to cover any interests held by either defendant was appropriate. The final ruling requires the specified LLCs to pay Arvest Bank all current and future distributions, draws, or other financial entitlements due to the Byrds until the underlying judgments and all accrued interest are paid in full. ♦

In re Denman, 513 B.R. 720 (W.D.Tenn., July 24, 2014).

♦ The United States Bankruptcy Court for the Western District of Tennessee addressed whether a member of a limited liability company could exercise a buy-out option triggered by a fellow member's bankruptcy filing. Debtors Derek and Marnie Denman filed a Chapter 13 petition, which constituted a triggering event under the operating agreement of Opus Medical Management, LLC, where Mr. Denman held a seventy percent membership interest. Dr. Michael Rack, a minority member, sought relief from the automatic stay to exercise his option to purchase Denman’s interest at a specified value. Chief Judge David S. Kennedy first determined whether the operating agreement was an executory contract under Section 365 or property of the estate under Section 541 of the Bankruptcy Code. Applying the Countryman standard, the court concluded that Tennessee limited liability company operating agreements are generally not executory contracts because they function as governance instruments rather than bilateral contracts. Specifically, under Tennessee law, a member’s failure to perform does not excuse other members from their obligations, and the structure of an LLC—which can include single-member entities—lacks the necessary mutual assent and consideration required of a traditional contract. Consequently, Denman’s membership interest became property of the bankruptcy estate upon the filing of the petition. The court further held that the buyout provision in the operating agreement was an unenforceable ipso facto clause under Section 541(c)(1)(B). This provision, which allows for the modification or forfeiture of a debtor’s property interest based solely on the commencement of a bankruptcy case, violates the Bankruptcy Code’s policy of preserving the estate to ensure a debtor’s fresh start. Because the underlying buyout provision was found invalid as a matter of law, Dr. Rack could not establish cause for relief from the automatic stay under Section 362(d)(1). The court ultimately denied the emergency motion, protecting the membership interest as an asset of the bankruptcy estate. ♦

In re DeVries, 2014 WL 4294540 (Bk.N.D.Tex., 2014).

♦ The United States Bankruptcy Court for the Northern District of Texas issued proposed findings of fact and conclusions of law regarding cross-motions for summary judgment in an adversary proceeding brought by the Chapter 7 Trustee against DeVries Family Farm, LLC. The central dispute involved the characterization of the debtor’s interest in a family-owned commercial dairy farm and the Trustee’s ability to exercise membership rights. The court determined that the company’s operating agreement, when integrated with a related cross-purchase agreement, constituted an executory contract because it imposed ongoing material obligations on members, including requirements to make capital contributions and provide personal guarantees for company debt. Because the Trustee failed to timely assume the operating agreement, it was deemed rejected by operation of law. The court concluded that this rejection functioned as a breach of contract under Section 365(g), which, pursuant to the agreement's terms, relegated the Trustee to the status of a mere assignee. Consequently, while the Trustee retained the debtor’s economic interests, she was no longer entitled to participate in management or exercise voting rights. Regarding the recovery of units transferred prepetition, the court ruled that if the transfers were avoided, the Trustee’s recovery under Section 550 would be limited to the return of the units themselves rather than their value, thereby avoiding complex valuation speculation. Additionally, the court held that a provision in the operating agreement waiving a member's right to seek judicial dissolution was unenforceable, reasoning that the Washington Limited Liability Company Act’s dissolution provisions are mandatory and cannot be waived by private agreement. Finally, the court denied summary judgment on the issue of the debtor’s insolvency, finding that despite the lack of expert testimony, the Trustee provided sufficient evidence to create a material dispute regarding the fair market value of the debtor’s assets at the time of the challenged transfers. ♦

Jack M. Sanders Family Limited Partnership v. Roger T. Fridholm Revocable Living Trust, 2014 WL 1603546 (Tex.App.Distr. 1, 2014).

♦ The Court of Appeals of Texas for the First District considered an appeal regarding the trial court's refusal to discharge a charging order. Initially, the Fridholm Trust and IPG Services Corporation secured a default judgment exceeding $600,000 against ESM and JRM. To facilitate collection, the trial court issued an agreed charging order in 2011, which required the Jack M. Sanders Family Limited Partnership (FLP) to redirect ESM’s partnership distributions to the judgment creditors. Years later, following the payment of federal tax liens, ESM assigned her 2.07 percent interest in FLP to the Jones Trust. Based on this transfer, FLP moved to discharge the charging order, arguing that ESM no longer possessed an interest to be charged. However, the trial court denied the motion and did not rule on the creditors' concurrent application for a turnover order and the appointment of a receiver. On appeal, the Court of Appeals primarily addressed whether it possessed jurisdiction to review the trial court's order. Under Texas law, appellate jurisdiction is typically limited to final judgments that dispose of all parties and claims, or specific interlocutory orders authorized by statute. The court determined that the order at issue was not final because it left several post-judgment requests unresolved and did not clearly state an intent to end the litigation. Additionally, the court rejected its argument that the order functioned as an appealable mandatory injunction, finding that it did not sufficiently determine substantive property rights or clarify the partnership's specific obligations. Drawing on the precedent established in Dispensa v. University State Bank, the appellate court held that such orders are interlocutory and unappealable. Consequently, the court dismissed the appeal for lack of jurisdiction, leaving the charging order in place and the underlying ownership disputes undecided at the appellate level. ♦

In re Wilson, 2014 WL 3700634 (Bk.N.D. Tex., 2014).

♦ The United States Bankruptcy Court for the Northern District of Texas addressed a motion by the Chapter 7 trustee to auction 200 membership units of Texas Star Refreshments, LLC held by debtor Rodney Wilson. The units represented a twenty percent interest in the company, which Wilson had retained following a previous Chapter 11 reorganization. Custom Food Group, a creditor and competitor, initiated the sale process with a seven thousand five hundred dollar offer. Wilson and another member, David Rogers, opposed the auction, arguing that the company agreement imposed valid transfer restrictions and a first right of refusal for existing members. They further contended that Wilson had claimed the units as exempt property with zero value. Custom Food Group countered that the company agreement was invalid due to clerical errors or should be deemed rejected as an unassumed executory contract. Judge Robert L. Jones determined that the company agreement remained valid and that its transfer restrictions were enforceable under the Texas Business Organizations Code. The court rejected the argument that the agreement was an executory contract, noting that the members' rights to participate in management did not constitute reciprocal obligations sufficient to meet that definition. While acknowledging that a charging order is typically the exclusive remedy for judgment creditors against a limited liability company interest under Texas law, the court held that a bankruptcy trustee must be permitted to liquidate estate assets to satisfy creditors. To maximize the value of the estate while respecting the contractual rights of the other members, the court authorized a sale via sealed bids. Crucially, the court permitted the existing members to match any high bid, thereby upholding the right of first refusal while ensuring the trustee could realize a fair market price for the membership units rather than being bound by a nominal book value. ♦

Joshlin Bros. Irrigation v. Sunbelt Rental, Inc., 2014 WL 248104, 2014 Ark. App. 65 (Ark.App., Unpublished, Jan. 22, 2014).

♦ The Court of Appeals of Arkansas addressed an appeal regarding a judgment entered against a partnership following a partner's unauthorized withdrawals in violation of a charging order. The litigation originated when Sunbelt Rental obtained a default judgment against Robert Joshlin, an equal partner in Joshlin Brothers Irrigation, for debt incurred in a separate business venture. To collect the judgment, Sunbelt secured a charging order directing the partnership to cease making distributions to Robert and instead redirect those payments to Sunbelt. Despite being served with the order, Robert withdrew funds from the partnership's bank account for his personal use before committing suicide. Consequently, Sunbelt initiated contempt proceedings against the partnership for the lost funds. During the contempt hearing, the remaining partner, Kenny Joshlin, argued that Robert’s fraudulent actions should not be imputed to the partnership under state law. The circuit court rejected this defense and entered a judgment against the partnership. On appeal, the partnership introduced new arguments based on sections 502 and 504 of the Uniform Partnership Act, asserting that these provisions defined a partner's transferable interest and established the exclusive remedy for judgment creditors. However, the appellate court declined to address these specific points, citing the well-established rule that arguments not raised or ruled upon in the lower court cannot be introduced for the first time on appeal. To circumvent this procedural bar, the partnership claimed in its reply brief that the circuit court’s failure to correctly apply the partnership statutes deprived it of subject-matter jurisdiction. The Court of Appeals rejected this characterization, clarifying that a court’s power to decide a case is independent of whether it interprets a statute correctly. It concluded that the circuit court maintained jurisdiction as the state court of original jurisdiction and that any alleged statutory misapplication was a substantive error that required timely preservation. Therefore, the court affirmed the lower court's decision, refusing to address the merits of the unpreserved arguments. ♦