2015 Opinions

2015 Site.Year2015ChargingOrderOpinions

2015 Charging Order Opinions

Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).

♦ The United States District Court for the Southern District of California addressed a motion by SPE LO Holdings, the assignee of Textron Financial Corporation, seeking a charging order against Michael S. Gallegos membership interest in two limited liability companies, Pacific Pearl Hotels, LLC and Pacific Pearl Hotel Management, LLC. Textron held a judgment exceeding twenty-one million dollars against Gallegos but had recovered only a minute fraction of the debt. The plaintiff relied on California Secretary of State documents to establish Gallegos involvement with the LLCs, noting that he was explicitly listed as a manager in those public records. Gallegos opposed the motion on three primary grounds: the alleged inadmissibility of the government records, insufficient service of process on the LLCs, and the failure of the plaintiff to prove he held a membership interest in the entities. Regarding admissibility, District Judge Larry Alan Burns took judicial notice of the Secretary of State filings, asserting they are public records whose accuracy cannot be reasonably disputed. On the issue of service, the court clarified that under the California Code of Civil Procedure, a judgment creditor can obtain a charging order without making the LLC a party, and service by mail on the debtor and the LLC is legally sufficient. However, the court found that the evidence regarding Gallegos membership interest was insufficient to meet the required substantial evidence standard. The court highlighted that while the records confirmed Gallegos served as a manager, the California Corporations Code allows for LLCs to be managed by non-members. Because statements made in legal briefs do not constitute evidence and the plaintiff offered no other proof of membership, the court denied the motion without prejudice. To prevent the debtor from avoiding the order, the court authorized SPE LO to pursue postjudgment discovery to ascertain Gallegos membership status. ♦

Wells Fargo Bank v. Barber, 2015 WL 470589 (M.D.Fla., Feb. 4, 2015).

♦ Involves efforts by judgment creditors Wells Fargo Bank and Regions Bank to collect a deficiency judgment totaling approximately 62.4 million dollars against Sabrina Barber and her company, Blaker Enterprises, LLC. Following a 2014 deposition, the banks alleged that Barber performed multiple fraudulent transfers of funds, including moving substantial sums through various bank accounts into Blaker Enterprises, an entity organized under the laws of Nevis. The defendants moved to dismiss the complaint, which contained counts for injunctive relief, foreclosure or a charging order against Barber’s membership interest in Blaker, and avoidance of transfers based on actual and constructive fraud under the Florida Uniform Fraudulent Transfer Act. In its February 2015 order, the United States District Court for the Middle District of Florida addressed several complex legal challenges. The court granted the motion to dismiss Count 1, ruling that injunctive relief is a remedy rather than a standalone cause of action. Regarding Count 2, the defendants argued the court lacked jurisdiction over Blaker because it was a foreign entity. However, the court held that a membership interest in a limited liability company is intangible personal property that follows the owner. Since Barber resided in Florida, her interest was subject to the court’s in rem jurisdiction. Furthermore, the court determined that Florida law, rather than Nevis law, governed the recovery because the property’s situs was Florida. The court also denied the motion to dismiss the fraudulent transfer claims in Counts 3 and 4, finding that the plaintiffs sufficiently alleged multiple badges of fraud, such as transfers to an insider and the debtor’s insolvency at the time of transfer. Finally, the court rejected a collateral estoppel argument, noting that preliminary injunction orders do not preclude subsequent findings on the merits. Ultimately, the court maintained the majority of the claims and required the defendants to answer. ♦

Kearney Construction Co., LLC v. Bank of America, N.A, 2015 WL 1499155 (M.D. Fla., 2015).

♦ The United States District Court for the Middle District of Florida addressed a Motion for Reconsideration filed by Defendant Bank of America regarding a prior order that denied its motion to reopen the case. The litigation originated in 2009 and resulted in a 2011 agreed final judgment in favor of Bank of America for over $7.6 million, after which the case was closed. In March 2015, Bank of America sought to reopen the action to enforce the judgment through charging orders on limited liability company and partnership interests. The Court initially denied the request to reopen and dismissed the associated motions as moot. Upon reconsideration, District Judge Virginia M. Hernandez Covington noted that while reconsideration is an extraordinary remedy used sparingly, a court’s jurisdiction is not exhausted by a judgment but continues until that judgment is satisfied. Consequently, the Court granted the motion in part, specifically acknowledging its ongoing jurisdiction to enforce the 2011 judgment until it is fully satisfied. However, the Court maintained its earlier refusal to formally reopen the case file, exercising its broad discretion over the binary status of the action. Furthermore, the Court declined to reinstate the motions for charging orders nunc pro tunc because Bank of America failed to comply with Local Rule 3.01(g), which requires moving parties to confer with opposing counsel in a good faith effort to resolve issues before filing. The Bank’s statement that opposing counsel simply had not responded was deemed insufficient. As a result, the motions for charging orders were denied without prejudice, allowing the Bank to refile them once they have properly complied with local meet-and-confer requirements. Ultimately, the Court’s order balanced the need for finality with the necessity of judgment enforcement while strictly mandating adherence to procedural rules. ♦

Regions Bank v. Hyman, 2015 WL 1912251 (M.D.Fla., April 27, 2015).

♦ The United States District Court for the Middle District of Florida addressed a dispute between two judgment creditors, Regions Bank and Travelers Casualty and Surety Company of America, regarding the priority of their claims against debtor Bing Charles W. Kearney, Jr.'s interests in several limited liability companies (LLCs). Regions Bank, holding an unsatisfied judgment of over $3.4 million, moved for a charging order against Kearney's interests in seven specific LLCs pursuant to Florida statutes and federal rules. Travelers, which held a prior judgment of $3.75 million and had recorded a judgment lien certificate in 2012, objected to the motion, asserting that its earlier filing granted it priority over Regions Bank's later efforts. Travelers further argued that for single-member LLCs, a charging order is not the exclusive remedy and that the court should determine priority based on the recording dates of the judgments. Regions Bank countered that it had been the diligent creditor, successfully litigating a fraudulent transfer action that forced the assets back into Kearney's name, and that it was the first to apply for the charging orders once the assets became available for execution. The court's analysis centered on the nature of LLC interests under Florida law, noting that such interests are personal property not subject to traditional execution under Florida Statute Section 56.061. The court concluded that because LLC and partnership interests are reached exclusively through charging orders or judicial foreclosure rather than through writs of execution, Travelers' judgment lien certificate did not establish priority over Kearney's LLC interests. Consequently, the court overruled Travelers' objection, granted Regions Bank's motion for the charging orders, and denied Travelers' request for reconsideration of a previous order regarding partnership interests, emphasizing that priority is generally established by the sequence in which judgment creditors apply for charging orders rather than the date of their underlying judgment liens. ♦

Gaslowitz v. Stabilis Fund I, LP, 2015 WL 1059575 (Ga.App., 2015).

♦ The Georgia Court of Appeals case Gaslowitz v. Stabilis Fund I, LP involved two joined appeals arising from a judgment creditor's efforts to collect a debt exceeding one million dollars from Adam Gaslowitz. In the first appeal, the creditor, Stabilis Fund I, LP, obtained a charging order against Gaslowitz's membership interest in his limited liability company and an order for an accounting of the company's assets. The appellate court affirmed the charging order, ruling that the Georgia Limited Liability Company Act allows a judgment creditor to receive distributions a member would otherwise receive until the judgment is satisfied. The court clarified that the creditor does not need to establish the exact remaining balance of the debt as a prerequisite for the order, as the charge is inherently limited to the unsatisfied portion of the judgment. However, the court reversed the trial court's order for an accounting of the company's assets. It explained that a charging order only grants the creditor the rights of an assignee, which do not include the right to an accounting under the relevant statutes. Additionally, because a member has no direct interest in specific company property, company assets are not subject to the individual debts of a member. In the second appeal, the court addressed a requirement for the appellants to post a supersedeas bond. It affirmed the bond requirement for Gaslowitz personally, finding that because a charging order involves the disposition of a member's property interest, a bond was appropriate to secure the creditor's rights during the appeal. Nevertheless, the court reversed the bond requirement for the legal entities G & A, LLC and G & A, Inc., noting they were not judgment debtors and the charging order did not involve the disposition of their property. The final ruling upheld the creditor's access to personal distributions while protecting the separate legal entities from unauthorized interference. ♦

Mahalo Investments III, LLC v. First Citizens Bank and Trust Co., Inc., 2015 WL 687922, _ S.E.2d ___ (Ga.App., Feb. 19, 2015).

♦ The Court of Appeals of Georgia addressed a matter of first impression regarding the procedural requirements for obtaining a charging order against a member's interest in a limited liability company under OCGA section 14-11-504(a). The case originated after First Citizens Bank obtained a multi-million dollar judgment against Mahalo Investments, Mark B. Epstein, and Andrew Kelly. To collect on this debt, the bank applied for a charging order in the same court and under the same case number as the original judgment, targeting the individuals' interests in several LLCs. The appellants challenged this procedure, contending that the statute required a separate legal action and that the trial court lacked jurisdiction because the LLCs themselves were not parties to the application. Upon review, the Court of Appeals affirmed the trial court's decision, emphasizing that the plain language of the statute only requires application to a court of competent jurisdiction. The court rejected the argument that language from the Georgia Uniform Partnership Act, which explicitly mentions the court that entered the judgment, should be read into the LLC statute to exclude that same court. Furthermore, the court clarified that a charging order is a collateral proceeding rather than an entirely new civil action, meaning it can be handled as an ancillary matter to the original judgment. Regarding the jurisdictional challenge, the court determined that because a charging order only grants the creditor the rights of an assignee to receive distributions and does not allow interference with the LLC's management or governance, the LLC's direct interests are not affected. Consequently, it is not necessary to join the LLC as a party or establish independent jurisdiction over it; jurisdiction over the judgment debtor alone is sufficient to authorize the entry of a charging order. ♦

Sullivan v. Mathew, 2015 WL 1509794 (N.D.Ill., 2015).

♦ The United States District Court for the Northern District of Illinois considered a motion to dismiss an adversary complaint filed by Chapter 7 Trustee Thomas Sullivan against the Arlington Heights Promenade Partnership. The Trustee sought the dissolution and winding up of the partnership after Ismail Faris filed for bankruptcy, asserting that the remaining partners failed to exercise their contractual right to purchase the debtor's interest within the required ninety-day period. The defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing that a partner had indeed made a written election to purchase the interest and, more critically, that the partnership agreement was an executory contract that the Trustee had rejected by operation of law. Regarding the election, the court held that the Trustee's claim was plausible since the purported election letters were sent by the debtor himself or arrived after the deadline, and thus did not warrant dismissal at the pleading stage. However, the court found the executory contract argument dispositive. Utilizing the Countryman definition, which classifies a contract as executory if material performance remains due on both sides, the court identified ongoing obligations such as management voting, potential capital contributions, and fiduciary duties as evidence of the agreement's executory nature. Under Section 365 of the Bankruptcy Code, the Trustee's failure to assume the agreement within sixty days meant it was deemed rejected. The court explained that while a debtor's economic property interest in partnership profits persists in the estate under Section 541, the management rights—including the power to compel dissolution—stem from the contract. Because the Trustee rejected the contract, he could no longer invoke its dissolution provisions. Consequently, the court granted the motion to dismiss for failure to state a claim, noting that the Trustee must seek recovery through other statutory mechanisms. ♦

Vision Marketing Resources, Inc. v. McMillin Group, LLC, 2015 WL 4390071 (D.Kan., July 15, 2015).

♦ The United States District Court for the District of Kansas addressed a plaintiff's request for a charging order against the defendants' interests in Buffalo Nickel Trading, LLC, a Georgia limited liability company. The plaintiff sought to satisfy a judgment of approximately 203,000 dollars arising from claims of breach of contract and fraudulent misrepresentation. Magistrate Judge Teresa J. James issued a Report and Recommendation, which was later adopted in full by District Judge Kathryn H. Vratil. The primary legal questions involved whether the court possessed the jurisdiction to issue such an order against a foreign entity not party to the suit and whether the relevant Kansas statute, K.S.A. 17-76,113, applied to limited liability companies formed outside of Kansas. The court determined that personal jurisdiction over the judgment debtors, James L. McMillin and McMillin Group, LLC, was sufficient to charge their property interests, regardless of lack of jurisdiction over the non-party Georgia LLC. It reasoned that a charging order acts as a lien on the debtor's right to receive future distributions and does not grant the creditor rights to possess LLC property or interfere with its internal operations, thereby not necessitating jurisdiction over the entity itself. Regarding the statutory scope, the court analyzed inconsistencies in Kansas law but concluded that K.S.A. 17-76,113 should be interpreted to include foreign LLCs. The court noted that excluding foreign entities would create a glitch hindering judgment creditors and forcing them to litigate in multiple jurisdictions. Consequently, the court sustained the plaintiff's request, ordered that the defendants' interests in the Georgia LLC be charged to satisfy the debt, and directed that any distributions due to the defendants be paid to the plaintiff until the judgment is fulfilled. ♦

In re Dzierzawski, 2015 WL 1612092 (Bk.E.D.Mich., 2015).

♦ Involves a Chapter 7 bankruptcy case where the United States Bankruptcy Court for the Eastern District of Michigan denied a debtor's motion to voluntarily dismiss his case under 11 U.S.C. sections 707(a) and 305(a)(1). The debtor, Randy K. Dzierzawski, sought dismissal approximately eighteen months after filing, promising a with prejudice dismissal and payment of administrative expenses. The motion was opposed by Vulpina, LLC, the debtor's largest creditor holding over 99 percent of allowed claims. Vulpina argued that dismissal would cause material prejudice to its ability to collect a judgment exceeding one million dollars. A central issue was Vulpina's pending fraudulent transfer action against the debtor's wife regarding a 100 percent interest in Vinifera Wine Co., LLC. The court found that inside bankruptcy, a successful avoidance would allow the Chapter 7 Trustee to liquidate the entity for the benefit of all creditors. However, the court predicted that outside of bankruptcy, Michigan's charging-order statute would limit Vulpina's remedy to a lien on distributions, which the debtor could easily manipulate to avoid payment. Judge Thomas J. Tucker rejected the debtor's argument that dismissal would reduce litigation burdens, noting that discovery disputes would simply relocate to non-bankruptcy forums. Additionally, the court found the debtor's proposed settlement with the Trustee, which would pay administrative costs and two minor creditors in full while leaving Vulpina with nothing, subverted the fundamental bankruptcy principle of equal distribution among similarly situated creditors. Because the debtor failed to demonstrate sufficient cause and the potential prejudice to Vulpina was significant and real, the court concluded that the interests of the creditors would not be better served by dismissal. Consequently, the court exercised its discretion to deny the motion, ensuring the case would proceed through full administration within the bankruptcy system. ♦

DiSalvo Properties, LLC v. Bluff View Commercial, LLC, 2015 WL 3759402 (Mo.App., 2015).

♦ The Missouri Court of Appeals addressed a question of first impression: whether a judgment creditor who obtains a charging order against a debtor's membership interest in a Missouri limited liability company is entitled to a court-ordered foreclosure and sheriff’s sale of that interest. The case stems from a default judgment of approximately 1.5 million dollars obtained by DiSalvo Properties against Debi Purvis. Seeking to satisfy the judgment, DiSalvo applied for a charging order against Purvis’s membership interests in two LLCs and requested that the court order those interests foreclosed and sold by the sheriff. While the trial court granted the charging order, it denied the request for foreclosure and sale, ruling that such remedies are unavailable under the Missouri Limited Liability Company Act. Upon review, the Court of Appeals affirmed the trial court’s judgment. The appellate court’s reasoning focused on statutory interpretation, specifically comparing Section 347.119 of the Missouri LLC Act with the Uniform Partnership Law and the Uniform Limited Partnership Law. The court observed that while the partnership statutes explicitly or implicitly authorize the foreclosure and sale of charged interests, the LLC Act contains no such language. Applying the legal canon of expressio unius est exclusio alterius, the court concluded that because the legislature was aware of the foreclosure provisions in partnership law when it drafted the LLC Act, the omission of similar provisions for LLCs was an intentional legislative act. The court further clarified that general equitable principles and prior case law regarding the foreclosure of liens could not override the specific statutory framework established by the General Assembly for limited liability companies. Ultimately, the court held that a judgment creditor’s remedy regarding an LLC membership interest is limited to the receipt of distributions as an assignee, and they may not force a foreclosure or sale. ♦

Becker v. Becker, 2015 WL 6550931 (Nev., 2015).

♦ The Supreme Court of Nevada addressed a certified question from the United States Bankruptcy Court regarding the scope of property exemptions for stocks in closely held corporations under NRS 21.090(1)(bb) and NRS 78.746. The case arose after Ernest A. Becker, IV, filed for Chapter 7 bankruptcy and claimed a full exemption for his stock in two small corporations, totaling over 1.5 million dollars. Creditors and the bankruptcy trustee challenged this, arguing the exemption only applied to noneconomic interests and that economic benefits like dividends should remain part of the bankruptcy estate. The Nevada Supreme Court conducted a de novo review of the statutes to determine if the law permitted a complete exemption. Analyzing the plain language of NRS 21.090(1)(bb), the court noted it exempts stock in certain corporations except as set forth in NRS 78.746. That section provides judgment creditors with a charging order remedy, which allows them to receive the distributions or dividends a shareholder would otherwise receive. The court explained that NRS 78.746 was designed to protect small, family-owned businesses from disruption by preventing creditors from seizing management control while still allowing them to satisfy debts through the debtor's economic interests. Consequently, the court held that while a debtor can exempt their stock in corporations with fewer than 100 stockholders that are not publicly traded, that exemption does not shield the economic interest from a charging order. The debtor retains noneconomic rights, such as management and voting, but the right to receive income from the stock remains accessible to creditors. The court further clarified that general exemption protections within NRS 78.746 simply ensure debtors can apply other specific exemptions, such as the wildcard exemption, to their economic interests, rather than granting a blanket exemption for all corporate stock. ♦

Knollman-Wade Holdings, LLC v. Platinum Ridge Properties, LLC, 2015 Ohio 1619, 2015 WL 1913565 (Ohio.App., 2015).

♦ The Tenth District Court of Appeals of Ohio analyzed the limitations of a trial court's authority when issuing a charging order against a limited liability company membership interest. The dispute began after Knollman-Wade Holdings (KWH) invested $275,000 in a hotel-acquisition venture based on a written guaranty from Platinum Ridge Properties (PRP). When PRP refused to honor the guaranty following KWH's exercise of a sell option, KWH filed suit and eventually secured a consent judgment for $288,330.07. Years later, seeking to satisfy the unpaid judgment, KWH applied for a charging order pursuant to Ohio Revised Code 1705.19(A) against PRP's interest in Platinum Polaris Investors, LLC. Although the parties agreed that a charging order was appropriate, they disputed its specific wording. The trial court ultimately adopted KWH's proposed language, which authorized the collection of withdrawals of capital and payments made through the judgment debtor. PRP appealed, contending that these specific phrases impermissibly expanded the scope of the rights granted to a judgment creditor under R.C. 1705.18(A). Upon review, the appellate court emphasized that the primary goal of statutory interpretation is to give effect to the legislature's intent as expressed through the plain language of the statute. The court found that R.C. 1705.18(A) is unambiguous, entitling an assignee only to specific distributions and allocations. By adding terms like withdrawals of capital and payments through the debtor, the trial court had improperly enlarged the statutory text. The appellate court concluded that if the General Assembly had intended to include such items, it would have done so explicitly. Therefore, the court reversed the trial court's judgment and remanded the case with instructions to enter a new charging order that precisely tracks the language of the statute, reaffirming that courts may not add words to clear legislative enactments. ♦

Earthgrains Baking Co. v. Sycamore Family Bakery, Inc., D.Utah Case No. 09CV523 (Aug. 21, 2015).

Moved to here.

Zazzali v. Wavetronix LLC (In re DBSI, Inc.), 2015 WL 12683817 (D.Idaho, 2015).

♦ The U.S. District Court for the District of Idaho addressed Wavetronix’s motion for partial summary judgment seeking a ruling that Stellar Technologies, LLC—an indirect DBSI affiliate whose interest in Wavetronix became part of DBSI’s Chapter 11 bankruptcy estate—had been “dissociated” as a Wavetronix member and therefore held only an economic assignee interest with no management or voting rights. Wavetronix argued dissociation occurred under its operating agreement and Idaho LLC law due to (1) an alleged substantial change in Stellar’s management and control by the Chapter 11 Trustee, (2) an alleged transfer of more than 5% of Stellar’s beneficial interest without the other members’ consent, and (3) a unanimous post-confirmation vote (excluding Stellar) acknowledging and confirming dissociation. The Liquidating Trustee opposed, contending these dissociation triggers were unenforceable under the Bankruptcy Code’s ipso facto doctrine, particularly 11 U.S.C. § 541(c), which invalidates contractual or statutory provisions that forfeit, modify, or terminate a debtor’s property interest based on insolvency, bankruptcy, or a trustee’s taking possession. The court held the confirmation order preserved, rather than waived, the applicability of § 541(c); found the alleged dissociating events fell within § 541(c)’s protections (or lacked adequate factual support); concluded the operating agreement was not an executory contract under § 365; and determined the equities did not favor either side. Because Wavetronix failed to establish dissociation as a matter of law on undisputed material facts, the court denied the motion. ♦