2016 Opinions

2016 Site.Year2016ChargingOrderOpinions

2016 Charging Order Opinions

Arayos, LLC v. Jimmie Ellis, 2016 WL 1642676 (S.D.Ala., 2016).

♦ The United States District Court for the Southern District of Alabama ruled on an application for a charging order against the membership interests of John M. Vellianitis in four limited liability companies. The plaintiff, Arayos, LLC, was attempting to collect on a default judgment from the District of Maine totaling 1,288,210.72 dollars, which had been registered in the Southern District of Alabama. The application targeted two Alabama companies, VMJ, LLC and JPV Hospitality Group, LLC, as well as two foreign entities, Lodge Entertainment, LLC and Jonesboro Investments, LLC, incorporated in Wyoming and Nevada. Chief Judge William H. Steele found that while the Alabama charging order statute, section 10A-5-6.05(a), applied to the domestic Alabama LLCs, it did not extend to the foreign entities. The court noted that the plaintiff failed to provide sufficient evidence that Vellianitis was actually a member of the foreign LLCs, rather than just a registered agent. More fundamentally, the court interpreted the Alabama statute's definitions of member and limited liability company as being strictly restricted to entities formed under Alabama law. Consequently, the court granted the charging order for the Alabama-based companies, requiring them to report all distributions and redirect funds due to Vellianitis to the plaintiff until the judgment is satisfied. However, the court denied the request regarding the Wyoming and Nevada companies, ruling that the Alabama code does not empower the court to charge interests in foreign limited liability companies. The decision emphasizes the jurisdictional limits of state-specific charging order statutes and the necessity for judgment creditors to establish clear proof of a debtor's membership status and the local formation of the targeted entities when seeking relief under this specific statutory provision. ♦

U.S. v. Alexander, 2016 WL 2893406 (D.Ariz., May 18, 2016).

♦ The United States District Court for the District of Arizona ruled on a government motion seeking a charging order to satisfy a significant restitution debt. Following a 2006 judgment, the defendant was ordered to pay approximately nine point nine million dollars to victims, a commitment he initially met through monthly payments until the government increased the required amount beyond his financial capacity. To recover the outstanding balance, the government moved to charge Alexander’s interest in E-Logic, LLC, a company where he is the sole member and primary service provider. The court affirmed that federal law allows for the enforcement of such judgments using state procedures, and specifically, Arizona law permits a court to charge a member’s interest in an LLC with the unpaid judgment amount. However, the court emphasized that such an order does not grant management rights but only the right to receive distributions. Crucially, the court addressed the defendant’s objection that the order should be limited by state garnishment laws. Interpreting Arizona statutes, the court found that the distributions Alexander received from his LLC constituted compensation for personal services and thus qualified as protected earnings. Under Arizona law, garnishment is restricted to twenty-five percent of an individual's disposable earnings, and this exemption remains applicable even when a charging order is issued against an LLC interest. Consequently, while the court granted the government’s motion, it explicitly capped the collection at twenty-five percent of the defendant’s disposable earnings. The order requires E-Logic to surrender all distributions and profits to the Clerk of Court until the total liability is resolved, while establishing the charging order as a formal lien. This ruling highlights the intersection of federal judgment enforcement and state-level debtor protections regarding personal service income. ♦

Dream Games v. PC Onsite LLC, 2016 WL 1554978 (April 18, 2016).

♦ No Synopsis ♦

Delaware Acceptance Corp. v. Estate of Metzner, 2016 WL 632893 (Del.Ch., Unpublished, Feb. 17, 2016).

♦ The Delaware Court of Chancery considered motions for summary judgment and clarification regarding a creditor's claim against a decedent's estate. The dispute originated when Delaware Acceptance Corp. and associated entities, known as the Creditor, sought to recover approximately forty-one thousand dollars from the Estate of Frank C. Metzner, Sr. This claim was based on a 2010 charging order against the deceased’s interest in the Metzner Family, LLC. The Creditor asserted that the LLC dissolved automatically upon Metzner’s death in 2012, thereby subjecting his interest to their claims. The Defendants, however, produced a document indicating that the surviving members had elected to continue the LLC within the required ninety-day period. The Defendants moved for summary judgment, arguing the underlying judgments and the charging order had expired under Delaware law because the Creditor had not sought a writ of scire facias to revive them after five years. Master Ayvazian rejected this argument, noting that Delaware has no statute of limitations on judgments, only a twenty-year presumption of payment. Since the charging order was initially issued within the five-year statutory window, it remained valid without the need for additional judicial permission. Additionally, the Court addressed a discovery conflict concerning the electronic metadata of the election document. The Creditor presented a reasonable suspicion that the document was backdated to appear as if it were executed within the legal timeframe. The Master recommended that the Creditor be allowed to seek the metadata from the computer network of the Defendants' former law firm to verify the document's actual creation date. The Master concluded by recommending the denial of the motions for summary judgment and reargument while granting the request to clarify the order for metadata production, with the Creditor bearing the associated costs of discovery. ♦

Biscayne Contractors, Inc. v. Redding, 2016 WL 6996125 (D.C.D.C., Nov. 29, 2016).

♦ The United States District Court for the District of Columbia considered a motion by garnishee Mohammed Abu-El-Hawa to set aside a 350,000 dollar judgment of condemnation. The litigation arose from Biscayne Contractors' efforts to satisfy a judgment against James Redding by garnishing payments due on a promissory note Redding received from Abu-El-Hawa for a 49 percent interest in TBM Holdings, LLC. Although Abu-El-Hawa initially failed to respond to a writ of attachment while proceeding pro se, resulting in a default judgment for the note’s full value, he later moved for relief under Federal Rule of Civil Procedure 60(b). He contended that he had already paid the 350,000 dollars to Redding’s creditors at Redding’s direction. Judge Gladys Kessler analyzed whether Abu-El-Hawa presented a meritorious defense, whether his default was willful, and whether setting aside the judgment would prejudice the plaintiff. The court determined that while most of the payments constituted valid performance under black-letter contract law, some did not. Specifically, the court found that approximately 19,000 dollars in payments predated the promissory note and thus could not satisfy its terms. Furthermore, the court held that roughly 59,000 dollars in payments made after Abu-El-Hawa received actual notice of a court-ordered charging order were willful violations and could not be used as a defense. Determining that the garnishee should not be forced to pay the same debt twice except where he lacked a valid defense or acted willfully, the court granted the motion in part. It reduced the judgment against Abu-El-Hawa by 272,144.02 dollars, leaving an amended judgment of condemnation totaling 77,855.98 dollars. This ruling balanced the garnishee’s failure to formally respond with the substantive evidence of his prior debt satisfaction, thereby avoiding a windfall for the plaintiff while upholding the integrity of the court’s orders. ♦

SEC v. Detroit Memorial Partners, LLC, 2016 WL 6595942 (N.D.Ga., Nov. 8, 2016).

♦ The United States District Court for the Northern District of Georgia addressed the distribution of approximately $13 million in assets recovered following a securities fraud scheme. The case centered on a Motion to Approve Plan of Distribution filed by the receiver for Detroit Memorial Partners (DMP), Jason S. Alloy, which proposed using a rising tide methodology to equalize recoveries for all claimants. Two primary objections were raised against this plan. First, Robert D. Terry, the receiver for the related Summit Investment Fund schemes, requested the court pool the DMP and Summit receiverships into a single estate. Terry argued that the schemes were inextricably intertwined and that separate administrations were inequitable. However, the court denied this request, finding that the two schemes were led by different architects, involved distinct investment objectives, and maintained separate financial accounts. Applying a good cause test, the court concluded that the investors were not similarly situated and that there was no unified fraudulent scheme warranting consolidation. The second objection came from Leonard J. Walter, who held a pre-receivership charging order and lien against DMP’s membership interest in Midwest Memorial Group. Walter argued that as a secured lien creditor, he was entitled to have his judgment paid in full before distributions were made to unsecured creditors. The court sustained Walter's objection, ruling that while equitable receiverships grant broad discretion, they must respect valid property rights and priority liens established under state law. Consequently, the court ordered Walter be paid $204,996.02 from specific settlement funds before the remaining assets were distributed pro rata. Ultimately, the court approved the DMP Receiver’s rising tide plan as amended, finding it to be a fair and equitable method for apportioning the remaining assets among the victims of the fraud. ♦

Merrill Ranch Properties, LLC v. Austell, 2016 WL 1176823 (Ga.App., 2016).

♦ The Court of Appeals of Georgia reviewed a trial court's grant of summary judgment in a case involving alleged fraudulent transfers under the state's Uniform Fraudulent Transfers Act. The underlying dispute followed a default on a 100 million dollar loan and its subsequent deficiency judgment, which were eventually assigned from Peoples Bank to the plaintiff. The plaintiff sought to void several asset transfers made by various entities and trusts connected to the borrower and guarantors, claiming the transfers were executed to hinder debt collection. On appeal, the court first addressed the validity of the loan assignment, reversing the trial court by holding that the loan had been effectively transferred via written allonge. However, the appellate court affirmed that the plaintiff lacked standing to challenge transfers made by non-judgment debtor limited liability companies. It ruled that obtaining a charging order against an LLC member's interest does not create a direct debtor-creditor relationship with the LLC itself, nor does it allow a creditor to reach specific company assets to satisfy a member's personal debt. Furthermore, the court applied Georgia's anti-assignment statute to bar claims for fraudulent transfers that occurred before the plaintiff was assigned the debt, noting that such claims were non-assignable under the laws in effect at that time. Regarding the only transfer made directly by a judgment debtor, known as the Item Nine Will Transfer, the court reversed the summary judgment. While the defendants argued the claim was time-barred, the appellate court remanded the matter for the trial court to determine if the one-year discovery period should apply due to evidence suggesting the deliberate concealment of assets. Consequently, the appellate ruling affirmed the limitations on creditor standing and claim assignability while allowing for further litigation on the direct transfer claim. ♦

Leasing Innovations, Inc. v. R&D Mainman Family Limited Partnership, 2016 NY Slip Op 31330(U) (N.Y. County Super., 2016).

♦ The Supreme Court of New York County presided over a legal battle between a judgment creditor and a group of respondents including the judgment debtor and two family-owned limited partnerships. The petitioner sought an order under New York Civil Practice Law and Rules to compel the delivery of the debtor's limited partnership interests to the sheriff for the purpose of satisfying a significant judgment exceeding one hundred and thirty-seven thousand dollars. In response, the respondents filed a motion to dismiss, asserting that the specific terms of their partnership agreements and Section 111 of the Partnership Law provided them with a superior right to redeem or purchase the debtor's interests at a calculated book value, which they claimed was effectively negative. Judge Geoffrey D. Wright ultimately denied the motion to dismiss and granted the petition in part. The court issued a charging order under the Revised Limited Partnership Act, directing the partnerships to pay the judgment using the debtor’s allocated distributions and profits. Furthermore, the court ordered the respondents to provide all necessary documentation to the Sheriff of New York County to facilitate the transfer of the debtor's interests, though it implemented a ninety-day stay on the enforcement of this turnover. The court also issued an injunction prohibiting the partnerships from making any payments to the debtor while the judgment remained outstanding. While the judge upheld the enforceability of partnership terms that restrict ownership to family members, he determined that the partnerships could not use buy-back provisions to block the creditor's right to a sheriff's sale. This decision effectively prioritized the creditor's right to enforce a legal judgment via a charging order while respecting the underlying contractual structure of the family limited partnerships. ♦

In re Talbut, 2016 WL 937373 (N.D.Ohio, Slip Copy, 2016).

♦ The United States Bankruptcy Court for the Northern District of Ohio considered a Chapter 7 Trustee's motion to sell a debtor's twenty-five percent interest in Cold Spring Farm, LLC, free and clear of external interests. The primary legal dispute concerned whether the Trustee could bypass the LLC's operating agreement, which granted the company a right of first refusal on any sale of membership interests. The Trustee contended that under Section 544(a) of the Bankruptcy Code, he held the status of a judicial lien creditor and could therefore foreclose upon the debtor's economic interest regardless of the operating agreement's restrictions. He specifically relied on Virginia Code Section 13.1-1041.1, arguing that Virginia law permitted such a foreclosure. However, Judge Mary Ann Whipple denied the motion, ruling that the Trustee had not established the legal authority to conduct a sale free and clear under Section 363(f). The court's analysis focused on the specific language of the Virginia charging order statute. Judge Whipple observed that the statute designates a charging order as the exclusive remedy for judgment creditors seeking to satisfy a debt from a member's LLC interest. Crucially, the court found that this remedy is limited to the right to receive distributions and does not include the right to foreclose on or force the sale of the membership interest itself. The court further noted that the Virginia legislature had amended the statute in 2006 to remove language that previously allowed for foreclosure, signaling a clear intent to limit creditor remedies. Because Virginia law did not permit a judgment creditor to compel a sale, the Trustee could not satisfy the conditions of Section 363(f)(1) or (f)(5). Ultimately, the court denied the motion without prejudice, suggesting that any future attempts to sell the interest must comply with the procedural requirements established in the LLC's operating agreement. ♦

Berish Berger v. Eli Weinstein, 2016 WL 1359459 (E.D.Pa., April 6, 2016).

♦ The U.S. District Court for the Eastern District of Pennsylvania granted a preliminary injunction to judgment creditors seeking to collect a 33 million dollar judgment against Ravinder Chawla. The creditors alleged that Ravinder evaded his obligations for over five years by fraudulently transferring assets into the name of his wife, Jatinder Chawla, to appear insolvent while maintaining a lifestyle funded by family business distributions. Evidence revealed that although Jatinder held significant ownership interests in real estate entities like Auroras Encore and Philadelphia Chancellor, LP, she contributed no capital, performed no management services, and possessed virtually no knowledge of the business operations or investments. Conversely, Ravinder remained highly active in negotiating deals and identifying properties but claimed to receive no direct compensation, living instead on stipends and management fees paid to his wife. While the court acknowledged the glaring disparity between Ravinder's professional activity and his claimed insolvency, it determined that under Pennsylvania law and Federal Rule of Civil Procedure 69, it lacked the authority to retitle assets or declare a de facto partnership during supplementary execution proceedings, as doing so would bypass necessary trial safeguards. Nonetheless, the court invoked its equitable powers to issue a preliminary injunction, finding that the creditors faced irreparable harm from the purposeful dissolution of assets and that Jatinder was acting in active concert with her husband to thwart the judgment. The court concluded that an injunction was necessary to preserve assets, such as the proceeds from a pending 25 million dollar sale of the Chancellor Street property, pending further collection efforts. To protect the defendants against potential wrongful restraint, the court ordered the creditors to post a one million dollar bond. Judge Schiller's ruling emphasized that the public interest favors the enforcement of valid judgments against debtors who employ sophisticated dodges to remain judgment-proof. ♦

Macharg v. Macharg, 2016 WL 6777526, 2016 PA Super 254 (Pa.Super., Nov. 16, 2016).

♦ The Superior Court of Pennsylvania reviewed a trial court order that denied a plaintiff wife essential tools for enforcing a substantial divorce judgment against her former husband. Following their divorce in Vermont, the plaintiff registered a judgment for over three hundred and forty-six thousand dollars in Pennsylvania, where the defendant held ownership interests in five different entities. Although a prior order directed that distributions from these companies be paid to the plaintiff, the judgment remained largely unpaid. The plaintiff subsequently moved for supplementary relief in aid of execution to preserve the defendant’s corporate shares and applied for a charging order and judicial sale of his nineteen percent interest in a limited partnership known as 1700 Broadway Limited. The trial court denied both requests, reasoning that the ongoing distribution payments maintained the status quo. However, the Superior Court reversed this decision, holding that the trial court misapplied the law. The appellate court explained that the purpose of Rule 3118 is to ensure that a debtor’s property remains available for execution and is not transferred or sold to third parties, regardless of whether distributions are being made. Regarding the partnership interest, the court clarified that Pennsylvania statutes authorize the judicial sale of interests in both general and limited partnerships. The court further determined that the trial court’s refusal to order a sale was an abuse of discretion because the annual distributions received by the plaintiff were significantly less than the interest accruing on the debt, meaning the principal would never be satisfied. Highlighting the public policy that debtors must pay their debts, the court vacated the lower court’s order and remanded the case for the entry of orders to facilitate the execution against the defendant’s assets. ♦

Rogers Group, Inc. v. Gilbert, 2016 WL 2605651 (Tenn.App., May 3, 2016).

♦ The Court of Appeals of Tennessee at Nashville addressed the jurisdictional question of whether a trial court's entry of a charging order against a member's interest in a limited liability company constitutes a final judgment appealable as of right. The litigation began after Rogers Group obtained a judgment for $214,071.62 against Phillip Gilbert and subsequently moved for a charging order against his interest in Grandview Farms, LLC. Gilbert opposed the motion, claiming his interest was held as tenants by the entirety and was therefore protected from the order. The trial court granted the charging order, prompting Gilbert to appeal. Rogers Group moved to dismiss the appeal, contending that the order was not final because it did not resolve all issues pending in the trial court. In its analysis, the Court of Appeals evaluated the nature of charging orders under Tennessee Code Annotated section 48-249-509, comparing them to garnishment proceedings. The court noted that the specific order required the LLC to file a sworn answer reporting the value of Gilbert's financial rights and any distributable funds. Because the LLC had not yet filed this answer, the trial court could not yet determine the exact amount of indebtedness or issue a final order to satisfy the judgment. The appellate court found that because significant steps remained for the parties and the trial court to accomplish to provide the remedy contemplated by the statute, the charging order lacked the finality required for an appeal. Consequently, the Court of Appeals dismissed the appeal for lack of subject matter jurisdiction and remanded the case to the trial court to allow for the LLC's compliance and the eventual entry of a final judgment. ♦

Devoll v. Demonbreun, 2016 WL 4538805 (Tex.App., Aug. 31, 2016).

♦ The San Antonio Court of Appeals addressed whether a trial court abused its discretion in granting a temporary injunction against Gene DeVoll to prevent him from transferring or encumbering partnership property. The legal battle originated from a suit by judgment creditors Rebecca Demonbreun and William Dowds, who alleged that Gene participated in a fraudulent transfer of a partnership interest from his brother, Norris DeVoll, to protect it from a charging order. Gene primarily contended that Section 152.308 of the Texas Business Organizations Code, which governs partnership charging orders, establishes an exclusive remedy and specifically bars creditors from seeking equitable relief against partnership assets. In a significant ruling, the court harmonized the charging order statute with the Texas Uniform Fraudulent Transfer Act (TUFTA). The court determined that the charging order statute’s limitations on remedies are intended to protect partnership business operations from outside debt collection but were not meant to facilitate fraudulent activity. It held that a trial court may grant injunctive relief under TUFTA to preserve assets underlying a partnership interest when a fraudulent transfer is asserted, provided the restraint is the minimum necessary to protect the creditor's potential interest. The court also disposed of Gene's additional challenges, including a statute of repose defense, concluding the suit was filed within the applicable four-year window. Furthermore, the court found that the creditors had adequately proven a probable right to relief and the likelihood of irreparable injury if the assets were dissipated. The appellate court also upheld the trial court's evidentiary decisions and found the nominal one-hundred-dollar injunction bond to be within the court's discretion. Consequently, the court affirmed the temporary injunction, ensuring the partnership's principal real estate asset remained secured during the ongoing fraudulent transfer litigation. ♦

Spates v. Office of the Attorney General, 2016 WL 354417 (Tex.App.14th Dist., Jan. 28, 2016).

♦ The Fourteenth Court of Appeals of Texas addressed the validity of a charging order issued to collect child support arrearages from a member's interest in a limited liability company. The Office of the Attorney General (OAG) intervened in a breach of contract lawsuit brought by Prodigy Services, LLC, against Eni U.S. Operating Company. Christopher Spates, the sole member of Prodigy, owed significant child support debts reduced to judgments in various family courts. The OAG sought and obtained a charging order from the trial court where the Prodigy-Eni suit was pending, requiring Prodigy to redirect any distributions intended for Spates to the Texas State Disbursement Unit until his debts were satisfied. On appeal, Spates and Prodigy challenged the trial court's personal and subject matter jurisdiction, arguing that only the specific family courts that issued the original support judgments could enforce them. The appellate court first dismissed Spates's individual appeal, determining he lacked standing because he was not a party to the underlying suit and a member's interest in an LLC does not constitute an interest in the company's specific property. Regarding Prodigy's appeal, the court held that while charging orders are often interlocutory, this specific order was appealable because it resolved substantive property rights and imposed explicit obligations on a third party. On the merits, the court affirmed the trial court's judgment, ruling that under the Texas Business Organizations Code and Family Code, child support judgments may be enforced as money judgments in any court of competent jurisdiction. The court clarified that the OAG, as a judgment creditor, may seek a charging order in any court with jurisdiction over the limited liability company to satisfy a judgment from a debtor's membership interest. The court concluded that the trial court properly exercised jurisdiction to issue the charging order as an exclusive remedy for the OAG, regardless of whether Spates was a formal party to the litigation. ♦