2019 Opinions

2019 Site.Year2019ChargingOrderOpinions

2019 Charging Order Opinions

MDQ, LLC v. Gilbert, Kelly, 2019 WL 948726 (Cal.App., Distr. 2, Feb. 27, 2019).

♦ TThe California Court of Appeal adjudicated a priority dispute within an interpleader action involving competing claims to distributions from limited liability companies. The conflict arose between Cleopatra Records, a judgment creditor with a recorded judgment lien, and the law firm Gilbert Kelly, which held an earlier assignment from the debtor, Floyd Mutrux. In April 2015, Mutrux irrevocably assigned a percentage of his economic rights in the MDQ entities to Gilbert Kelly to secure payment for legal services. Later that year, Cleopatra obtained a significant money judgment against Mutrux and a subsequent charging order that created a lien on his transferable interests. Gilbert Kelly contended its interest was an absolute transfer that preceded the judgment and therefore fell outside the reach of the charging order. However, the appellate court affirmed the trial court’s finding that the assignment created a security interest in personal property governed by Division 9 of the California Uniform Commercial Code (UCC). Under the UCC, security interests in payment intangibles generally require the filing of a financing statement for perfection against third parties. Because Gilbert Kelly did not file a UCC-1 statement, its interest remained unperfected. Applying Code of Civil Procedure section 697.590, the court held that Cleopatra’s perfected judgment lien was superior to Gilbert Kelly’s unperfected security interest despite the assignment occurring first. The court also upheld an order requiring Gilbert Kelly to bear the attorney fees and costs of the interpleader plaintiffs, ruling that the trial court had the discretionary authority to shift these costs to the claimant whose erroneous legal position necessitated the litigation. This decision underscores that parties seeking to protect assigned economic interests must comply with UCC perfection requirements to maintain priority over subsequent judgment creditors. ♦

Pansky v. Barry S. Franklin & Assoc., 2019 WL 581620 (Fla.App., Feb. 13, 2019).

♦ The case of Pansky v. Barry S. Franklin and Associates, P.A. represents a significant appellate review of a Florida trial court's nonfinal order which authorized both a charging order and the direct transfer of Daniel Pansky's right, title, and interest in Daniel Pansky, LLC to a judgment creditor. The appellee, a law firm that had transitioned from Pansky's legal counsel in a divorce proceeding to his judgment creditor following unpaid attorney's fees, sought to satisfy its monetary judgments by targeting Pansky's ownership interest in his limited liability company. While Pansky acknowledged the law firm's legal right to a charging order, he vehemently opposed the forced transfer of his actual ownership interest. Upon review, the Fourth District Court of Appeal determined that the trial court overstepped its statutory boundaries as defined by section 605.0503 of the Florida Statutes. This statute explicitly provides that a charging order is typically the sole and exclusive remedy for a judgment creditor to reach a member's interest, functioning essentially as a lien on distributions that would otherwise be paid to the debtor. The court highlighted that while more aggressive remedies, such as the sale of an interest via foreclosure, might be available for single-member LLCs if distributions are insufficient, a critical factual dispute remained regarding whether the entity in question had one or two members. The appellate court found it problematic that the trial court issued an order transferring Pansky's total interest before resolving this membership status. Drawing on established precedents like Abukasis v. MTM Finest, Ltd., the court reaffirmed that there is no statutory basis for the direct transfer of property interests in satisfaction of money judgments. The ruling underscores that a charging order is intended only to redirect economic benefits rather than seize managerial control or title. Thus, the court reversed the order and remanded the case for proper factual findings. ♦

Preservation Holdings, LLC v. Norberg, 2019 IL App (1st) 181136 (June 14, 2019).

♦ The Appellate Court of Illinois affirmed a circuit court order confirming the judicial sale of various limited liability company and limited partnership interests belonging to defendant Pamela Gleichman to satisfy substantial outstanding judgments. The legal proceedings began after several final judgments from Maine state courts were domesticated in Cook County, Illinois, pursuant to the Uniform Enforcement of Foreign Judgments Act. Following this domestication, the circuit court imposed charging orders on Gleichman's distributional and transferable interests in 51 specific entities and subsequently granted a motion to foreclose. At a public judicial sale, the Cook County sheriff sold Gleichman's interests in two LLCs and 46 limited partnerships as a collective group to the Promenade Trust for 4.8 million dollars. Gleichman appealed the sale's confirmation, raising four primary arguments. She first contended that the sale price was unconscionably low, offering an expert affidavit that valued the underlying real estate portfolio at over 25 million dollars. The court rejected this argument, noting that the expert valued the properties in their entirety rather than focusing on the specific distributional interests being sold, which lack management rights and are subject to significant discounts in forced sale environments. Next, Gleichman argued that the interests should have been sold individually rather than en masse. The appellate court found this point forfeited because Gleichman failed to raise a timely objection during the confirmation hearing. She also challenged the inclusion of two specific entities, Stanford Management and Acadia Maintenance, but the court ruled this argument was also forfeited and that the assets were reachable via a revocable trust. Ultimately, the court found no evidence of fraud or irregularity, concluding that the sale was just and complied with the mandatory requirements of the Illinois Code of Civil Procedure. The appellate court affirmed the decision, upholding the judicial sale. ♦

Wells Fargo Equip. Fin. v. Retterath, 2019 WL 1574686 (Iowa, April 12, 2019).

♦ The Supreme Court of Iowa affirmed a district court ruling in Wells Fargo Equipment Finance, Inc. v. Retterath, upholding a charging order against a judgment debtor's membership interests in an Iowa limited liability company. The dispute involved Jason and Analia Retterath, Florida residents who held units in Homeland Energy Solutions, LLC, an Iowa entity. Wells Fargo, holding Florida judgments against Jason, registered those judgments in Iowa and obtained a charging order to satisfy the debt. The Retteraths petitioned to vacate the order, contending that their membership units were held as a tenancy by the entireties under Florida law, a form of joint ownership that protects marital property from the individual debts of one spouse. The primary legal question was whether the law of the owners' domicile or the law of the state of the LLC’s formation governed the interest. In a significant matter of first impression, the Court determined that the situs of an LLC membership interest is the state where the entity was formed. This holding recognizes that charging orders are directed toward the LLC itself to redirect distributions, making the LLC's location the most stable and uniform jurisdictional point. Consequently, Iowa law applied, and since Iowa does not recognize tenancy by the entireties, the exemption claim failed. The Court also addressed procedural challenges, ruling that a clerk's failure to docket the mailing of the foreign judgment notice was a mere technicality that did not invalidate jurisdiction because the debtor received actual notice. Additionally, the Court rejected due process arguments regarding the notice requirements of the Uniform Enforcement of Foreign Judgments Act, concluding that the original litigation in Florida provided sufficient procedural protections for the debtor’s property interests. By affirming the lower court's decision, the Supreme Court solidified the application of Iowa law to interests in domestic LLCs regardless of the member's outside domicile. ♦

In re Graves Farms, 2019 WL 3407134 (Bk.D.Kan., July 26, 2019).

♦ The United States Bankruptcy Court for the District of Kansas denied the confirmation of a second amended Chapter 12 Joint Plan involving a partnership and its individual partners. The plan proposed that Kylee Graves, a non-debtor and daughter of one partner, would operate the farming assets, contribute personal assets and credit lines, and make balloon payments by 2023 to satisfy secured claims held by RCB Bank. However, Judge Robert E. Nugent found the plan unworkable for several legal and factual reasons. Primarily, the court determined the plan was not feasible under Section 1225(a)(6). Adverse weather and late planting schedules created significant doubt regarding projected crop yields, and there was no evidence that Kylee could secure the necessary refinancing for the substantial balloon payments. Furthermore, the Joint Plan suffered from serious structural flaws by improperly mingling the partnership estate with individual estates and the assets of a non-debtor. The court noted that the plan ignored fundamental Kansas partnership law, particularly regarding the Bank's status as a transferee of partnership interests and the dissociation of the partners following their bankruptcy filings. Because the individual partners, Dean and Mike Graves, lacked sufficient independent income to cover their tax liabilities and other obligations without partnership distributions—which were legally precluded or earmarked for unsecured creditors—their specific plans were also deemed unfeasible. While the court rejected the Bank's allegations of bad faith, citing Kylee's sincere efforts and personal financial risk to save the family farm, it concluded that the legal requirements for confirmation had not been met. Consequently, the partnership's case was dismissed, and the individual debtors were granted fourteen days to amend their plans or convert their cases. The decision emphasizes the necessity for Chapter 12 plans to maintain the distinct legal identities of separate estates and provide realistic, evidence-based assurances of financial viability. ♦

Open Road Trucking, LLC v. Swanson, 2019 WL 6768443 (N.D., Dec. 12, 2009).

♦ The North Dakota Supreme Court examined whether a judgment debtor who pays a joint and several liability in full may take an assignment of that judgment to enforce a right of contribution against a co-debtor. The dispute arose after Western State Bank secured a judgment exceeding 1.3 million dollars against Leland Swanson and James Lund. Swanson paid the total amount to the bank and received an assignment of the judgment, which he subsequently assigned to Open Road Trucking. Open Road sought a charging order against Lund's interests in various limited liability companies to recover Lund's proportionate share, roughly half of the original debt. The district court initially denied this request and directed a satisfaction of the judgment, concluding that Swanson's payment extinguished the debt entirely, leaving no unsatisfied portion to justify a charging order under state law. On appeal, the Supreme Court reversed these components of the lower court’s rulings. Chief Justice VandeWalle, writing for the court, clarified that while performance of an obligation by one joint debtor extinguishes the liability to the original creditor, it also creates a statutory right to contribution from the co-obligor. The Court adopted a rule used in other jurisdictions, holding that a paying debtor or their assignee may take an assignment of the judgment specifically for the purpose of enforcing contribution. This approach avoids the inefficiency of requiring a separate legal action to establish a right that was already implicit in the original judgment. The Court determined that the judgment remains alive in equity as between the co-debtors for the purpose of recovery. Therefore, the phrase unsatisfied amount of the judgment in the charging order statute includes the co-debtor's unpaid proportionate share. The case was remanded for the entry of the charging order, establishing that such assignments are a valid mechanism for streamlined recovery between joint obligors in North Dakota. ♦

Earthgrains Baking Companies, Inc. v. Sycamore Family Bakery, Inc., 2019 WL 6001940 (D.Utah, Nov. 14, 2019).

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Bank of Hampton Roads v. Wilkins, 266 N.C.App. 404, 831 S.E.2d 635 (N.C.App., 2019).

♦ Defendant Saieed appealed an order amending earlier charging orders to correct the name of the judgment creditor from O’Mahoney Holdings, “LTD” to O’Mahoney Holdings, “LLC.” The underlying dispute began when the Bank sued to collect on a defaulted loan guaranteed by Saieed, obtained summary judgment, and later assigned that judgment; the assignee then secured charging orders against multiple LLCs in which Saieed allegedly held interests. After Saieed challenged a related lawsuit on the ground that the plaintiff lacked standing because the assignment and charging orders named “LTD,” O’Mahoney filed motions under North Carolina Rule of Civil Procedure 60(a), asserting the “LTD/LLC” designation was a long‑standing clerical misnomer. Although the trial court initially ruled LLC was not the real party in interest until the assignment was corrected, O’Mahoney filed an amended assignment and renewed its Rule 60(a) motion; the court then amended the charging order to reflect LLC as holder, effective as of the original entry date, and separately ruled LLC was the real party in interest (an order Saieed did not appeal). The Court of Appeals affirmed, holding Rule 60(a) permits correction of a misnomer that does not affect substantive rights; the change was a clerical error with no shown prejudice, did not improperly operate “nunc pro tunc,” could be made by a different judge, and was not barred by laches or judicial estoppel. ♦

Pearce v. Woodfield (In re Woodfield), 602 B.R. 747 (Bk.D.Ore. May 16, 2019). Bankruptcy, Executory Interest, 365

♦ The U.S. Bankruptcy Court for the District of Oregon considered a motion for summary judgment concerning the debtor's membership interests in three LLCs. The plaintiff, Pearce, sought declarations that the debtor, Woodfield, had dissociated from the LLCs upon filing bankruptcy and that the operating agreements were rejected. The court first addressed the debtor's dissociation. Under Oregon law, a member filing for bankruptcy dissociates, but retains the right to distributions and allocations. The LLC operating agreements modified this by entitling a dissociated member to a set monetary amount instead of ongoing distributions. The court found that the Bankruptcy Code's provision (§ 541(c)(1)) invalidating clauses that modify or forfeit a debtor's property interest due to bankruptcy preempted this dissociation provision. Therefore, Woodfield retained his economic rights. Regarding governance rights, the court determined that Woodfield retained general voting rights, as any provision to the contrary would also be preempted by § 541(c)(1). However, the debtor's right to manage the LLCs was analyzed separately. Since the LLCs were designated as "manager-managed" in their articles of organization, members generally only had the right to vote for managers. The court could not rule on whether Woodfield's management role was affected because the record lacked information on how he became a manager. Finally, the court addressed the plaintiff's request to declare the operating agreements rejected. The court noted that the debtor had not rejected them and that this issue would arise during plan confirmation. The court then determined whether the agreements were "executory contracts" under § 365, finding they were due to various unperformed obligations by both parties. The court also found that the LLC Act's restrictions on accepting performance from an assignee, even if the interest was assignable, meant that the debtor could not assume these agreements without Pearce's consent, as per § 365(c)(1). In summary, the court granted summary judgment for the plaintiff on the issue of non-assignability of the operating agreements but denied it on the debtor's dissociation and rejection of the agreements. ♦