2020 Opinions

2020 Site.Year2020ChargingOrderOpinions

2020 Charging Order Opinions

Perez v. Dhillon, 2020 WL 1900447 (E.D.Cal., April 17, 2020).

♦ The United States District Court for the Eastern District of California considered an amended motion by plaintiff Alberto Perez to enforce a foreign judgment against defendant Rupinder Dhillon. The underlying judgment, which stems from a default in the District of Utah involving violations of the Fair Labor Standards Act and Title VII of the Civil Rights Act, awarded the plaintiff a total of $36,302.84. Perez sought a charging order against the defendant’s purported membership interest in an entity known as Hiway Farm, LLC, as well as a court order directing the company and its members to pay the outstanding debt. To establish the defendant's ownership interest, the plaintiff relied on public records identifying Dhillon as the LLC’s registered agent and a municipal staff report describing him as a property owner. However, Dhillon opposed the motion, submitting sworn declarations stating that he has never held a membership interest in the company and that his son is the sole owner and manager. He further clarified that his role as a registered agent was merely a matter of convenience. In its analysis, the court applied Federal Rule of Civil Procedure 69(a)(1), which dictates that supplementary proceedings must follow state law. Under the California Corporations Code, a charging order may be entered against a judgment debtor’s transferable interest in an LLC, but the plaintiff failed to provide reliable evidence that such an interest existed. The court found that registered agent status is not probative of membership and that the planning commission report was insufficient to prove ownership. Because the defendant corroborated his opposition with a grant deed and because the plaintiff failed to utilize available discovery tools to meet his burden of proof, the magistrate judge recommended that the motion to enforce the judgment be denied. ♦

Wilson v. Pauling, 2020 WL 2197931 (D.Colo., May 6, 2020).

♦ The United States District Court for the District of Colorado denied motions to dismiss in a case involving alleged violations of the Colorado Uniform Fraudulent Transfer Act (CUFTA) and civil conspiracy. Plaintiff Amanda Wilson sought to collect a 4.1 million dollar judgment against Jonathan Pauling arising from a prior sexual assault case. Wilson alleged that Jon Pauling, in conjunction with his brother Mark Pauling and their partnership Two Mile Ranch, engaged in a series of fraudulent transfers to shield assets from collection. These transfers included reallocating Jon Pauling’s fifty percent interest in Two Mile Ranch to ten percent using backdated documents and subsequently transferring ranch property to Lardyn Consulting LLC, a shell entity managed by Elyce York, a woman Jon Pauling was allegedly grooming. Farmers State Bank was also named as a defendant for its alleged role in a conspiracy to facilitate these transfers through continued financing despite having knowledge of the judgment. The defendants moved to dismiss, arguing that Two Mile Ranch was not a judgment debtor, that the transferred property was fully encumbered and therefore not an asset under CUFTA, and that the claims against York relied on gender stereotyping. The court rejected these arguments, finding that Jon Pauling’s alleged control over the partnership allowed for a plausible claim that he indirectly disposed of assets. Furthermore, the court held that the question of whether property was fully encumbered could not be settled at the pleading stage through judicial notice of the truth of public records. The court also found sufficient factual allegations to support the claim that York served as a straw person and that Farmers State Bank’s long-standing relationship with the Paulings made a conspiracy claim plausible. Finally, the court applied a four-year statute of limitations to the CUFTA claims, ultimately denying the motions to dismiss and the associated motions for joinder. ♦

In re Cole, 2020 WL 7233190 (Bk.M.D.Fla., Dec. 8, 2020).

♦ The United States Bankruptcy Court for the Middle District of Florida considered a Chapter 7 Trustee's motion to avoid nearly $4 million in transfers as fraudulent. The Debtor, William W. Cole, Jr., a sophisticated real estate developer, had defaulted on a personal guaranty exceeding $12 million to PRN Real Estate & Investments, Ltd. in late 2011. Approximately two weeks after receiving a formal notice of default, Cole directed his Nevada limited partnership, Cole of Orlando, to transfer nearly $4 million into joint accounts held with his wife as tenants by the entireties. The Trustee moved for partial summary judgment, alleging these transfers were actually and constructively fraudulent under Florida law. Cole opposed the motion, arguing that the partnership was the legal transferor and that the winding down of the entity was motivated by the repeal of Florida's intangible tax. However, the Court applied a flexible control test and determined that Cole, who maintained complete command over the entities, was the legal transferor. The Court identified multiple badges of fraud, such as transfers to insiders, the retention of control over funds, and the proximity of the transfers to the debt default. It rejected Cole's defense that creditors actually benefited from the transfers because they previously only had a right to an ineffectual charging order. Instead, the Court found that moving assets from a business entity to exempt joint accounts depleted the bankruptcy estate without providing reasonably equivalent value. Consequently, the Court granted the Trustee's motion, ruling the transfers were fraudulent and constituted an improper conversion of non-exempt assets. Regarding a separate 2010 transfer of 3,000 Google shares to Cole's wife, the Court denied her motion for summary judgment, finding material factual disputes regarding when the transfer should have been discovered for statute of limitations purposes. ♦

Kostoglou v. Fortuna, 2020 WL 813366 (Fla.App., Feb. 19, 2020).

♦ The District Court of Appeal of Florida, Fourth District, addressed an appeal regarding the scope of a charging order against a debtor’s interest in a multi-member limited liability company. John A. Kostoglou, the creditor, had obtained a judgment against John Fortuna in Ohio and subsequently domesticated it in Florida. Seeking to satisfy this judgment, the creditor moved for a charging order against the debtor’s five percent interest and distribution rights in a specific LLC. While the trial court granted the charging order against the debtor’s interest, it specifically precluded the creditor from receiving any distributions of earnings from the LLC. The appellate court affirmed the initial granting of the charging order but focused its review on the denial of distribution rights. Citing section 605.0503(1) of the Florida Statutes, the court noted that a charging order acts as a lien on a debtor’s transferable interest and explicitly requires the LLC to pay the judgment creditor any distribution that would otherwise be directed to the debtor. This interpretation was supported by section 605.0502(2), which grants a transferee the right to receive distributions the transferor was entitled to. The appellate court referenced several precedents, including Panksy v. Barry S. Franklin and Associates and McClandon v. Dakem and Associates, to reinforce that the primary function of a charging order is to divert the debtor’s rights to profits and distributions to the creditor. Consequently, the court reversed the portion of the trial court’s order that denied the creditor's claim to the debtor's share of distributions. The case was remanded for the entry of a corrected charging order requiring the LLC to pay distributions directly to the creditor, thereby aligning the order with established Florida statutory law regarding limited liability company interests. ♦

In re Nilhan Developers, LLC, 2020 WL 6572235 (Bk.N.D.Ga., Nov. 9, 2020).

♦ The United States Bankruptcy Court for the Northern District of Georgia addressed a motion for sanctions filed by Chittranjan Chuck Thakkar against Gateway. The central issue was whether Gateway violated the automatic stay or a court-ordered mediation stay by obtaining a charging order in Florida state court against Thakkars interest in the debtor entity. The court ultimately denied the motion on several grounds. First, it determined that Thakkar lacked standing to seek sanctions because he was not the debtor, a creditor, or an equity owner of Nilhan Developers, as ownership was held by his children. The court noted that any potential claim for a stay violation would belong to the Chapter 11 Trustee as the fiduciary of the estate. Regarding the automatic stay, the court held that Gateway did not technically violate it because a charging order against a members personal interest in a limited liability company is an action against the individual rather than the entity itself and does not directly affect property of the bankruptcy estate. The court also found no civil contempt regarding the mediation order, concluding the orders language was not sufficiently specific or definite to stay collection efforts against non-debtors in other jurisdictions. Despite these legal findings, the court criticized Gateways behavior as bad form, noting that counsel neglected to notify the Trustee of the state court hearing and pursued the order on the eve of mediation. The court concluded that while Gateways tactics were strategically aggressive and potentially misleading to the state court regarding the Trustees position, they did not reach the threshold of a punishable legal violation under the Bankruptcy Code or the specific terms of the mediation stay. Consequently, Judge Wendy L. Hagenau denied the request for attorney fees and sanctions, ending the dispute over the charging order while emphasizing the importance of transparency in multi-jurisdictional litigation. ♦

BMO Harris Bank N.A. v. Smith, 2020 WL 2914838 (June 3, 2020).

♦ The United States District Court for the District of Kansas issued a charging order to satisfy an unpaid judgment of over 1.4 million dollars against defendant Robert Smith. The plaintiff, BMO Harris Bank N.A., sought to reach Smiths membership interest in R & M Land, LLC, a Kansas entity, after Smith failed to make any payments on the judgment. The court first verified its jurisdiction under Federal Rule of Civil Procedure 69 and Kansas Statutes Annotated section 17-76,113, which allows a court to charge a members interest in an LLC formed under Kansas law to satisfy a debt. This interest encompasses the members share of profits, losses, and rights to receive asset distributions. After confirming that the defendant was indeed a member of the Kansas-based LLC, the court addressed the disputed method of payment. The bank requested that any distributions be placed into the court registry for later disbursement, but the court rejected this approach. Citing Federal Rule of Civil Procedure 67, Judge Daniel D. Crabtree explained that the court registry is intended for the safekeeping of disputed funds during litigation rather than a mechanism for satisfying undisputed judgments. Relying on local precedent, the court instead ordered R & M Land, LLC to pay all distributions due to Smith directly to BMO Harris Bank N.A. until the judgment, including all accrued interest and costs, is fully satisfied. Additionally, the court denied the plaintiffs request for the United States Marshals Service to effect service of the order, noting that the plaintiff did not meet the requirements for such assistance and must handle the service process independently. The resulting order formalizes the charge against Smiths interests and mandates direct payment to the judgment creditor. ♦

AOK Property Investments, LLC v. Boudreaux, _ So.3d __, 2020 WL 7240057, 20-237 (La.App. 5 Cir. Dec. 9, 2020).

♦ The Louisiana Fifth Circuit Court of Appeal addressed the critical legal question of whether a judgment creditor can seize the entire membership interest of a single-member limited liability company or if they are limited to the remedy provided by the state's charging order statutes. The case originated when AOK Property Investments sought to annul transfers made by Donald J. Boudreaux, Jr., the sole member of SCI Leasing, LLC, in an effort to restore his full ownership and subsequently seize the interest to satisfy a prior judgment. The trial court initially denied Boudreaux’s motion for summary judgment, reasoning that the charging order statute, which typically protects other members from unwanted management interference, was irrelevant in a single-member context. Drawing on Florida jurisprudence, the trial court suggested that a single-member’s interest should not be shielded from execution. However, the appellate court reversed this decision, emphasizing the specific language of Louisiana Revised Statutes 12:1331 and 12:1332. The court observed that under Louisiana law, a membership interest is personal property distinct from the LLC itself, and a judgment creditor is restricted to only the rights of an assignee. This means the creditor receives financial rights, such as distributions and profits, but cannot assume management powers or become a member without proper authorization. The court concluded that the inclusion of the word only in the statute indicates that the charging order is the exclusive remedy available to creditors. Consequently, the appellate court held that even in a single-member LLC, a creditor is precluded from seizing a member's 100% interest like a standard asset. This ruling reinforces the separation between financial and management rights in Louisiana business law and confirms that charging orders represent the sole statutory path for creditors seeking to satisfy judgments from an LLC member's interest. ♦

Morgan Stanley Smith Barney LLC v. Johnson, 2020 WL 1222684 (March 13, 2020).

♦ The United States Court of Appeals for the Eighth Circuit affirmed a district court order appointing a receiver and issuing a charging order to assist a judgment creditor in collecting a 1.5 million dollar arbitration award. The legal dispute began after Christopher Johnson failed to respond to an action to confirm the award, and subsequent collection efforts by Morgan Stanley, such as writs of execution and bank garnishments, proved largely unsuccessful. Evidence indicated that Johnson maintained significant interests in various limited liability companies and had previously been involved in high-value stock transactions, yet he claimed to have no income and submitted incomplete financial documentation. To address these discrepancies, the district court appointed a receiver under Federal Rule of Civil Procedure 66 to investigate Johnson’s financial status and determine if his LLC interests were being used to shield assets. Johnson appealed, contending that the appointment was an abuse of discretion and that the receiver’s authority improperly exceeded the scope defined by Minnesota state law. The Eighth Circuit dismissed these claims, ruling that the appointment of a receiver in federal diversity cases is governed by federal law and equitable principles rather than state-specific statutes. While acknowledging that a receivership is an extraordinary remedy, the court determined it was appropriate here due to Johnson’s apparent efforts to frustrate the collection process and his pattern of nondisclosure. The court further clarified that federal courts may look to state law for guidance but are not bound by it when exercising their equitable powers under Rule 66. By affirming the lower court's decision, the Eighth Circuit upheld the receiver's broad investigative mandate to identify assets and prevent the subterfuge of debt obligations, ensuring the integrity of the judicial award. ♦

Grengs v. Grengs, 2020 ND 242, 2020 WL 6793355 (N.D., Nov. 19, 2020).

♦ The Supreme Court of North Dakota affirmed a divorce judgment and subsequent orders involving Greg and Lisa Grengs. The case centered on Greg's appeal of a district court decision to enforce a settlement agreement reached just before trial and a subsequent finding of contempt. Initially, the district court invalidated a 2014 post-marital agreement due to inadequate financial disclosures and duress. During a telephonic hearing, both parties confirmed their agreement to a new settlement, which required Greg to make a lump sum property payment and provide a mortgage on real estate owned by his company, GLG Farms, LLC, as security. When Greg failed to comply, the court found him in contempt. Greg argued that he lacked the authority to encumber property held by an LLC and that the settlement was invalid because he was incompetent and the prior post-marital agreement should have been enforced. He also challenged the district court's dismissal of his motion to set aside the judgment for lack of jurisdiction while his appeal was pending. The Supreme Court held that the district court appropriately determined it lacked jurisdiction to modify or set aside a judgment already under appeal without a specific remand. Furthermore, the Court declined to address Greg's arguments regarding his competency and the validity of the settlement agreement because those issues were not properly raised in the lower court and cannot be introduced for the first time on appeal. Regarding the contempt charge, the Court distinguished this case from previous rulings where an obligor lacked total control over corporate assets. Since Greg was the sole owner and controller of GLG Farms, LLC, and provided no evidence that he was legally prohibited from encumbering its assets, he failed to meet his burden of proving an inability to comply. Consequently, the high court found no abuse of discretion and affirmed the judgment. ♦

435 Elm Investment, LLC v. CBD Investments LP I, 2020 Ohio 943, 2020 WL 1230320 (Ohio App., March 13, 2020).

♦ The Ohio Court of Appeals for the First District reversed a trial court decision to grant a charging order against several entities associated with judgment debtors Ronald J. Goldschmidt and CBD Investments. The plaintiff, 435 Elm Investment, LLC, had obtained a monetary judgment exceeding 1.5 million dollars and sought to collect by invoking Ohio Revised Code 1705.19(A). This statute allows creditors to charge a member interest in a limited liability company (LLC) to satisfy a debt. However, the appellate court identified two primary legal errors in the lower court ruling. First, the charging order improperly included entities that were not LLCs, such as corporations and a limited partnership, which are fundamentally outside the statutory scope of the LLC-specific law. Second, regarding the entities that were confirmed as LLCs, the court found that the plaintiff failed to provide the necessary evidence to establish that the judgment debtors held membership interests in those specific companies. Relying on the precedent established in Stanfield v. On Target Consulting, LLC, the court emphasized that a creditor must provide reliable records maintained for corporate governance, such as operating agreements, tax returns, or member lists, to prove ownership entitled to distributions. The court rejected the plaintiff argument that the trial court could have issued the order based on inherent equitable powers, noting that the original motion and order were explicitly anchored to the LLC statute. While a partial dissent argued that the order should have been upheld for the LLC entities due to the absence of transcripts and certain admissions of ownership in the record, the majority concluded that the lack of formal proof necessitated reversal. Consequently, the case was remanded for further proceedings consistent with the requirements for establishing statutory charging orders and verifying membership interests. ♦

Steamfitters Union v. Direct Air, LLC, 2020 WL 6131163 (E.D.Pa., 2020).

♦ The United States District Court for the Eastern District of Pennsylvania addressed whether it could issue a charging order against a debtor's interest in a foreign limited liability company without possessing personal jurisdiction over that company. The litigation originated from a consent judgment obtained by the Steamfitters Union and its associated funds against Direct Air, LLC, and its principals, Salvatore Taormina and Sal Campagna, for unpaid employee contributions mandated by collective bargaining agreements. After the defendants failed to satisfy the judgment, the plaintiffs sought a charging order under the Pennsylvania Uniform Limited Liability Company Act of 2016 against the defendants' membership interests in SCST Realty Group LLC, a New Jersey entity. The plaintiffs argued that the court's personal jurisdiction over the individual members was sufficient, as the order would only affect their personal transferable interests and not the company's operations. However, the court concluded that it lacked authority to grant the motion. Applying Federal Rule of Civil Procedure 69(a)(1), the court held that state execution procedures apply, and under Pennsylvania law, a charging order functions as a garnishment. Consequently, the court must have in personam jurisdiction over the garnishee—the entity that holds and controls distributions. Because SCST was a foreign company with no continuous or systematic business in Pennsylvania, and the plaintiffs' claims did not arise from the company's local real estate holdings, the court lacked the necessary jurisdiction. While the court denied the charging order, it granted supplemental relief under Pennsylvania Rule of Civil Procedure 3118. This relief included enjoining the defendants from transferring or disposing of assets and allowing the plaintiffs to pursue discovery to identify other property subject to execution. The ruling emphasizes that judgment creditors seeking to charge interests in foreign entities must generally domesticate their judgments in the jurisdiction where the entity is located to satisfy due process requirements. ♦

In re Hafen, 625 B.R. 529 (D.Utah, 2020).

♦ The bankruptcy court issued a memorandum decision on the chapter 7 trustee’s motion to sell alleged estate property and related litigation rights arising from a 2004 case that was reopened in 2018 after creditors filed a state-court fraud/avoidance action against the debtor and others. The trustee proposed an “as is, where is, and if is” sale for $15,277 of whatever interests the estate might have in (among other things) the debtor’s claimed interests in certain limited partnership and LLC interests, a trust (the C.A.R./CAR A Trust), and certain water-rights-related claims; the debtor objected, arguing (among other grounds) transfer restrictions, lack of beneficial interest, that some assets never belonged to him, and that an adversary proceeding and an estate-property determination were required before any sale. The court held that, like a quitclaim deed, the trustee may convey only whatever interest the estate has without warranties, and therefore may sell the water-rights claims and any trust interest even if disputed, without first litigating ownership; it overruled the debtor’s arguments that an adversary proceeding or prior determination was necessary for those items. By contrast, the court concluded that transfer restrictions in the limited partnership and LLC agreements (including rights of first refusal and notice requirements) apply to the trustee’s proposed sale of those interests, and that the earlier notice process did not ensure compliance, so an additional hearing would be required after compliance (potentially via an auction process). The parties stipulated that avoidance powers could be severed if problematic, so the court excluded avoidance actions from the sale, set a continued hearing/status conference for January 25, 2021, and reserved standing issues for later proceedings. ♦