2021 Opinions

2021 Site.Year2021ChargingOrderOpinions

2021 Charging Order Opinions

Blizzard Energy, Inc. v. Schaefers, 2021 WL 5366815 (Cal.App., Distr. 6, Nov. 18, 2021).

♦ The California Court of Appeal examined a trial court order that added BKS Cambria, LLC, as a judgment debtor to a 3.825 million dollar Kansas fraud judgment against Bernd Schaefers. Blizzard Energy had originally obtained the judgment in Kansas and subsequently registered it in California. Seeking to collect, Blizzard moved to amend the judgment under the doctrine of outside reverse veil piercing, asserting that the LLC was Schaefers' alter ego. The trial court granted the motion after finding that Schaefers used the LLC as his personal property by commingling funds, paying personal and separate business expenses from LLC accounts, and living rent-free on land owned by the entity. On appeal, the court first addressed jurisdictional and procedural challenges, concluding that the trial court maintained jurisdiction to amend the judgment despite a pending appeal because proceedings under the Sister State Money Judgments Act are special proceedings rather than civil actions, thus exempting them from certain automatic stays. The court further held that a charging order is not a creditor’s exclusive remedy against an LLC and that the act does not prevent adding a nonparty alter ego. While finding substantial evidence that Schaefers and the LLC shared a unity of interest, the appellate court ultimately reversed the order. The reversal was primarily based on the trial court's failure to properly weigh the equities regarding Schaefers' wife, Karin, who owns the remaining 50 percent of the LLC. The trial court had incorrectly assumed that Karin's interest was community property liable for the debt. However, the appellate court clarified that because the fraud occurred long after the couple's 1996 separation, the debt was Schaefers' separate obligation under California law. The case was remanded for the trial court to determine if reverse veil piercing would be inequitable to Karin as an innocent third party. ♦

Medipro Medical Staffing LLC v. Certified Nursing Registry, Inc., 2021 WL 388660 (Feb. 4, 2021).

♦ The California Court of Appeal reversed a trial court’s order appointing a receiver to collect a money judgment, holding that such an appointment constitutes an abuse of discretion when the record lacks evidence that judgment debtors frustrated collection efforts or that less intrusive methods were inadequate. Medipro had obtained a multi-million-dollar judgment against Certified and its founder, Christina Sy, for business torts and initially collected over four hundred thousand dollars through bank and hospital levies. When these collections ceased, Medipro moved for the appointment of a receiver to take control of Certified’s records and bank accounts, claiming the debtors were circumventing levies by billing under different names. However, the trial court struck Medipro’s evidence supporting these claims as hearsay and speculation. Despite this, the lower court granted the receivership. On appeal, the court emphasized that appointing a receiver is a drastic, harsh, and costly move that transfers property out of an owner's hands and must be exercised with extreme caution. The court noted that while statutes like Code of Civil Procedure section 708.620 allow for receivers, they are rarely a necessity for simple money judgments unless a debtor engages in obfuscation or contumacious conduct. In this case, Medipro failed to provide substantial evidence of such behavior, failing to prove that the slowdown in accounts was not simply due to the business decline Sy described. Additionally, Medipro had barely utilized other enforcement tools, such as interrogatories or debtor examinations. The appellate court concluded that allowing a receiver under these circumstances would improperly make this extraordinary remedy a routine part of collection. Consequently, the order and its subsidiary injunction were reversed because Medipro did not demonstrate the requisite necessity or exhaustion of standard legal remedies to justify such an intrusive measure. ♦

Rice v. Downs, 2021 WL 6111750 (Cal.App., Distr. 2, Dec. 27, 2021).

♦ The California Court of Appeal addressed a dispute regarding the priority of competing claims to funds disbursed by a limited liability company (LLC). The litigation centered on a 450,000 dollar payment made by Triton Community Development LLC to the law firm Glaser Weil for legal services rendered to Triton’s sole managing member, William Rice. Gary Downs, who held an unsatisfied judgment against Rice, contended that this payment violated a charging order that directed Triton to pay Rice’s distributions to Downs instead. Glaser Weil argued that the payment was for Triton’s own contractual obligation as a co-obligor and was not a distribution to Rice. Furthermore, the firm asserted that its security interest in Rice's membership in Triton, which was perfected by a July 2019 UCC filing, took priority over Downs’ charging order lien obtained in October 2019. While the trial court acknowledged the potential priority of the security interest, it utilized its equitable authority to order Glaser Weil to disgorge the funds to Downs. On appeal, the court first affirmed that the payment was indeed a distribution subject to the charging order. It concluded that since Triton was Rice’s alter ego, disbursements made to satisfy his personal debts were distributions regardless of Triton’s status as a co-obligor. However, the court reversed the disgorgement order on the issue of lien priority. It held that Glaser Weil’s perfected security interest was senior to Downs’ later charging order under the general first-in-time rule. The court clarified that Downs' first unsuccessful charging order motion in 2018 did not establish priority because the resulting lien was extinguished when the motion was denied. Finding no equitable grounds to override statutory priority, the appellate court remanded the case for the trial court to determine the specific terms of Glaser Weil’s security interest. ♦

Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021).

♦ The Delaware Court of Chancery addressed an unusual case involving an unsatisfied appraisal judgment. The plaintiffs, former minority stockholders of SourceHOV Holdings, had dissented from a merger with Exela Technologies and were awarded a judgment of approximately $57.6 million. When the judgment remained unpaid despite a charging order, the plaintiffs sued Exela and its subsidiaries, seeking to hold them liable through traditional and reverse veil-piercing theories, as well as a claim for unjust enrichment. Vice Chancellor Slights denied the defendants motion to dismiss the veil-piercing claims, finding it reasonably conceivable that Exela used a complex securitization facility to starve the judgment debtor of funds and bypass the charging order. Notably, this opinion marks the first time a Delaware court explicitly adopted the doctrine of outsider reverse veil-piercing. The court held that this equitable remedy is available in limited, exceptional circumstances to prevent the use of corporate forms to facilitate fraud or injustice. The court established a framework for this doctrine, requiring a showing of alter ego status and weighing factors such as the severity of the wrongful conduct and the potential harm to innocent third-party creditors or investors. Conversely, the court dismissed the unjust enrichment claim, ruling that Delawares charging order statute provides the exclusive remedy for judgment creditors seeking to satisfy debts from a members interest in a limited liability company. While the statute precludes alternative legal or equitable claims for direct recovery of assets, the court clarified that it does not prohibit expanding the scope of a charging order through veil-piercing. Ultimately, the ruling emphasizes that Delaware courts will not allow corporate separateness to shield entities from legal obligations when there is evidence of intentional undercapitalization or bad-faith diversion of assets to avoid judgments. ♦

O'Neal v. CDB American Franchise System, Inc., 2021 WL 3709716 (M.D.Fla., Aug. 20, 2021).

♦ The United States District Court for the Middle District of Florida addressed a motion by Plaintiff Thomas O’Neal seeking a charging lien against Defendant Brandon Carnes’s membership interests in nine Missouri-based limited liability companies. Following a prior judgment in his favor for $608,400.00, O’Neal attempted to collect these funds using Florida’s debt execution procedures as permitted under Federal Rule of Civil Procedure 69(a), which requires federal courts to follow the execution practices of the state in which they are located. The primary legal hurdle involved the court's jurisdiction over foreign property and assets. Florida Statute 605.0503 allows courts of competent jurisdiction to issue charging orders to intercept distributions from a debtor's interest in an LLC, essentially redirecting payments that would otherwise go to the member. While membership interests are legally classified as intangible personal property that generally accompanies the owner wherever they reside, Florida case law dictates that state courts lack the necessary in rem or quasi in rem jurisdiction over property that is not domestic to the state. The court found that O’Neal failed to satisfy this essential jurisdictional requirement because the evidence established that Carnes was a resident of Kansas and the LLCs in question were organized and domestic to Missouri rather than Florida. Without a sufficient and legally recognized connection to the state of Florida, the court determined it could not exercise the necessary judicial authority over the intangible personal property interests held by a non-resident in foreign companies. Consequently, United States Magistrate Judge Amanda Arnold Sansone concluded that the court lacked the power to impose the requested lien on these specific external assets. As a result of these jurisdictional findings, the Plaintiff’s motion for a charging order against the defendant’s Missouri limited liability company interests was denied. ♦

Ramos v. Mississippi Real Estate Dispositions, LLC, 2021 WL 112763 (Fla.App., Jan. 13. 2021).

♦ The Third District Court of Appeal of Florida examined the extent of a trial court's equitable powers in proceedings supplementary concerning membership interests in a limited liability company. The appellant, Alvaro Gorrin Ramos, was a judgment debtor who had personally guaranteed large loans that defaulted, resulting in a judgment of approximately thirty million dollars. The appellee, Mississippi Real Estate Dispositions, LLC, acting as the successor judgment creditor, sought to satisfy this debt by targeting Ramos's membership units in Intercontinental Bankshares LLC. Following a merger where Sunstate Bank offered cash for these units upon the surrender of original certificates, the trial court ordered Sunstate to pay the redemption proceeds directly to Mississippi. This order was issued despite the fact that Ramos had previously pledged the units as collateral to an escrow agent and could not produce the original certificates as required by the merger agreement. The trial court relied on its equitable authority under section 56.29(6) of the Florida Statutes to bypass these requirements. However, the appellate court reversed the decision, holding that section 605.0503 of the Florida Statutes provides the sole and exclusive remedy for a judgment creditor to satisfy a judgment from a debtor's interest in a multi-member LLC. This exclusive remedy is a charging order, which establishes a lien and entitles the creditor only to distributions that would otherwise be payable to the debtor. The court concluded that equitable powers in supplementary proceedings cannot be used to contravene this specific statutory limitation. Because the trial court's order enforced a turnover of assets rather than a simple charging order, it exceeded the scope of relief permitted by law. The decision emphasizes that judgment creditors cannot seize the underlying assets of an LLC membership through supplementary proceedings beyond the statutory charging order mechanism. ♦

Oberg v. Lowe, 2021 WL 495043 (D.Kan., Jan. 4, 2021).

♦ The United States District Court for the District of Kansas addressed a post-judgment collection matter involving plaintiffs Helmer W. Oberg and Kathey Lindsey, acting as Trustee of the Jeff Oberg Insurance Trust, against defendant Daniel H. Lowe. Following a final confessed judgment entered on July 15, 2020, in the amount of 1,535,944.44 dollars plus significant interest and legal fees, the plaintiffs sought to satisfy the debt by filing an amended application for the issuance of charging orders against the defendant's interests in nineteen specified limited liability companies. Magistrate Judge Gwynne E. Birzer issued a report and recommendation advising that the application be granted. The court established its jurisdiction over the matter, noting that the defendant is a Kansas citizen and that the entities in question were formed under Kansas law. Although the defendant argued that seven of the listed limited liability companies were no longer in existence and that his ownership was limited to one primary entity through which he held indirect interests in others, he failed to provide evidence that none of the entities held assets from which distributions could be made. Under Federal Rule of Civil Procedure 69(a)(1) and Kansas statute K.S.A. 17-76,113, the court determined that charging orders are an appropriate supplementary procedure to aid in the execution of a judgment. The recommendation specifies that any distributions otherwise due to the defendant from the nineteen enumerated entities should be redirected to the plaintiffs until the judgment is fully satisfied. This order constitutes a lien on the defendant's interests but does not grant the plaintiffs the right to manage the companies or seize their property directly. The court further required the defendant to file for a release of the order if he could prove he held no interest in specific entities. ♦

SEC v. Brogdon, 2021 WL 2802153 (D.N.J., July 2, 2021).

♦ The United States District Court for the District of New Jersey addressed the Securities and Exchange Commission's efforts to collect an unpaid 48 million dollar disgorgement judgment against Christopher and Connie Brogdon. Judge Kevin McNulty granted the SEC's motions for turnover, vacatur, and specifically a charging order against sixty limited liability companies in which the defendants hold transferable interests. The defendants raised several objections, primarily arguing that the court lacked personal jurisdiction over out-of-state entities and that the New Jersey Revised Uniform Limited Liability Company Act only authorized charging orders against companies formed within the state. The court rejected the jurisdictional challenge, finding that the Brogdons lacked standing to assert the rights of non-objecting third-party garnishees. Regarding the statutory interpretation, the judge acknowledged a technical gap or glitch in the law's definitions but concluded that the legislature did not intend to hinder judgment creditors by requiring them to seek orders in every state where a debtor might hold interests. The court emphasized that such a narrow reading would allow debtors to shelter assets in a maze of foreign entities, which is inconsistent with principles of equity and the purpose of the charging order statute. Additionally, the court dismissed arguments regarding the current lack of cash distributions, the sale of certain entity assets, and the impact of Chapter 11 bankruptcy proceedings, noting that a charging order simply ensures that any future distributions for the benefit of the defendants are directed to the SEC. Finally, the court maintained that entities identified in the defendants tax returns would remain subject to the order unless subsequent evidence proves a lack of ownership or existence. This decision ultimately reinforces the broad authority of district courts to facilitate judgment execution under Federal Rule 69, providing a pathway for the SEC to fulfill its mission. ♦

Berns Custom Homes, Inc. v. Johnson, 2021 WL 3928911, 2021 Ohio 3033 (Ohio App., Sept. 2, 2021).

♦ The Ohio Eighth District Court of Appeals reversed a trial court decision to grant a charging order and appoint a receiver against a defendant interest in his legal professional association. The case originated from a 2010 contract dispute where Berns Custom Homes obtained an arbitration award and subsequent judgment against Richard G. Johnson for breach of home renovation services. To collect on this judgment, Berns sought a charging order against Johnson law firm, Richard G. Johnson Co., L.P.A., specifically citing Ohio partnership statutes as the basis for the request. The trial court permitted the order and the appointment of an attorney receiver, ruling that no specific statutory prohibition existed to prevent such remedies being applied against professional associations. However, the appellate court applied a de novo review and determined that a legal professional association is a corporate entity governed by Ohio Revised Code Chapter 1785, rather than a partnership governed by Chapter 1776. Under the principle of statutory construction known as expressio unius est exclusio alterius, the court noted that while the Ohio General Assembly explicitly authorized charging orders for partnerships and limited liability companies, it deliberately chose not to include such provisions for professional associations or general corporations. The court held that judicial interpretation cannot add language to a statute that the legislature omitted. Consequently, the court found the trial court erred by applying partnership-specific remedies to a corporate entity without express statutory authority. While the court rejected Johnson argument that res judicata barred the proceedings based on a previous creditor bill dismissal, it ultimately sustained his primary assignments of error regarding the charging order legal basis. The judgment was reversed and remanded with instructions to vacate the charging order and the receiver appointment, emphasizing that judgment creditors must utilize authorized corporate collection methods rather than partnership remedies when targeting a debtor corporate interest. ♦

Kerr v. Collier, 2021 WL 972529 (N.D.Ohio, March 16, 2021).

♦ The United States District Court for the Northern District of Ohio addressed a pro se Motion to Alter or Amend Judgment filed by Plaintiff Jeremy Kerr under Federal Rule of Civil Procedure 59(e). Kerr originally initiated a civil rights action under 42 U.S.C. Section 1983 against Judge John Collier of the Henry County Common Pleas Court, contesting a 2013 Charging Order that permitted a judgment creditor to collect from Kerr’s interests in limited liability companies. Kerr sought a federal declaration that the state court order was void due to alleged due process violations. However, the district court initially dismissed the complaint on two primary grounds: the Rooker-Feldman Doctrine, which prevents federal district courts from acting as appellate courts for state judgments, and the expiration of the two-year statute of limitations for Section 1983 claims. In his Rule 59(e) motion, Kerr argued that the court committed clear errors of law, asserting that due process claims are exempt from Rooker-Feldman and that void judgments are immune to statute of limitations constraints. Presiding Judge Jeffrey J. Helmick denied the motion, explaining that Rule 59(e) is intended to correct manifest injustice or clear errors rather than provide a second opportunity to relitigate settled issues. The court noted that the legal precedent Kerr cited had been overruled and that the core of his injury was the state court judgment itself, making federal intervention improper. Additionally, the judge found the statute of limitations argument meritless, clarifying that the 2013 order was not void for lack of jurisdiction and that federal filing deadlines remain binding regardless of state procedural notes. Consequently, the court maintained its dismissal, emphasizing that federal courts lack the authority to nullify state civil proceedings or ignore statutory time bars. ♦

Ex Parte SE Property Holdings LLC (SE Property Holdings, LLC v. Harrell), 2021 WL 5145446 (Ala., Nov. 5, 2021).

♦ The Supreme Court of Alabama reviewed a legal challenge involving SE Property Holdings, LLC (SEPH) and David L. Harrell concerning the enforcement of a postjudgment charging order. The litigation followed a default on construction loans totaling $17 million by Water’s Edge, LLC, where Harrell acted as a guarantor. Following a judgment against him, SEPH obtained a charging order pursuant to Section 10A-5A-5.03 of the Alabama Code, which targeted Harrell’s membership interests in Southern Land Brokers, LLC (SLB) and other entities. This order mandated that any distributions or income Harrell was entitled to receive be paid instead to the clerk of court. SEPH subsequently filed a contempt petition, asserting that Harrell, in his capacity as SLB’s managing member, intentionally evaded the order by directing distributions exclusively to his wife and paying personal expenses through the company. SEPH presented Schedule K-1 tax forms as evidence of these distributions, while Harrell provided only a conclusory denial without supporting documentation. The trial court denied SEPH’s petition without conducting a hearing, prompting SEPH to seek both an appeal and a writ of certiorari. The Supreme Court consolidated these and first clarified that the denial of a contempt petition initiating an independent proceeding constitutes a final, appealable judgment, rendering the certiorari petition superfluous. Regarding the merits, the Court concluded that the trial court exceeded its discretion by dismissing the petition given the evidence of potential willful non-compliance. Crucially, the Court determined that Alabama Rule of Civil Procedure 70A(c)(2) requires a formal hearing before adjudicating such a petition. The Supreme Court thus reversed the trial court’s decision and remanded the matter for an evidentiary hearing to properly evaluate the contempt allegations and allow for the presentation of evidence by both parties. ♦

Wholesaler Equity Development Corp. v. Bargreen, 2021 WL 321560 (W.D.Wa., Feb. 1, 2021).

♦ The United States District Court for the Western District of Washington issued an order granting a preliminary injunction in favor of the plaintiff, Wholesaler Equity Development Corporation, also known as Wedco. The conflict stems from the alleged mismanagement of Crown LLC, a distribution business formed by Wedco and Crown of Everett. While Bargreen served as the manager with a majority stake, the Operating Agreement provided Wedco the right to remove him for cause, including fraud or intentional misconduct. Wedco alleged that Bargreen engaged in extensive self-dealing, specifically citing an irregular distribution of over three hundred thousand dollars aimed at settling Bargreen’s personal tax debts and legal judgments involving family members. Additionally, an audit suggested Bargreen misappropriated approximately four hundred thousand dollars for personal family expenses and misrepresented these as business costs. When Wedco attempted to remove Bargreen and appoint a liquidating trustee to wind up the company, Bargreen refused to recognize their authority or grant access to the premises. Chief Judge Ricardo S. Martinez concluded that Wedco successfully met the legal criteria for preliminary relief by showing a high likelihood of success on its breach of contract and fiduciary duty claims. The court ruled that the deprivation of Wedco’s contractual managerial control represented irreparable harm and that the balance of equities favored the protection of the minority owner’s rights against continued misconduct. The resulting injunction prohibits Bargreen from performing managerial duties or interfering with the liquidating trustee. Additionally, the court determined that a security bond was unnecessary because the liquidation process would ensure the defendants are fairly compensated for their interests. This contiguous summary outlines the judicial reasoning and immediate legal consequences of the court's decision regarding the internal governance and dissolution of Crown LLC. ♦