Adkisson's

Charging Orders

The Creditors' Primary Remedy Against A Debtor's

Interest In A Limited Liability Company Or Partnership

Caution state law variances!

 

The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association, click here for more

 

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Rockstone

 

Rockstone Capital, LLC v. Marketing Horizons, Ltd., 2013 WL 4046597 (Conn.Super., Unpublished, July 17, 2013).

 

UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.

 

Superior Court of Connecticut, Judicial District of New Haven.

 

ROCKSTONE CAPITAL, LLC

 

v.

 

MARKETING HORIZONS, LTD et al.

 

No. NNHCV065006818S.

 

July 17, 2013.

 

Thomas E. Crosby, Crosby Law Firm, LLC, Guilford, CT, for Marketing Horizons, Ltd, et al.

 

ROBERT E. YOUNG, Judge.

 

BACKGROUND

 

*1 On June 16, 2008, the parties entered into a stipulated judgment. The plaintiff, Rockstone Capital, LLC, alleges that one of the defendants, Ashton Edwards, has failed to make certain monthly payments pursuant to the judgment. The plaintiff further alleges that Edwards owns interests in two entities, Marketing Ventures Worldwide, LLC and Nonprofit Solutions, LLC. The plaintiff has filed a motion for charging order (120.00) pursuant to General Statues sec. 34–171,FN1 seeking an order to charge Edwards' interests in the two entities.

 

FN1. General Statutes sec. 34–171 provides "On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member's limited liability company interest with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member's limited liability company interest. Nothing in sections 34–100 to 34–242, inclusive, shall be held to deprive a member of the benefit of any exemption provided by law applicable to such person's limited liability company membership interest."

 

Defendant Edwards objects to the motion for charging order as to one of the two entities—Nonprofit Solutions, LLC. In his objection (121.00), Edwards claims that this entity is a foreign corporation over which the court lacks jurisdiction. Additionally, the defendant has filed a motion to dismiss "the matter" for lack of personal jurisdiction and insufficient service of process (122.00), to which the plaintiff has filed an objection (125.00).

 

LEGAL STANDARD

 

Practice Book sec. 10–30 provides: "Any defendant, wishing to contest the court's jurisdiction, may do so even after having entered a general appearance, but must do so by filing a motion to dismiss within thirty days of the filing of an appearance ..." "The motion to dismiss shall be used to assert (1) lack of jurisdiction over the subject matter, (2) lack of jurisdiction over the person, (3) improper venue, (4) insufficiency of process, and (5) insufficiency of service of process." Practice Book sec. 10–31(a). "Any claim of lack of jurisdiction over the subject matter cannot be waived; and whenever it is found after suggestion of the parties or otherwise that the court lacks jurisdiction over the subject matter, the judicial authority shall dismiss the action." Practice Book sec. 10–33.

 

"A motion to dismiss ... properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court ... A motion to dismiss tests, inter alia, whether, on the face of the record, the court is without jurisdiction." (Internal quotation marks omitted.) Cox v. Aiken, 278 Conn. 204, 210–11, 897 A.2d 71 (2006).

 

"Jurisdiction of the subject-matter is the power [of the court] to hear and determine cases of the general class to which the proceedings in question belong." (Internal quotation marks omitted .) Doe v. Roe, 246 Conn. 652, 661, 717 A.2d 706 (1998). "[A] claim that ... [the] court lacks subject matter jurisdiction [may be raised] at any time." (Internal quotation marks omitted.) Dowling v. Slotnik, 244 Conn. 781, 787, 712 A.2d 396, cert. denied, 525 U.S. 1017, 119 S.Ct. 542, 142 L.Ed.2d 451 (1998). "[O]nce the question of lack of jurisdiction of a court is raised, [it] must be disposed of no matter in what form it is presented ... and the court must fully resolve it before proceeding further with the case." (Internal quotation marks omitted.) Figueroa v. C & S Ball Bearing, 237 Conn. 1, 4, 675 A.2d 845 (1996).

 

ANALYSIS

 

I. MOTION TO DISMISS

 

A. Personal Jurisdiction Over Nonprofit Solutions, LLC

 

*2 It is uncontested that the court retains jurisdiction over the parties. "For the purposes of postjudgment procedures, the Superior Court shall have jurisdiction over all parties of record in an action until satisfaction of the judgment or, if sooner, until the statute limiting execution [of the judgment] has run ..." General Statutes sec. 52–350d(a). Although it is not stated in his motion, Edwards asserts in his memorandum in support of the motion to dismiss that the claim of lack of personal jurisdiction is not as to himself, but rather, as to Nonprofit Solutions, LLC, which he asserts is a foreign corporation.

 

This claim of Edwards must fail for two reasons. First, Edwards lacks the requisite standing to challenge the court's jurisdiction, if any, over Nonprofit Solutions, LLC. "[I]t is the burden of the party who seeks the exercise of jurisdiction in his favor ... clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute." (Internal quotation marks omitted.) Wilcox v. Webster Ins., Inc., 294 Conn. 206, 213–14, 982 A.2d 1053 (2009). Nonprofit Solutions, LLC is not seeking dismissal, nor is it a party. Edwards seeks dismissal on Nonprofit Solutions, LLC's behalf. Edwards has asserted no basis upon which his standing to do so is conferred.

 

Second, Nonprofit Solutions, LLC is not a party of record in this action. The court is not exerting jurisdiction over Nonprofit Solutions, LLC. Defendant Edwards offers no authority for his assertion that a court must have jurisdiction over a limited liability company in order to enforce a judgment against an individual who is a member of that entity.

 

"The statute governing the issuance of a charging order against a limited liability company, sec. 34–171, does not require that the limited liability company be made a party to an action seeking such an order. It is not necessary to make a limited liability company a party because a charging order merely gives the judgment creditor the rights of an assignee of the member's interest in the limited liability company ... Pursuant to the Connecticut Limited Liability Company Act, General Statutes secs. 34–100 to 34–242, an assignment of a limited liability company interest entitles the assignee to receive only the distributions to which the assignor would be entitled ... An assignment does not dissolve the limited liability company or entitle the assignee to participate in the management and affairs of the limited liability company or to become or exercise any rights of a member ... An action seeking a charging order does not impact the rights or interests of a limited liability company to the degree necessary to require that it be made a party in order for the action to proceed." (Citations omitted.) Cadle Co. v. Ginsburg, Superior Court, judicial district of Ansonia–Milford at Milford, Docket No. CV 95 0076811 (March 28, 2002, Alander, J.) (31 Conn. L. Rptr. 597); accord Bank of America, N.A. v. Freed, 983 N.E.2d 509, 522, 368 Ill.Dec. 96 (2012), cert. denied, 2013 Ill. LEXIS 601 (2013) ("charging orders on a distributional interest in [a limited liability company] ... [give] the [creditor] ... very limited rights, which are different from ... [a] transfer [that] ... would [entitle the creditor to a managerial interest in the limited liability company] ... [C]harging orders on distributional interests do not affect the rights or interests of the [limited liability company] to the degree necessary to require that it be made a party."). The court has jurisdiction over Edwards' interest in the two limited liability companies, not over the limited liability companies themselves.

 

*3 For the foregoing reasons, the court declines to grant Edwards' motion to dismiss on these asserted grounds.

 

B. Domestic v. Foreign Company

 

Defendant Edwards asserts that sec. 34–171 does not apply to foreign business entities over which the court has not established jurisdiction, citing Merchants Bank & Trust Co. v. Chestnut Tree Hill Partnership, Superior Court, judicial district of Ansonia–Milford at Milford, Docket No. CV 90 0033304 (June 6, 2003, Curran, J.T.R.) [35 Conn. L. Rptr. 160]. In that case, the court considered whether sec. 34–171 applies only to limited liability companies. "Although the history of sec. 34–171 provides little insight, the court finds guidance in the statute's language and its relationship to other legislation. The language of sec. 34–171 clearly allows 'any judgment creditor of a member ... [to] charge the member's limited liability company interest with payment of the unsatisfied amount of the judgment with interest.' Thus, the language of the statute does not provide for a charging order against an interest in a business corporation ..." Merchants Bank & Trust Co. v. Chestnut Tree Hill Partnership, supra, Superior Court, Docket No. CV 90 0033304. Based on this construction of the statute, the court concluded that sec. 34–171 is not applicable to a debtor's interests in corporations.

 

However, that is not the issue presented here. There is no evidence that Nonprofit Solutions, LLC is a corporation. In fact, Edwards asserts that Nonprofit Solutions, LLC is a limited liability company. Later, when it suits his purposes, Edwards blithely refers to Nonprofit Solutions, LLC as a corporation, so as to take advantage of holdings in both Merchants Bank and another trial decision. In citing Merchants Bank, Edwards states that "Connecticut General Statutes sec. 34–171 does not apply to New York State corporations." However, Nonprofit Solutions, LLC is not a corporation.

 

Edwards' assertion that sec. 34–171 does not provide for a charging order as to foreign limited liability companies is bereft of authority. The court in Merchants Bank did not deal with that issue, only the application of sec. 34–171 to business entities other than limited liability companies. Therefore, the holding of Merchants Bank is not edifying as to this particular issue and the defendant's argument fails. This court finds no constraints in sec. 34–171 which limit its application solely to domestic limited liability companies. Therefore, the court declines to grant Edwards' motion to dismiss on this ground.

 

C. Insufficiency of Service

 

Edwards asserts that there was insufficiency of service against him by way of three arguments. Edwards first asserts that service was improper pursuant to General Statutes sec. 52–356c. Section 52–356c concerns any "dispute ... between the judgment debtor or judgment creditor and a third person ... " (Emphasis added .) As this is a dispute between a judgment creditor and a judgment debtor, and does not involve a third person, sec. 52–356c is inapplicable here.

 

*4 Second, Edwards asserts that the application for charging order was not properly served upon him in accordance with "Practice Book Section 108.4." Edwards claims that the plaintiff did not comply with "[t]he Connecticut Rules of Practice, specifically Practice Book Section 108.4 attached ..." Edwards attached as Exhibit B to his memorandum, photocopies of "Form 108.4" from what appears to be a book of "civil practice forms." There is no Practice Book Section 108.4.FN2 The court is aware of no authority requiring the plaintiff to comply with forms which are not official forms or standing orders of the judges of the Superior Court.

 

FN2. The prior Practice Book of 1978 contained a rule 108, which corresponds to Rule 10–1 of the current Practice Book of 1998 as amended. This rule has no connection with the issues presented here.

 

Third, Edwards contends that service of the motion for charging order cannot be made "by U.S. Mail to initiate a court proceeding against Ashton Edwards." The plaintiff is not initiating a court proceeding, it is seeking a postjudgment remedy in an existing proceeding.

 

Edwards was represented by counsel at the time of the filing of the motion for charging order. He has been represented by counsel since March 21, 2007. Not only did the plaintiff serve Edwards' attorney in accordance with Practice Book sec. 10–13, the plaintiff went further and sent copies of the motions to Edwards as well, by certified mail. It is clear that, as a result of the filing, Edwards retained new counsel, who filed his "in lieu of" appearance on April 26, 2013. Edwards was certainly aware of the motion for charging order as evidenced by his objection to it and his motion to dismiss. Service of the motion was proper. Therefore, the court declines to grant Edwards' motion to dismiss on the grounds of insufficiency of service.

 

All of the grounds for dismissal proffered by defendant Edwards are without merit. The motion to dismiss is, therefore, denied.

 

II. MOTION FOR CHARGING ORDER

 

In his objection (121.00) to the motion for charging order, the defendant Edwards repeats his assertions contained in the motion to dismiss. For the same reasons, the court overrules the objections and grants the motion for charging order (120.00). The signed order is appended to this memorandum of decision.

 

ORDER

 

The defendant's motion to dismiss (122.00) is denied. The objection to the motion to dismiss (125.00) is sustained. The plaintiff's motion for charging order (120.00) is granted. The objection to the motion for charging order is overruled.

 

CHARGING ORDER

 

After the Plaintiff's/Judgment Creditor's Motion for Charging order dated April 11, 2013 came on for a hearing.

 

IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT

 

1. The interests of the Defendant/Judgment Debtor, Ashton Edwards (the "Defendant"), in the Companies (as defined in the Motion for Charging Order) are charged with payment of the unsatisfied amount of the judgment debt herein and also with costs, attorneys fees and interest. Within 10 days of the entry of this Order, the Defendant is ordered to provide the complete name and current mailing address of the managing member of each of the Companies, Marketing Ventures Worldwide, LLC & Nonprofit Solutions, LLC.

 

*5 2. The Companies are each directed to pay the Plaintiff present and future shares of any and all distributions, credits, drawings, or payments due to the Defendant until the judgment is satisfied in full, including attorneys fees, interest and costs.

 

3. Until said judgment is satisfied in full, including attorneys fees, interest and costs, the Companies shall make no loans, directly or indirectly, to or for the benefit of the Defendant or other partners or anyone else for the benefit of the Defendant without further Order of this Court.

 

4. Within twenty days of service of a copy of this Order upon any members of the Companies, the Companies shall supply the Plaintiff full, complete and accurate copies of the Companies' Operating Agreements including any and all amendments or modifications thereto; true, complete and accurate copies of any and all Federal and State income tax or informational income tax returns filed within the past two years; balance sheets and profit and loss statements for the past two years; and balance sheet and profit and loss statements for the past two years; and balance sheet and profit and loss statements for the most recent present period for which same have been computed. Further, upon twenty-day notice from the Plaintiff to the Companies, all books and records shall be produced for inspection, copying and examination in the Plaintiff's counsel's office.

 

5. Until said judgment is satisfied in full, including all costs and interest thereon, the Companies shall supply the Plaintiff, within thirty days of the close of the respective accounting period for which said data is or may be generated, all future statements reflecting cash position, balance sheet position, and profit and loss.

 

By the Court,

 

Young, J.

 

C O M M O N      P A G E      F O O T E R

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More Articles On Charging Orders click here

 

THE CHARGING ORDER PRACTICE GUIDE BY JAY ADKISSON

 

The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association, click here for more

 

Available for purchase at https://goo.gl/faZzY6

LAW REVIEW ARTICLES BY JAY ADKISSON

 

For more on the historical background of Charging Orders and contemporary issues involving the same, see Jay Adkisson's article, Charging Orders: The Peculiar Mechanism, 61 South Dakota Law Review 440 (2016). Available at SSRN: https://ssrn.com/abstract=2928487

WEBSITE CONTENTS

 

Appeal - Issues relating to the appeal of a charging order

 

Bankruptcy - Treatment of the debtor/member's interest in bankruptcy

 

Compliance - Issues for the LLC and non-debtor members in complying with a charging order

 

Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute

 

Creditor Rights Restrictions - Limitations on creditors' management and informational rights

 

Economic Rights - Limitation of charging order and foreclosure to debtor's economic rights

 

Exclusivity - The charging order as the sole remedy available to creditors and exceptions

 

Exemptions - Available state and federal protections that may apply to charging orders

 

Foreclosure - Liquidation by judicial sale of the debtor's right to distributions

 

Information Rights - Creditors' ability to access information about the LLC

 

Intra-Member Disputes - Where one member obtains a charging order against another

 

Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs

 

Lien - The lien effect of a charging order and priority issues

 

Procedure - The procedure for obtaining a charging order and ancillary provisions

 

Receiver - The role of the receiver in charging order proceedings

 

Single-Member LLCs - Enforcing the judgment against an LLC with a sole member

 

Taxes - Tax issues relating to charging orders for all involved parties

 

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  • Collecting On A Judgment - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies - https://collectingonajudgment.com/

 

  • Voidable Transactions - Discussion of the Uniform Voidable Transactions Act (a/k/a 2014 Revision of the Uniform Fraudulent Transfers Act) and fraudulent transfer law in general - https://voidabletransactions.com/

 

  • Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused - https://privateretirementplans.com/

 

  • Protected Series LLCs - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017 - https://protectedseriesact.com/

 

  • California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues - https://calejl.com/

 

 

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© 2018 Jay D. Adkisson. All Rights Reserved. No claim to government works or the works of the Uniform Law Commission. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction.  This site is https://chargingorder.com Contact: jay [at] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678.

 

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