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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Textron Financial

 

Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).

 

TEXTRON FINANCIAL CORPORATION, Plaintiff,

 

v.

 

MICHAEL S. GALLEGOS, Defendant.

 

Case No. 15cv1678-LAB (DHB).

 

United States District Court, S.D. California.

 

October 7, 2015.

 

ORDER DENYING TEXTRON'S MOTION TO CHARGE GALLEGOS' MEMBERSHIP INTEREST

 

LARRY ALAN BURNS, District Judge.

 

Textron obtained a $21,921,165.45 judgment against Gallegos in the U.S. District Court for the District of Rhode Island, but has only collected $10,484.99. (Docket nos. 40-1 and 40-6.) Its assignee, SPE LO Holdings, seeks a charging order against Gallegos' interest in two entities: Pacific Pearl Hotels, LLC and Pacific Pearl Hotel Management, LLC. (Docket no. 40.) SPE LO relies on California Secretary of State documents to establish Gallegos' interest in the LLCs. (Docket nos. 40-2, 40-3, and 40-4.) Gallegos' name is listed on line 9 of the Secretary of State documents, which require the "name . . . of any manager . . ., or if none have been appointed or elected, . . . the name . . . of each member." (Docket nos. 40-2 and 40-3.) His name is also listed on line 15, where he's identified as the "manager" of both LLCs. SPE LO served the motion by mail on Gallegos and the LLCs. (Docket nos. 40-9 and 41.)

 

Gallegos opposes the motion, arguing: (1) the Secretary of State records aren't admissible; (2) Textron failed to serve the LLCs; and (3) Textron hasn't shown that he is a member of the LLCs. (Docket no. 47.) He doesn't contend that the Secretary of State records are inaccurate. Nor does he deny that he's a member of the LLCs. He just argues that SPE LO hasn't proved it.

 

Admissibility of Secretary of State Records

 

The Secretary of State filings are matters of public record whose accuracy cannot be reasonably disputed. Potocki v. Wells Fargo Bank, NA, 2014 WL 2949286, at *1 n.1 (E.D. Cal. June 30, 2014). The Court takes judicial notice of them.

 

Sufficiency of Service

 

When there's a money judgment against an LLC member personally, but not against the LLC, the member's interest may be reached by a charging order. Cal. Code of Civ. P. sec. 708.310. A charging order is a lien on the member's distributional interest. 51 Am. Jur. 2d Limited Liability Companies sec. 23. It only allows the judgment creditor to receive distributions to which the member would otherwise be entitled; it doesn't entitle the creditor to participate in the LLC's management or exercise the rights of a member. Cal. Corp. Code secs. 17701.02(aa), 17705.02, and 17705.03. It thereby "protect[s] other members of an LLC from being forced to involuntarily share governance responsibilities with someone they did not choose, or from being forced to accept a creditor of another member as a co-manager." In re First Prot., Inc., 440 B.R. 821, 829-30 (B.A.P. 9th Cir. 2010).

 

Because the other LLC members are protected, a judgment creditor can obtain a charging order under sec. 17705.03(a) without serving the LLC or making it a party. See Bank of Am., NA v. Freed, 983 N.E.2d 509, 522 (Dec. 28, 2012) ("[C]harging orders on distributional interests do not affect the rights or interests of the LLC to the degree necessary to require that it be made a party. . . . It would be impractical and unnecessarily costly to require a lender seeking charging orders to serve all of the entities in which a borrower has an interest."). But, to obtain a lien on a judgment debtor's interest in an LLC before the court issues a charging order, the judgment creditor must serve a notice of motion for charging order on (1) the debtor and (2) the LLC or all of its members. Cal. Code of Civ. P. sec. 708.320(a). Service by mail is sufficient to satisfy sec. 708.320(a); personal service isn't required. See, e.g., Choice Hotels Int'l, Inc. v. Penta Denver LLC, No. 3:13-mc-80249, 2014 WL 458069, at *4 (N.D. Cal. Jan. 27, 2014); see also id. at Docket no. 8. Textron adequately served Gallegos and the LLCs.

 

Gallegos' Interest in the Pacific Pearl Entities

 

Entry of a charging order requires "substantial evidence" that the debtor is a partner or member of the entity. See Ribero v. Callaway, 87 Cal. App. 2d 135, 139 (1948); Cf. Regions Bank v. Alverne Associates, LLC, 456 S.W.3d 52, 58 (Mo. Ct. App. 2014). "Substantial evidence" means "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Braewood Convalescent Hosp. v. Workers' Comp. Appeals Bd., 34 Cal. 3d 159, 164 (1983). It has been found where the debtor's interest was evidenced by a certificate of limited copartnership, Ribero v. Callaway, 87 Cal. App. 2d at 137, and by previous declarations of the debtor and his partner, Safeco Ins. Co. of Am. v. Raisch Co., 2013 U.S. Dist. LEXIS 39658, *2 (N.D. Cal March 20, 2013).

 

Here, the Secretary of State documents establish that Gallegos is a manager of the LLCs. But, an LLC can be managed by a non-member. Cal. Corp. Code secs. 17701.02 and 17704.07. While Gallegos' name is listed on line 9 of the Secretary of State documents, where the LLCs could have listed a member if no manager had been appointed, line 15 establishes that a manager was appointed. Thus, the Secretary of State documents don't prove Gallegos' membership interest in the LLCs, and SPE LO offers no other evidence that Gallegos is a member. While they argue that he is a member in their motion, "statements made in briefs are not evidence"—let alone substantial evidence. In re Heritage Bond Litig., 2004 WL 1970058, at *4 (C.D. Cal. July 23, 2004).

 

Conclusion

 

SPE LO's motion for a charging order is DENIED WITHOUT PREJUDICE. It may bring the motion again once it has substantial evidence of Gallegos' membership interest in the LLCs. To avoid the possibility that Gallegos has avoided entry of a charging order by playing coy, the Court authorizes SPE LO to pursue postjudgment discovery to determine whether Gallegos is, in fact, a member of the LLCs.

 

IT IS SO ORDERED.

 

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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  • 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.

 

Additional related sites: Voidable Transactions