2010 Opinions

2010 Site.Year2010ChargingOrderOpinions

2010 Charging Order Opinions

In re First Protection Inc. (Fursman v. Ulrich), _ B.R. __, 2010 WL 5059589 (9th Cir.BAP (Ariz.), Nov. 22, 2010).

Olmstead v. FTC, 44 So.3d 76 (Fla., 2010).

In re LaHood (LaHood v. Covey), 437 B.R. 330 (Bkrpt.C.D.Ill. 2010).

First Mid-Illinois Bank & Trust, N.A. v. Parker, 403 Ill.App.3d 784, 933 N.E.2d 1215 (2010).

♦ The Illinois Appellate Court addressed lien priority among multiple judgment creditors seeking to reach members’ distributional interests in an LLC. Mid–Illinois Bank obtained a prejudgment attachment against the defendants’ LLC distributional interests, later reduced its claim to judgment, and then secured a charging order; competing creditors later obtained their own charging orders or relied on citations to discover assets. The trial court ruled that only charging orders created liens under the Illinois Limited Liability Company Act and prioritized later-entered charging orders over Mid–Illinois Bank’s earlier attachment. On appeal, the court reversed, holding that the Act’s charging-order remedy is the exclusive postjudgment method to satisfy a judgment from an LLC distributional interest, but it does not bar prejudgment attachment under the Code of Civil Procedure to preserve that interest. When a judgment is later entered and a charging order obtained, the charging order lien relates back to the date of the prejudgment attachment for priority purposes. Applying first-in-time principles, the court concluded that Mid–Illinois Bank’s lien had priority because its attachment predated the competing charging orders, and it remanded for further proceedings consistent with that ruling. ♦

Stanley v. Reef Securities Inc., 314 S.W.3d 659 (Tex.App., 2010).

♦ The Dallas Court of Appeals clarified the critical distinction between a "partnership interest" and a "partnership distribution" under Texas law. The debtor, Robert Stanley, attempted to shield $20,000 monthly payments received from his limited partnership by arguing that the charging order is the exclusive remedy for creditors and that the payments constituted exempt "current wages." The court rejected these arguments, holding that while a charging order is indeed the exclusive means to reach a partnership interest—defined as the right to receive future distributions—it does not protect funds once they have actually been distributed and are in the debtor’s possession. At that point, the money ceases to be a "partnership interest" and becomes nonexempt personal property subject to a turnover order under Tex. Civ. Prac. & Rem. Code § 31.002. Furthermore, the court affirmed that the payments were distributions rather than wages because, as a partner, Stanley was not entitled to compensation for services absent a specific agreement. While the appellate court modified the order to remove references to other property for which no evidence of ownership was provided, it affirmed the turnover of the $20,000 monthly payments and the award of attorney’s fees. This ruling serves as a vital precedent for creditors, confirming that the "exclusivity" of the charging order remedy ends the moment the partnership's assets cross the threshold into the debtor's hands. ♦

Regions Bank v. Stewart, 2011 WL 1827453 (S.D.Ala., 2011).

North Valley Bank v. McGloin, Davenport, 251 P.3d 1250 (Col.App., 2010).

♦ The Colorado Court of Appeals addressed whether a statutory attorney’s charging lien on a judgment has priority over a creditor’s previously perfected UCC security interest. North Valley Bank had loaned money to a contractor and perfected a security interest in the contractor’s accounts receivable and proceeds; later, the contractor hired attorneys to collect an unpaid project bill, and the attorneys filed notice of an attorney’s lien under § 12-5-119, C.R.S. After litigation, a judgment of $51,402 was paid to the attorneys, who retained most of it for fees and a retainer and forwarded the remainder to the contractor; the bank then sued, claiming its security interest entitled it to the entire award. Affirming the trial court, the appellate court held the attorney’s lien was superior because the statute expressly makes the charging lien a “first lien,” demonstrating clear legislative intent to give it priority over earlier-perfected interests, and because Colorado’s UCC does not govern or determine the lien’s priority in this context (including that the relevant UCC priority provision concerns possessory liens on goods, whereas a charging lien is nonpossessory and attached to a judgment). ♦