2023 Opinions

2023 Site.Year2023ChargingOrderOpinions

2023 Charging Order Opinions

Bran v. Spectrum MH, LLC, 2023 WL 5487421 (Tex.App., 14th Distr., August 24, 2023).

♦ The Texas Fourteenth Court of Appeals addressed whether a trial court may appoint a receiver to seize a judgment debtor’s membership interests in limited liability companies (LLCs). Following a $1.4 million judgment, the trial court issued a broad turnover and receivership order under Texas Civil Practice and Remedies Code § 31.002, authorizing a receiver to seize various assets, including bank accounts, real property, and all LLC membership interests held by the debtors. The primary legal issue was the exclusivity of charging orders. The court held that under Texas Business Organizations Code § 101.112, a charging order is the "exclusive remedy" by which a judgment creditor may satisfy a judgment out of a member’s LLC interest. This statutory exclusivity prevents a receiver from seizing, managing, or selling membership interests, regardless of whether the LLC is a single-member or multi-member entity. The court concluded that the trial court abused its discretion by extending the receivership to these interests. The court also addressed the evidentiary requirements for turnover orders. Under § 31.002, a creditor must provide evidence that the debtor owns the specific non-exempt property targeted. While the record supported the existence of specific bank accounts at Independent Bank, BBVA Compass, and Rabobank, the creditors failed to provide evidence of ownership for the other broad categories of property listed in the order. Additionally, the court noted that turnover proceedings cannot reach assets belonging to third-party non-debtors. The court reversed the trial court’s order and remanded the case with instructions to issue a new order limited strictly to the debtors' interests in the specifically identified bank accounts. ♦

Brockley v. Ellis, 2023 WL 6303748 (S.D., Sept. 27, 2023).

♦ The Supreme Court of South Dakota affirmed circuit court orders denying a motion by Mark and Annesse Brockley to hold Michael Trucano, the Michael J. Trucano Living Trust, and Hickoks Hotel and Suites, LLC in civil contempt for allegedly violating a charging order. The dispute originated from a 2014 lawsuit where the Brockleys sought payments due under a contract for deed from Clarence Griffin and other business partners. In late 2016, the circuit court issued a charging order directing that any distributions from Griffin's interest in N.M.D. Venture, LLC, which was later renamed Hickoks, be paid to the Brockleys to satisfy their judgment. However, in 2015, prior to the entry of the charging order, Griffin had assigned his membership interest to himself and his wife, Kimberly, as tenants by the entirety. Following the sale of the business's hotel and casino assets and Griffin's death in 2020, the company distributed the remaining sale proceeds to Kimberly as the sole surviving member. The Brockleys sought contempt sanctions, claiming the distribution bypassed their charging order. On appeal, the Supreme Court held that the circuit court did not err in finding no willful or contumacious disobedience. The court reasoned that under both Florida and South Dakota law, the 2015 assignment effectively created a right of survivorship, meaning Griffin's interest passed automatically to his wife upon his death. Because Kimberly became the sole owner of the interest by operation of law before the distribution occurred, the funds were not owed to Griffin and thus were not subject to the charging order. Furthermore, the court found that Trucano had exercised due diligence to ensure compliance while he was manager and that the Brockleys lacked standing to challenge the validity of the assignment based on internal company agreements or administrative gaming regulations. Therefore, the denial of the contempt motion was affirmed. ♦

In re Canada, Bk.N.D.Tex. Case No. 23-30568 (Dec. 5, 2023).

♦ In the Chapter 7 bankruptcy case of William Ralph Canada, Jr., the United States Bankruptcy Court for the Northern District of Texas, presided over by Judge Michelle V. Lorson, issued a definitive order regarding the Trustee's objection to the debtor's claimed exemptions. The Chapter 7 Trustee, Daniel J. Sherman, sought to disallow two specific exemptions: a 70% ownership interest in a corporation known as DAD Drilling, LLC, and a residential homestead exemption for a specific parcel of property in Aubrey, Texas, identified as Lot 14, Nail Springs Branch. The debtor asserted that the Aubrey property was a contiguous part of his family homestead, even though it was titled separately from adjacent parcels held in a family trust for the benefit of his wife. He provided sworn testimony that the family used the subject land for children's activities, as a pet cemetery, and for the free roaming of domestic ducks and turkeys. Overruling the Trustee's objection, the court held that under Texas law, separate parcels can properly constitute one contiguous homestead if used for the family's support and convenience, regardless of whether the parcels are titled specifically in different names within a family unit. Conversely, the court found the debtor's attempt to exempt his interest in DAD Drilling, LLC, to be entirely without legal merit. The debtor argued that because state law limits a judgment creditor's remedy to a charging order, the interest was effectively exempt from the bankruptcy estate. The court rejected this analogy, emphasizing that Texas charging order statutes are designed to protect fellow members from management interference rather than providing a personal exemption for individual debtors. Citing several state court precedents, the court affirmed that membership interests in limited liability companies are non-exempt assets under the Texas Constitution and Property Code. Consequently, it sustained the Trustee's objection to the business interest while allowing the homestead exemption. ♦

Crabar/GBF, Inc. v. Wright, 2023 WL 8110737 (D.Neb., Nov. 22, 2023).

♦ The United States District Court for the District of Nebraska issued a Memorandum and Order in the case of Crabar/GBF, Inc. v. Wright, ruling on a series of motions related to the enforcement of a substantial money judgment. The court had previously entered an amended judgment against Mark Wright for 1.75 million dollars and Wright Printing Company for 1 million dollars. In response to the plaintiff’s application for a charging order against Wright’s interests in two limited liability companies, 121 Court, LLC and 11616 I Street, LLC, the defendants moved for a temporary stay of execution without posting a security bond. Senior District Judge John M. Gerrard denied the motion for a stay, determining that the defendants failed to satisfy the necessary criteria. The court noted that Wright’s history of asset concealment and the speculative nature of a proposed property sale did not justify an unsecured stay. Highlighting the complexity of the collection process and the lack of confidence in the availability of funds, the court emphasized that judicial economy should not be burdened by Wright’s delays. Turning to the charging order, the court granted the plaintiff’s request under Nebraska law, effectively creating a lien on Wright’s transferable interests in the specified LLCs. The court cited evidence provided by the plaintiff suggesting that Wright was actively shielding assets and potentially engaging in fraudulent transfers to avoid his legal obligations. Although the plaintiff had not yet formally moved for such a remedy, the court observed that the situation constituted an extreme case that might warrant the appointment of a receiver. Consequently, the court ordered the parties to meet and confer to stipulate to a receiver or submit proposals for the court’s consideration. The resulting order mandates that any distributions from the LLCs be paid into the court registry to satisfy the outstanding judgment and establishes clear deadlines for the receivership process. ♦

Fremont Bank v. Signorelli, 2023 WL 2505021 (N.D.Cal., Feb. 24, 2023).

♦ The United States District Court for the Northern District of California addressed a motion by Fremont Bank for a charging order against the interests of Signorelli Family, L.P. in two private equity funds, Pine Brook Capital Partners II, L.P. and PBCP Feeder, L.P. This matter stems from a 2018 breach of contract and written guaranty action regarding a defaulted business loan, which led to a 2019 summary judgment in favor of the bank totaling over nine hundred thousand dollars. By 2023, the outstanding judgment balance had grown to approximately one million dollars due to accrued interest and minimal payments. Following a series of collection challenges, including Robert J. Signorelli's failure to attend debtor examinations which resulted in a contempt finding, the bank moved to satisfy the judgment via the partnership interests. The legal standard for such an order is governed by Federal Rule of Civil Procedure 69(a) and California Code of Civil Procedure section 708.310, which requires evidence of a money judgment and the debtor's interest in a partnership. The bank presented substantial evidence of these interests, including testimony and account statements reflecting millions in capital contributions and ongoing cash distributions. The defendants eventually filed an untimely opposition, arguing that the charging order would deprive them of income necessary for their support, citing an exemption under California Code of Civil Procedure section 704.225. However, the court found the opposition meritless, noting that such exemptions are legally limited to natural persons and do not apply to entities like Signorelli Family, L.P. Because the bank met its burden and the defendants failed to provide a valid legal defense, Magistrate Judge Donna M. Ryu recommended granting the motion. This recommendation permits the bank to apply the transferable partnership interests toward the satisfaction of the significant outstanding debt.Text ♦

Klinek v. Luxeyard, Inc., 2023 WL 4497063 (Tex.App. 14th Distr., July 13, 2023).

♦ The Fourteenth Court of Appeals of Texas reviewed a trial court order granting turnover relief and appointing a receiver to aid in collecting a final money judgment against Robert Klinek. The underlying dispute involved a judgment ordering Klinek to disgorge profits from a pump-and-dump stock scheme, which he had failed to pay while also obstructing post-judgment discovery efforts. Klinek challenged the turnover order on two grounds, arguing that LuxeYard provided no evidence he owned non-exempt property and that the court set a twenty-five percent receiver fee without evidence of its reasonableness. In its analysis, the appellate court established that while a judgment creditor must initially show the debtor owns property, the burden of proving specific exemptions rests with the debtor. The court found sufficient evidence that Klinek owned various assets, including scheme proceeds, real property in California, and corporate stock. However, the court determined the trial court abused its discretion by including Klinek’s 2012 Honda Fit, which is exempt from execution under the Texas Property Code as a matter of law. Additionally, the court found that turnover relief was improper for Klinek’s membership interests in three limited liability companies. It noted that under the Texas Business Organizations Code, a charging order is the exclusive remedy for a judgment creditor to satisfy a debt from a member’s LLC interest. Regarding the receiver’s fee, the court held that setting a fixed twenty-five percent rate was an abuse of discretion because the record lacked evidence concerning the value of services, complexity of the work, or results obtained. Ultimately, the appellate court affirmed the turnover order as modified to exclude the vehicle and LLC interests, reversed the fee award, and remanded the case for further proceedings consistent with its opinion. ♦

Estate of Lieberman v. Playa Dulce Vida, S.A., 2023 WL 138317 (E.D.Pa., Jan. 9, 2023).

♦ The United States District Court for the Eastern District of Pennsylvania addressed a post-judgment motion for a charging order. Following a five-day jury trial, the Estate of Dr. Richard Lieberman secured a verdict and subsequent judgment of $1,777,075.08 against Playa Dulce Vida, S.A. (PDV), a Costa Rican corporation that owns and operates the Arenas Del Mar Beachfront and Rainforest Resort. The Plaintiff sought a charging order under the Pennsylvania Uniform Limited Liability Company Act of 2016, specifically 15 PA. CONS. STAT. Section 8853, to satisfy the judgment. District Judge Eduardo C. Robreno denied the motion based on the legal classification of the Defendant. The court determined that PDV is a sociedad anonima (S.A.), which functions as a corporation rather than a limited liability company (LLC). Citing precedents from the Third and Seventh Circuits and Treasury Department regulations, the court concluded that an S.A. is a joint stock company equivalent to a U.S. corporation. Thus, the PULLCA, which applies only to LLCs, could not provide the requested relief. Furthermore, the court held that even if the Defendant was an LLC, the motion was misdirected. Under Pennsylvania law, a charging order constitutes a lien on a specific member’s transferable interest in an LLC, requiring the company to pay distributions to the judgment creditor that would otherwise go to that member. The Plaintiff’s motion improperly sought a charging order against PDV itself rather than a member’s interest. Consequently, because PDV is not an LLC and because the motion targeted the entity rather than a member's transferable interest, the court denied the petition for a charging order in its entirety. ♦

In re McCuan, 2023 WL 4030468 (M.D.Fla. 2:19-CV-317, June 15, 2023).

♦ In re McCuan involves an appeal and cross-appeal from a bankruptcy court judgment regarding fraudulent transfers by debtor William P. McCuan intended to hinder collection of over $14 million in judgments by Regions Bank. The United States District Court for the Middle District of Florida affirmed the bankruptcy court's findings that several transfers were avoidable under the Florida Uniform Fraudulent Transfers Act. These included a $200,000 certificate of deposit purchased for MJF, a $44,000 transfer to the McCuan Trust used to pay a car loan, and the transfer of a membership interest in MDG-Patriot, LLC. The court found these transactions were made with actual fraudulent intent while the debtor was insolvent and receiving no equivalent value. It rejected the argument that these were not assets due to being pledged collateral, clarifying that surplus funds exceeding the lien remained reachable by creditors. Regarding the cross-appeal, the court affirmed the summary judgment ruling that transfers of interests in Little Harpers, LLC and Lakefront North Investors, LP were time-barred. The court held that the plaintiffs failed to present sufficient evidence to refute that the assignments occurred in November 2007, outside the look-back period. Furthermore, the court upheld the decision not to enter a money judgment against the debtor's wife, Jill McCuan. Although the bankruptcy court found the debtor had retitled accounts to include her with fraudulent intent, it exercised its equitable powers to spare her from a judgment because she never exercised control over the funds or exhibited bad faith. The district court determined that the lower court correctly applied the law and did not make clearly erroneous factual findings. Consequently, the court affirmed the bankruptcy court's consolidated findings, summary judgment orders, and the final judgment, directing the clerk to close the appellate file. ♦

Mexico Foods Holdings, LLC v. Nafal, 2023 WL 6284705 (Tex.App. Dallas, Sept. 27, 2023).

♦ The Dallas Court of Appeals affirmed a trial court order appointing a receiver over a disputed membership interest in a limited liability company during an accelerated interlocutory appeal originating from a complex divorce proceeding. The underlying dispute involved the transfer of the husband’s 31.26 percent equity interest in Mexico Foods Holdings (MFH) to other members for approximately 33 million dollars, despite temporary orders specifically enjoining the parties from alienating company interests. The wife subsequently filed claims under the Uniform Fraudulent Transfer Act (UFTA), seeking a receiver to protect the community estate. The trial court granted the request, finding the transfer was fraudulent and made with the actual intent to hinder or defraud the wife. On appeal, MFH argued that the trial court abused its discretion because less-harsh alternatives, such as an injunction or the existing interpleader action in another court, were available to protect the assets. The Court of Appeals rejected these arguments, clarifying that UFTA does not require a creditor to prove that other remedies are inadequate before a receiver may be appointed. The court noted that while receivership is an extraordinarily harsh remedy, the trial court's findings regarding the fraudulent nature of the transfer and the risk of loss to the community estate justified the decision. Additionally, MFH contended that the receivership order conflicted with provisions of the Texas Business Organizations Code governing limited liability companies. However, the appellate court determined that MFH failed to preserve this issue for review because it did not raise the argument until nearly three months after the receiver was appointed. Concluding that the trial court exercised its discretion in a reasonable and principled fashion based on the record, the appellate court affirmed the order, ensuring the receiver could manage and potentially liquidate the transferred interests. ♦

Pettine v. Direct Biologics, LLC (In re Pettine), 2023 WL 7648619 (BAP 10th Cir., Nov. 15, 2023).

♦ The United States Bankruptcy Appellate Panel of the Tenth Circuit addressed whether a Chapter 7 trustee could obtain a charging order against a debtor's membership interest in a limited liability company to satisfy estate claims. Dr. Kenneth Pettine, the debtor, held a minority interest in Direct Biologics, a Wyoming LLC, which became property of his bankruptcy estate. The trustee sought a charging order under Wyoming law and authority to sell the resulting interest, citing her powers as a hypothetical judicial lien creditor under 11 U.S.C. Section 544(a). The bankruptcy court initially determined that the debtor lacked standing to object but held in the alternative that the trustee was entitled to the relief. Upon review, the Panel reversed the bankruptcy court's standing ruling, finding that the debtor had both Article III and prudential standing. It reasoned that the charging order caused a concrete pecuniary injury because, absent the order, the membership interest would likely be abandoned to the debtor unencumbered, meaning the order directly diminished the asset's value upon its eventual return to him. On the merits, however, the Panel affirmed the issuance of the charging order. It concluded that Section 544(a)(1) grants a trustee the same rights and powers as a creditor who obtained a judicial lien at the commencement of the case. Because Wyoming law permits judgment creditors to obtain a charging order against a member's transferable interest, the trustee was authorized to exercise that remedy. The Panel also rejected the debtor's contention that the charging order violated his right to a fresh start, noting that while a discharge voids personal liability, it does not prevent the liquidation of non-exempt estate property or the enforcement of judicial liens. Consequently, the Panel upheld the trustee's ability to use state-law remedies to maximize the value of the bankruptcy estate. ♦

Prime Victor Int'l Ltd. v. Simulacra Corp., D.Nev. Case No. 23-MS-00014 (Nov. 29, 2023).

♦ The United States District Court for the District of Nevada issued a comprehensive charging order against Simulacra Corporation’s membership interest in Abyss Creations, LLC. Presided over by Chief District Judge Miranda M. Du, the court granted the motion to facilitate the satisfaction of an unpaid Final Judgment balance in accordance with Nevada Revised Statutes. The order establishes rigorous constraints on Abyss Creations, prohibiting it from making any disbursements, distributions, remuneration, or loans to Simulacra or any third party for Simulacra's benefit without explicit authorization. Furthermore, Abyss is barred from paying any of Simulacra's liabilities or engaging in capital acquisitions while the judgment remains outstanding. Specific tax provisions require Abyss to continue allocating all tax items, including profits and losses, to Simulacra, while prohibiting the issuance of tax schedules or forms to Prime Victor International Limited except as required for cash remittances. Simulacra is also prohibited from accepting any financial benefits from Abyss or transferring, encumbering, or modifying its equity interest in the entity without permission. Both parties must provide the court with monthly reports detailing the financial performance of Abyss and the specific income attributable to Simulacra. Most significantly, any funds or proceeds originally intended for Simulacra must be redirected and paid directly to Prime Victor International Limited until the debt is fully satisfied. Under the order, Prime Victor International Limited assumes the status of an assignee of the interest, granting it the right to receive economic distributions without assuming the underlying obligations or management roles of the member. The court emphasized that while this order charges the interest to secure the debt, it does not grant a foreclosure on Simulacra's interest in Abyss Creations, LLC. ♦

Saregama India, Ltd. v. Subramanian Aiyer, N.D.Cal. Case No. 23-MC-80172 (Nov. 29, 2023).

♦ None ♦

SFG Commercial Aircraft Leasing Inc. v. Montgomery Equipment Co., 2023 WL 2447469 (S.D.W.Va., March 10, 2023).

♦ The United States District Court for the Southern District of West Virginia addressed a Motion for Charging Order filed by the plaintiff. SFG obtained a 2018 judgment in Indiana against Montgomery Equipment and Dr. A. Thomas Falbo for approximately 1.65 million dollars plus interest. Following the registration of this judgment in West Virginia and a subsequent debtor examination, SFG sought to charge Dr. Falbos distributional interests in five specific West Virginia limited liability companies: The Faldent Group, TXTXDX, MOEQCO, Montgomery Iron and Machine, and Republic American. Under West Virginia Code Section 31B-5-504, the court has the discretion to charge a members distributional interest to satisfy a judgment, creating a lien on those interests. Judge Joseph R. Goodwin granted the motion in part, entering a charging order against Dr. Falbos interests in all five LLCs. The order requires the entities to report and distribute to SFGs counsel any amounts due to Dr. Falbo until the judgment is fully satisfied. Furthermore, if Dr. Falbo receives any distributions in violation of the order, he must immediately deliver them to the plaintiff. The court also granted ancillary relief requiring each LLC to provide quarterly accountings of all distributions made to or for the benefit of Dr. Falbo. However, the court denied SFGs request to enjoin the LLCs from transferring property or money in which Falbo has an interest, finding the request either duplicative or unsupported by state law, which treats distributional interests as personal property but does not grant members ownership of LLC assets. Additionally, the request for an accounting of distributions that could have been made was denied as overly vague. The court directed SFG to serve the order on the LLCs and maintain compliance until total satisfaction of the debt. ♦

Universal Life Ins. Co. v. Lindberg, 2023 WL 8379394 (N.C.App., Dec. 5, 2023).

♦ Universal Life Ins. Co. v. Lindberg, 2023 WL 8379394 (N.C.App., Dec. 5, 2023), is a legal opinion from the Court of Appeals of North Carolina in the case of Universal Life Insurance Company v. Greg E. Lindberg. The opinion addresses the validity of an injunction and a charging order issued by a lower court in an attempt to enforce a federal court judgment against Lindberg. Here's a breakdown of the key points: (1) The Injunction: (a) The court found that the trial court lacked jurisdiction to issue the injunction. This is because the plaintiff, Universal Life Insurance Company, did not attempt to execute the judgment through a writ of execution before seeking the injunction. North Carolina law requires a returned, unsatisfied writ of execution before supplemental proceedings, like the injunction, can be pursued. (b) The court vacated the injunction. (2) The Charging Order: (a) The court found that the charging order was too broad. It included LLCs in which Lindberg did not have an "economic interest" as defined by the North Carolina Limited Liability Company Act. (b) The court reversed the charging order in part. The trial court must reduce the number of LLCs included in the charging order to only those where Lindberg is a member or has a legally assigned economic interest. (c) The court also reversed the charging order's requirements for Lindberg to produce documents and freeze distributions. These requirements were deemed beyond the scope of the "exclusive remedy" provided by the NC LLC Act. (3) Overall: The Court of Appeals found that the lower court's attempts to enforce the judgment against Lindberg were flawed. The injunction was vacated, and the charging order was significantly narrowed. The case was remanded back to the trial court for further proceedings consistent with the appellate court's opinion. (4) Key Takeaways: (a) Jurisdiction is crucial. The court emphasized the importance of following proper procedures, such as attempting to execute a judgment before seeking supplemental relief. (b) Statutory interpretation is key. The court carefully analyzed the language of the NC LLC Act to determine the scope of the charging order. (c) The "exclusive remedy" principle matters. The court recognized that the NC LLC Act provides a specific remedy for judgment creditors, and any additional requirements must be justified by other legal authority. ♦

Wright v. Shenandoah Investors, LLC, 2023 NY Slip Op. 31392(U)

♦ The Supreme Court of New York County considered a motion by respondents Shenandoah Investors, LLC, Broad River Investors, LLC, and Cavan Properties, Inc. to vacate a default judgment previously entered against them. The respondents moved under CPLR 5015(a)(1), a provision requiring the demonstration of both a reasonable excuse for the failure to appear and the existence of a meritorious defense to the claims. The respondents' primary excuse for their default was the failure of their registered agent to forward service of process to the designated organizational point person. They further contended that the petitioner bore responsibility for serving an address that was known to be incorrect, despite the respondents' own failure to update their records with the New York Secretary of State. Justice Lyle E. Frank dismissed these arguments, affirming that the statutory obligation to maintain accurate contact information with the Secretary of State rests entirely with the corporation. The court cited established precedent that a failure to receive process due to a breach of this obligation is not an excusable mistake. In addition to lacking a reasonable excuse, the court found that the respondents failed to establish a meritorious defense regarding the issuance of a charging order against Cavan Properties' membership interests in the LLCs. Although the LLCs were foreign entities, the court determined that membership interests constitute intangible personal property under the laws of Virginia and South Carolina. Because the debtor, Cavan Properties, is a New York corporation over which the court has personal jurisdiction, the court possesses the authority to reach its intangible assets regardless of their situs. Ultimately, because the court maintained proper jurisdiction and the respondents failed to meet the dual requirements of CPLR 5015(a)(1), the motion to vacate the default judgment was denied in its entirety. ♦