2024 Opinions

2024 Site.Year2024ChargingOrderOpinions

2024 Charging Order Opinions

CFPB v. Integrity Advance, LLC, 2024 WL 5262916 (D.Kan.Dec. 31, 2024).

♦ In CFPB v. Integrity Advance, LLC, the U.S. District Court for the District of Kansas ruled that the Federal Debt Collection Procedures Act (FDCPA) preempts a Kansas state law allowing for charging orders to seize a debtor's interest in a Limited Liability Company (LLC). The Consumer Financial Protection Bureau (CFPB) was attempting to collect a $43 million judgment against James R. Carnes. The CFPB had previously obtained a charging order under Kansas law to attach Carnes's interests in several LLCs. However, the court, upon its own review, determined that the FDCPA, which governs federal debt collection, provides the exclusive means for the CFPB to collect debts. The court found that the FDCPA's garnishment provision, which allows for the seizure of a debtor's property held by a third party, applies to LLC interests. Therefore, the court vacated the existing charging order and denied all pending motions related to it, including a new application for a charging order, concluding that the FDCPA's garnishment procedures are the proper method for the CFPB to pursue Carnes's LLC interests. The court sided with the weight of recent authority that interprets the FDCPA to preempt state laws that provide alternative collection mechanisms. ♦

Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024).

♦ Bartch v. Bartch involves a dispute between partners in Culta, LLC, a Maryland-licensed marijuana business. David Joshua Bartch ("Josh") and Mackie Barch ("Mackie") agreed that Josh would temporarily relinquish his ownership interest to ensure the business secured a state license. Once the license was obtained, Mackie refused to reinstate Josh’s ownership. Procedural History: Josh sued Mackie and his company, Trellis Holdings, for breach of contract in federal court. Mackie did not raise an illegality defense during the initial proceedings. Following a bench trial, the district court awarded Josh $6.4 million. Mackie did not appeal the original judgment but refused to pay. Josh then sought to enforce the judgment, leading the district court to issue an enforcement order under Colorado Rule of Civil Procedure 69(g). This order required Mackie to use his "best efforts" to sell his equity in Culta and turn over the proceeds. Mackie appealed the enforcement order and moved to vacate the original judgment under Rule 60(b)(4), arguing the court lacked jurisdiction because the contract violated the federal Controlled Substances Act (CSA). Final Ruling: The Tenth Circuit affirmed the original judgment, ruling that the district court had jurisdiction and that Josh had standing to seek damages. The court held that a judgment is not "void" under Rule 60(b)(4) simply because an underlying contract might be illegal. However, the Tenth Circuit vacated the judgment enforcement order. While it confirmed the district court possessed authority under Colorado law to reach the equity, it held that the specific order raised serious public policy concerns. Because the order might effectively require the parties to abet continued marijuana operations to maintain equity value, the court remanded the case to determine if the enforcement mechanism compels a violation of federal law. ♦

Stich v. Mattingly, 2024 WL 2788210 (Ky.App., May 31, 2024).

♦ Stich v. Mattingly, 2024 WL 2788210 (Ky.App., May 31, 2024), involves a dispute between Kevin Stich, a member of a limited liability company (LLC) called Haunt Brothers, LLC, and Kevin Mattingly, a judgment creditor. Mattingly obtained a judgment against Stich for unpaid rent and sought to collect on the judgment by foreclosing on Stich's interest in Haunt Brothers. (1) Key Points: (a) Charging Order: Mattingly obtained a charging order against Stich's interest in Haunt Brothers, which gave him the right to receive distributions from the LLC up to the amount of the judgment. (b) Foreclosure: Mattingly sought to foreclose on Stich's interest in Haunt Brothers, arguing that he was entitled to the entire interest, not just the right to receive distributions. (c) Stich's Argument: Stich argued that the foreclosure should be limited to his right to receive distributions up to the amount of the judgment. (d) Court's Decision: The court affirmed the foreclosure order, finding that the statute (KRS 275.260) allows for the foreclosure of the entire interest in the LLC, not just the right to receive distributions. (2) Reasoning: (a) The court interpreted the statute to mean that the "limited liability company interest subject to the charging order" in KRS 275.260(4) refers to the judgment debtor's entire transferable interest in the company. (b) The court found that limiting the foreclosure to the right to receive distributions would render the foreclosure provision meaningless. (c) The court reasoned that the foreclosure process is intended to provide a more drastic remedy for creditors, allowing them to recoup their debts through a forced sale of the member's entire interest. (3) Outcome: The court upheld the foreclosure order, allowing Mattingly to foreclose on Stich's entire interest in Haunt Brothers, LLC. This means that Stich will lose his membership in the LLC, and the purchaser at the foreclosure sale will acquire his rights as an assignee. (4) Implications: This case highlights the importance of understanding the specific provisions of the Kentucky Limited Liability Company Act (KRS 275.001 et seq.) when dealing with charging orders and foreclosures. It also demonstrates that creditors can use foreclosure as a powerful tool to collect on judgments against LLC members. ♦

Big Sandy Co. v. American Carbon Corp., 2024 WL 5250401 (E.D.Ky., Dec. 30, 2024).

♦ In Big Sandy Co. v. American Carbon Corp., the U.S. District Court for the Eastern District of Kentucky granted Big Sandy Company's motion for a charging order against American Carbon Corporation (ACC). This order allows Big Sandy to collect on a prior judgment against ACC by placing a lien on ACC's interests in four subsidiary LLCs (McCoy Elkhorn Coal, Knott County Coal, Deane Mining, and Perry County Resources). The court rejected ACC's arguments that the court lacked jurisdiction because the subsidiaries were not registered in Kentucky, and that the charging order would improperly give Big Sandy priority over other creditors. The court held that it had jurisdiction over ACC, and therefore could issue a charging order against its interests in the LLCs, regardless of where they were formed. The court also clarified that the charging order acts as a lien, not an assignment, and does not inherently grant priority over other creditors. The order requires the subsidiaries to notify Big Sandy of any distributions to ACC and to pay those distributions directly to Big Sandy until the judgment is satisfied. The order also prevents the subsidiaries from diverting funds and requires ACC to inform Big Sandy of any new or reinstated LLCs. ♦

245 Park Member LLC v. HNA Group (Int'l) Co., 2024 WL 1506798 (2nd Cir., April 8, 2024).

♦ The Second Circuit affirmed a district court order requiring HNA Group (International) Company Limited ("HNA") to turn over its membership interest in HNA North America, LLC—a Delaware entity—to 245 Park Member LLC to satisfy an approximately $185 million arbitration judgment. The primary legal issue was whether New York or Delaware law governed the turnover of membership interests in a foreign LLC. HNA argued that Delaware law applied and prohibited such turnovers. The Second Circuit disagreed, holding that under New York’s Civil Practice Law and Rules (CPLR) Article 52, New York law governs enforcement procedures for judgments entered in its courts. Citing Hotel 71 Mezz Lender LLC v. Falor, the court confirmed that membership interests in out-of-state LLCs are "assignable and transferable" property subject to enforcement under CPLR 5201(b). The court also rejected HNA’s argument that the judgment creditor was limited to a charging lien. It held that New York law permits the full turnover of LLC membership interests. Furthermore, the court affirmed the district court’s exercise of equitable authority under CPLR 5240 to order a direct turnover to the creditor, rather than to a sheriff. This departure from standard procedure was justified by HNA’s history of obstructing collection efforts and the uncertain value of the membership interest. Finally, the Second Circuit upheld the denial of HNA’s Rule 60(b) motion for relief from judgment. The court found no evidence the judgment had been fully satisfied and determined that the motion was premature. The district court did not abuse its discretion in refusing to reduce the judgment amount while enforcement proceedings were ongoing, especially as the motion was denied without prejudice. ♦

Campbell v. 1 Spring, LLC, 2024-Ohio-308, 2024 WL 342686 (Ct.App., Slip Op., Jan. 30, 2024).

♦ Robert W. Campbell entered into a 2012 consulting agreement with 1 Spring, LLC and its members, James and Samuel Horner, to secure state advertising permits for their property. In exchange, 1 Spring agreed to pay Campbell 10% of gross rent receipts from a lease with Lamar Companies for a total of 20 years. Following prior litigation, a 2019 judgment confirmed Campbell’s right to 10% of future rent revenues received from the lessee or its successors. In 2021, 1 Spring and Lamar executed a "new lease" that terminated the original agreement. Appellants subsequently ceased payments to Campbell, arguing their obligation was tied strictly to the original lease terms. Campbell moved for a charging order against the Horners’ membership interests in 1 Spring to satisfy the unpaid judgment. The trial court granted the motion, ruling that the new lease was a "successor lease" and that the compensation obligation remained in effect until 2032. The Tenth District Court of Appeals affirmed. Reviewing the contract de novo and the charging order for abuse of discretion, the court found the consulting agreement's core bargain was a 20-year payment term in exchange for Campbell’s successful permit assistance. The court determined the 2021 lease was effectively a renegotiation and extension of the original bargain rather than a distinct transaction. Because Campbell fulfilled his obligations and the 2019 judgment was binding, the court held that the trial court properly issued the charging order under R.C. 1706.342 (formerly R.C. 1705.19) to satisfy the debt from the judgment debtors’ membership interests. Under Ohio Supreme Court Rep.R. 3.4, this 2024 appellate decision serves as persuasive legal authority. ♦

Universitas Education, LLC v. Avon Capital, LLC, 124 F.4th 1231 (10th Cir., 2024).

♦ The Tenth Circuit affirmed the district court’s re-entry of summary judgment and receivership orders in a long-running collection action stemming from a $30 million insurance fraud scheme. The litigation followed a prior appellate vacatur which had found that the judgment creditor, Universitas, allowed its registered New York judgment to expire under Oklahoma’s five-year enforceability statute before the district court issued its initial order. Upon remand, the district court re-adopted its summary judgment and receivership rulings after Universitas re-registered the judgment. The Tenth Circuit rejected the debtors' jurisdictional arguments, holding that the district court properly exercised its power to maintain the status quo and that re-registering the foreign judgment cured the enforceability defect without requiring a new lawsuit. Addressing the merits, the court dismissed the appellants' claim that Oklahoma law restricted the creditor’s remedy to a charging order. The court clarified that while charging orders are the exclusive remedy against a member's interest in an LLC, they do not preclude a receivership over the LLC’s own assets—in this case, a $6.7 million insurance portfolio—when the entity itself is the judgment debtor. Given the extensive history of fraudulent transfers and the use of shell companies to hide assets, the court found that the district court acted well within its equitable discretion to appoint a receiver to carry the judgment into effect. This decision effectively prevents judgment debtors from using corporate structures and procedural "gaps" to evade long-standing financial obligations. ♦