Opinion 2002 North Carolina Foreclosure Charging Order

Adkisson's CHARGING ORDERS The Creditors' Primary Remedy Against A Debtor's Interest In A Limited Liability Company Or Partnership

Caution state law variances! Check currency of statutes!

 

Charging Order Statutes Of The United States

 

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2002 - North Carolina - Herring

 

Herring v. Keasler, 563 S.E.2d 614 (N.C.App. 06/04/2002).

 

North Carolina Court of Appeals

 

No. COA01-1000

 

563 S.E.2d 614, 2002.NC.0000665

 

June 04, 2002

 

MAX HERRING, AS ASSIGNEE OF BRANCH BANKING & TRUST CO., PLAINTIFF,

v.

BENNETT M. KEASLER, JR., DEFENDANT.

 

Appeal by plaintiff from order filed 16 May 2001 by Judge Jack W. Jenkins in Wake County Superior Court. Heard in the Court of Appeals 14 May 2002. Wake County No. 94 CVS 7235

 

Michael W. Strickland & Associates, P.A., by Nelson G. Harris, for plaintiff-appellant.

 

Hunton & Williams, by John D. Burns, for defendant-appellee.

 

The opinion of the court was delivered by: Greene, Judge

 

PUBLISHED

 

Max Herring (Plaintiff), as assignee of Branch Banking & Trust Company (BB&T), appeals an order filed 16 May 2001 enjoining Plaintiff from seizing or selling Bennett M. Keasler, Jr.'s (Defendant) membership interests in various limited liability companies.

 

On 3 January 1996, BB&T obtained a default judgment (the judgment) against Defendant and his wife in the amount of $29,062.57 plus interest. *fn1 On 12 December 2000, BB&T assigned its interest in the judgment to Plaintiff, and Plaintiff obtained a writ of execution against Defendant on 19 March 2001. Subsequently, on 19 April 2001, Defendant filed an emergency motion seeking an order to restrain Plaintiff from attempting to have Defendant's membership interests in several limited liability companies seized and sold. In Defendant's affidavit, he stated he had a 20% membership interest in several limited liability companies, "including River Place I, LLC; River Place II, LLC; River Place III, LLC[;] and River Place IV, LLC [(collectively, the LLCs)], which were created for the purpose of developing real estate in Wake County, North Carolina."

 

In an order dated 20 April 2001, the trial court temporarily restrained Plaintiff from seeking the seizure and sale of Defendant's membership interests in the LLCs. Thereafter, Plaintiff filed a motion on 23 April 2001 seeking an order under N.C. Gen. Stat. § 1-362 directing Defendant's membership interests in the LLCs be sold and the proceeds applied towards the judgment. Pending the sale of Defendant's membership interests in the LLCs, Plaintiff requested an order directing any distributions and allocations of those interests to be applied towards the satisfaction of the judgment (charging order). On 16 May 2001, the trial court filed an order: enjoining Plaintiff from seeking the seizure or sale of Defendant's membership interests in the LLCs; denying Plaintiff's motion, insofar as he sought to have Defendant's membership interests in the LLCs sold or transferred; and granting Plaintiff's motion for a charging order. With respect to the charging order, the trial court directed: Defendant's membership interests in the LLCs to be charged with payment of the judgment, plus interest; the LLCs to deliver to Plaintiff any distributions and allocations that Defendant would be entitled to receive on account of his membership interests in the LLCs; Defendant to deliver to Plaintiff any allocations and distributions he would receive; and Plaintiff to not obtain any rights in the LLCs, except as those of an assignee and under the respective operating agreement.

 

The dispositive issue is whether N.C. Gen. Stat. § 57C-5-03 permits a trial court to order a judgment debtor's membership interest in a limited liability company seized and sold and the proceeds applied towards the satisfaction of a judgment.

 

Generally, a trial court may order any property, whether subject or not to be sold under execution (except the homestead and personal property exemptions of the judgment debtor), in the hands of the judgment debtor or of any other person, or due to the judgment debtor, to be applied towards the satisfaction of [a] judgment. N.C.G.S. § 1-362 (2001).

 

North Carolina General Statutes § 57C-5-03, however, provides that with respect to a judgment debtor's membership interest in a limited liability company, a trial court "may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest." N.C.G.S. § 57C-5-03 (2001). This "charge" entitles the judgment creditor "to receive . . . the distributions and allocations to which the [judgment debtor] would be entitled." N.C.G.S. § 57C-5-02 (2001). The "charge" "does not dissolve the limited liability company or entitle the [judgment creditor] to become or exercise any rights of a member." Id. Furthermore, because the forced sale of a membership interest in a limited liability company to satisfy a debt would necessarily entail the transfer of a member's ownership interest to another, thus permitting the purchaser to become a member, forced sales of the type permitted in section 1-362 are prohibited. See N.C.G.S. § 57C-3-03 (2001) (except as provided in the operating agreement or articles of organization, consent of all the members of a limited liability company required to "[a]dmit any person as a member").

 

In this case, despite Plaintiff's attempts to have Defendant's membership interests in the LLCs seized and sold, his only remedy is to have those interests charged with payment of the judgment under N.C. Gen. Stat. § 57C-5-03. Accordingly, the trial court did not err in ordering that the judgment be satisfied through the application of the distributions and allocations of Defendant's membership interests in the LLCs and in denying Plaintiff's motion to have Defendant's membership interests seized and sold.

 

Affirmed.

 

Judges HUDSON and BIGGS concur.

 

 

Opinion Footnotes

 

*fn1 The judgment as to Defendant's wife was subsequently vacated.

 

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More Articles On Charging Orders click here

 

THE CHARGING ORDER PRACTICE GUIDE

 

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 directly from the ABA at https://goo.gl/faZzY6

 

Also available from Amazon at https://www.amazon.com/Charging-Orders-Practice-Guide-Understanding/dp/1641052643

LAW REVIEW ARTICLES

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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

 

General Information

 

Analysis of Uniform Limited Liability Company Act Sections re Charging Orders

  • Charging Orders (Section 503) contains the general charging order provisions.
  • Transfers of Transferable Interests (Section 502) includes definitions of "transfer" (102(23)), "transferable interests" (102(24)), and "transferees" (102(25)) defines to what the charging order attaches.
  • Definition of Distribution (Section 102(4)) specifies the economic right obtained through a charging order lien and/or foreclosure.

 

The Uniform Acts re Charging Orders and Transferable Interests (without Jay's comments):

 

Effect of Bankruptcy On The Debtor-Member's LLC Interest here

 

 

Collected Court Opinions On Charging Orders here and below

 

Charging Order Example Sample Form

 

TOPICAL RESEARCH

 

 

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

 

Distributions - Creditors rights to distributive payments

 

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

 

Foreign Entities - Charging orders against out-of-state entities

 

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

 

Management & Voting Rights - Rights of creditor after charging order issued

 

Order Form Generally - Most issues to the form of the charging order

 

Order Form Future Interests - How the charging order affects subsequently-acquired interests

 

Prejudgment Relief - Freezing the interest and distributions pending judgment

 

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

 

Receiver - The role of the receiver in charging order proceedings

 

Repurchase/Redemption Rights - Third-parties' ability to purchase the charged interest

 

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

 

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

 

Unknown Interest - Where the debtor's interest, if any, has not been ascertained

 

Voidable Transactions/Fraudulent Transfers - Issues relating to avoidable transfers of interests

 

= = = = =

 

Additional Court Opinions About charging orders (unsorted)

 

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