Opinion 2012 Iowa Wells Fargo Charging Order

 

Adkisson's

CHARGING ORDERS

The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership

2012 - Iowa - Wells Fargo

 

 

 

Wells Fargo Bank, N.A. v. Continuous Control Solutions, Inc., 2012 WL 3195759 (Table) (Iowa App., Slip Copy, Table, Aug. 2012).

 

NOTICE: FINAL PUBLICATION DECISION PENDING

 

Court of Appeals of Iowa.

 

WELLS FARGO BANK, NATIONAL ASSOCIATION, Plaintiff,

 

v.

 

CONTINUOUS CONTROL SOLUTIONS, INC., Dmitry Khots, Alex Komm, Ilya Markevich, Boris G. Pusin, Vadim Shapiro, Alex Shcharansky, Boris Shcharansky and Zoya Staroselsky, Defendants.

 

Alex Komm, Ilya Markevich, Boris G. Pusin, Vadim Shapiro, and Dmitry Khots, Cross–Claim Plaintiffs/Counter CrossClaim Defendants–Appellees,

 

v.

 

Continuous Control Solutions, Inc., n/k/a Continuous Control Solutions, L.L.C., and Alex Shcharansky, Cross–Claim Defendants/Counter Cross–Claim Plaintiffs–Appellants, and

 

Boris Shcharansky and Zoya Staroselsky, Cross–Claim Defendants/Counter Cross–Claim Plaintiffs,

 

Alex Komm, Ilya Markevich, Boris G. Pusin, and Vadim Shapiro, Cross–Petition Plaintiffs–Appellees,

 

v.

 

Leonid Shcharansky and Slava Staroselsky, Cross–Petition Defendants–Appellants,

 

Global Energy Investments, L.L.C. and Zorass Newco, L.L.C., Third Parties in Interest–Appellants.

 

No. 11–1285.

 

Aug. 8, 2012.

 

Appeal from the Iowa District Court for Polk County, Scott D. Rosenberg, Judge.

 

Appellants appeal the provisions of charging orders directing the limited liability companies to provide cash flow statements to appellees. AFFIRMED IN PART AND VACATED IN PART.

 

Stanley J. Thompson of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, and David J. Butler and Bryan M. Killian of Bingham McCutchen, L.L.P., Washington, D.C., pro hac vice for appellants.

 

Todd A. Strother and Tony L. James of Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, for appellees Alex Komm, Ilya Markevich, Boris G. Pusin, Vadim Shapiro, and Dmitry Khots.

 

Considered by VAITHESWARAN, P.J., and DOYLE and DANILSON, JJ.

 

DOYLE, J.

 

*1 The district court entered charging orders under Iowa Code section 489.503 (2011) against judgment debtors' economic interests in three limited liability companies (LLCs). On appeal, the LLCs challenge the provisions of the charging orders which require the LLCs to provide to the judgment creditors, or the court, periodic cash flow statements. We vacate the challenged disclosure provisions of the charging orders.

 

The facts and history of the underlying case are set forth in great detail in a previous opinion of this court and need not be repeated here in view of the discrete issue presented. See Wells Fargo Bank, N.A. v. Continuous Control Solutions, Inc., No. 10–1070, 2011 WL 2695269, at *1–4 (Iowa Ct.App. July 13, 2011). Alex Komm, Ilya Markevich, Boris Pusin, Vadim Shapiro, and Dmitry Khots (collectively judgment creditors) obtained a judgment against Alex Shcharansky, Leonid (Lenny) Shcharansky, and Slava Staroselsky (collectively judgment debtors). In an effort to collect on the judgment, the judgment creditors applied for charging orders pursuant to Iowa Code section 489.503 against the judgment debtors' economic interests in three LLCs: Zorass Newco, L.L.C., owned by the three judgment debtors, and Global Energy Investments, L.L.C. and Continuous Control Solutions, L.L.C., owned in part by Alex Shcharansky. The judgment creditors also requested an order requiring the LLCs to disclose their cash flow statements or other documentation "in order to verify no distributions have been made to the judgment debtors or any other entity or person with an ownership interest in these limited liability companies."

 

The LLCs filed a limited resistance to the application, not generally challenging the application for the issuance of a charging order, but resisting the request for disclosure of quarterly cash flow statements. After briefing and a hearing, the district court granted charging orders against each judgment debtor. Additionally, the court ordered the LLCs to provide to counsel for the judgment creditors or to the court "a cash flow statement every six months, beginning August 1, 2011, specifically outlining any and all disbursals, distributions, inflows, or payments in order to ensure compliance with this charging order." The court later granted a stay of the disclosure provisions of the charging orders pending appeal. The LLCs and judgment debtors appealed. FN1

 

FN1. The judgment creditors have not filed an appellate brief.

 

On appeal, the LLCs argue there is no statutory authority for the disclosure orders issued by the district court. We agree.

 

Application for a charging order by a judgment creditor against the transferable interest of a judgment debtor is a post-judgment equitable proceeding. See Iowa Code sec. 630.16. Our review is therefore de novo. Iowa R. Civ. P. 6.907.

 

A charging order is a lien on a judgment debtor's "transferable interest" in an L.L.C., i.e., his or her right as a member to receive a "distribution" of money or property from the L.L.C.FN2 See Iowa Code sec.sec. 489.503(1), .102(5), .102(24) (defining "charging order," "distribution," and "transferable interest"). Iowa Code section 489.503 provides, in relevant part:

 

FN2. The limited liability company or "L.L.C." as it is now known is a hybrid business entity that is considered to have the attributes of a partnership for federal income tax purposes and the limited liability protections of a corporation. Matthew G. Doré, 5 Iowa Practice: Business Organizations sec. 1.6, at 18–19 (2004) [hereinafter Doré]. As such, it provides for the operational advantages of a partnership by allowing the owners, called members, to participate in the management of the business. See id. sec. 1.6, at 20–21. Yet, the members and managers are protected from liability in the same manner shareholders, officers, and directors of a corporation are protected. Id. sec. 1.6, at 21.

 

*2 1. On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charging order constitutes a lien on a judgment debtor's transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.

 

2. To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subsection 1, the court may do all of the following:

 

a. Appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made.

 

b. Make all other orders necessary to give effect to the charging order.

 

....

 

7. This section provides the exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor's transferable interest.

 

(Emphasis added.)

 

Charging orders have been described as "nothing more than a legislative means of providing a creditor some means of getting at a debtor's ill-defined interest in a statutory bastard, surnamed 'partnership,' but corporately protecting participants by limiting their liability as [ ] corporate shareholders." In short, "[a] charging order gives the charging creditor only limited access to the partnership interest of the indebted partner." Consequently, the judgment creditor does not unequivocally step into the shoes of a limitedliability member.... A judgment creditor, or assignee, is only entitled to the judgment debtor's share of the profit and distributions, takes no interest in the LLC's assets, and is not entitled to participate in the management or administration of the business. After the entry of a charging order, the debtor member no longer has the right to future LLC distributions to the extent of the charging order, but retains all other rights that it had before the execution of the charging order, including managerial interests.

 

Weddell v. H2O, Inc., 271 P.3d 743, 750 (Nev.2012) (internal citations omitted).

 

Under the guise of Iowa Code section 489.503(2)(b), the judgment creditors requested the district court to enter an order requiring the LLCs to turn over quarterly cash flow statements "to verify no distributions have been made to the judgment debtors or any other entity or person with an ownership interest in these limited liability companies." The court included the requested disclosure provision in its charging orders, citing specifically to section 489 .503(2)(b). Although section 489.503(2)(b) authorizes the court to "[m]ake all other orders necessary to give effect to the charging order," it does not specifically authorize the requested disclosure provision. For the following reasons we do not believe the statutory provision can be read as broadly as the judgment creditors argued to the district court.

 

*3 Section 489.503(2)(a) authorizes the court to appoint a receiver "with the power to make all inquiries the judgment debtor might have made." This Code section mirrors section 503(b)(1) of the Revised Uniform Limited Liability Company Act (RULLCA). The receiver contemplated by this section is not a receiver for the L.L.C., but a receiver for the distributions. See RULLCA sec. 503, 6B U.L.A. 499 cmt. 503(b)(1) (2008). "The principal advantage provided by this paragraph is an expanded right to information." Id. But it appears no such expanded right to information is contemplated under Iowa Code section 489.503(2)(b). Unlike section 489.503(2)(a), section 489.503(2)(b), the provision relied upon by the judgment creditors, does not specifically include a right to information as a remedy to effectuate the collection of distributions. Nor is an expanded right to information mentioned as an example "to give effect to the charging order" in RULLCA's comment to section 503(b)(2), which mirrors Iowa Code section 489.503(2)(b). RULLCA sec. 503, 6B U.L.A. 499–500 cmt. 503(b)(2). This provision authorizes ancillary orders that affect only economic rights, not governance rights.FN3 See id. We thus conclude this expanded right to information ("power to make all inquiries the judgment debtor may have") is limited to a receiver appointed by the court under Iowa Code section 489.503(2)(a) and is not authorized under section 489.503(2)(b).

 

FN3. "A member's rights in a limited liability company are bifurcated into economic rights (the transferable interest) and governance rights (including management rights, consent rights, rights to information, rights to seek judicial intervention)." RULLCA sec. 502, 6B U.L.A. 497 cmt.

 

Our conclusion is further supported by Iowa Code section 489.502(1)(c)(2), which provides a transferee of a L.L.C. member's interest is not entitled to, except upon the L.L.C.'s dissolution and winding up, "access to records or other information concerning the company's activities." Iowa Code sec. 489.502(1)(c)(2), (3); accord id. sec. 489.410(6) (right to access an L.L.C.'s business and financial information do not extend to a person as a transferee). A charging order constitutes a mere lien upon the judgment debtor's transferable interest (the member's economic interest) in the L.L.C. Id. sec. 489.503(1). If a transferee of a member's economic interest is not entitled to access to the L.L.C.'s records, the holder of a lien upon the member's economic interest should be similarly denied access to the L.L.C.'s records or other information concerning the company's activities, unless otherwise authorized by statute.

 

To effectuate a charging order, Iowa Code section 489.503 authorizes a court to order an L.L.C. to disclose financial information to a court-appointed receiver only. We conclude there is no statutory authority for the disclosure orders the district court issued in this case. We therefore vacate the parts of the orders which require disclosure to the judgment creditors' counsel or to the court and affirm the remaining portions of the orders. In fairness to the district court, we note there is no case law directly on point from which the court could have drawn some guidance.

 

AFFIRMED IN PART AND VACATED IN PART.

 

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More Articles On Charging Orders click here

 

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

 

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

 

NATURE OF REMEDY

     Distributions/Economic Rights - Creditors rights to distributional interests/economic rights

PREJUDGMENT

     Prejudgment Relief - Freezing the interest and distributions pending judgment

MOTION MECHANICS

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

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

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

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

     Exemptions - Available state and federal protections that may apply to charging orders

INTERSTATE

     Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute

     Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs

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

CREDITOR RESTRICTIONS

     Creditor Rights Restrictions - Limitations on creditors' management and informational rights

     Information Rights - Creditors' ability to access information about the LLC

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

LIEN EFFECT AND PRIORITY

     Lien - The lien effect of a charging order and priority issues

COMPLIANCE

     Compliance - Issues for the LLC and non-debtor members in complying with a charging order

     Receiver - The role of the receiver in charging order proceedings

SINGLE MEMBER LLC

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

FORECLOSURE

     Foreclosure - Liquidation by judicial sale of the debtor's right to distributions

REPURCHASE AND REDEMPTION RIGHTS

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

APPEAL

     Appeal - Issues relating to the appeal of a charging order

RELATION TO OTHER REMEDIES

     Exclusivity - The charging order as the sole remedy available to creditors and exceptions

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

SUNDRY OTHER

     Bankruptcy - Treatment of the debtor/member's interest in bankruptcy

     Intra-Member Disputes - Where one member obtains a charging order against another

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

 

= = = = =

 

Additional Court Opinions About charging orders (unsorted)

 

THE CHARGING ORDERS 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

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