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CHARGING ORDERS

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

 

2014 - Tennessee - Arvest Bank

 

Arvest Bank v. Byrd, Case No.10-02004 (W.D.Tenn., Aug, 19, 2014).

 

ARVEST BANK, Plaintiff,

 

v.

 

PRESTON E. BYRD, and DONETTE L. BYRD, Defendants.

 

No. 10-02004.

 

United States District Court, W.D. Tennessee, Western Division.

 

August 19, 2014.

 

ORDER GRANTING MOTION FOR CHARGING ORDER

 

SAMUEL H. MAYS, Jr., District Judge

 

Before the Court is Plaintiff Arvest Bank's June 16, 2014 Motion for Charging Order. (Mot. for Charging Order, ECF No. 235.) Plaintiffs Preston E. Byrd and Donette L. Byrd (collectively, "the Byrds") responded on July 2, 2014, and do not object to the Motion. (Resp., ECF No. 241.) For the following reasons, Arvest Bank's Motion for Charging Order is GRANTED.

 

I. Background

 

Plaintiff Arvest Bank contended at trial that Preston Byrd had defrauded it by using Arvest Bank's funds for his personal benefit. Arvest Bank contended that Donette Byrd had willfully and knowingly ratified the wrongful acts of Preston Byrd and accepted the benefits of his conversion of funds. Arvest Bank6> also contended that transfers to Donette Byrd were made to hinder, delay, and defraud Arvest Bank as an existing creditor.

 

On December 23, 2011, a jury returned a verdict for Arvest Bank against the Byrds. (Jury Verdict, ECF No. 173.) The jury found that Preston Byrd had converted the funds of Arvest Bank, committed fraud in the inducement of a contract, been unjustly enriched, and made fraudulent conveyances. (Id.) The jury found that Donette Byrd had retained the benefits of fraudulent conveyances. (Id.) The jury assessed damages against the Byrds and punitive damages against Preston Byrd. (Jury Verdict on Punitive Damages, ECF No. 175.) Judgment was entered against the Byrds on December 30, 2011 in the respective amounts of $6,513,954.24 against Preston Byrd and $659,000.00 against Donette Byrd (collectively, the "Judgments"). (J., ECF No. 177.)

 

In its Motion for Charging Order, Arvest Bank represents that the Judgments are entirely unsatisfied and that the Byrds have exhausted all appeals. (Mot. for Charging Order, ECF No. 235.) Arvest Bank asks the Court to charge Horizon Financial Group, LLC, Horizon Companies, LLC, and Horizon Holding Company, LLC to recognize the Judgments. (Id.) The Byrds "do not object to Arvest Bank's Motion for Charging Order against these three entities." (Resp., ECF No. 241.)5>

 

II. Standard of Review

 

Even where, as here, a motion is uncontested, the court may grant relief only when appropriate under the applicable law. Stough v. Mayville Cmty. Sch., 138 F.3d 612, 614 (6th Cir. 1998). "`The court is required, at a minimum, to examine the movant's motion . . . to ensure that [the movant] has discharged [its initial] burden.'" Carver v. Bunch, 946 F.2d 451, 455 (6th Cir. 1991).

 

III. Analysis

 

Under Federal Rule of Civil Procedure 69, "[a] money judgment is enforced by a writ of execution, unless the court directs otherwise." Fed. R. Civ. P. 69(a)(1). Enforcement of a district court judgment "must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies." Id.; see also Condaire, Inc. v. Allied Piping, Inc., 286 F.3d 353, 357 (6th Cir. 2002). Under Tennessee law, a charging order is the "exclusive remedy of a judgment creditor with respect to the judgment debtor's membership interest" in a limited liability company. Tenn. Code Ann. sec. 48-249-509. The Court may charge the debtor's "financial rights with payment of the unsatisfied amount of the judgment with interest." Id.5>

 

A charging order affects only the debtor's distributional interest in the limited liability company and does not permit the judgment creditor to reach company assets. Id. The charging order effectively acts to garnish the judgment debtor's financial rights in the limited liability company; a judgment creditor can only collect when the limited liability company makes a distribution or other payment to the judgment debtor with respect to the judgment debtor's transferable interest in the company. Id. "To the extent charged, the judgment creditor has only the rights of a transferee of [the judgment debtor's] financial rights." Id.

 

Horizon Financial Group, LLC, Horizon Companies, LLC, and Horizon Holding Company, LLC are active Tennessee limited liability companies with their principal place of business at 1016 W. Poplar Avenue, Suite 106, Collierville, TN XXXXX-XXXX and their registered agent, CT Corporation System, located at 800 S. Gay Street, Suite 2021, Knoxville, TN XXXXX-XXXX. (LLC Filing Docs., ECF No. 235-10.) No federal statute governs enforcement of a judgment against a member's interest in a limited liability company. Tennessee law establishes that a charging order is the exclusive remedy of a judgment creditor seeking to satisfy a judgment from a judgment debtor's interest in a limited liability company. Applying Tennessee law, the Court should order the requested recovery under Federal Rule of5> Civil Procedure 69 from any interests the Byrds own in any of the three limited liability companies. Id.; Fed. R. Civ. P. 69(a)(1).

 

There is some uncertainty as to Preston and Donette Byrd's individual interests in Horizon Financial Group, LLC. On January 29, 2013, the Byrds, in sworn interrogatory answers, claimed that Donette Byrd owns 79.044% of Horizon Financial Group, LLC. (Answer to Interrog., ECF No. 235-3, at 3. See also Membership Interest Transfer Agreement, ECF No. 235-5 (agreement between Preston Byrd and Donette Byrd in which Preston purports to transfer his entire interest in Horizon Financial Group, LLC to Donette).) Subsequent tax returns represent that Preston Byrd, not Donette Byrd, is the owner of a 79.044% interest in Horizon Financial Group, LLC. (Tax Returns, ECF No. 235-6; see also Trial Tr., ECF No. 235-8 (trial testimony addressing the discrepancies between the Byrds' statements and the tax returns).)

 

Horizon Financial Group, LLC is the controlling member of Horizon Holding Company, LLC, owning a 67.05% interest. (Preston Byrd Aff., ECF No. 235-4.) Preston Byrd owns 80% of Horizon Companies, LLC. (Answer to Interrog., ECF No. 235-3.) Because of the uncertainty and conflicting information about Preston and Donette Byrd's individual ownership interests in these limited liability companies, Arvest Bank's request that5> the Court's order apply to any interest either of the Byrds may own in any of the three companies is reasonable.

 

IV. Conclusion

 

For the foregoing reasons, Arvest Bank's Motion for Charging Order is GRANTED. Horizon Financial Group, LLC, Horizon Companies, LLC, and Horizon Holding Company, LLC are hereby charged to pay to Arvest Bank all sums, distributions, draws, financial entitlements, or other financial interests of Defendants Preston E. Byrd or Donette L. Byrd due or owed now or in the future to Defendants Preston E. Byrd or Donette L. Byrd on account of his or her direct or indirect interest in Horizon Financial Group, LLC, Horizon Companies, LLC, or Horizon Holding Company, LLC as of the date of this order and in the future, including amounts sufficient to satisfy the Judgments and accrued interest. Horizon Financial Group, LLC, Horizon Companies, LLC, and Horizon Holding Company, LLC are charged to recognize and honor the Judgments against Defendants Preston E. Byrd and Donette L. Byrd in favor of Arvest Bank until those Judgments are fully satisfied.

 

So ordered.

 

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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

OTHER INFORMATIONAL WEBSITES

by Jay Adkisson

 

  • Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances.

 

  • Creditor-Debtor Law - An overview of judgment enforcement tools and their uses by creditors, and possible defenses by debtors. Related topics include:

 

  • Voidable Transactions - Discussion of the Uniform Voidable Transactions Act (a/k/a 2014 Revision of the Uniform Fraudulent Transfers Act) and fraudulent transfer law in general.

 

  • California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues.

 

  • Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused.

 

  • Protected Series - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017.

 

  • Asset Protection - The all-time best-selling book on asset protection planning by Jay Adkisson and Chris Riser.

 

 

  • Captive Insurance - Licensed insurance companies formed by the parent organization to handle the insurance and risk management needs of the business.

 

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© 2020 Jay D. Adkisson. All Rights Reserved. No claim to government works or the works of the Uniform Law Commission. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction. This site is https://chargingorder.com Contact: jay [at] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678.