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

Textron Financial


Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).








Case No. 15cv1678-LAB (DHB).


United States District Court, S.D. California.


October 7, 2015.




LARRY ALAN BURNS, District Judge.


Textron obtained a $21,921,165.45 judgment against Gallegos in the U.S. District Court for the District of Rhode Island, but has only collected $10,484.99. (Docket nos. 40-1 and 40-6.) Its assignee, SPE LO Holdings, seeks a charging order against Gallegos' interest in two entities: Pacific Pearl Hotels, LLC and Pacific Pearl Hotel Management, LLC. (Docket no. 40.) SPE LO relies on California Secretary of State documents to establish Gallegos' interest in the LLCs. (Docket nos. 40-2, 40-3, and 40-4.) Gallegos' name is listed on line 9 of the Secretary of State documents, which require the "name . . . of any manager . . ., or if none have been appointed or elected, . . . the name . . . of each member." (Docket nos. 40-2 and 40-3.) His name is also listed on line 15, where he's identified as the "manager" of both LLCs. SPE LO served the motion by mail on Gallegos and the LLCs. (Docket nos. 40-9 and 41.)


Gallegos opposes the motion, arguing: (1) the Secretary of State records aren't admissible; (2) Textron failed to serve the LLCs; and (3) Textron hasn't shown that he is a member of the LLCs. (Docket no. 47.) He doesn't contend that the Secretary of State records are inaccurate. Nor does he deny that he's a member of the LLCs. He just argues that SPE LO hasn't proved it.


Admissibility of Secretary of State Records


The Secretary of State filings are matters of public record whose accuracy cannot be reasonably disputed. Potocki v. Wells Fargo Bank, NA, 2014 WL 2949286, at *1 n.1 (E.D. Cal. June 30, 2014). The Court takes judicial notice of them.


Sufficiency of Service


When there's a money judgment against an LLC member personally, but not against the LLC, the member's interest may be reached by a charging order. Cal. Code of Civ. P. sec. 708.310. A charging order is a lien on the member's distributional interest. 51 Am. Jur. 2d Limited Liability Companies sec. 23. It only allows the judgment creditor to receive distributions to which the member would otherwise be entitled; it doesn't entitle the creditor to participate in the LLC's management or exercise the rights of a member. Cal. Corp. Code secs. 17701.02(aa), 17705.02, and 17705.03. It thereby "protect[s] other members of an LLC from being forced to involuntarily share governance responsibilities with someone they did not choose, or from being forced to accept a creditor of another member as a co-manager." In re First Prot., Inc., 440 B.R. 821, 829-30 (B.A.P. 9th Cir. 2010).


Because the other LLC members are protected, a judgment creditor can obtain a charging order under sec. 17705.03(a) without serving the LLC or making it a party. See Bank of Am., NA v. Freed, 983 N.E.2d 509, 522 (Dec. 28, 2012) ("[C]harging orders on distributional interests do not affect the rights or interests of the LLC to the degree necessary to require that it be made a party. . . . It would be impractical and unnecessarily costly to require a lender seeking charging orders to serve all of the entities in which a borrower has an interest."). But, to obtain a lien on a judgment debtor's interest in an LLC before the court issues a charging order, the judgment creditor must serve a notice of motion for charging order on (1) the debtor and (2) the LLC or all of its members. Cal. Code of Civ. P. sec. 708.320(a). Service by mail is sufficient to satisfy sec. 708.320(a); personal service isn't required. See, e.g., Choice Hotels Int'l, Inc. v. Penta Denver LLC, No. 3:13-mc-80249, 2014 WL 458069, at *4 (N.D. Cal. Jan. 27, 2014); see also id. at Docket no. 8. Textron adequately served Gallegos and the LLCs.


Gallegos' Interest in the Pacific Pearl Entities


Entry of a charging order requires "substantial evidence" that the debtor is a partner or member of the entity. See Ribero v. Callaway, 87 Cal. App. 2d 135, 139 (1948); Cf. Regions Bank v. Alverne Associates, LLC, 456 S.W.3d 52, 58 (Mo. Ct. App. 2014). "Substantial evidence" means "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Braewood Convalescent Hosp. v. Workers' Comp. Appeals Bd., 34 Cal. 3d 159, 164 (1983). It has been found where the debtor's interest was evidenced by a certificate of limited copartnership, Ribero v. Callaway, 87 Cal. App. 2d at 137, and by previous declarations of the debtor and his partner, Safeco Ins. Co. of Am. v. Raisch Co., 2013 U.S. Dist. LEXIS 39658, *2 (N.D. Cal March 20, 2013).


Here, the Secretary of State documents establish that Gallegos is a manager of the LLCs. But, an LLC can be managed by a non-member. Cal. Corp. Code secs. 17701.02 and 17704.07. While Gallegos' name is listed on line 9 of the Secretary of State documents, where the LLCs could have listed a member if no manager had been appointed, line 15 establishes that a manager was appointed. Thus, the Secretary of State documents don't prove Gallegos' membership interest in the LLCs, and SPE LO offers no other evidence that Gallegos is a member. While they argue that he is a member in their motion, "statements made in briefs are not evidence"—let alone substantial evidence. In re Heritage Bond Litig., 2004 WL 1970058, at *4 (C.D. Cal. July 23, 2004).




SPE LO's motion for a charging order is DENIED WITHOUT PREJUDICE. It may bring the motion again once it has substantial evidence of Gallegos' membership interest in the LLCs. To avoid the possibility that Gallegos has avoided entry of a charging order by playing coy, the Court authorizes SPE LO to pursue postjudgment discovery to determine whether Gallegos is, in fact, a member of the LLCs.





by Jay Adkisson


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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:



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





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


     Prejudgment Relief - Freezing the interest and distributions pending judgment


     Entities - The types of legal entities amenable to charging orders, or not

     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


     Abstention - Collateral attacks on charging orders in federal court

     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 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 - The lien effect of a charging order and priority issues


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


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


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


     Appeal - Issues relating to the appeal of a charging order


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

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


     Abstention - Attempts to collaterally attack the charging order in federal court

     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


= = = = =


List Of Court Opinion Sections

Additional Court Opinions About charging orders (unsorted)




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


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