The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).
TEXTRON FINANCIAL CORPORATION, Plaintiff,
MICHAEL S. GALLEGOS, Defendant.
Case No. 15cv1678-LAB (DHB).
United States District Court, S.D. California.
October 7, 2015.
ORDER DENYING TEXTRON'S MOTION TO CHARGE GALLEGOS' MEMBERSHIP INTEREST
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.
IT IS SO ORDERED.
by Jay Adkisson
2020.06.20 ... Payment Of Distributions Directly To Creditor Holding A Charging Order Deemed Appropriate In BMO Case
2020.04.30 ... Charging Order Denied For Lack Of Proof Of The Debtor's Interest In Dhillon
2020.02.29 ... Florida Charging Order Requires Distributions To Be Re-Directed To The Creditor In Kostoglou
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
Analysis of Uniform Limited Liability Company Act Sections re Charging Orders
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
NATURE OF REMEDY
Distributions/Economic Rights - Creditors rights to distributional interests/economic rights
Prejudgment Relief - Freezing the interest and distributions pending judgment
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
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 EFFECT AND PRIORITY
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 LLC
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 AND REDEMPTION RIGHTS
Repurchase/Redemption Rights - Third-parties' ability to purchase the charged interest
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
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
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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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