The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
JPMorgan Chase Bank v. McClure, 2017 CO 22, 2017 WL 1321334 (Colo., April 10, 2017).
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
Supreme Court of Colorado.
Petitioner: JPMorgan Chase Bank, N.A., a national banking association,
Respondents: Douglas and Nancy McClure, a married couple, and Spiral Broadcasting, L.L.C., an Arizona limited liability company.
Supreme Court Case No. 15SC816
April 10, 2017
Certiorari to the Colorado Court of Appeals
Court of Appeals Case No. 14CA1775
Attorneys and Law Firms
Attorneys for Petitioner: Kutak Rock LLP, John H. Bernstein, Jeremy D. Peck, Denver, Colorado
Attorneys for Respondents: Carl H. Tessler, P.C., Carl H. Tessler, Denver, Colorado
JUSTICE GABRIEL delivered the Opinion of the Court.
Para.1 This case principally requires us to decide the relative priority of competing charging orders filed by multiple judgment creditors against a foreign judgment debtor's membership interests in several Colorado limited liability companies.1
Para.2 We conclude first that for purposes of determining the enforceability of a charging order, a membership interest of a non-Colorado citizen in a Colorado limited liability company is located in Colorado. We further conclude that when, as here, a judgment creditor obtains a foreign charging order that compels certain action by a Colorado limited liability company, the charging order is ineffective as against the limited liability company until the creditor has taken sufficient steps to obligate the company to comply with that order. Although the authorities are not uniform as to the steps to be taken, under any of the applicable scenarios, the charging orders obtained by the petitioner, JPMorgan Chase Bank, N.A. ("Chase"), did not become effective until after the respondents had obtained and served competing charging orders. We thus conclude that the respondents' charging orders are entitled to priority over Chase's competing charging orders.
Para.3 Accordingly, we affirm the judgment of the court of appeals.
I. Facts and Procedural History
Para.4 In July 2013, Chase obtained an Arizona judgment of over $20 million against several defendants, including Reginald Fowler, an Arizona resident. As part of its post-judgment collection efforts, Chase obtained Arizona orders charging Fowler's membership interests in three Colorado limited liability companies, Bridgeport Ethanol, LLC, Yuma Ethanol, LLC, and Sterling Ethanol, LLC ("the LLCs").2
Para.5 On December 3, 2013, Chase served its Arizona charging orders on the LLCs and domesticated its Arizona judgment in the District Court for the City and County of Denver, Colorado, pursuant to the Uniform Enforcement of Foreign Judgments Act, secs. 13-53-101 to -108, C.R.S. (2016). As pertinent here, each of Chase's charging orders provided that until the judgment is paid in full, the LLC (1) "shall make no further Distributions of any kind to Judgment Debtor with respect to his interests" in the LLC and (2) "shall make to [Chase] any and all Distributions to which Judgment Debtor is or would be entitled," with such distributions to be made within three business days following the date on which such distributions would or could have been made to Fowler or within three business days following the date on which Fowler would have been entitled to receive such distributions, whichever date is sooner.
Para.6 Subsequently, in March 2014, the respondents, Douglas McClure, Nancy McClure, and Mr. McClure's wholly-owned company, Spiral Broadcasting, L.L.C. (collectively, "the McClures"), obtained a stipulated judgment for $1.5 million against Fowler, among others, in the Arizona Superior Court. In April 2014, the McClures domesticated their Arizona judgment in the District Court for Arapahoe County, Colorado, and between May and July 2014, they obtained and served Colorado orders charging Fowler's membership interests in the LLCs.
Para.7 Now confronted with facially competing charging orders, the LLCs paid Fowler's then-due distributions into the Arapahoe County District Court registry. That same day, the McClures moved for release of the distribution funds to them, and several days later, Chase sought and obtained leave to intervene and opposed the McClures' motion.
Para.8 The district court ultimately ordered the distribution funds released to the McClures. In so ruling, the court opined that Chase's domesticated Arizona judgment could only be enforced in Colorado by the means authorized by Colorado law, namely, by obtaining Colorado charging orders or by domesticating the Arizona charging orders.
Para.9 Thereafter, on August 21, 2014, nunc pro tunc to August 11, 2014, Chase domesticated its Arizona charging orders in the Denver District Court.3 Chase then moved for reconsideration of the release order, arguing that its newly-domesticated charging orders should be deemed effective as of the date they were issued in Arizona and that therefore, those orders were entitled to priority over the McClures' competing charging orders.
Para.10 The district court, however, again ruled in the McClures' favor. Concluding that Chase's Arizona charging orders were unenforceable in Colorado until they were domesticated, the court ruled that the McClures' charging orders "were the first enforceable charging orders served on the [LLCs] and, hence, they have priority over [Chase's] Arizona charging orders."
Para.11 Chase appealed, and in McClure v. JP Morgan Chase Bank NA, 2015 COA 117, para. 3, ___ P.3d ___, a unanimous division of the court of appeals affirmed. As pertinent here, the division held that as a matter of first impression in Colorado, the priority of charging orders issued against an out-of-state debtor's membership interests in Colorado LLCs is based on first-in-time service of charging orders that are enforceable in Colorado. Id. Because Chase did not domesticate its charging orders in Colorado before serving them, the division determined that the McClures' later-served but Colorado-issued charging orders had priority over Chase's charging orders. Id. at paras. 2–3.
Para.12 Chase then sought, and we granted, certiorari.
Para.13 We begin by noting the applicable standard of review. We then explain the nature and purpose of charging orders generally, as well as the rules in Colorado for obtaining valid charging orders and determining priority among competing charging orders. Thereafter, we discuss the location of membership interests in Colorado-formed LLCs. We conclude by addressing the effectiveness of Chase's Arizona-issued charging orders and the resulting priorities of the competing charging orders at issue.
A. Standard of Review
Para.14 The material facts in this case are undisputed. The legal effect of those facts, including the effectiveness and relative priorities of the parties' competing charging orders, therefore presents a question of law. See Hicks v. Londre, 107 P.3d 1009, 1011 (Colo. App. 2004) (noting that when the controlling facts are undisputed, the legal effect of those facts constitutes a question of law), aff'd, 125 P.3d 452 (Colo. 2005). We review such legal questions de novo. See id. (reviewing de novo the legal question of whether on the undisputed facts presented, the doctrine of equitable subrogation applied).
B. Charging Orders Generally
Para.15 A charging order is a statutorily created remedy that simultaneously (1) allows a judgment creditor to realize the value of a judgment debtor-LLC member's distributional interest in an LLC (i.e., the debtor-member's right to profits and distributions from the LLC) and (2) protects the LLC's ability to continue to operate and the interests of its other members. See 51 Am. Jur. 2d Limited Liability Companies sec. 23, at 858–59 (2011). Derived from the charging order remedy created for the personal creditors of partners in a partnership, a charging order allows a judgment creditor of an LLC member to obtain and enforce a lien on the "economic value that flows from membership in an LLC." Id. at 859. The lien attaches to the judgment debtor's distributional interest and diverts to the judgment creditor, until the judgment is satisfied, the right to receive any distributions that would otherwise have been paid to the debtor-member. Id. To the extent the debtor-member's interest is charged, however, the judgment creditor obtains only the rights of a transferee or assignee. See, e.g., Ariz. Rev. Stat. sec. 29-655(A) (2016); sec. 7-80-703, C.R.S. (2016). Accordingly, the judgment creditor has no right to compel a distribution or otherwise participate in the LLC's management. See sec. 7-80-702(1), C.R.S. (2016) ("Unless the assignee or transferee [of an LLC member's interest] is admitted as a member [of the LLC], the assignee or transferee shall only be entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled and shall have no right to participate in the management of the business and activities of the [LLC] or to become a member.").
Para.16 Under Colorado law, the lien created by a charging order generally attaches at the time the order is served on the LLC. See Union Colony Bank v. United Bank of Greeley Nat'l Ass'n, 832 P.2d 1112, 1115 (Colo. App. 1992) (discussing charging orders in the partnership context). That charging order is then typically entitled to priority over later-served charging orders, regardless of the order in which the competing creditors' judgments were entered. See id.4
Para.17 With these general principles in mind, we now consider the location of the LLC membership interests at issue and whether Chase's charging orders were effective to establish priority over the McClures' competing orders.
C. Location of Colorado LLC Membership Interests
Para.18 Because the location of Fowler's membership interests may impact the enforceability of the charging orders at issue and, thus, their relative priorities, we first address the location of those membership interests.
Para.19 A membership interest in an LLC constitutes the personal property of the member. See Ariz. Rev. Stat. sec. 29-732(A) (2016); sec. 7-80-702(1), C.R.S. (2016). Courts have divided, however, as to where this intangible property interest lies.
Para.20 In Wells Fargo Bank, N.A. v. Barber, 85 F. Supp. 3d 1308, 1314 (M.D. Fla. 2015), for example, the court stated, with little analysis, that a membership interest in an LLC is intangible personal property that accompanies its owner.
Para.21 In Koh v. Inno-Pacific Holdings, Ltd., 54 P.3d 1270, 1271–72 (Wash. Ct. App. 2002), in contrast, the court, relying on cases involving the situs of partnership interests, concluded that a member's interest in an LLC is located where the LLC was formed.
Para.22 Resolving this long-standing debate has yielded no easy answer. As Justice Cardozo observed long ago:
The situs of intangibles is in truth a legal fiction, but there are times when justice or convenience requires that a legal situs be ascribed to them. The locality selected is for some purposes, the domicile of the creditor; for others, the domicile or place of business of the debtor, the place, that is to say, where the obligation was created or was meant to be discharged; for others, any place where the debtor can be found. At the root of the selection is generally a common sense appraisal of the requirements of justice and convenience in particular conditions.
Severnoe Sec. Corp. v. London & Lancashire Ins. Co., 174 N.E. 299, 300 (N.Y. 1931) (citations omitted).
Para.23 Here, for two reasons, we agree with the Koh court that for purposes of determining the enforceability of a charging order, a member's membership interest is located where the LLC was formed.
Para.24 First, given that a charging order is a mechanism by which a judgment creditor may enforce its judgment by requiring an LLC to redirect the debtor-member's distributions to the creditor, as a practical matter, the charging order is directed to the LLC. Accordingly, we deem it more appropriate to place the membership interest in the state in which the LLC, and thus the membership interest, was created, as opposed to in whatever state the debtor-member happens to be domiciled at a given time. See Koh, 54 P.3d at 1271–72; see also Carter G. Bishop & Daniel S. Kleinberger, Limited Liability Companies: Tax & Business Law para. 5.14[c][iii] (2017) ("A member's interest in an LLC is personal property and, moreover, intangible property. For purposes of jurisdiction, that property must be 'located' somewhere. According to partnership precedent, the proper location is the state whose LLC act created the entity (and thereby gave rise to the interest)."); Carter G. Bishop, LLC Charging Orders: A Jurisdictional & Governing Law Quagmire, 12 No. 3 Bus. Entities 14, 21 (May/June 2010) (same).
Para.25 Second, in our view, justice and convenience militate in favor of locating the membership interest in the state in which the LLC was formed. To conclude otherwise (i.e., that the interest lies wherever the debtor happens to be domiciled) could result in substantial uncertainty and confusion. Consider, for example, a hypothetical scenario in which Fowler resided in New York, rather than Arizona, at the time the Arizona judgments were entered. If his membership interests were deemed to be located with him, then the case would involve an Arizona judgment that presumably would be domesticated in New York, followed by the issuance of New York charging orders that would be served on the Colorado LLCs. Such a scenario would understandably give the LLCs pause as to which, if any, of the foregoing orders were binding on them, particularly given the LLCs' or their members' or managers' potential liability were they to misdirect member distributions. See secs. 7-80-404, (detailing the duties that LLC members and managers owe to the LLC), 7-80-504 (providing that distributions of cash or other assets of an LLC shall be allocated among the members and among classes of members on the basis of value of the contributions made by each member), C.R.S. (2016); LaFond v. Sweeney, 2012 COA 27, para. 38, 345 P.3d 932, 939 (noting that members of an LLC owe each other fiduciary duties), aff'd, 2015 CO 3, 343 P.3d 939. And this scenario could become even more uncertain were Fowler to move to a different state while the judgment creditors were seeking to enforce their judgments against him.
Para.26 In our view, such a scenario could place a substantial burden on the LLCs, contrary to the above-noted purpose of a charging order, which is to allow a judgment creditor to proceed against a debtor-member's membership interest without impairing the LLC's ability to continue to operate or the interests of its other members. See 51 Am. Jur. 2d Limited Liability Companies at 858–59.
Para.27 For these reasons, we believe that justice and convenience favor placing the membership interest in the LLC's state of formation, which is fixed, rather than placing it in the state of the debtor's domicile, which may not be.
Para.28 Accordingly, we conclude that the membership interests at issue are located in Colorado, where the LLCs were formed. With that understanding, we proceed to address the priority of the charging orders at issue.
D. Priority of the Charging Orders at Issue
Para.29 Chase sought and obtained its charging orders pursuant to section 29-655 of the Arizona Limited Liability Company Act, Ariz. Rev. Stat. secs. 29-601 to -858 (2016). That section provides, as pertinent here:
On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member's interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member's interest.
Para.30 As an initial matter, the McClures assert that Chase's charging orders were not validly issued under Arizona law and that therefore, the orders were invalid and incapable of establishing lien priority in Colorado. Specifically, the McClures aver that the Arizona court could not issue charging orders against Fowler's interests in Colorado LLCs because section 29-655's charging order provisions apply only to LLCs organized under Arizona law. See Ariz. Rev. Stat. sec. 29-601(6) (2016) (defining "limited liability company" to mean a limited liability company organized and existing under "this chapter"). We, however, need not decide this question because, as we proceed to discuss, even assuming that Arizona law authorizes charging orders against interests in foreign (i.e., non-Arizona) LLCs, we ultimately conclude that Chase's charging orders are not entitled to priority over the McClures' orders.
Para.31 Chase principally contends that the division erred in determining that Chase's charging orders were unenforceable until domesticated in Colorado. Chase argues, instead, that a court with jurisdiction over the debtor-member (here, the Arizona court) may issue a valid and enforceable charging order against the debtor's economic interests in an LLC, regardless of where the LLC is organized. We are not persuaded.
Para.32 Central to Chase's argument is the notion that the Arizona charging orders were simply liens on Fowler's right to receive distributions from the LLCs and thus were directed at Fowler, not the LLCs. Chase's argument, however, does not adequately consider the fact that the charging orders at issue not only served as liens on Fowler's right to receive distributions but also specifically ordered the LLCs to act, namely, to pay to Chase any distributions to which Fowler was or would be entitled and to do so within specified time frames. Cf. Shanghai Real Estate Ltd. v. Greenberg, No. LLICV104011273S, 2014 WL 660624, at *1–2 (Conn. Super. Ct. Jan. 28, 2014) (rejecting judgment debtors' jurisdictional challenge to orders charging their interests in several foreign LLCs because the orders were directed to the judgment debtors only and "[did] not order the foreign companies to do anything") (emphasis added).
Para.33 In our view, this distinction is material because it impacts the enforceability of the charging orders and, in turn, the relative priority of Chase's orders vis-à -vis the McClures' competing orders.
Para.34 Specifically, as the division below observed, determining the relative priorities of the competing charging orders requires us to ascertain when each order became effective or enforceable. See McClure, para. 21. This is because any assessment of the relative priorities of competing charging orders mandates comparing only effective and enforceable orders to one another (assuredly, an unenforceable or ineffective order could not take priority over an enforceable, effective one). See Union Colony, 832 P.2d at 1115–17 (concluding that the district court had erred in issuing a judgment creditor's charging order nunc pro tunc to the date of that creditor's earlier writ of garnishment and determining priority between competing charging orders based on those orders' effective dates).
Para.35 To be enforceable and effective, a charging order that compels an LLC to act must bind the LLC such that ignoring the order would subject the LLC to remedial action. See Bishop, LLC Charging Orders, 12 No. 3 Bus. Entities, at 21. To hold otherwise would be to suggest that the charging order is effective even though it has no legal force against the LLC.
Para.36 The question thus becomes what a judgment creditor must do to render a charging order effective as against an LLC from which the order compels action. In our view, the answer to this question turns on one's view as to the nature of the jurisdiction being exercised by the court issuing the charging order—namely, personal jurisdiction over the member, in rem jurisdiction over the membership interest to be charged, or personal jurisdiction over the LLC itself. See id.
Para.37 Before addressing these possibilities, however, we note that the parties do not allege, nor does the record contain any evidence to suggest, that the LLCs are registered to do business in Arizona, in fact do business in Arizona, or have any connection to Arizona other than that one of their members was sued in Arizona and had judgments entered against him there. We proceed to address each jurisdictional scenario with that understanding.
Para.38 First, assuming without deciding that our analysis should be premised on the trial court's personal jurisdiction over Fowler, we do not see how such an exercise of jurisdiction by an Arizona court could force the Colorado LLCs to act, thereby rendering the charging orders at issue effective or enforceable against the LLCs.
Para.39 Second, given that the membership interests to be charged are located in Colorado, the court's exercise of in rem jurisdiction also would not assist Chase here. Specifically, the parties have cited no applicable authority suggesting that an Arizona state court may exercise in rem jurisdiction over a Colorado res, nor have we seen such authority. Indeed, the authority that we have seen is to the contrary. See generally 1B Cathy Stricklin Krendl, Colo. Methods of Practice sec. 24:12, at 385 (6th ed. 2010) (noting that in rem jurisdiction allows a state to exercise jurisdiction over property located within the state's boundaries); 4A Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure sec. 1070, at 291 (2002) (noting that one of the requirements of in rem jurisdiction is that the property be within the court's jurisdiction at the time of suit). Accordingly, in an in rem jurisdiction scenario, a charging order would not be enforceable against a Colorado LLC unless it was issued by a Colorado court (i.e., a court in the state in which the LLC (and, thus, the membership interest at issue) was formed).
Para.40 Here, as noted above, Chase did not obtain Colorado charging orders based on a domesticated foreign judgment. Instead, Chase domesticated its Arizona judgment and then domesticated its Arizona charging orders. Although it is unclear whether Chase's actions could properly be deemed the equivalent of obtaining Colorado charging orders based on a domesticated foreign judgment, even if they could, Chase would not have obtained enforceable Colorado charging orders until, at the earliest, August 11, 2014 (i.e., when it domesticated its Arizona charging orders), which was after the McClures had obtained and served effective and enforceable charging orders on the LLCs.
Para.41 Finally, assuming without deciding that our analysis should be premised on whether the district court properly exercised personal jurisdiction over the LLCs, we note that if an LLC is not subject to personal jurisdiction in the state in which the judgment was entered and the creditor seeks a charging order, then the creditor must engage in a two-step process to obtain an effective charging order: "(1) Domesticate the money judgment in the LLC's state of formation [and] (2) Seek a charging order from a competent court in that state." Bishop, LLC Charging Orders, 12 No. 3 Bus. Entities, at 21. After doing so, "[t]he LLC would be clearly bound by the order, and ignoring it would invite a contempt penalty." Id.
Para.42 In this scenario, Chase would have needed to domesticate the Arizona judgment in Colorado and then to obtain and serve Colorado charging orders. Again assuming without deciding that domesticating the Arizona judgment and then domesticating the Arizona charging orders would suffice to satisfy these requirements, Chase did not acquire effective charging orders until, at the earliest, August 11, 2014, when it domesticated its Arizona charging orders in Colorado.5
Para.43 For these reasons, whether we analyze this case as implicating either in rem jurisdiction over Fowler's membership interests or personal jurisdiction over the LLCs, Chase's charging orders did not become effective until, at the earliest, August 11, 2014, which was after the McClures had obtained and served effective charging orders on the LLCs.
Para.44 Accordingly, we agree with the division that the McClures' charging orders had priority over Chase's later-effective charging orders. See Union Colony, 832 P.2d at 1115–17.
Para.45 For these reasons, we affirm the judgment of the court of appeals.
We granted certiorari to review the following issues:
1. Whether the membership interests of a non-Colorado citizen in a Colorado LLC are located in the citizen's home state or in Colorado for purposes of determining the enforceability of charging orders and lien enforcement.
2. Whether the court of appeals erred in holding that the priority of charging orders issued against the membership interests of a non-Colorado citizen in a Colorado LLC is determined by first in time service of either charging orders issued by Colorado courts or foreign charging orders that have been domesticated in Colorado courts.
For convenience, although we have defined the LLCs at issue as "the LLCs," we also follow conventional nomenclature and refer to limited liability companies generally as LLCs.
For purposes of this opinion, we will assume that this domestication order was effective as of August 11, 2014.
In its opening brief, Chase conceded that the relative priorities of competing charging orders are ordinarily based on the principle of "first in time, first in right."
One commentator has noted that personal jurisdiction over the LLC may not be required because in complying with a charging order, "the LLC is simply carrying out an order rendered by any court of jurisdiction." Id. Under this view, the LLC need only assure itself that the court had jurisdiction to enter the order against the debtor-member, and the judgment creditor's domestication of that order in the LLC's state of formation would likely provide the requisite assurance. See id. Thereafter, service of the foreign state's charging order on the LLC would likely be deemed sufficient. See id. Like the above-described scenarios, however, this approach would not assist Chase here because even if it were enough for Chase to domesticate and serve the Arizona charging orders, it did so, at the earliest, on August 11, 2014, after the McClures obtained and served their charging orders.
= = = = = = = = = =
McClure v. JP Morgan Chase Bank NA, 2015 WL 4760275 (Colo.App., Aug. 13, 2015).
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. A PETITION FOR REHEARING IN THE COURT OF APPEALS OR A PETITION FOR CERTIORARI IN THE SUPREME COURT MAY BE PENDING.
Colorado Court of Appeals, Div. IV.
Douglas MCCLURE; Nancy McClure; and Spiral Broadcasting LLC, Plaintiffs–Appellees,
JP MORGAN CHASE BANK NA, Intervenor–Appellant.
Court of Appeals No. 14CA1775 | Announced August 13, 2015
Arapahoe County District Court No. 14CV30911, Honorable J. Mark Hannen, Judge
Attorneys and Law Firms
Carl H. Tessler, PC, Carl H. Tessler, Denver, Colorado, for Plaintiffs–Appellees.
Kutak Rock, LLP, John H. Bernstein, Jeremy D. Peck, Denver, Colorado, for Intervenor–Appellant.
Opinion by JUDGE TERRY
*1 Para. 1 Intervenor, JP Morgan Chase Bank NA (Chase), appeals an order declaring that charging orders entered in favor of plaintiffs, Douglas McClure and Nancy McClure and Spiral Broadcasting LLC, have priority over charging orders entered in favor of Chase.
Para. 2 The orders all charge the same debtor's membership interest in Colorado limited liability companies (LLCs). Chase's charging orders were issued by an Arizona state court, and the McClures' charging orders were later issued by a Colorado district court. Chase served its charging orders on the LLCs before the McClures did so.
Para. 3 As a matter of first impression, we determine that priority of charging orders against membership interests in Colorado LLCs is based on first-in-time service of charging orders that are enforceable in Colorado. Because Chase failed to domesticate its charging orders in this state before serving them, they did not become enforceable here in time to establish priority over the McClures' charging orders. Therefore, we affirm.
Para. 4 The relevant facts are undisputed and reflected in this timeline:
• July 2013: Chase obtained an Arizona judgment of roughly $20 million against Reginald D. Fowler and Spiral, an Arizona corporation.
• November 2013: The Arizona court issued charging orders in favor of Chase, charging Fowler's membership interests in three Colorado LLCs.
• December 2013: The Chase charging orders were served on the LLCs, and the Denver District Court entered an order domesticating Chase's Arizona judgment.
• March 2014: The McClures obtained a $1.5 million judgment in Arizona against Fowler and Spiral.
• April 2014: The McClures domesticated their Arizona judgment in Colorado by filing it in the Arapahoe County District Court.
• May through July, 2014: The Arapahoe County District Court issued charging orders in favor of the McClures, charging Fowler's and Spiral's membership interests in the same Colorado LLCs as those charged in the Chase charging orders, and the McClures served the orders on the LLCs.
• August 2014: The Denver District Court entered an order domesticating Chase's Arizona charging orders.
Para. 5 Faced with the difficulty of determining which of the competing charging orders to honor, the LLCs paid Fowler's distributions into the Arapahoe County District Court registry. After the McClures filed a motion in that court for release of the funds, Chase intervened and opposed the McClures' motion. The district court ruled that because the McClures' charging orders were issued by a Colorado court, they "were the first enforceable charging orders served on the [LLCs] and, hence, they have priority over [Chase's] Arizona charging orders."
II. Subject Matter Jurisdiction
Para. 6 As an initial matter, because a challenge to the court's subject matter jurisdiction is an issue that can be raised at any time, Town of Carbondale v. GSS Props., LLC, 169 P.3d 675, 681 (Colo. 2007), we consider Chase's contention (raised for the first time in its reply brief) that the district court lacked subject matter jurisdiction to settle the priority dispute between the parties. We reject this contention.
*2 Para. 7 Colorado district courts are courts of general jurisdiction in "all civil, probate, and criminal cases" subject to express statutory limitations. Colo. Const. art. VI, sec. 9; Wood v. People, 255 P.3d 1136, 1140 (Colo. 2011). Chase has not identified, and we are not aware of, any statutory limitation on jurisdiction that would apply here. Chase does not dispute that the district court had jurisdiction to enforce the McClures' domesticated judgment or to issue charging orders to the McClures, and Chase intervened in that proceeding for the express purpose of protecting Chase's rights. Therefore, the court had subject matter jurisdiction to decide the parties' priority dispute.
A. Whether the Arizona Charging Orders Were Enforceable
Para. 8 A charging order may be issued under section 7–80–703, C.R.S. 2014, against the membership interest of a judgment debtor who is also a member of a limited liability company. The order may be entered by a "court of competent jurisdiction" to "charge" the membership interest "with payment of the unsatisfied amount of the judgment" plus interest on the judgment. sec. 7–80–703. The McClures' charging orders were issued under this statute, while Chase's charging orders were issued under the comparable Arizona statute, Ariz. Rev. Stat. sec. 29–655 (2014).
Para. 9 Chase contends that the district court erred when it ruled that Chase's Arizona charging orders were unenforceable in Colorado until they had been domesticated in Colorado. We disagree.
Para. 10 Whether an undomesticated foreign charging order is enforceable in Colorado is a question of law. We review such issues de novo. Valdez v. People, 966 P.2d 587, 590 (Colo. 1998).
Para. 11 "Under the Full Faith and Credit Clause of the United States Constitution, Colorado courts have always enforced judgments rendered in foreign jurisdictions subject to our courts' satisfaction that the judgments were duly rendered." Wells Fargo Bank, Nat'l Ass'n v. Kopfman, 226 P.3d 1068, 1071 (Colo. 2010) (emphasis added).
Para. 12 The primary methods available to foreign judgment creditors seeking to enforce foreign-state judgments in Colorado are (1) filing a complaint in a Colorado court asserting the existence, details, and enforceability of the foreign judgment; or (2) domesticating the foreign judgment in a Colorado court under the Uniform Enforcement of Foreign Judgments Act (Enforcement Act), secs. 13–53–101 to –108, C.R.S. 2014. Kopfman, 226 P.3d at 1071; see also Griggs v. Gibson, 754 P.2d 783, 785 (Colo. App. 1988) (Under the Enforcement Act, "the filing of [an] authenticated copy of [a] foreign judgment is ... the equivalent of the entry of an original judgment by the domestic court, and, thus, is a necessary condition precedent to the domestic enforcement of [the] judgment" in Colorado.). Although there are other statutory methods for enforcing foreign-country judgments, see secs. 13–62–101 to –112, C.R.S. 2014, and foreign family-support orders, see secs. 14–5–101 to—903, C.R.S. 2014, those methods are inapplicable here.
Para. 13 A charging order is a judgment subject to the Enforcement Act. See sec. 13–53–102, C.R.S. 2014 (including orders of courts of the United States in definition of "foreign judgments" entitled to full faith and credit).
Para. 14 Chase argues that its Arizona-issued charging orders are enforceable in Colorado because the Arizona court was a "court of competent jurisdiction" under the Colorado charging order statute, sec. 7–80–703, and the Arizona charging orders complied with Colorado law. However, unless one of the Kopfman procedures has been complied with, foreign charging orders are not enforceable here. Specifically, to enforce a foreign charging order against a Colorado LLC based on domestication, the creditor would have to domesticate the charging order and not just the judgment on which the charging order is based. This is so because the charging order—unlike the judgment on which it is based—requires the Colorado LLC to take action, namely, to pay LLC distributions to the judgment creditor.
*3 Para. 15 Chase did establish the enforceability of the Arizona charging orders by domesticating them here; however, at the relevant time—i.e., before service of the McClures' charging orders—Chase's charging orders were not yet enforceable in this state.
B. First Party to Serve Colorado–Enforceable Charging Order Has Priority
Para. 16 The next question is: between Chase's first-in-time but (not yet) domesticated Arizona charging orders, on the one hand, and the McClures' later-in-time but Colorado-issued charging orders, on the other hand, which have priority? We review this issue of law de novo. Valdez, 966 P.2d at 590.
Para. 17 We hold that the priority of charging orders issued against Colorado LLCs is determined by first-in-time service of charging orders enforceable in Colorado. Charging orders that are enforceable in Colorado include both those issued by Colorado courts as well as foreign charging orders that have been domesticated in Colorado courts. See Kopfman, 226 P.3d at 1071.
Para. 18 As demonstrated in the Colorado Limited Liability Company Act, secs. 7–80–101 to –1101, C.R.S. 2014, Colorado has an interest in limited liability companies organized in this state, and the priority rule we announce today furthers that interest. Cf. In re Blixseth, 484 B.R. 360, 369 (9th Cir. BAP 2012) ("[W]e are persuaded that because [the debtor's] interests in the LLC and [limited liability limited partnership] were created and exist under, and his creditor's remedies are limited by, Nevada state law, that is sufficient reason to deem [the debtor's] interests to be located in Nevada."); Koh v. Inno–Pac. Holdings, Ltd., 114 Wash.App. 268, 54 P.3d 1270, 1272 (2002) ( "[W]here a partnership organizes under the laws of a state, the partnership interest is located within that state."); see also Carter G. Bishop, LLC Charging Orders: A Jurisdictional and Governing Law Quagmire, J. Bus. Entities, May/June 2010, at *14,*16–17, available at 2010 WL 2594393 (noting that state where the charging order is issued is important in enforceability of charging orders against limited liability companies, and describing adverse impacts to those companies based on enforcement of charging orders).
Para. 19 Though Colorado appellate courts have not previously addressed a case involving priority among foreign and domestic charging orders, in Union Colony Bank v. United Bank of Greeley National Association, 832 P.2d 1112 (Colo. App. 1992), a division of this court addressed the rule for determining priority between competing Colorado charging orders. United Bank obtained its judgment against the debtor more than a month before Union Colony Bank got its own judgment, but the latter bank served its charging order first on the debtor. Id. at 1113–14. The division held that a creditor's lien on a partnership interest attaches on the date of service of a charging order on the partnership, and that the service date establishes priority over a later-served charging order, regardless of the dates of the competing creditors' judgments. Id. at 1115. Therefore, the court held that Union Colony's lien had priority over United Bank's lien. Id. at 1117.
Para. 20 Citing Union Colony, Chase contends that the district court erred in determining that the McClures' later-issued Colorado charging orders had priority over Chase's earlier-issued, but then-undomesticated, Arizona charging orders. According to Chase, Union Colony established a rule of first-in-time, first-in-right for charging orders. We are not persuaded that Union Colony established such a rule that would apply to charging orders entered by courts of different states. Both orders in that case were entered by Colorado courts, and the decision's precedential value with respect to enforceability of foreign judgments is accordingly limited.
*4 Para. 21 In the context presented here, Union Colony's first-in-time rule must be viewed through the prism of enforceability established by Kopfman. Thus, the first creditor to obtain a charging order that has been rendered enforceable through one of the means discussed in Kopfman, 226 P.3d at 1071, is the first in right. Here, the McClures established their primacy as creditors by being the first to obtain Colorado-enforceable charging orders.
Para. 22 Our holding will not unfairly burden foreign judgment creditors because Colorado has a simplified procedure for rendering foreign judgments enforceable in Colorado: domestication under the Enforcement Act. See Kopfman, 226 P.3d at 1071. As relevant here, foreign judgment creditors need not anticipate every jurisdiction where their priority might be challenged; but if they seek to establish priority in charging a Colorado LLC, they must follow the Kopfman procedures.
Para. 23 Because the McClures were the first to serve charging orders that were enforceable in Colorado, the trial court was correct to declare that the McClures' charging orders had priority over the Chase charging orders.
Para. 24 Further, because we have concluded that that McClures' charging orders have priority over those of Chase, the McClures will not be affected by the Chase charging orders, and we need not address the McClures' argument that the Arizona court lacked authority to enter the charging orders in favor of Chase.
IV. Full Faith and Credit
Para. 25 Finally, Chase contends that the district court's order constitutes a collateral attack on Chase's Arizona charging orders in violation of the Full Faith and Credit Clause, U.S. Const. art. IV, sec. 1. We review this question of law de novo, Valdez, 966 P.2d at 590, and disagree with Chase.
Para. 26 The Full Faith and Credit Clause protects the final judgments of one state from collateral attack in another state. See Marworth, Inc. v. McGuire, 810 P.2d 653, 655–56 (Colo. 1991). However, no such collateral attack occurred here.
Para. 27 As the Supreme Court has explained,
Full faith and credit ... does not mean that States must adopt the practices of other States regarding the time, manner, and mechanisms for enforcing judgments. Enforcement measures do not travel with the sister state judgment as preclusive effects do; such measures remain subject to the evenhanded control of forum law.
Baker ex rel. Thomas v. Gen. Motors Corp., 522 U.S. 222, 235, 118 S.Ct. 657, 139 L.Ed.2d 580 (1998).
Para. 28 The trial court did not deny full faith and credit to Chase's Arizona charging orders. It simply and correctly determined the enforceability and priority of the competing states' charging orders, applying the elements described in Kopfman, 226 P.3d at 1071.
Para. 29 We are not persuaded to rule otherwise based on Pardee v. Mostow, 757 P.2d 1148 (Colo. App. 1988), which is distinguishable from the circumstances here. In Pardee, a division of this court held that certain tax refund checks awarded to a wife in an Illinois marriage dissolution order could not later be attached in Colorado by one of her ex-husband's Colorado creditors without running afoul of the Full Faith and Credit Clause. Id. However, neither the marriage dissolution order nor the tax refund checks in Pardee had any connection with Colorado, whereas here the orders issued by the Arizona court on behalf of Chase required Colorado LLCs to make payments of limited liability company distributions or face possible contempt charges. Subjecting the wife in Pardee to the Kopfman procedural requirements for obtaining full faith and credit, just so that she could receive the proceeds of the refund checks that had been awarded to her, would have been unfairly burdensome. In contrast, here, it is reasonable to require Chase to domesticate its Arizona charging orders in the state where the charged LLCs are organized in order to obtain priority over beneficiaries of competing charging orders.
*5 Para. 30 The order is affirmed.
Webb and Graham, JJ., concur.
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
OTHER INFORMATIONAL WEBSITES
by Jay Adkisson
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