Opinion 2017 Florida Capstone Bank Charging Order

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

Caution state law variances! Check currency of statutes!

 

Charging Order Statutes Of The United States

 

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

Capstone Bank

 

Capstone Bank v. Perry-Clifton Enterprises, LLC, 2017 WL 5894915 (Fla.App., Nov. 30, 2017).

 

NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

 

District Court of Appeal of Florida,

 

First District.

 

CAPSTONE BANK, Appellant,

 

v.

 

PERRY–CLIFTON ENTERPRISES, LLC, Christopher L. Richards, John Eric Richards and Christy Richards, Appellees.

 

CASE NO. 1D16–1094

 

Opinion filed November 30, 2017

 

An appeal from the Circuit Court for Okaloosa County. John T. Brown, Judge.

 

Attorneys and Law Firms

 

Louis E. Harper, III, T. A. Borowski, Jr., Darryl Steve Traylor, Jr., of Borowski & Traylor, P.A., Pensacola, for Appellant.

 

William L. Ketchersid, David L. Powell, of Ward & Ketchersid, P.A., Destin, for Appellee Christy Richards.

 

Opinion

 

PER CURIAM.

 

*1 Capstone Bank challenges the trial court's order finding that an Alabama divorce judgment obtained by former wife Christy Richards constitutes a charging order that has priority over the charging order issued to Capstone Bank in this proceeding, each regarding the former husband's membership interest in Perry–Clifton Enterprises, LLC, a Florida limited liability company.

 

A charging order is "a remedy that a creditor of a member in an LLC (or of a partner in a limited partnership) can receive from a court that instructs the entity to give the creditor any distributions that would otherwise be paid to the partner or member from the entity." Alan S. Gassman, After Olmstead: Will a Multiple–member LLC Continue to Have Charging Order Protection?, 84 Fla. B.J. 10, (December 2010); see also Krauth v. First Cont'l Dev–Con, Inc., 351 So.2d 1106, 1108 (Fla. 4th DCA 1977) ("The charging order is a flexible court-supervised substitute for the more disruptive process of execution by the sheriff."); Trawick, Fla. Prac. & Proc. sec. 27:11 (2016–2017 ed.) ("A charging order is the method used to collect a judgment when the judgment debtor has partnership or limited liability company assets.").

 

On April 14, 2015, the Circuit Court of Etowah County, Alabama issued a Final Judgment of Divorce (the "Alabama Judgment") which included reference to the membership interest of the former husband, Christopher Richards, in Perry–Clifton Enterprises, LLC. The Judgment provides that:

 

In consideration for the property settlement awarded to Christy, Chris shall receive all right, title and interest in and to all business entities (Richard Motors, Inc.; Sunroc Properties, LLC; Economy Auto Mart, LLC; Perry–Clifton Enterprises; etc.), real property, automobiles, motorcycles, boats, aircraft and any future BP settlement proceeds, not otherwise awarded to the wife. However, the property settlement, unpaid alimony, or other financial obligations ordered payable by Chris for the benefit of Christy shall act as a lien against Chris' interest in all property awarded to him until paid in full.

 

The Alabama Judgment stated: "Each party shall execute any and all documents necessary to carry out the intent of this Order." Christy Richards recorded the Alabama Judgment in the Public Records of Okaloosa County, Florida and filed an affidavit stating that she remained unpaid. She did not seek issuance of a charging order.

 

On September 22, 2015, the trial court in Okaloosa County, Florida granted Capstone Bank's motion for a charging order against the membership interests of Christopher L. Richards and John Eric Richards in Perry–Clifton Enterprises, LLC. In response, on November 4, 2015, Christy Richards made a motion to intervene and a motion to stay the bank's charging order. The trial court determined that the Alabama Judgment itself constituted a charging order and was obtained prior to Capstone Bank's charging order, thereby giving Christy Richards priority in the membership interest of Christopher L. Richards in Perry–Clifton Enterprises, LLC.

 

*2 The question is whether the Alabama Judgment is a de facto charging order under Florida law, such that its entry by the Alabama court before entry of the competing charging order of Capstone Bank grants it priority. We start by noting that under Florida law a charging order requires application to a court for its issuance. Section 605.0503(1), Florida Statutes (2014), provides: "On application to a court of competent jurisdiction by a judgment creditor of a member or a transferee, the court may enter a charging order against the transferable interest of the member or transferee for payment of the unsatisfied amount of the judgment with interest." (Emphasis added). This language requires that a judgment creditor must file a motion for a charging order in order for one to be issued. See also Trawick, Fla. Prac. & Proc. sec. 27:11 (2016–2017 ed.) (citing Fla. R. Civ. P. Rule 1.100(b)) ("The judgment creditor must file a motion for a charging order and allege the judgment, that it has not been paid and the interest that the judgment creditor seeks to charge."); Regions Bank v. Alverne Assocs., LLC, 456 S.W.3d 52, 56 (E.D. Mo. 2014) (citing Mo. Rev. Stat. sec. 347.119 (1993)) ("To obtain a charging order, the judgment creditor must file an 'application to a court of competent jurisdiction.' "); Jay D. Adkisson, Charging Orders: The Peculiar Mechanism, 61 S.D. L. Rev. 440, 454 (2016) (internal citations omitted) (A charging order "requires that the creditor file a motion for charging order with the court, serve the debtor and often either the LLC, or all its members, and then have a hearing before the court where the merits of the charging order are considered.").

 

The need for issuance of a charging order is due to its exclusivity as a remedy in Florida, whose Legislature recently enacted a statute making it clear that "a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member's transferee may satisfy a judgment from the judgment debtor's interest in a limited liability company or rights to distributions from the limited liability company" for multiple-member LLCs, the so-called Olmstead patch. sec. 605.0503(3), Fla. Stat. (2014) (emphasis added).1 Accordingly, a judgment lien alone does not amount to a charging order. See Branch Banking and Trust Co. v. Crystal Ctr., LLC, No. 8:15-cv-1462-T-30AAS, 2016 WL 7650655, at *1 (M.D. Fla. December 12, 2016) (stating "the interest held by a member in a limited liability company is not subject to execution under Fla. Stat. sec. 55.061, and a judgment-creditor must, instead, seek a charging order against such interest") adopted in part and reversed in part, No. 8:15-cv-1462-T-30AAS, 2017 WL 57345 (M.D. Fla. January 5, 2017).

 

Here, the language of the Alabama Judgment creates a lien against the membership interest of Christopher Richards in Perry–Clifton Enterprises, LLC, for nonpayment of his obligations therein, but it does not itself rise to the level of a charging order for which Florida has established a procedure for issuance. As such, Christy Richards would need to apply for a charging order against the membership interest in Perry–Clifton Enterprises, LLC, which is the "sole and exclusive remedy" available against a limited liability company of this type. sec. 605.0503(3), Fla. Stat. Because Christy Richards did not obtain a charging order, the trial court erred in concluding that the Alabama Judgment had priority over Capstone Bank's charging order.

 

REVERSED.

 

WOLF, RAY, and MAKAR, JJ., CONCUR.

 

Footnotes

 

1

 

"In response to Olmstead [v. F.T.C., 44 So.3d 76 (Fla. 2010) ] ... the Legislature amended Sec. 608.433, Fla. Stat. [replaced by sec. 605.0503] to clarify the exclusive remedies available to a judgment creditor as to a judgment debtor's interest in an LLC: a charging order, or a charging order followed by a foreclosure sale." Regions Bank v. Hyman, No. 8:09-CV-1841-T-17MAP, 2015 WL 1912251, at *1, *7 (M.D. Fla. April 27, 2015). Section 608.433 was repealed in 2015 and became section 605.0503. See Historical and Statutory Notes, sec. 608.433, Fla. Stat.

 

= = = = = = = = = =

 

Capstone Bank v. WinSouth Credit Union, 2017 WL 5894911 (Fla.App., Nov. 30, 2017).

 

NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

 

District Court of Appeal of Florida,

 

First District.

 

CAPSTONE BANK, Appellant,

 

v.

 

WINSOUTH CREDIT UNION, Richards Motors, Inc., John Eric Richards, Christopher L. Richards and Christy Richards, Appellees.

 

CASE NO. 1D16–1484

 

Opinion filed November 30, 2017

 

An appeal from the Circuit Court for Okaloosa County. Terrance R. Ketchel, Judge.

 

Attorneys and Law Firms

 

Louis E. Harper III, Darryl Steve Traylor, Jr., and T. A. Borowski, Jr., Borowski & Traylor, P.A., Pensacola, for Appellant.

 

Eric A. Dibert, Matthews & Jones, LLP, Crestview, for Appellee Winsouth Credit Union.

 

Opinion

 

PER CURIAM.

 

*1 This case arises from competing monetary claims to the respective membership interests of John Eric Richards and Christopher L. Richards in a Florida limited liability company. Capstone Bank challenges the trial court's determination that WinSouth Credit Union's charging order has priority over Capstone Bank's charging order. We reverse because WinSouth's charging order was entered on an Alabama judgment that was not properly domesticated as to John and Christopher. WinSouth obtained a final judgment in Alabama against Richards Motors, Inc., John Eric Richards, and Christopher L. Richards, but it only recorded the certificate of judgment against Richards Motors, Inc. in the public records of Florida. Nowhere on that recorded judgment is it apparent that WinSouth also obtained a judgment against John or Christopher. Since the Alabama court issued three separate certificates of judgments in favor of WinSouth, domestication was required as to each. WinSouth's recording of its judgment against Richards Motors, Inc. did not serve to domesticate its judgment against John and Christopher notwithstanding there is joint and several liability. See sec. 55.503(1), Fla. Stat. (2015) (requiring that the judgment sought to be domesticated must be recorded in order for it to be enforced as a judgment of the state). Because domestication was not established, it was error to accord relief to WinSouth. Accordingly, we reverse and remand for proceedings consistent with this opinion.

 

REVERSED and REMANDED.

 

WOLF and RAY, JJ., CONCUR. MAKAR, J. CONCURS IN RESULT WITH OPINION.

 

MAKAR, J., concurring in result.

 

A single two-page judgment against three defendants holding them jointly and severally liable was entered in Alabama. A certified copy of that judgment, along with only one of the certificates of authentication (as to corporate defendant Richards Motors) and a required affidavit, was filed with the clerk in Okaloosa County by WinSouth Credit Union, which sought to impose a charging lien. Certificates as to co-defendants Christopher Richards and John Eric Richards were not filed, but statutory notice was filed and provided to all affected persons including all three judgment debtors. Under these circumstances, where no discernable prejudice appears, domestication of the collective judgment as to the three defendants was established.

 

Even if the Alabama judgments had not been domesticated, however, reversal is warranted as to the trial court's determination as to priority, the record showing that Capstone Bank applied for and obtained its perfected charging order prior to that of WinSouth.

 

A charging order is "a remedy that a creditor of a member in an LLC (or of a partner in a limited partnership) can receive from a court that instructs the entity to give the creditor any distributions that would otherwise be paid to the partner or member from the entity." Alan S. Gassman, After Olmstead: Will a Multiple-member LLC Continue to Have Charging Order Protection?, 84 Fla. B.J. 10, (December 2010); see also Krauth v. First Cont'l Dev–Con, Inc., 351 So.2d 1106, 1108 (Fla. 4th DCA 1977) ("The charging order is a flexible court-supervised substitute for the more disruptive process of execution by the sheriff.").

 

*2 Between competing judgment creditors, the first to obtain an enforceable charging order has priority. See In re Jaffe, 235 B.R. 490, 492 (Bankr. S.D. Fla. 1999) ("[A]n application for a charging order starts the judicial process for perfecting a lien against a partnership interest. Perfection of the lien, however, does not occur until a court actually enters a charging order."); but see Krauth, 351 So.2d at 1108 (providing that "where unsecured judgment creditors are concerned, the first to apply to a court of proper jurisdiction for a [ ] charging order has priority").

 

Because a charging order "constitutes a lien on the judgment debtor's limited liability company interest or assignee rights," Young v. Levy, 140 So.3d 1109, 1111 (Fla. 4th DCA 2014), issuance of an enforceable charging order requires domestication of the foreign judgment. See Michael v. Valley Trucking Co., Inc., 832 So.2d 213, 215 (Fla. 4th DCA 2002) (explaining that, prior to Florida's adoption of the Florida Enforcement of Foreign Judgments Act ("FEFJA"), "creditors with foreign judgments had to file an action to domesticate the judgment in Florida and then record the judgment as a Florida judgment in order to create a valid lien").1

 

A charging order issued by a domestic court without foreign judgment domestication would not be perfected upon the issuance of the charging order.2 See, e.g., McClure v. JP Morgan Chase Bank NA, 395 P.3d 1123 (Colo. App. 2015) (determining that a domesticated judgment, although later in time, had priority over a first-in-time judgment that had not been domesticated). As a result, we must review the timing of the parties' domestication and charging order issuance to determine priority.

 

Here, Capstone Bank filed an action to domesticate its foreign judgment on May 22, 2015 and filed a motion for a charging order on August 11, 2015. Both domestication of the foreign judgment and issuance of the charging order were granted on September 22, 2015. WinSouth obtained domestication of its foreign judgment in Florida on July 22, 2015, filed a motion for a charging order on August 24, 2015, and obtained a charging order on October 6, 2015. As such, Capstone Bank obtained domestication of the foreign judgment on the same day it was issued a charging order (September 22, 2015), which is permissible. See Lefkowitz v. Quality Labor Mgmt., LLC, 159 So.3d 147, 148 (Fla. 5th DCA 2014) (illustrating the trial court's entering of a final judgment and charging order on the same day is allowed). Because Capstone Bank applied for and obtained a perfected charging order prior to WinSouth, Capstone Bank has priority; that WinSouth domesticated its judgment before Capstone Bank does not control.

 

Footnotes

 

1

 

The FEFJA was enacted to expedite the domestication process. Pratt v. Equity Bank, N.A., 124 So.3d 313, 315–16 (Fla. 5th DCA 2013). But the FEFJA did not eliminate the ability to file an action to domesticate a judgment. See id. at 316 (quoting sec. 55.502(2), Fla. Stat. (2013)) (stating that the FEFJA procedure does not "impair the right of a judgment creditor to bring an action to enforce his or her judgment instead of proceeding under [the FEFJA]").

 

2

 

Although a foreign jurisdiction can enter a charging order on a domestic LLC, see Vision Mktg. Res., Inc. v. McMillin Group, LLC, No. 10-2252-KHV, 2015 WL 4390071, at *1, n.11 (D. Kan. July 15, 2015) (finding that "[t]he Court need not have jurisdiction over the LLC entity itself in order to issue a charging order, when it has jurisdiction over the LLC member because the LLC has no right or direct interest affected by the charging order") and Wells Fargo Bank, N.A. v. Barber, 85 F.Supp.3d 1308, 1315 (M.D. Fla. 2015) (stating that "a membership interest in a limited liability company is intangible personal property, which 'accompanies the person of the owner' "), domestication would still be required in order for the charging order to be deemed enforceable. See Carter G. Bishop, LLC Charging Orders: A Jurisdictional & Governing Law Quagmire, 12 No. 3 Busent 14, 21, 46–47 (May/June 2010); Cadle Co. v. Ginsburg, 31 Conn. L. Rptr. 597, 2002 WL 725500 (Conn. Super. March 28, 2012).

 

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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

 

 

Appeal - Issues relating to the appeal of a charging order

 

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

 

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

 

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

 

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

 

Distributions - Creditors rights to distributive payments

 

Economic Rights - Limitation of charging order and foreclosure to debtor's economic rights

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Prejudgment Relief - Freezing the interest and distributions pending judgment

 

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

 

Receiver - The role of the receiver in charging order proceedings

 

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

 

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

 

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

 

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

 

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

 

= = = = =

 

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

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  • 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.

 

 

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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.