The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
2020 - Florida - Kostoglou
Kostoglou v. Fortuna, 2020 WL 813366 (Fla.App., Feb. 19, 2020).
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, Fourth District.
John A. KOSTOGLOU, Appellant,
John FORTUNA, Appellee.
[February 19, 2020]
Appeal from the Circuit Court for the Fifteenth Judicial Circuit, Palm Beach County; Peter D. Blanc, Judge; L.T. Case No. 50-2018-CA-000777-XXXX-MB.
Attorneys and Law Firms
Matthew B. Weissberg of the Law Office of Matthew B. Weissberg, P.A., West Palm Beach, for appellant.
Mark E. Pena of the Law Office of Mark E. Pena, P.A., Tampa, for appellee.
*1 John A. Kostoglou (“Creditor”) appeals an order granting him a charging order against John Fortuna’s (“Debtor”) interest in, but precluding any distributions from, a limited liability company (“LLC”). We affirm the order as to the granting of a charging order against Debtor’s interest without further comment. However, we reverse part of the order denying Creditor the right to receive Debtor’s distributions from the LLC.
By way of background, Creditor obtained a judgment against Debtor in Ohio. After domesticating the foreign judgment, Creditor sought to satisfy his judgment by obtaining a charging order against Debtor’s interest and rights to distributions in a multi-member LLC pursuant to section 605.0503, Florida Statutes. Debtor holds a 5% interest in the LLC, which entitles Debtor to receive a 5% distribution of earnings subject to working capital from the LLC. The court concluded that Creditor was entitled to a charging order against Debtor’s interest in the LLC but not to the right to distribution of earnings. This appeal follows.
Pursuant to section 605.0503(1), Florida Statutes, “a charging order constitutes a lien upon a judgment debtor’s transferable interest and requires the limited liability company to pay over to the judgment creditor a distribution that would otherwise be paid to the judgment debtor.” § 605.0503(1), Fla. Stat. (2019) (emphasis added). This concept is further reiterated in the statute under section 605.0502(2), Florida Statutes, which states that “[a] transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.” § 605.0502(2), Fla. Stat. (2019).
This Court has recognized that section 605.0503, Florida Statutes, authorizes the court to enter a charging order against a judgment debtor’s transferrable interest and requires an LLC to pay over to the judgment creditor any distribution that would otherwise be paid to the judgment debtor. See Panksy v. Barry S. Franklin & Assocs., P.A., 264 So. 3d 961, 962 (Fla. 4th DCA 2019). Our sister courts have also held the same. See McClandon v. Dakem & Assocs., LLC, 219 So. 3d 269, 271 (Fla. 5th DCA 2017) (“Under ... section 605.0503, the charging order entered by the court should have only directed the LLCs to divert [the debtor’s] rights to the LLCs’ profits and distributions to [the creditor].”); Capstone Bank v. Perry-Clifton Enters., LLC, 230 So. 3d 970, 971 (Fla. 1st DCA 2017) (“A charging order is ‘a remedy that a creditor of a member in an LLC ... can receive from a court that instructs the entity to give the creditor any distributions that would otherwise be paid to the ... member from the entity.’ ”) (quoting Alan S. Gassman et al., After Olmstead: Will a Multiple-member LLC Continue to Have Charging Order Protection?, FLA. B.J., Dec. 2010, at 8, 8).
Accordingly, we reverse in part the charging order to the extent that it denied Creditor’s claim to Debtor’s share of distributions from the LLC and remand for entry of a charging order requiring the LLC to pay over to Creditor any distribution that would otherwise be paid to Debtor.
*2 Affirmed in part, reversed in part, and remanded.
by Jay Adkisson
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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
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
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 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
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
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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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