Friday, August 23, 2013

Challenges to Charging Order Rejected

Challenges to Charging Order Rejected

      In a recent decision from a Connecticut Court, numerous challenges to the entry of a charging order, including an assertion that the court did not have necessary jurisdiction over a foreign LLC, were rejected.  Rockstone Capital, LLC v. Marketing Horizons, Ltd., 2013 WL 4046597 (Conn. Supr. July 17, 2013).
      This action arose out of a post-judgment effort to collect upon a stipulated judgment.  Rockstone Capital sought charging orders against the interest that Ashton Edwards owned in two LLCs, Marketing Ventures Worldwide, LLC and Nonprofit Solutions, LLC.  With respect to the charging order sought against Nonprofit Solutions, Edwards asserted that the court could not enter the charging order on the basis it was a foreign, not a Connecticut, entity, and that the court lacked personal jurisdiction over it. 
      With respect to the first jurisdictional argument, the court (correctly) noted that it is not an issue of whether it has jurisdiction over the entity in which the interest is to be charged, but whether it has jurisdiction over the holder of that interest.  In this instance, and setting aside the question that Edwards could not, of himself, challenge jurisdiction over Nonprofit Solutions, LLC, such was simply not necessary:
Defendant Edwards offers no authority for his assertion that a court must have jurisdiction over a [LLC] in order to enforce a judgment against an individual who is a member of that entity.
      Secondly, the court determined that its ability to issue a charging order pursuant to the Connecticut LLC Act applied equally to an LLC organized under New York law. 
This Court finds no constraints in § 34-171 [the charging order provision of the Connecticut LLC Act] which limit application solely to domestic limited liability companies.

      This opinion is useful on both of these grounds, especially the latter.  With respect to those states that do not specify in their charging order statutes that the entity is not a necessary party to the proceeding, this decision answers the question of whether it need be.  A ruling to similar effect is Bank of America, N.A. v. Freed, 2012 WL 6725894 (Ill. App. I Dist., Dec. 28, 2012), which decision was reviewed here on January 4, 2013.  Kentucky is an exemption to this ambiguity – all of the Kentucky charging order provisions expressly provided that the entity is not a necessary party to the proceeding in which a charging order is sought.  See, e.g., KRS § 275.260(6).
      Of greater import is the court’s determination that it may issue a charging order, in accordance with domestic law, against an interest in a foreign entity.  Some have argued, typically without citation to any authority, that a charging order may only be issued in accordance with the laws of the jurisdiction of organization, and it is even suggested that only the courts of the jurisdiction of organization have the capacity to enter a charging order.  From there arises the claim that those states that have restricted the scope of their charging order laws  are effective as asset protection vehicles in other jurisdictions.  For example, the 2012 Ohio and 2013 Delaware amendments to those LLC acts aim to preclude equitable remedies for enforcement of the charging order lien.  Decisions such Rockstone Capital undercut that assertion.  Rather, if a judgment is issued in another jurisdiction, it may apply its charging order law even if that law would give the judgment-creditor more rights than would be afforded under the law of the LLC’s jurisdiction of organization.  As we have been reminded by my friend Jay Adkisson, “All remedies law is local,” and the charging order is a remedy.

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