Prior Liens Are Not a Defense to the Entry of a Charging Order

Prior Liens Are Not a Defense to the Entry of a Charging Order

      In a recent decision from Nevada, there was rejected the suggestion that charging orders should not be issued with respect to interest in a company on the basis that federal tax liens are already pending against those assets.  Renteria v. Canepa, No. 3:cv-00534-RCJ-CWH (D. Nev. June 19, 2013).

      In this case, Canepa executed a series of promissory notes to a trust of which, it would appear, Renteria was the trustee.  When those notes went into default, judgment was rendered against Canepa.  Seeking to collect on the judgment, Renteria sought charging orders against Canepa’s interest in two Nevada corporations, FQ Men’s Club, Inc. and Monkey Bars, Inc., as well as his interest in a Nevada LLC, Western Properties of Nevada.

      Initially, with respect to the charging orders sought against the corporations, Nevada has a unique statute that, with respect to certain closely-held corporations, imposes charging order protections.  As such, at least under Nevada law, a judgment-creditor cannot seize the stock of a Nevada corporation.

      Substantively, Canepa stated that federal tax liens were already recorded against him individually and against FQ Men’s Club, Inc., asserting, in the words of the Court, that in light of these superior tax liens “execution on the judgment [in favor of Renteria] against those assets would be inappropriate.”  The Court did not agree.  Rather, it found that:

It is only for this Court to determine whether the charging order requested is available under state law, which it is.  If the IRS or the entities to be charged wish to challenge Plaintiff’s subsequent attempts to enforce the charging orders under federal priority statutes, that is a separate matter.

       Another case involving the question of how a charging order would interface with federal tax liens was Cadle Company v. Ginsberg, 2002 WL 725500 (Conn. Supr. Mar. 28, 2002).  Therein, the Court first considered and rejected the notion that the LLC must be a party to the action in which a charging order is requested, determining that “An action seeking a charging order does not impact the rights or interests of a [LLC] to the degree necessary to require that it made a party in order for the action to proceed.”  Likewise, the Cadle Company Court dismissed the assertion that the IRS be made a party on the basis that it has or may claim a lien on the interest in the LLC, as “any charging order will be subject to any superior rights that the [IRS] may have in the defendant’s interest in the [LLC].”

       Still, the scope of the charging order entered in Renteria is open to questions (the text of the charging order is part of the Court’s decision).  Specifically, it precluded the LLC from making any loans to the defendants.  In addition, the charging order required the subject companies to supply the holder of the charging order with copies of the company’s operating agreement, federal and state tax returns and financial statements.  The Court’s authority to make these orders, especially with respect to the inspection of company books and records, is at best questionable.