Tuesday, November 5, 2013

Proposed Charging Order Rejected for Including Right to Participate in LLC’s Management

Proposed Charging Order Rejected for Including
Right to Participate in LLC’s Management


       A recent decision from the Court of Civil Appeals of Oklahoma has affirmed the rule that while a charging order may properly reach a member’s economic (interim and liquidating distribution) rights in an LLC, it does not extend to giving the judgment-creditor a voice in the LLC’s management for control over the judgment-debtor’s voting rights therein.  Southlake Equipment Company, Inc. v. Henson Gravel & Sand, LLC, __ P.3d __, 2013 WL 5657702 (Okla. Civ. App. Div. 4 Sept. 6, 2013).
      An agreed judgment in the amount of $40,840.19 plus attorneys’ fees and costs was entered against Henson Gravel & Sand, LLC and Melvin D. Henson, Jr., that judgment in favor of Southlake Equipment Company, Inc.  That Texas judgment was then domesticated in Oklahoma and Southlake filed an application for a “writ of special execution” pursuant to which Henson’s 24% interest in Econtuchka Erosion Control, LLC (“EEC”) would be assigned to Southlake.  The trial court granted that request, and Henson appealed.
      The Court of Appeals reviewed Oklahoma’s charging order statute as set forth in its LLC Act, noting that it is limited in application to a member’s economic rights in an LLC and does not extend to the voting rights.  It bears noting that while this statute contains the usual recitation that the holder of the charging order has only the rights of an assignee of the membership interest, the Oklahoma statute goes on to provide:
A charging order entered by a court pursuant to this section shall in no event be convertible into a membership interest through foreclosure or other action.
      The Court ultimately determined that, while the charging order could be properly issued with respect to Henson’s right to the economic fruits of EEC, it could not extend to the right to participate in management.  Rather:
In the present case, the trial court charged Debtor to transfer his entire membership interest, both economic and voting, to Southlake in partial satisfaction of the judgment.  This charge clearly conflicts with the plain meaning of § 2034 and was therefore in error.  The trial court may only charge Debtor to assign the share of the profits and surplus that flow from his membership interest in his Units in EEC until the judgment has been satisfied.

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