Friday, March 21, 2014

North Carolina Court of Appeals Addresses Rights Under a Charging Order

North Carolina Court of Appeals Addresses Rights Under a Charging Order


The North Carolina Court of Appeals recently reviewed, and found to be over-broad, a charging order issued in connection with the judgment-creditors efforts to collect on a judgment.  First Bank v. S&R Grandview, L.L.C., ___ S.E.2d ___, 2014 WL 846671 (N.C. App. March 4, 2014).

            Donald Rhine was found to be indebted to First Bank for in excess of $3.5 million.  Seeking to collect on this judgment, First Bank sought a charging order against Rhine’s interests in S&R Grandview, LLC (“Grandview”).  The terms of the charging order that was entered are recited in the opinion, and in addition to directing that all distributions that would have been made to Rhine be made instead to First Bank (the charging order as well directions that all allocations be made to First Bank – clearly they have not thought through what it is they want from a charging order), it as well directed that:

  • “Until such time as the full amount of the judgment has been paid to First Bank, Defendant D. Rhine shall be enjoined from exercising any of the rights of a member of” Grandview; and
  • “Defendant D. Rhine’s membership right shall lie fallow until the judgment is satisfied ….”
Rhine appealed the scope of the charging order.

            The Court reviewed the charging order provisions of the old and new NC LLC Acts, finding them to consistently state that a judgment-creditor holding a charging order has only the rights of an assignee.  However, in that the rights of the judgment-creditor vis-à-vis the LLC will come to an end when the underlying judgment is satisfied, the holder of a charging order is not the same as an assignee.  In that the entry of a charging order did not affect an assignment of the judgment-debtor’s interest in the LLC, the member did not suffer the consequences of assignment, namely dissociation and the loss of the rights to participate in the LLC’s management.

Had the General Assembly intended a charging order to assign all membership interests and terminate a debtor’s membership in the LLC, as plaintiff contends, it could have easily included language to that effect.  Absent such language, we are bound by the words used by the General Assembly, and we hold that a charging order does not effectuate an assignment of a debtor-member’s total interest in an LLC.  2014 WL 846671, *3.

      The Court of Appeals reversed those aspects of the charging order precluding Rhine from exercising the management rights relating to the charged interest and requiring that they “lie fallow” until satisfaction of the judgment in favor of First Bank.

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