Sunday, April 12, 2015

Kentucky Court of Appeals Rules on Challenge to Charging Order

Kentucky Court of Appeals Rules on Challenge to Charging Order


In the decision rendered last Friday, the Kentucky Court of addressed the propriety of a charging order issued against the interest of the judgment-debtor in some eight different limited liability companies. Unfortunately, the Court of Appeal seems to have rather glossed over the most interesting aspect of the charge orders that were issued.  Vance v. Spring Hill Signs, LLC, No. 2013-CA-001264-MR (Ky. App. April 10, 2015).

Spring Hill Signs held several judgments against Donna Vance.   In an effort to collect thereon, Springhill sought charging orders with respect to Vance’s interest in numerous LLCs.  In addition, Spring Hill sought the appointment of a receiver with respect to her interest in each of those LLCs.  While the charging orders were issued, the trial court denied the request that a receiver be appointed. Specifically, and most interestingly, the charging order provided that:

if any disbursements are made to other members, then a corresponding disbursement for Donna Vance's share/interest must be made at the same time.

Vance then brought this appeal, asserting that the charge in order as I enter by the trial court “exceeded its authority and adjudicating the rights of non-parties.” Slip op. at 4.

Initially, Spring Hill sought to avoid the appeal by arguing that the entry of a charging order is not a final and appealable order. The Court of Appeals rejected that argument and determined that an appeal could be taken therefrom.  Also, notwithstanding a determination that the argument with respect to the validity of the charging orders was not argued to the trial court and therefore could not be brought on appeal, the Court of Appeals did go on to consider it.

Essentially, as characterized by the Court of Appeals, it was:

[Vance’s] allegation that the trial court's charging order assumes jurisdiction over those eight limited liability companies, which are not parties to the action, when they restricted the method or means by which those limited liability companies may make distributions to their members.  Slip op. at 9.

Initially, the Court rejected this on the basis of a statue recognized by Vance, it providing that an LLC is itself not a necessary party to the application for a charge in order.  Note, however, that the opinion contains a typo in its reference to KRS § 275.260(2) as the controlling statute. Rather, it is KRS § 275.260(6) which provides: “the [LLC] is not a necessary party to an application for a charging order.”

Implicitly, the decision of the Court of Appeals was that the charging order should be read narrowly to the effect that, if and to the extent distributions are made, a distribution on Vance’s behalf, subject to diversion pursuant to the entered charging order, must take place, and the LLC may not “bank” the distributions that would otherwise go to her or otherwise make disproportionate distributions.  Pursuant to that reading, the entered operating charging order did not impact the internal affairs of the LLC or otherwise permit the holder of the charging order to influence its management and affairs.  There is, however, an alternative reading of the charging order which, again implicitly, seems to of been rejected. Under that alternative reading, the LLC and its constituent members would be precluded from altering Vance’s sharing ratio in the various companies during the pendency of the charging order.  Clearly such a charging order would be invalid as it would intrude into the internal affairs of the LLC.  Unfortunately the Court of Appeals did not squarely address that question.

For a general review of the charging orders utilized in Kentucky's LLC Act, the same statutory provisions as well appearing in Kentucky's partnership and limited partnership acts, see Thomas E. Rutledge and Sarah Sloan Wilson, An Examination of the Charging Order under Kentucky’s LLC and Partnership Acts (Part I), 99 Kentucky Law Journal Online 85 (2011); An Examination of the Charging Order under Kentucky’s LLC and Partnership Acts (Part II), 99 Kentucky Law Journal Online 107 (2011).



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