More Confusion on Charging Orders

More Confusion on Charging Orders

      As previously noted (HERE IS ALINK to that posting), recently the Colorado Court of Appeals held that a charging order issued by a foreign court could be enforced in Colorado against a Colorado LLC only if it, in addition to the judgment for whose enforcement it was entered, were domesticated in Colorado. In effect, the court held that a charging order entered by a foreign court against an interest in a Colorado LLC could not be enforced absent domestication of the charging order.

      Fine, but now a decision from the U.S. District Court in Utah has, in effect, held to the reverse. Earthgrains Baking Companies, Inc. v. Sycamore Family Bakery Inc., Case No 2:09CV523DAK, 2015 WL 5009376 (D. Utah Aug. 21, 2015).

      Earthgrains held a judgment in the range of $6,000,000 against Sycamore Family Bakery and Leland Sycamore, its 48% member. This decision was rendered, in part, in response to Earthgrain’s motion for sanctions against Sycamore Family LLC for failure to make distributions, which would be captured by the charging order, to Leland even as distributions were made to his spouse, Jeri, the other 48% member. Ultimately, the court punted on sanctions, stating that additional discovery is needed. However, in doing so it rejected Sycamore’s assertion that the charging order is invalid “because it was entered under Utah law instead of Nevada law, which it submits is the proper law on the basis that the LLC was organized in Nevada.” In rejecting that assertion, it noted that a charging order does not implicate the internal affairs of the LLC, which are governed by the laws of the jurisdiction of organization, but rather governs the rights of a third party vis-a-vis the LLC.

      Based upon the information provided, the Earthgrains’ decision, being largely in response to a motion for contempt, is somewhat skimpy on the background facts, in one instance we have a court saying that the charging order cannot be enforced until it is domesticated even as another court says that an LLC with notice of a charging order (no suggestion that domestication is necessary) can be held in contempt for not complying with it.  Charging orders, of themselves, are already confusing. These disagreements among various courts as to procedural requirements are only making it worse.