LLC Allowed to Intervene in Action for Charging Order Against Member’s Interest in That LLC

LLC Allowed to Intervene in Action for Charging Order Against Member’s Interest in That LLC

      In a recent (and questionable) decision out of Iowa, an LLC was allowed to intervene in an action in which a charging order was sought against the interest of one of the LLC’s members. DuTrac Community Credit Union v. Hefel, No. 15-1379, 2017 WL 461211 (Iowa Feb. 3, 2017).

      This decision reviews and largely rejects a number of challenges made to the entry of charging orders in support of the collection of certain bank debts for a real estate development project that never happened. On the upside, the court easily disposed of the argument that, as the LLC’s operating agreement prohibited, without consent, the transfer of an ownership interest, a charging order would violate the operating agreement. The court correctly noted that the charging order attaches only the distributions, and does not vest in the holder of the charging order any rights of a member.

      However, the court did allow the LLC to intervene in the action seeking the charging order against the member’s interest in the company. On this argument, the court found that the LLC, Westgate, had standing, it writing:

Westgate has a specific interest in the outcome of the litigation - namely, the amount of proceeds that would be dispersed to DuTrac under the terms of the charging order. The alleged injury is specific to Westgate, as it deals with Westgate's disbursements and is not one that is the same for the population in general. Second, the potential injury is not conjectural or hypothetical because it deals with concrete, monetary amounts. Westgate has standing. 2017 WL 461211,*4 (citations omitted).

      This determination is at best questionable. The distributions, to which the charging order would attached, are those funds that the company has already determined will be distributed to the members. It is only at the time that a distribution is declared that the charging order attaches to any funds. That attachment takes place only after the LLC has determined that it does not need those funds for its operations or to satisfy the claims of its creditors. Here, in effect, the court allowed the LLC to have standing as to the disbursement of funds it has, in application, already determined to give away. For that reason, this is a questionable decision.