Enforcement of Foreign Charging Order Fails for Failure to Domesticate

Enforcement of Foreign Charging Order Fails for Failure to Domesticate

      An Alabama court entered a judgment in favor of Bentley for $1,350,000 against Byrd. When Bentley asked a Tennessee court to assist in collecting on this judgment by issuing a charging order against Byrd’s interest in Hisbach, LLC, a Tennessee LLC, things broke down. Estate of Mark Bentley v. Byrd, No. W2017-00446-COA-R3-CV, 2018 WL 930921 (Tenn. App. Feb. 15, 2018).

      Under Tennessee law, before the court would have jurisdiction, it needed to make service of the request for a charging order on Byrd, the judgment debtor. Tenn. Code Ann. § 26-6-105(c). Bisbach argued that “because Mr. Byrd had never been served with process, Mr. Bentley’s requested relief could not be granted.” 2018 WL 930921, *1. Still, the trial court issued the charging order, finding that Byrd was on notice, “both ‘actually and constructively’” as:

Plaintiff has made a good faith effort to serve actual notice upon Defendant at two separate residences in Alabama, a third residence in New Mexico listed for Defendant in a separate legal proceeding here in Madison County, and actual service upon Hisbach Partners. 

Legal counsel for Byrd participated in at least one telephone conference with the court.

      Under the Tennessee Uniform Enforcement of Foreign Judgments Act, the clerk of the court issues a summons to the judgment debtor and, if after being served, the judgment debtor makes no response, the judgment debtor may enforce the judgment. The Bentley court noted that:

As is clear, service on the judgment debtor plays a key role in the statutory requirements. The statute unequivocally provides that no execution whether enforcement action is allowed until thirty days after summons has been served on the judgment debtor. This requirement is important because it allows the judgment debtor to ‘appear and show why enforcement of the judgment should be stayed.’

2018 WL 930921, *4. The court also found that the participation by Byrd’s out-of-state counsel in one telephone conference with the court was not sufficient to waive lack of service.

      Ultimately, because Byrd was never served in Tennessee in connection with the effort to enforce the Alabama judgment, the charging order issued against him “was void.” Id. *5.

      This decision is rather troubling with respect to the ability to use a charging order to collect upon a judgment. Consider, for example, judgment entered by a court in Alabama with respect to a defendant resident in New York. That New York resident is a member in a Utah LLC. That New York resident, however, has absolutely no other connections to Utah. In fact, the investment in the Utah LLC was made by means of a wire transfer. In order to enforce the Alabama judgment against the New York resident with respect to his membership interest in the Utah LLC, (here assuming Utah law is the same as that of Tennessee discussed in the decision above), when application is made to the Utah court for a charging order, that Utah court must have personal jurisdiction over the New York resident. Absent a statute giving rise to special jurisdiction by reason of being a member of a Utah LLC (see, e.g. KRS § 275.335(6)), the Utah court will lack the capacity to enter the charging order.  In effect, by being a member in LLCs organized in states in which the member does not otherwise have contacts, it may be possible to avoid service and therefor the issuance of a charging order.