Charging Order Lien Survives Bankruptcy; Violation of Charging Order to be Addressed Through Contempt Powers of the Issuing Court
A recent decision from the Bankruptcy Court for the Southern District of New York addressed two important question, namely (i) does the lien created by a charging order survive the charged member’s bankruptcy? and (ii) how are violations of the terms of a charging order to be remedied. In short (i) “yes” and (ii) “by the contempt powers of the issuing court.” All in all a sobering reminder of the importance of compliance with charging orders. In re Campbell, 2026 WL 84544 (Bankr. S.D.N.Y. Jan. 12, 2026).
Joe Campbell had been held responsible to pay on a promissory note of some $305,000 owed to Vision Bank, predecessor to Radiance Capital Receivables Twelve, LLC, the plaintiff in this adversary proceeding. In that original trialaction, after a determination of liability, numerous charging orders were issued against various LLCs in which Campbell was a member both directing that all distributions that would be made to Campbell be diverted to the judgment creditor:
IT IS ORDERED that a lien is charged against the financial interests of [the Debtor] in the [LLCs] in the amount of $317,135.00, being the final judgment of September 9, 2013, rendered in favor of [SEPH] and against [the Debtor], plus accrued interest and costs, and that [the LLCs] are Ordered to distribute to [SEPH] any income, officer's fees, bonuses, distributions, salaries or dividends paid or otherwise conveyed to [the Debtor] by reason of any interest he owns in the [LLCs] until [SEPH] is satisfied in full.
Further, each LLC was ordered to notify the judgment creditor “each time a distribution subject to this [charging] order was made.”
It will come as no surprise that these instructions were not followed. In fact the LLCs made no reported distributions to Campbell even as their assets were used to pay his expenses. When the judgment creditor moved for sanctions to enforce the charging orders Campbell filed for personal bankruptcy, and the automatic stay prevented the issuing court from taking further action as to enforcement of the charging orders it has issued. The judgment creditor then instituted this adversary proceeding. This decision was in response to competing motions for summary judgment.
Three matters were considered, namely:
In short, the answers were (i) “no,” (ii) “yes,” and (iii) “yes.”
§ 523(a)(2)(a)
As described by the court:
Section 523(a)(2)(A) exempts from an individual debtor's bankruptcy discharge, among other things, “any debt ... for money ... to the extent obtained by ... actual fraud ....” Courts typically rely on the common law of torts when analyzing “actual fraud” under section 523(a)(2)(A). As stated, Radiance Capital argues that the Debtor's transfer of funds violated Alabama fraudulent transfer law and gave rise to a debt owed to Radiance Capital, separate from the Judgment, that is nondischargeable under 11 U.S.C. § 523(a)(2)(A). 2026 WL 84544, *9 (citations omitted)
Campbell would prevail on this point, it being found that the debt at issues, the original $305,000 loan from Vision, was not procured by fraud and Campbell’s interference with the collection of the judgment thereon did not go to the terms and issuance of the initial obligation.
As stated above, the underlying debt at issue is based on the Debtor's default of a business loan. The Debtor did not obtain the loan by committing fraud. Further, the money loaned to the Debtor by Vision Bank in 2007 “is obviously not traceable” to the transfers from the LLCs years later. 2026 WL 84544, *11.
§ 523(a)(6)
As described by the court:
Section 523(a)(6) exempts from an individual debtor's bankruptcy discharge “any debt ... for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). The “word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Further, section 523(a)(6) encompasses “intentional torts” rather than “negligent or reckless torts,” and intentional torts “generally require that the actor intend ‘the consequences of an act,’ not simply ‘the act itself.’ ”
“The injury caused by the debtor must also be malicious, meaning ‘wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.’ ” “Malice may be implied by the acts and conduct of the debtor in the context of the surrounding circumstances.” 2026 WL 84544, *12 (citation, internal quotation marks, and alteration omitted).
The court’s application of this provision / law was as follows:
In Count II, Radiance Capital argues, among other things, that the Debtor “knowingly violated the [Charging Orders] in an effort to thwart [Radiance Capital's] security interest in the distributed funds.” (Complaint ¶ 60.) “Failure to obey a court order constitutes willful and malicious conduct, and a judgment against a defiant debtor is excepted from discharge.” Quoting a Western District of New York bankruptcy court decision, the Fifth Circuit in Williams explained that damages resulting from an intentional violation of a court order are ipso facto the result of “willful and malicious” injury:
[W]hen a court of the United States ... issues an injunction or other protective order telling a specific individual what actions will cross the line into injury to others, then damages resulting from an intentional violation of that order as is proven either in the Bankruptcy Court or, so long as there was a full and fair opportunity to litigate the questions of volition and violation, in the issuing court are ipso facto the result of a “willful and malicious injury.”
This is because what is “just” or “unjust” conduct as between the parties has been defined by the court.... An intentional violation of the order is necessarily without “just cause or excuse” and cannot be viewed as not having the intention to cause the very harm to the protected persons that order was designed to prevent.
It follows, therefore, that monetary sanctions levied against a party for intentionally violating a court order are per se nondischargeable under section 523(a)(6). As one court observed:
[W]here there is an order of a court finding a debtor in contempt for violating an earlier court order, for purposes of establishing a willful and malicious injury under § 523(a)(6), it is conclusively presumed or established by that contempt order that (1) the debtor's conduct caused an injury to the other party, and (2) that the sanctions awarded are a “debt ... for [that] injury ....” In other words, a debt arising as a result of a violation of a court order does not require proof of an injury beyond showing that the court order was knowingly violated, and neither the existence of an injury nor the amount (or reasonableness) of damages from an injury need be established beyond showing that the court imposed sanctions on the debtor for the violation.
A party who violates a charging order under Alabama law may be held in contempt.
The record here establishes that the Debtor knowingly violated the Charging Orders. The Charging Orders required the LLCs to make distributions to Radiance Capital that are otherwise payable to the Debtor “by reason of any interest he owns in the [LLCs]” until the Judgment was fully satisfied. The Charging Orders also required the LLCs to notify Radiance Capital each time a distribution subject to the order was made. In contravention of the orders, the Debtor caused Whigham Place to make dozens of transfers directly to the Debtor throughout the decade following the entry of the Charging Orders. Whigham Place is a single-asset real estate company that collects rent proceeds from its ownership of commercial real estate in Alabama, and the Debtor provided no business justification for Whigham Place's transfers of funds to the Debtor. These transfers must therefore be viewed as transfers on account of the Debtor's ownership and control of Whigham Place in violation of the Charging Orders.
The remainder of the transfers were technically made to third parties but were for the benefit of the Debtor. Transfers from Whigham Place to WB Property were used to fund the Debtor's living expenses as he used WB Property's bank account “as a personal checking account.”
Transfers from Whigham Place to Clairise Court and Able Builders represented funds that were purportedly payable to the Debtor but were instead deposited into the accounts of the latter two entities. The Debtor characterized these as “salary” payments to himself,but that assertion lacks merit. Although the Debtor owns Whigham Place, he is not an employee of, or otherwise entitled to salary from, Whigham Place.20
The transfer from Antilles GP to Marina similarly represented funds that were purportedly payable to the Debtor but were instead transferred to Marina. The Debtor admitted that he caused Antilles GP to return a prior capital contribution to him and transferred those funds to Marina. The return of a prior capital contribution can be seen as nothing other than a distribution on account of the Debtor's equity interest in Antilles GP.
Last, the transfers from Whigham Place to JP Morgan paid sizeable balances for three JP Morgan credit card accounts held in the name of “John F. Campbell Clairise Court LLC.” As set forth above, the Debtor routinely used the credit cards to cover his personal expenses including attorney's fees to his divorce attorney. 2026 WL 84544, *12-14 (citation, internal quotation marks, and alteration omitted).
The court quickly disposed of Campbell’s argument that compliance with the charging orders was not required as they were subordinate to the IRS’s lien, writing:
This argument lacks merit. As the Supreme Court explained, absent a stay pending appeal, a party subject to an order must comply with the order “promptly” and may not make “private determinations” about the legal effect of that order:
We begin with the basic proposition that all orders and judgments of courts must be complied with promptly. If a person to whom a court directs an order believes that order is incorrect the remedy is to appeal, but, absent a stay, he must comply promptly with the order pending appeal. Persons who make private determinations of the law and refuse to obey an order generally risk criminal contempt even if the order is ultimately ruled incorrect. 2026 WL 84544, *14-15.
Survival of the Charging Order Liens
The court quickly addressed the question of whether the charging order liens susvided Campbell’s bankruptcy, writing:
In Count III, Radiance Capital seeks a declaratory judgment that the liens created by the Charging Orders survive the Debtor's bankruptcy discharge. “[L]ienspass through bankruptcy unaffected” unless they are avoided23 or otherwise addressed. The same is true for liens created by charging orders.
Here, the liens created by the Charging Orders are valid and have not been avoided or otherwise addressed in this bankruptcy case. Therefore, such liens survive the Debtor's bankruptcy discharge. 2026 WL 84544, *16-17.
Enforcement to of the Charging Orders Through Contempt Powers
While this bankruptcy court found Campbell to have acted in violation of the issued charing orders, it was stated as well that it is the Alabama court that first issued the charging orders that should address the contempt:
Therefore, while it is appropriate for this Court to determine whether the Debtor engaged in “willful and malicious” conduct within the meaning of 11 U.S.C. § 523(a)(6), the Alabama District Court must be the court that issues the contempt order for the Debtor's violations of the Charging Orders. To facilitate the Alabama District Court's determination of appropriate sanctions, this Court will modify the automatic stay sua sponte to permit Radiance Capital to continue prosecution of the Sanctions Motion or otherwise seek sanctions for the Debtor's violations of the Charging Orders in the Alabama Action. 2026 WL 84544, *16.
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