Wednesday, October 19, 2011

Meyer v. Christie: Another Court Confuses the Holder of a Charging Order with an Assignee

Meyer v. Christie:  Another Court Confuses the Holder of a
Charging Order with an Assignee
     The good news is that the outcome described in this case cannot come about in Kentucky – our statute expressly precludes it.  Sadly, it expressly precludes it because a prior Kentucky court made the same mistake.
     Meyer v. Christie involves a relatively run-of-the-mill application for a charging order by which to enforce a judgment.  Meyer v. Christie, 2011 WL 4857905 (D. Kan. October 13, 2011).  However, the Court got wildly off base in discussing the effect of that charging order, ultimately equating (incorrectly) holding a charging order with being an assignee of the LLC.
     Initially, the defendant argued that the charging order could not be entered because the operating agreement of the LLC at issue provided that an interest therein may not be assigned.  In response thereto, the Court properly noted that the Kansas LLC Act provides that the charging order is the judgment creditor’s exclusive remedy, noting as well that the holder of a charging order “has the rights of an assignee.”  It was here that the train came off the tracks; the defendant was asserting that the charging order violated the limitation on assignability and the Court noted the holder of a charging order has the rights of an assignee.  From here, it was no small step for the Court to make the error in its analysis, determining that the holder of the charging order is an assignee.  This mattered because Kansas has an atypical provision to the effect that the assignee of the sole member of the LLC has the right to participate in its management and affairs.  Kan. Stat. Ann. § 17-76,112(f).  Ergo, the holder of the charging order was equated with an assignee and, pursuant to the statute, is now permitted to participate in the LLC’s management and affairs.
     The provision that the holder of a charging order has the rights of an assignee is not intended to be an affirmative grant but rather a limitation.  An assignee has quite limited rights vis-à-vis the partnership or LLC.  The intention of “has the rights of an assignee” is to indicate that, inter alia, the holder of a charging order has only the limited rights of an assignee. 
     Fortunately, a similar result cannot happen in Kentucky.  In Hubbard v. Talbott Tavern, Inc., No. 2003-CA-001468-MR, 2006 WL 2089308 (Ky. App. 2006), the Court of Appeals upheld a trial court order that “assigned” to the judgment creditor the judgment debtor’s membership interest in each of three LLCs and further directed that the judgment creditor be dissociated and cease to be a member of each of those companies.  The order of dissociation was based upon KRS § 275.280(1), it providing that a member is dissociated upon making an “assignment for the benefit of creditors.”  In response to this decision, the charging order provision of the LLC Act was amended to provide “A charging order does not of itself constitute an assignment of the [LLC] interest.”  KRS § 275.260(3).
     For an expansive review of the charging order as it appears in Kentucky’s LLC and partnership acts, see Thomas E. Rutledge & Sara Sloane Wilson, An Examination of the Charging Order under Kentucky’s LLC and Partnership Acts (Part I), 99 Kentucky Law Journal Online 85 (2011); (Part II), 99 Kentucky Law Journal Online 107 (2011).

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