Monday, September 24, 2012

Holder of Charging Orders Not Entitled to Company Financial Records

Holder of Charging Order Not Entitled to Company Financial Records
      In a recent decision rendered by the Iowa Court of Appeals, it was held that the holder of a charging order is not entitled, with respect to the LLC of whose interests have been charged, to the LLC’s cash flow statements.  Wells Fargo Bank, N.A. v. Continuous Control Solutions, Inc., No. 2-431 / 11-1285 (Iowa Ct. App. Aug. 8, 2012).  The primary review of the facts of the underlying dispute are set forth at Wells Fargo Bank, N.A. v. Continuous Control Solutions, Inc., No. 10-1070, 2011 WL 2695269 (Iowa Ct. App. July 13, 2011).
      A group of individual judgment-creditors obtained a judgment against a group of individual judgment-debtors.  Seeking to collect on that judgment, the judgment-creditors applied for charging orders against the judgment-debtors’ interests in three LLCs that they owned collectively and as well interest in two other LLCs in part owned by one of the judgment-debtors.  In connection that request for a charging order, the judgment-creditors requested that the LLCs “disclose their cash flow statements or other documentation ‘in order to verify no distributions had been made to the judgment-debtors or any other entity or person with an ownership interest in these limited liability companies.’” Slip op. at 3.  In turn, the LLCs objected to the requirement to disclose their financial information.  Ultimately, the trial court did order the disclosure of that information every six months.
      Cutting to the chase:
On appeal, the LLCs argued there is no statutory authority for the disclosure orders issued by the district court.  We agree.  Slip op. at 4. 
      The court recognized that the Iowa LLC charging order provision does authorize the issuing court to “[m]ake all of the orders necessary to give effect to the charging order,” but held that this language did not authorize the sought requirement of financial information disclosure.  Ultimately, it determined that this provision applied only with respect to a receiver appointed by the court to receive the distributions.  The court noted as well that as the holder of a charging order is one step removed from being a transferee of the charged economic interest, and as a transferee of an economic interest is not entitled to access company records; no right to company information should be available:
A charging order constitutes a mere lien on the judgment-debtor’s transferrable interest (the member’s economic interest) in the L.L.C. [Iowa Code] § 489.503(1).  If a transferee of a member’s economic interest is not entitled to access to the L.L.C.’s records, the holder of the lien upon the member’s economic interest should be similarly denied access to the L.L.C.’s records or other information concerning the company’s activities, unless otherwise authorized by statute.
      This decision, at least as to the rights of the holder of a charging order to information, should be good law in Kentucky (whether the implication that information could be compelled to be shared with a receiver requires further analysis).  Under Kentucky law, it is express that the holder of a judgment lien “has only the rights of a transferee and shall have no right to participate in the management of or to cause the dissolution of the partnership.”  KRS § 362.1-504(2); see also KRS § 275.260(2) (equivalent provision in the Kentucky LLC Act).  As transferees do not have information rights, the holder of a charging order should likewise lack information rights.

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