Wednesday, August 2, 2017

Courts Disagree as to the Standard for Issuing a Charging Order; Is the Judgment-Debtor a Member?

Courts Disagree as to the Standard for Issuing a Charging Order;
Is the Judgment-Debtor a Member?

      As a vehicle for collecting on a judgment, a charging order may be issued against a judgment-debtor’s interest in a partnership, limited partnership or LLC, functioning essentially as a garnishment of whatever distributions that company would otherwise make to the judgment-debtor. Pursuant to the charging order, those amounts are paid to the judgment-creditor. In a pair of recent decisions, courts disagreed as to what level of showing must be made that the judgment-debtor is indeed a member/partner in the LLC/partnership that would be subject to the charging order.
      In the first of these decisions, the court held, in effect, that there is a very low threshold for the issuance of a charging order.  Seufret v. Temple Management, LLC, 2017 WL 2622347 (Conn. Sup. Ct. May 25, 2017). In this instance, the judgment-creditor asserted that the judgment-debtor, Bergman, was a member in 660 Sherman, LLC, and that his interest therein should be subject to a charging order. An objection thereto was filed on the basis that the plaintiff had not made a showing that of the judgment-debtor held an interest therein. The court overruled that objection, writing:
If 660 Sherman, LLC is served with the charging order and owes no debt to the defendant, 660 Sherman, LLC is under no jeopardy. If a dispute arises about whether Bergman is owed a debt by 660 Sherman, LLC, that dispute can be presented to this court for resolution at a future date with notice to all relevant parties.
      In contrast, in a decision out of Missouri, the judgment-creditor seeking a charging order was held to a much higher standard. St. Louis Bank First v. Kohn, 517 S.W.3d 666 (Mo. Ct. App. 2017). Therein, the court of appeals reversed a lower decision granting charging orders with respect to the judgment-debtor’s alleged interest in certain partnerships and LLCs. On the basis that there had not been a sufficient showing that in fact the judgment-debtor was a member/partner in those ventures, the award of the charging orders was reversed.
      IMHO, the Seufret decision is the better of the two. Vis-a-vie the LLC, the charging order is a passive obligation to direct to the judgment-creditor what would otherwise be paid to the judgment-debtor. For that reason, little proof of the judgment-debtor’s interest in the LLC need be shown. Rather, even as the statute is silent as to the point, the judgment-creditor should be awarded a charging order on “information and belief” that the judgment-debtor is a member/assignee. If in fact the judgment-debtor is not in fact a member/assignee of the LLC, it is not obligated to do anything as there are no payments to divert to the judgment-creditor.

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