Nobody Comes Out Looking Good in this Charging Order Dispute

Nobody Comes Out Looking Good in this Charging Order Dispute

      In a recent decision from Arizona, everybody, they being the law firm that held a charging order against a former client and that former client, came out looking good. Campbell Law Group Chartered v. Jagelski, No. 1 CA-CV 17-0032, 2018 WL 3853518 (Ariz. Ct. App. August 14, 2018).

      Campbell Law Group Chartered (“CLG”) held a judgment of some $454,000 against its former client Monica Jagelski for failure to pay attorney fees. CLG sought a charging order against Jagelski’s interest in Empire Vista, LLC. Jagelski was the sole member of that LLC. It in turn owned a one-third interest in real property worth in excess of half a million dollars. Having been awarded a charging order against Jagelski’s interest in Empire Vista, CLG filed with the Arizona Corporation Commission articles of amendment to the LLC’s articles, identifying CLG as the 100% member therein. Then, CLG contacted the other co-owners of the property, claiming to be Empire Vista’s new sole member. CLG as well advised those co-owners that all proceeds from a pending sale of the property should be conveyed to CLG “In its capacity as the new sole member and manager of Empire Vista, LLC.”

      Shortly after CLG obtained the charging order with respect to Empire Vista, Jagelski caused there to be formed a new LLC, Northern Mancore LLC, it owned by her children. By a mechanism not explained in the decision, Empire Vista “Then transferred the real property” to that newly owned LLC; how and what was done is unclear in that the opinion earlier says that Empire was a one third, not a 100%  owner in the property. Regardless, Northern Mancore then transferred the property back to Empire Vista, whereupon Empire Vista transferred it to another LLC, Southwest Mancore, “In exchange for a promissory note in the amount of $550,000 and a deed of trust.” It is recited that “Jagelski admits the purpose of the transfer from Empire Vista to Southwest Mancore was to ‘protect the assets of Empire Vista’ from CLG.” Thereafter, CLG obtained a charging order against Jagelski’s interest in Southwest Mancore and as well sought a court ruling that CLG was in consequence the member in Southwest Mancore.

      The decision would then focus upon three points, namely: (i) is the holder of a charging order a substitute member for the judgment-debtor, (ii) did Jagelski’s efforts to transfer the property from Empire Vista constitute a fraudulent conveyance; and (iii) did the property transfers violate the terms of the charging order?

The Holder of a Charging Order is a Not a Substitute Member

      The court began by rejecting the assertion that the person holding a charging order is a substitute member, even for a sole member. Rather, under the statute, the holder of the charging order has only the rights of an assignee.

      The court did not address the penalty to be suffered by CLG for, without authority, amending the articles of Empire Vista.

Transfers Done to Avoid Creditor Claims are Fraudulent

      With respect to the various transfers of property amongst the LLCs, the court found that they did constitute a fraudulent conveyance in that they were undertaken for the purpose of thwarting the claims of CLG. Balancing the equities, the court wrote:

Though arguably undertaken as a practical means of thwarting CLG’s own unlawful efforts to take over control of the LLCs, the transfers were no less fraudulent. The fraudulent transfer statutes contain no exceptions for debtors faced with malfeasant creditors. Debtors faced with unlawful attempts at collection may seek emergency relief from the court - they may not violate the law in the name of self-help.

The Property Transfers Did Not Violate the Charging Orders

      The court rejected the suggestion that the transfers of property amongst the various LLCs, beginning with Empire Vista, violated the charging order CLG had been awarded with respect to Jagelski’s interest therein. While fraudulent, the transfers did not result in any distribution to Jagelski that was not properly diverted to CLG pursuant to the charging order.