Monday, October 5, 2020

A Pair of Decisions (One Recent) on Foreclosure of the Charging Order

 A Pair of Decisions (One Recent) on Foreclosure of the Charging Order

            As has otherwise been noted, a charging order is a lien issued in favor of a judgment-creditor against a judgment-debtor’s distributional interest in an LLC. As distributions are made by the LLC, pursuant to the charging order they are paid not to the judgment debtor, but rather are diverted to the judgment creditor with the aim of reducing the outstanding judgment indebtedness. Being a lien, the possibility of foreclosure exists. There are relatively few decisions on the foreclosure of a charging order; last year I reviewed the Illinois decision Preservation Holdings,LLC v. Norberg. Here are two more decisions to consider.

          The first decision, Professionals Real Estate Partnership v. Linn, No. 1970-MDA 2019, 2020 WL 3887995 (Pa. Super. July 10, 2020), involved a general partnership. In this instance, and as is seldom seen, the judgment-creditor was the partnership itself; the charging order was issued in order to enforce a judgment in favor of the partnership against one of the partners. In this instance, the partnership held certain office buildings that were occupied by the partner’s respective businesses; the judgment-debtor in this case had failed to satisfy certain obligations to the partnership. The partnership itself generated no net distributable income. On that basis, it argued that it should be able to foreclose upon the charging order in that it would not generate funds sufficient to satisfy the judgment in any reasonable period of time. The judgment-debtor asserted that foreclosure was not justified in that, once the property was sold, the judgment could be collected from his portion of the sale proceeds. This assertion was rejected by the court in that it was the judgment-debtor partner who had repeatedly interfered with the sale of the partnership’s property.

         In the second decision, the Missouri Court of Appeals was called upon to consider whether foreclosure the charging order can even take place.  DiSalvo Properties, LLC v. BluffView Commercial, LLC, No. ED 101977, 2015 WL 3795402 (Mo. App. June 16, 2015), the question presented was whether the charging order lien could be foreclosed upon. In this case, the court held that foreclosure was not possible in that the statute did not affirmatively provide for foreclosure.

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