Tuesday, October 6, 2020

Charging Order Denied

                                                             Charging Order Denied

            In an April decision from California, the charging order was denied a judgment-creditor when that judgment-creditor failed to demonstrate that the judgment-debtor was in fact a member of the LLC against which the charging order was sought. Perez v. Dhillon, No. 2:19-mc-00071 KJM AC, 2020 WL 1900447 (E.D. Ca. April 17, 2020.

            In this case, when the judgment-creditor sought a charging order against the judgment-debtor’s alleged interest in Hiway Farm LLC, both it and the judgment-debtor challenge that he, in fact, had an interest in that LLC. Finding that the judgment-creditor had not carried its burden of showing that the judgment-debtor was a member of the LLC, the court wrote, “Plaintiff’s motion to enforce the judgment against the defendant’s debtor interest in the Hiway Farm, LLC necessarily fails, because plaintiff has not established that defendant has any such interest.” 2020 WL 1900447, *3.

            As I and others, including Jay Adkisson, have suggested, this and similar decisions are of questionable merit.  The cost of an LLC of complying with a charging order where the judgment-debtor is not a member is nothing; there is no distribution to be diverted to the judgment-creditor.  In contrast, there can be high transaction costs in requiring the judgment-creditor to prove the judgment-debtor is in fact a member of the LLC.  Believe it or not judgment-debtors are sometimes (often) less than forthcoming in identifying their assets against which a judgment may be collected, and while it may be possible under local law to require the LLC in which the judgment-debtor may be a member to respond to discovery, that imposes additional cost upon the judgment-creditor and the LLC.  This latter class of costs is imposed irrespective of whether the judgment-debtor is or is not a member.   

No comments:

Post a Comment