Monday, October 5, 2020

Scope of Charging Order Upheld

Scope of Charging Order Upheld

        A charging order is a lien on the distributions made to a member who is a judgment-debtor.  Essentially a garnishment, it directs the LLC to pay the distributions not to the judgment-debtor, but rather to the judgment-creditor.  Those distributions are then applied against and reduce the judgment.  It is not uncommon for judgment-debtors to argue that the scope of the charging order, i.e, what will be treated as a distribution is overly broad.  In this recent decision, the court rejected that assertion.  In Johnny Thomas, Trustee of Performance Products, Inc. v. Hughes, SA-16-CV-00951-DAE, 2020 WL 5015441 (W.D. Tex. Aug. 8, 2020).

            The court wrote:

 “Plaintiffs contend they have the right to receive any distribution to which Hughes would otherwise be entitled with respect to her membership interest in M. G. & Sons and that any membership distributions, profits, cash, assets, or other monies due or that shall become due by Hughes by virtue of that membership shall be paid by Hughes, M. G. & Sons, and/or any third party to Plaintiffs through their counsel of record. Furthermore, Plaintiffs ask the Court to order that Hughes and M. G. & Sons be required to obtain leave of court before transferring any asset of M. G. & Sons to any third party, transferring any funds to any third party except for transactions in the ordinary course of business, or transferring Hughes’s interest in M. G. & Sons to any third party.”

         Implicitly the court approved of the limitations on the transfer of company assets that were not identified as distributions and the transfer of the judgment-debtors interest in the LLC, neither of which would strictly be subject to the charging order.  The court noted, in approving the language, the judgment-debtor’s “history of fraudulent transfers to avoid payment of a judgment.” Id. at *3.

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