Tuesday, April 6, 2021

Charging Orders and Foreign LLCs

 

Charging Orders and Foreign LLCs

A recurring issue in LLC law is whether a court has the capacity to issue a charging order as to the LLC interests of the judgment-debtor when the LLC that issued those interests is not of itself subject to the jurisdiction of the court.  Consider a court sitting in Jefferson County, Kentucky. The judgment debtor, domiciled in Kentucky, holds a membership interest in an LLC that is organized in Colorado; the LLC is not a party to the lawsuit.  Can the Jefferson Circuit Court issue a charging order as to the judgment-debtor’s interest in the Colorado LLC?  The courts disagree as illustrated by a pair of recent decisions.

   In Oberg v. Lowe, 2021 WL 495043 (D. Kan. Jan. 4, 2021), the court cited Professor Carter Bishop (Id., note 7, citing Carter G. Bishop, LLC Charging Orders: A Jurisdictional & Governing Law Quagmire, 12 No. 3 Bus. Ent. 14, 21 (May/June 2010)) for the proposition that there are “three ways a court can have jurisdiction to enter an LLC charging order: (1) Personal jurisdiction over the member, (2) In rem jurisdiction over the LLC membership interest to be charged, or (3) Personal jurisdiction over the LLC itself.”  On that basis it was recommended that the court had jurisdiction to issue the requested charging orders in that “Defendant is a citizen of Kansas. If Defendant were not a citizen of Kansas, the Court would have in rem jurisdiction over his interests in the various limited liability company interests, all of which were formed in Kansas.” 2021 WL 495043, *2 (footnotes omitted).

In contrast is the decision rendered in Steamfitters Union, Local 420 Welfare Fund v. Direct Air, LLC, 2020 WL 6131163 (E.D. Pa. Oct. 10, 2020),  wherein the court sitting in Pennsylvania determined it did not have jurisdiction to enter a charging order as to the judgment-debtors interests in a New Jersey LLC. See also id. at note 18 (suggesting that the judgment-creditors could domesticate the judgment in New Jersey and from a court in that state request the charging order). The judgment-creditors argued the Pennsylvania court had that capacity:

 The question is whether a Pennsylvania court can charge a transferable interest in a New Jersey limited liability company. The plaintiffs contend that jurisdiction over a foreign limited liability company is not required to enter a charging order against its members’ transferable interests. They argue that because we have personal jurisdiction over SCST’s members, our jurisdiction over them extends to their personal property, wherever it is located. They rationalize that because a judgment creditor, as transferee, obtains only limited rights of a member, the charging order will affect only the member’s transferable rights and will not affect SCST itself.

See id. at *3.  Notwithstanding this invitation the court found that the New Jersey LLC did not have minimum contacts with Pennsylvania sufficient to assert jurisdiction, and on the basis the requested charging order was denied.  Id. at *6 (“Because we lack authority under the PULLCA to charge the defendants’ transferable interests in the New Jersey limited liability company over which we have no jurisdiction, we shall deny the plaintiffs’ motion for entry of a charging order.”).

 

 

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