A charging order is by statute the exclusive remedy for a judgment creditor seeking to collect … [+]
As I have written on many occasions, it is often procedurally difficult for our courts to enter charging orders because they have so little statutory guidance. The so-called Harmonized Acts, being the Uniform Partnership Act (UPA), the Uniform Limited Partnership Act (ULPA), and the Uniform Limited Liability Company Act (ULLCA), and their latest revised iterations beginning with an “R” (RUPA, RULPA, and RULLCA), all mandate that a charging order is the “exclusive remedy” for a judgment creditor to employ against a debtor’s interest in such an entity, but don’t tell the courts either how to go about issuing one or offer any guidance as to how to resolve the vast number of technical issues that might — and frequently do — crop up. Thus, it is in the nature of a minor miracle and a tribute to the quality of many of our judges that more charging order cases are decided appropriately than not. Even where the courts get it wrong, either in the opinion of their appellate courts or just in my own humble opinion, their error is usually excusable, if not completely explainable, by the near total absence of statutory guidance on the particular issue that they muffed.
One area where the Harmonized Acts offer utterly no guidance is in the area of jurisdiction, i.e., the sort of jurisdiction necessary for a court to enter a charging order against LLCs formed in another state. On this point, the decision by U.S. Magistrate Judge Gwynne E. Birzer, sitting in the District of Kansas in the case of Oberg v. Lowe, is well worth discussing.
Plaintiffs Helmer W. Oberg and Kathey Lindsey, who was acting as the trustee of Oberg’s insurance trust, sued defendant Daniel H. Lowe on a couple of promissory notes in the U.S. District Court for the District of Kansas. Eventually, Lowe confessed judgment in the amount of a little over $1.5 million, plus costs, attorney’s fees and interest. About six months after the judgment was entered, Oberg and Lindsey filed an application for a charging order against Lowe’s interests in some 19 limited liability companies, alleging “upon information and belief” that Lowe did indeed hold an interest in those LLCs.
For his part, Lowe responded that seven of the 19 LLCs no longer existed, and that he held ownership in only two of the remaining seven LLCs, which two LLCs owned the interests in the other five. Lowe’s biggest argument, however, that the LLCs were formed outside of Kansas and thus the Kansas (and the U.S. District Court sitting in Kansas) did not have personal jurisdiction over those entities such that the charging order could be entered.
The court rejected Lowe’s jurisdictional argument on two grounds. First, the court noted that Lowe was a citizen of Kansas, and thus the court had personal jurisdiction over LLC interests which Lowe held. Second, the court noted that because Lowe was a citizen of Kansas, there would be in rem jurisdiction (i.e., jurisdiction over a piece of property as opposed to a person) over the LLCs interests. Presumably, but without explaining, the court here was relying upon ULLCA § 501 which states that an LLC interest is one of intangible personal property, and intangible personal property is subject to the jurisdiction of the state where the debtor/member is a resident — intangible property essentially follows a debtor’s around, but at least exists if anywhere in the debtor’s state of residence. [In a footnote, the court also noted a third basis for the court’s jurisdiction which was not present in this case, which would be when the LLC itself was within the state’s jurisdiction.]
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The court then issued the charging order sought by Oberg and Lindsey, and by doing so implicitly rejected Lowe’s two arguments that some of the LLCs had since gone out of existence and that a charging order could only be issued against the top-level LLCs that he owned directly, and not the bottom-level LLCs that were only owned by the top-level LLCs.
Since the U.S. Magistrate Judge for whatever reason passed on analyzing these issues, let’s do it ourselves and starting with Lowe’s argument that some of the LLCs had gone out of existence. It is here that it must be recalled that a charging order is simply a vehicle to place an involuntary lien on the debtor’s economic right to distributions, if any, and thus a charging order is very similar to other post-judgment vehicles for placing liens such as abstracts of judgments real estate and forms filed with the Secretary of State to place liens on the debtor’s personalty. In that light, if the charging order causes a lien to attach against the debtor’s interest in an LLC or partnership that’s great, but if the charging order misses then (just like with an abstract of judgment) there is “no harm, no foul”. Since there are various ways by which a dead entity can be revived, and upon revival the charging order would then attach to the debtor/member’s interest, it was thus appropriate for the court to enter a charging order against the debtor’s interests in even dead entities. Which is all to say that a court should enter a charging order so long as the creditor presents at least minimal evidence that the debtor owns an interest, without regard to the nature or quantity of that interest.
The other issue that the court glossed over is that of Lowe’s claim that only owned two top-tier LLCs, and then those two LLCs held the membership interests in the remaining lower-tier LLCs. Here, the court simply treated for charging order purposes all the LLCs to be owned by Lowe, and thus issued what might be described as either a cascading charging order (i.e., the charging order “cascades down” from the upper-tier entities to the lower ones) or as a collapsing charging order (i.e., the court simply treated all the LLCs as being of a like level or one big unit regardless of actual ownership).
Arguably, this treatment by the court was error under the plain text of the charging order statute, which addresses strictly and only the interest of a debtor — and only the debtor —in a particular LLC. Otherwise stated, the plain text of ULLCA § 503 doesn’t authorize what the court did, at least without the court doing something more such as finding that the two upper-tier LLCs were Lowe’s alter egos, or perhaps at least that those two LLCs were single-member LLCs that might be disregarded under charging order law (which is meant to protect the non-debtor members of an LLC or partnership, and thus has been held to be of no utility where there are no non-debtor members to protect). The upshot is that where the court is going to enter a cascading or collapsing charging that it needs to first make findings as to why the upper-tier entities should be disregarded or treated as if they were the alter egos of the debtor. Here, the court did not go that extra step, and that was probably a mistake, although the opinion here is pretty sparse and we really don’t know everything that in the record before the court, and thus may have included such facts. Nevertheless, the court should have made a specific finding as to this issue, and not simply glossed over it.
I suspect that in the future we will see many more opinions which address multiple-tier LLC structures so stay tuned.
CITE AS
Oberg v. Lowe, 2021 WL 495043 (D.Kan., Jan. 4, 2021), report adopted 2021 WL 492879 (Feb. 10, 2021). Full Opinion at
