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Charging Orders: Rights Of A Judgment Creditor Against A Membership Interest Of An Indiana Limited Liability Company

Lesson.  A charging order is the only remedy for a judgment creditor against a judgment debtor's member’s interest in an Indiana limited liability company (LLC), and the remedy is quite limited.

Case cite.  In Re: Boone County Utilities, 2014 Bankr. LEXIS 3943 (S.D. Ind. 2014) (.pdf).

Legal issue.  What are the rights of a judgment creditor against a judgment debtor's membership interest in an Indiana LLC?  More specifically, can a judgment creditor garnish a judgment debtor's interest in an LLC? 

Vital facts.  Judgment creditor (Branham) held a judgment against an LLC (Newland), which was the sole member of BCU, another LLC.  Branham sought to garnish Newland's interest in BCU in order to collect on the judgment.  

Procedural history.  The purpose of the Boone opinion was to rule on a discovery dispute between Branham and BCU, which was named as a garnishee defendant.  The case dealt with whether a deposition of a representative of BCU could occur and, if so, what topics could be covered in the deposition. 

Key rules.  The discovery battle in Boone gave rise to a great discussion by the Court of Indiana LLC law, including judgment enforcement and charging orders.  Here are some of rules:

  • Ind. Code 23-18-6-7 says that a judgment creditor can seek a charging order against an LLC.
  • A charging order grants to the judgment creditor “only the rights of an assignee of the member’s economic interest (the right to payment and distribution) in the LLC.”
  • A charging order does not result in the judgment creditor becoming a member of the LLC.
  • Indiana’s Business Flexibility Act (Ind. Code 23-18), which controls LLCs, provides that, while a membership interest in an LLC is the member’s personal property subject to execution, members have no direct interest in the LLC’s assets.
  • Thus a member’s interest in an LLC is limited by Ind. Code 23-18-1-10 “to the economic rights [to payments/distributions from the LLC] and nothing more.” 

Holding.  The Court concluded that a charging order was the only remedy for Branham against Newland's member interest in BCU - “a very limited and possibly unsatisfactory remedy.”  Branham was not entitled to membership in Newland and was not entitled to participate in corporate actions.  Branham was not permitted to force a monetary distribution or to insist upon inspecting Newland's books and records.  Moreover, the Branham did not acquire rights to the Newland's membership in BCU or to participate in the corporate actions, management, governance or direction of BCU.  At best, Branham could obtain BCU's distributions to Newland, if any.  As to the discovery dispute, the Court generally concluded that Branham could inquire into facts reasonably calculated to lead to admissible evidence about any such distributions, but little else.    

Policy/rationale.  The Court in Boone did not address much policy in its opinion.  I think the point here is that the law generally is set up to shield investors and owners of a corporate entity against personal liability, unless there is proof that the corporate veil should be pierced.  As a practical matter, charging orders against an Indiana LLC generally have little value.  In seemingly rare instances, if an LLC has money, and if it decides to distribute that money to its members, a charging order requires the LLC to redirect such payment from the judgment debtor to the judgment creditor.  When and how this would happen, if ever, could be the subject of its own post.  If you’ve seen or heard of a charging order netting money to a judgment creditor, please share your story in the comment section below.  I’d love to hear about it as I’ve yet to see the tool work myself.     

Related posts.    

22 Houses Evaporate But Judge Rejects Creditor's Indiana Fraudulent Transfer Claims

Lesson.  Fraudulent transfer claims can be expensive to prove and difficult to win, even if the underlying transactions stink.  Lenders trying to collect a judgment, and borrowers/guarantors trying to avoid collection, can learn from Judge Simon’s Pringle opinion. 

Case citePringle v. Wittig, 2014 U.S. Dist. LEXIS 118453 (N.D. Ind. 2014) (.pdf).

Legal issuePringle involved two issues:  (1) whether the defendant provided “reasonably equivalent value” for twenty-two houses he bought and (2) whether the real estate transactions were “made with the intent to hinder, delay or defraud” the plaintiff.

Vital facts.  Garcia allegedly cheated Pringle out of millions in a real estate fraud scheme.  Because Garcia was insolvent, Pringle sued Wittig, who allegedly participated in the scheme by buying several houses from Garcia during the collapse of Garcia’s scheme.  Pringle asserted that Wittig helped Garcia shield assets from Pringle by buying properties from Garcia “on the cheap.”  So, Pringle filed suit against Wittig to void the alleged fraudulent transfers. 

Procedural historyPringle was the federal district court’s decision on Wittig’s motion for summary judgment based essentially on the notion that Pringle failed to produce evidence of fraud. 

Key rules.  At issue was liability under the Indiana Fraudulent Transfer Act, Ind. Code 32-18-2-14 and 15.  The Court noted that an action to set aside a fraudulent conveyance “does not negate the disputed transaction” but only subjects the conveyed property to execution “as though it were still in the name of the grantor.”  There are two paths to victory under the IUFTA.  First, plaintiffs can show that the transfer was made “with the actual intent to defraud creditors” (aka actual fraud).  Second, plaintiffs can show that the transferor did not receive “reasonably equivalent value” in exchange for the transfer (aka constructive fraud).  Actual fraud claims involve proof of the so-called “eight badges of fraud” discussed here previously (see 12/14/06 post).  Constructive fraud claims focus on whether the transferor was insolvent and whether the property was transferred without the receipt of reasonably equivalent value in exchange. 

Holding.  The primary dispute in Pringle was whether Wittig gave “reasonably equivalent value” for the twenty-two houses he bought from Garcia, and the opinion discusses in detail the facts relevant to that question.  As to both the actual and constructive fraud claims, the Court held that, but for two houses, Pringle had not established a case.  The Court therefore granted summary judgment for Wittig concerning twenty of the sales.  The remaining two transactions warranted a trial, however.

Policy/rationale.  “Reasonably equivalent value” is not defined in the IUFTA.  The Court concluded that the law requires “something more than consideration to support a contract,” and there is no fixed formula.  Factors to be considered include whether the transaction was made at arm’s length, whether the transferee acted in good faith and “most importantly” a determination of the fair market value of the property transferred and received.  The opinion in Pringle summarized the evidence submitted by both sides and concluded that Wittig made “a strong case that he paid fair market value for each house” (but for two).  Whereas, Pringle relied only on county tax assessments, which “do not reflect … fair market value….”  Pringle failed to offer appraisals, comparable sales or testimony from real estate agents.  As to the two transactions that survived, however, Pringle successfully showed that, on the same day Garcia sold the houses to Wittig, Wittig sold the houses to Garcia’s IRA, in a deal akin to a “secret or hurried transaction not in the usual mode of doing business.”     

Related posts

Res Judicata, Specifically Claim Preclusion, And How To Dismiss A Borrower’s Post-Foreclosure Case

Lesson.  Absent an appeal, borrowers generally cannot obtain relief following an unsuccessful defense to a state court foreclosure action.  If a borrower files a subsequent case that is, essentially, an attempt at a do-over, Indiana courts very likely will dismiss it.  

Case cite.  Thomas v. Deutsche Bank, 2014 U.S. Dist. LEXIS 131081 (N.D. Ind. 2014) (.pdf).

Legal issue.  Whether the borrower’s federal court complaint was barred by res judicata (claim preclusion).   

Vital facts.  The defendants were a lender/mortgagee and its loan servicer.  The lender filed an action in state court against the borrower seeking to foreclose on the mortgaged property.  The borrower appeared in the action and filed a counterclaim.  The state court entered judgment, which the borrower sought to set aside to no avail.  She even filed a post-judgment complaint, which the state court struck.  Next, the borrower filed a new action in state court with a pleading identical to the complaint struck by the prior court.  The new action then was removed to federal court. 

Procedural history.  The Thomas opinion arose out of the lender’s Rule 12(b)(6) motion to dismiss for failure to state a claim.   

Key rules.  Thomas dealt with the claim preclusion component of res judicata in which four factors must be present:  (1) the former judgment was entered by a court of competent jurisdiction, (2) the former judgment was rendered on the merits, (3) the current matter in question was, or could have been, determined in the prior case and (4) the controversy adjudicated in the prior action was between the parties to the present suit or their privies.  A “privy” includes one that controls an action, although not a party to it, and one whose interests are represented by a party to the action. 

Holding.  The federal district court in Thomas granted the motion to dismiss and concluded that the four prongs of claim preclusion were satisfied.  “[Lender] obtained a final, favorable judgment by a court of competent jurisdiction, and [borrower] missed her opportunity to raise her allegation at that time.”  The servicer, although not a party to the former action, also was dismissed because it was in privy with the lender.

Policy/rationale.  The borrower sought to raise issues that were or could have been adjudicated in the foreclosure proceeding.  She challenged the lender’s interest in the property and its status as the holder of the loan.  Yet, the foreclosure action determined ownership and interest.  “[Borrower] had an opportunity to dispute the ownership in the prior proceeding before the [state court].”  Her contentions were, or should have been, resolved in the former case.

Related posts.