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No Jurisdiction Needed Over LLC Which Interests Were Charged In Rockstone Capital

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Edwards entered into a stipulated judgment with the Creditor, and agreed to pay the Creditor certain monthly payments. However, Edwards did not make the scheduled payments, and the Creditor sought to enforce the judgment against Edwards in Connecticut Superior Court.

Edwards owned interests in two limited liability companies, Marketing Ventures, LLC and Nonprofit Solutions, LLC. The Creditor filed a Motion for Charging Order in Connecticut seeking to charge Edwards's interests in these two companies.

Edwards objected to the Motion for Charging Order against Nonprofit Solutions, LLC claiming inter alia that since Nonprofit Solutions, LLC was not a Connecticut company, the Connecticut Court lacked jurisdiction over it to enter the Charge Order.

But the Connecticut Court first pointed out that Edwards had no standing to assert a claim for lack of personal jurisdiction on behalf of Nonprofit Solutions, LLC:

Nonprofit Solutions, LLC is not seeking dismissal, nor is it a party. Edwards seeks dismissal on Nonprofit Solutions, LLC's behalf. Edwards has asserted no basis upon which his standing to do so is conferred.

In other words, if Nonprofit Solutions, LLC desired to objection to the Motion for Charging Order, it needed to appear before the Court to do so; Edwards could not raise any objection for it. Nonprofit Solutions, LLC would have to intervene -- or as law professor Arthur Miller once put it, "must parachute into the middle of the case" -- to assert any objection that it might have.

But even beyond that, Nonprofit Solutions, LLC was not a party, and did not need to be a party to the proceeding since the Motion for Charging Order was not directed against Nonprofit Solutions, LLC:

Nonprofit Solutions, LLC is not a party of record in this action. The court is not exerting jurisdiction over Nonprofit Solutions, LLC. Defendant Edwards offers no authority for his assertion that a court must have jurisdiction over a limited liability company in order to enforce a judgment against an individual who is a member of that entity.

The statute governing the issuance of a charging order against a limited liability company . . . does not require that the limited liability company be made a party to an action seeking such an order. It is not necessary to make a limited liability company a party because a charging order merely gives the judgment creditor the rights of an assignee of the member's interest in the limited liability company ... [A]n assignment of a limited liability company interest entitles the assignee to receive only the distributions to which the assignor would be entitled ... An assignment does not dissolve the limited liability company or entitle the assignee to participate in the management and affairs of the limited liability company or to become or exercise any rights of a member ... An action seeking a charging order does not impact the rights or interests of a limited liability company to the degree necessary to require that it be made a party in order for the action to proceed. . . .  The court has jurisdiction over Edwards' interest in the two limited liability companies, not over the limited liability companies themselves.

[Internal quotations and citations omitted]

And with that, the Connecticut Court entered the Charging Order over Edwards' objections. For those who might be interested in what a Charging Order looks like, here is text:

CHARGING ORDER

After the Plaintiff's/Judgment Creditor's Motion for Charging order dated April 11, 2013 came on for a hearing.

IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT

1. The interests of the Defendant/Judgment Debtor, Ashton Edwards (the "Defendant"), in the Companies (as defined in the Motion for Charging Order) are charged with payment of the unsatisfied amount of the judgment debt herein and also with costs, attorneys fees and interest. Within 10 days of the entry of this Order, the Defendant is ordered to provide the complete name and current mailing address of the managing member of each of the Companies, Marketing Ventures Worldwide, LLC & Nonprofit Solutions, LLC.

2. The Companies are each directed to pay the Plaintiff present and future shares of any and all distributions, credits, drawings, or payments due to the Defendant until the judgment is satisfied in full, including attorneys fees, interest and costs.

3. Until said judgment is satisfied in full, including attorneys fees, interest and costs, the Companies shall make no loans, directly or indirectly, to or for the benefit of the Defendant or other partners or anyone else for the benefit of the Defendant without further Order of this Court.

4. Within twenty days of service of a copy of this Order upon any members of the Companies, the Companies shall supply the Plaintiff full, complete and accurate copies of the Companies' Operating Agreements including any and all amendments or modifications thereto; true, complete and accurate copies of any and all Federal and State income tax or informational income tax returns filed within the past two years; balance sheets and profit and loss statements for the past two years; and balance sheet and profit and loss statements for the past two years; and balance sheet and profit and loss statements for the most recent present period for which same have been computed. Further, upon twenty-day notice from the Plaintiff to the Companies, all books and records shall be produced for inspection, copying and examination in the Plaintiff's counsel's office.

5. Until said judgment is satisfied in full, including all costs and interest thereon, the Companies shall supply the Plaintiff, within thirty days of the close of the respective accounting period for which said data is or may be generated, all future statements reflecting cash position, balance sheet position, and profit and loss.

By the Court,

Young, J.

Analysis

There is a truism that goes around among creditor-rights attorneys that "All collection law is local". What this means is that local judges will almost always apply local law to a judgment enforcement issue, and it is like pulling teeth to convince a judge to apply the laws of some other state post-judgment.

This truism is as practically applicable in the context of charging orders as it is with any other judgment enforcement proceeding. We've now had at least three cases, Bay Guardian (where Yours Truly was the collection counsel), Fairstar Resources, and now Rockstone Capital, where the courts have applied local law and issued charging orders locally against LLCs and partnerships formed in other states.

We've yet to have a single case go the other way and mandate that the laws of the state where the LLC was formed would control instead. There really is no reason to hold one's breath that such a case will ever arise, for the reason that it doesn't make much sense in the context of post-judgment proceedings.

As the Rockstone Capital court points out, a Motion for Charging Order is a remedy that is directed at the debtor's interest in a company, not the company itself. Because the remedy is directed at the debtor's interest, and the debtor is already before the Court, the Court already has jurisdiction over the debtor's interest as well.

It is fundamentally no different that if a creditor attempted to levy on Microsoft stock held by a debtor in Connecticut. The debtor is already before the Court in Connecticut, and thus the Debtor's stock is already before the court in Connecticut (or can be made so by a turnover order directed to the Debtor to bring the stock to Connecticut), so the Court can order the disposition of that stock in Connecticut.

In such a circumstance, there is no need for the creditor to go to Redmond, Washington, and sue Microsoft, since the creditor is not seeking a remedy against Microsoft, but rather against Microsoft's stock, which is different.

Why would anybody think differently? Certainly, there is no technical reason to believe that the outcome should be otherwise. Not a single state requires that one seeking to levy on corporate stock has to go where that business is incorporated to obtain the levy. The same is true for charging orders.

JDA

What has happened is that some states have changed their charging order laws to be more debtor-friendly so as to attract more formation business. These states advertise greater asset protection via their entities to the masses, and the masses (who don't know otherwise) thus form companies in those states thinking that they are somehow better protected from creditors even if they don't live in those states.

In other words, the masses are being sold a placebo -- something that makes them think they are better protected so they sleep better at night, but in fact does nothing for them. While those laws may be more favorable for debtors actually resident in those states, they are of little or no help for persons living elsewhere.

So far, this has also been the result with so-called Domestic Asset Protection Trusts (DAPTs), see, e.g., In re Huber.

By the way, don't think for a second that either the Internal Affairs Doctrine or drafting a choice-of-venue clause into an LLC or partnership agreement will force the creditor to go to another state. The Internal Affairs Doctrine has been consistently held not to apply to third party creditors, see, e.g.,  McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987); Petro v. Gold, 166 Ohio.App.3d 371, 850 N.E.2d 1218 (2006); In re The Heritage Organization, 413 B.R. 438 (Bk.N.D.Tex. 2009).

Similarly, third-party creditors are not bound by whatever is in the operating or partnership agreement for the simple fact that there were never parties to that document.

Asset protection planners would do well to heed my following advice:

Amateurs stare at the laws of particular jurisdictions; professionals focus on the soundness of transactions so that they are likely to work under any jurisdiction's laws.

And that advice is no placebo.

CITE AS:

Rockstone Capital, LLC v. Marketing Horizons, Ltd., 2013 WL 4046597 (Conn.Super., Unpublished, July 17, 2013). Full Opinion at https://chargingorder.com/opinion-2013-connecticut-rockstone-charging-order.html

This article at http://onforb.es/16ivKTQ and http://goo.gl/1stblH

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