Christopher Spates owed $82,730.64 on his child support obligations to three different mothers, and the Child Support Division of the Texas Office of the Attorney General ("OAG") was trying to collect.
Spates was the sole owner and member of Prodigy Services, LLC. That company got into a dispute with another business, Eni U.S. Operating Company, and Prodigy ended up suing Eni in Harris County, Texas (where Houston is located).
The OAG got wind of the lawsuit, and filed liens in the Prodigy vs. Eni lawsuit to capture any proceeds that Prodigy might win. A week later, Prodigy and Eni settled, under the terms of which Eni was required to pay Prodigy $257,500. Apparently worried about the OAG's liens, Eni asked the trial court to enter an order, which it did, allowing Eni to pay the $257,500 into the court's registry.
The OAG then filed a request for a Charging Order against Spates's interest in Prodigy Services LLC, and requested that the Court disburse $82,730.64 to the OAG to satisfy Spates's child support judgments. Over Prodigy's objections, the Court granted the OAG's request.
Prodigy then filed a Writ of Mandamus with the Texas Court of Appeals, seeking to have that court order the District Court to distribute all of the Eni settlement to Prodigy instead. The Court of Appeals agreed, and the District Court then ordered the $257,500 paid to Prodigy.
But the very next day, the District Court entered the Charging Order requested by the OAG, in the amount $94,376.54 (the amount to which Spates's child support obligation had grown in the interim), and directed that any funds that Prodigy distributed to Spates were to instead go to the OAG and the three mothers until the obligation was paid down.
Spates and Prodigy both appealed the Charging Order, contending that the District Court did not have jurisdiction to enter the Charging Order (recalling that the case before the District Court was the Eni litigation, and Spates personally was not a party to that case). They also contended that the OAG was not entitled to a Charging Order because it did not serve Spates as the debtor with a notice of the request for Charging Order.
But the procedural sword cuts both ways, and since Spates was not a party to the underlying Eni litigation, he also lacked standing to appeal the District Court's order, and his appeal was dismissed on this ground at the outset. But Prodigy could still appeal, and the Court of Appeals took up its arguments.
First, the Court of Appeals had to address whether the Charging Order was even appealable as a final Order, holding that it was because it did finally resolve the rights of the OAG to Spates's distributions from Prodigy.
Prodigy argued that the District Court lacked personal jurisdiction over Spates, since he was not a party to the lawsuit, and subject matter jurisdiction since, the Eni litigation did not involve the OAG. In other words, Prodigy contended that the OAG should have sought the charging order in the family law court that was hearing the child support matter, not in the Eni litigation.
However, a Charging Order creates a lien on the debtor's interest in an LLC, and the OAG is empowered by Texas law to create liens on a debtor's assets to collect on a child support order. The only way to create such a child support lien on Spates's interest in Prodigy was by a Charging Order, and Texas law further allows the OAG to create liens (but not specifically Charging Order liens) in any court case where the debtor has any right to payment. Thus, it was appropriate that the District Court could enter the Charging Order against Spates's interest in Prodigy in the Eni litigation.
That left the issue of the District Court entering the Charging Order, even though Spates was not a party to the Eni litigation. But,
it was not necessary that Spates be made a party for the trial court to have jurisdiction to enter the charging order. The Business Organizations Code does not require that the judgment debtor be made a party to an action in which a judgment creditor files an application for a charging order against the debtor's membership interest in the limited liability company. Additionally, the charging order in this case is not directed to Spates and it imposes no obligations on him. Likewise, the charging order does not entitle the OAG to reach the proceeds of Prodigy's settlement with Eni or Prodigy's property to satisfy the OAG's three money judgments against Spates.
In other words, the Charging Order merely created a lien on Spates's distributional interest for an existing judgment, and so it was wholly unnecessary that he be joined as a party in the Eni litigation. This same reasoning also took care of Prodigy's procedural arguments, and the Court of Appeals thus affirmed the District Court.
ANALYSIS
The curious question not answered by this case is why the OAG didn't get a Charging Order against Prodigy in the family law court, instead of the court that was hearing the Eni litigation. It sort of tortures logic to say that because Prodigy was getting a payment from Eni, that the OAG should be able to lien Spates's interest in that particular litigation.
Reading between the lines, always a dangerous thing to do, it seems that the Court was looking at Prodigy as essentially being Spates, since he was the sole owner of Prodigy, and then extrapolating that to allowing the OAG to assert its lien in the Eni litigation.
One can only wonder what would have been the result if, say, Spates had owned only a 1% in some investment hedge fund that was receiving settlement proceeds, i.e., he didn't own anything like a majority in the LLC nor control it.
Otherwise, this opinion once again emphasizes the lien nature of a Charging Order, and how lien law (in this case, family law liens) so closely interrelates with Charging Orders. If you are going to deal with Charging Orders, then you'd better understand liens pretty well generally, and if you are going to litigate Charging Orders, then you'd better understand the ramification of liens in a particular case.
Because with a Charging Order, that's what you end up with: A lien. Too many practitioners keep overlooking this very fundamental fact.
CITE AS
Spates v. Office of the Attorney General, 2016 WL 354417 (Tex.App.14th Dist., Jan. 28, 2016). https://chargingorder.com/opinion-2016-texas-spates-charging-order.html
This article at http://onforb.es/1PKnzEp
