Update 4/12/2017: The Colorado Supreme Court has affirmed the decision of the Colorado Court of Appeals, see https://chargingorder.com/opinion-2017-colorado-mcclure-charging-order.html
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In July of 2013, Chase Bank won a $20 million judgment against Reginald D. Fowler and an Arizona company called Spiral Broadcasting LLC. Fowler and Spiral owned interests in three Colorado LLCs.
In November of that year, the Arizona court issued Charging Orders in favor of Chase Bank that created judgment liens on Fowler's interests in the Colorado LLCs. The next month, Chase Bank both served the Charging Orders on the Colorado LLCs, and domesticated its Arizona judgment in Colorado. But not until August, 2014, did Chase Bank domesticate the Arizona Charging Orders in Colorado.
Meanwhile, Fowler and Spiral were also being sued by Doug and Nancy McClure, who themselves won a $1.5 million judgment against those two debtors in March, 2014.
Instead of having the Arizona court issue the Charging Orders first and then domesticating those Orders in Colorado (as Chase Bank had done), the McClures first domesticated their Arizona judgment in Colorado, and then had the Colorado court issue the Charging Orders against the Colorado LLCs. The McClures then served the Colorado Charging Orders on the Colorado LLCs, doing so in July, 2014, a month before Chase Bank domesticated its Arizona Charging Orders in Colorado.
Let me digress here and say that a Charging Order is basically the means by which a Court places a judgment lien on an LLC or partnership interest held by the debtor. Think of the Charging Order as a can of spray paint that coats the debtor's interest with the judgment lien. The lien is said to be "perfected" when it is served on the LLC or partnership.
Once properly placed, a judgment lien is like any other lien, and is subject to such things as priority between lienholders. Priority of liens is usually determined on the basis of "first in time is first in right".
So, the question before the Court here was: Between Chase Bank and the McClures, whose Charging Order lien had priority?
The Colorado lower court held that the McClures' Charging Order lien which was perfected in July, 2014, had priority over that of Chase Bank, the latter's Arizona Charging Orders not being domesticated in Colorado until August, 2014. Chase Bank appealed, thus leading to the opinion of the Colorado Court of Appeals which I shall now relate.
The Court of Appeals decided that the key issue is whether the Arizona Charging Order was enforceable in Colorado. Under the Full Faith & Credit Clause of the U.S. Constitution, Colorado is required to recognize judgments and orders rendered by the courts of other states, but only if those other judgments or orders were "duly rendered".
To domesticate an out-of-state judgment in Colorado, a creditor has the choice of either filing a new lawsuit to recognize the judgment or order, or file the judgment or order in a Colorado court under the Uniform Enforcement of Judgments Act ("Enforcement Act").
If a Judgment or Order has not been domesticated in Colorado by one of these two means, then it is not enforceable in Colorado. The Court then pointed out that while Chase Bank had obtained its Charging Order in Arizona before the McClures obtained theirs in Colorado, the Chase Bank Charging Order were not enforceable in Colorado until it was domesticated that state -- and that was after the McClures had already obtained their Charging Order.
Thus, because the McClures were the first to obtain their Charging Order in Colorado, their Charging Order had priority over that of Chase Bank. This rule, sayeth the Court, furthers Colorado's interest in LLCs that are formed in Colorado. Further,
Our holding will not unfairly burden foreign judgment creditors because Colorado has a simplified procedure for rendering foreign judgments enforceable in Colorado: domestication under the Enforcement Act. [ ] As relevant here, foreign judgment creditors need not anticipate every jurisdiction where their priority might be challenged; but if they seek to establish priority in charging a Colorado LLC, they must follow the [Colorado] procedures. (Internal citations omitted)
Chase Bank argued that this result would violate the Full Faith & Credit Clause as an impermissible collateral attack on the Arizona Charging Order, but the Court disagreed, noting a U.S. Supreme Court holding that:
Full faith and credit ... does not mean that States must adopt the practices of other States regarding the time, manner, and mechanisms for enforcing judgments. Enforcement measures do not travel with the sister state judgment as preclusive effects do; such measures remain subject to the evenhanded control of forum law.
This is indeed the law -- the judgment enforcement remedies of a state generally stop at its borders, and to enforce a judgment in another state, the creditor will need to domesticate the judgment there.
And with that, the Colorado Court of Appeals affirmed the decision of the lower court which held that the McClure's Charging Order had priority over that of Chase Bank's.
ANALYSIS
With my usual caveat that nobody has seen fitten to give me a black robe, I humbly suggest that the Colorado Court may have whiffed on this decision.
The reason is that the Colorado Court did not take into account what a Charging Order does, which to place a lien on the debtor's interest in the LLC, and that Chase Bank's lien placed in Arizona should have been valid as a lien in Colorado.
Thus, the Colorado Court misconstrues the Charging Order as an enforcement mechanism against the LLC, which it is not, but rather is an enforcement procedure against the debtor.
Under Colorado Revised Statutes 7-80-702, "The interest of each member in a limited liability company constitutes the personal property of the member . . .." Being personal property, the interest is said to exist in the state where the member resides -- in this case Arizona.
(Actually, there is a case to be made that any court that has personal jurisdiction over the debtor can issue a valid Charging Order, and I myself have won a Charging Order in California based on that argument, but I'll save that much more lengthy discussion for another day.)
Recalling that a Charging Order creates a lien on the debtor/member's interest, the lien must be perfected, just like any other lien, and this is accomplished by serving the LLC or its members wherever found. Typically, one does not have to register a judgment in another state in order to perfect a lien. In many states, a Charging Order lien can be perfected by serving all the members of the LLC instead of the members itself. These members may be scattered all over the nation, and it doesn't make respectable nonsense to require that the judgment be domesticated in each state where a member resides just so they can be given notice of the Charging Order.
When Chase Bank served the Colorado LLCs in Colorado, it perfected Chase Bank's lien on the debtors' interests in the Colorado LLC. Because Chase Bank perfected its Charging Order lien first, it wins and not the McClures.
The Colorado Court of Appeals didn't consider any of this, and the opinion does not indicate whether these issues were even argued. At any rate, what we are left with is, frankly, "bad law".
Consider that Chase Bank's lien is good and has first priority in Arizona. What the Colorado Court of Appeals accomplished is the precise opposite of what Full Faith & Credit compels, which is that the courts of two states do not reach conclusions that are opposite.
The Opinion also does not take into account that the Charging Order is also binding upon the debtor, meaning here that Fowler and Spiral are now subject to contrary Court Orders, in the sense that they can be held in contempt of the Arizona Charging Order if distributions are not made to Chase, and in contempt of the Colorado Charging Order if distributions are not make to the McClures. The Arizona Charging Order is also binding on the McClures if they live in Arizona, since they could be held in contempt for violating the Arizona Charging Order and that a contrary Charging Order has been issued in Colorado should be no defense.
Again, we don't know what was argued to the Colorado Court, but as a matter of lien priority law, this opinion seems to be plainly untenable and hopefully other courts will decline to follow it.
That's my view anyhow, made without the benefit of a black robe.
CITE AS
McClure v. JP Morgan Chase Bank NA, 2015 WL 4760275 (Colo.App., AAug. 13, 2015). Full opinion at https://chargingorder.com/opinion-2017-colorado-mcclure-charging-order.html
This article at http://onforb.es/1PVaQzV and http://goo.gl/XBA4SG
