BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Charging Order Jurisdictional And Foreign LLC Issues Become Clearer In Vision Marketing

Following
This article is more than 8 years old.

Vision Marketing Resources, Inc. ("Vision") sued James L. McMillin and McMillin Group LLC, claiming that Vision has purchased several sets of golf clubs from the latter which were neither delivered or the payment refunded, and that the former used McMillin Group LLC to conduct his personal business.

The defendants failed to respond, and Vision took a default judgment against the two for $101,500 in compensatory damages and the same amount for punitive damages, for a total judgment of $203,000 plus some costs and interest. This was in 2011, and the default judgment was entered in the U.S. District Court for the District of Kansas.

JDA

Vision requested that the Court enter a Charging Order against the defendants' interest in Buffalo Nickel Trading LLC. Both defendants, and Buffalo Nickel, list Georgia addresses. But the Kansas Court did not grant the request, but instead instructed the Plaintiff to tell the Court:

(1) How the U.S. District Court in Kansas had jurisdiction over Buffalo Nickel as a Georgia company; and

(2) Why Kansas law relating to Charging Orders against an LLC did not limit its application to only Kansas LLCs and not foreign (i.e., not Kansas) LLCs.

As to the first part, Vision responded that the Court only needed jurisdiction over the member(s) of a foreign LLC. As to the second, Vision argued that the Kansas LLC statute did not expressly exclude foreign LLCs from the application of its Charging Order provisions.

The U.S. District Judge referred the matter to a U.S. Magistrate Judge to sort out, and the Magistrate Judge entered the Opinion which I shall now relate. To spoil the suspense over that process, the Magistrate Judge's Order was affirmed in all aspects by the U.S. District Judge and became the ruling of the Court, and because of that, I will simply refer to the Magistrate Judge's Report and Recommendation as the "Opinion", since it was adopted in all respects by the U.S. District Judge.

The Court first addressed the issue of whether it had the jurisdiction to issue a Charging Order in Kansas against a Georgia LLC. A U.S. District Court in post-judgment enforcement proceedings will apply the collection laws of the state in which it sits, unless there is a contrary federal statute as to a particular issue (and no such federal statute controlled here). The Kansas statute provides simply:

On application by a judgment creditor of a member or of a member's assignee, a court having jurisdiction may charge the limited liability company interest of the judgment debtor to satisfy the judgment.

In this case, the Court had personal jurisdiction over the two defendants, but it did not have personal jurisdiction over Buffalo Nickel Trading LLC. Moreover, Buffalo Nickel did not have any presence in Kansas, was not doing business there, and really had no connections at all to the Sunflower State.

Similarly, the Court did not have in rem jurisdiction (which is jurisdiction over property as opposed to jurisdiction over a person or entity) over the interests in Buffalo Nickel which were to be charged by the Charging Order. An interest in an LLC is considered to in the nature of intangible property, and intangible property is said to be located where its owner resides, and here the owners of the interests in Buffalo Nickel resided in Georgia.

Vision argued that the Rockstone Capital opinion, which I previously wrote about here, support its argument that a creditor does not need jurisdiction over the LLC whose interests are charged, but instead just needs personal jurisdiction over the defendants holding those interests -- and, of course, a court that has entered a judgment against those defendants has already determined that hit has such personal jurisdiction (or it could not have entered the judgment).

Although the Court found no Kansas authority on the subject, it did not that Rockstone Capital and several other cases, including Mahalo Investments III, LLC v. First Citizens Bank & Trust Co., which I wrote about here, have likewise held that it is not necessary for the particular court which enters the Charging Order to have jurisdiction over the entity itself. Thus:

the Court agrees with the rationale expressed in them. It therefore concludes that it has the requisite jurisdiction needed to issue a charging order against the LLC member interest of Judgment Debtor James McMillin by its continuing jurisdiction over Plaintiff and Defendants/Judgment Debtors. The Court need not have jurisdiction over the LLC entity itself in order to issue a charging order, when it has jurisdiction over the LLC member because the LLC has no right or direct interest affected by the charging order. Rather it is the judgment debtor's interest in and right to future distributions of the LLC that is being charged. As provided by the Kansas charging order statute, the charging order constitutes a lien on the judgment debtor's LLC interest. It only grants Plaintiff the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled with respect to such LLC interest. The statute further provides that no creditor of a member or of a member's assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the LLC. These provisions make it clear that it is the judgment debtor's interest in and rights to the LLC interest that are affected by the charging order.

Ultimately, the Court decided that because it had jurisdiction over the debtor, the Charging Order could be properly issued against Buffalo Nickel Trading LLC, even though the Court did not have personal jurisdiction over that entity itself.

That left the second issue to be determined by the Court, which was whether the Charging Order provisions of the Kansas Limited Liability Company Act should be applied to a Georgia LLC (a "foreign LLC" in the vernacular of the Act).

Here is the issue:

The Kansas Limited Liability Company Act defines a "limited liability company" as one formed in Kansas, and a "foreign limited liability company" as one formed in another jurisdiction. Foreign LLCs are treated in one part of the Act, but that part does not mention charging orders.

Charging orders are treated in another part of the Act (K.S.A. 17-76,113) but that part only references LLCs and not foreign LLCs. Thus, there is an open question as to whether the Act's charging order provisions relate only to Kansas LLCs, or whether those provisions should control foreign LLCs as well.

Much to my own amazement, this is where I somehow come into the picture as the Court described the issue:

The definition of "member," which specifically includes a person who is admitted to a foreign LLC, suggests that a court having jurisdiction can issue a charging order against a foreign LLC under K.S.A. 17–76,113. However, because the term "limited liability company" appears to be limited to those "formed under the laws of the state of Kansas," this suggests the opposite—that a court does not have authority to issue a charging order against the interests in LLCs formed under another state's laws. One commentator has remarked on this as a foreign LLC "glitch" in the Revised Uniform Limited Liability Company Act ("RULLCA"). Jay D. Adkisson, in his paper,Charging Orders, The Misunderstood Theory -vs- The Trenches of Litigation, has described this as a glitch of statutory drafting resulting from how a "limited liability company" is defined under Section 102 of the RULLCA, the lack of any section authorizing charging orders under Article 8 (applying to foreign LLCs), and because Section 503 (which authorizes charging orders) does not make any reference to a foreign limited liability company.

A strict statutory construction of the Act would lead one to conclude that the charging order provisions only apply to Kansas LLCs, and not to foreign LLCs. Indeed, that is the result that has been reached by two cases: Fannie Mae v. Heather Apartments LP and the aforementioned Rockstone Capital case. But is that the right result?

The Heather Apartments decision has been subject to academic criticism, not the least of which by Professor Carter Bishop of Suffolk University's Law School, who is an expert on this particular topic if anybody is. Here, we finally have a court that makes more than a superficial analysis of the issue, and concludes:

Based upon the inconsistencies in the definitions and absence of any language in K.S.A. 16–76,113 specifically excepting its provisions from applying to a member's interest in a foreign (non-Kansas) LLC, the Court concludes that K.S.A. 16–76,113 is not limited to interests in Kansas LLCs, and a charging order may be issued against an LLC member's interest in a foreign (non-Kansas) LLC. This conclusion is supported by the purpose of a charging order, which is to execute or collect upon a judgment. It is a post-judgment remedy by which the judgment creditor attempts to collect its judgment from future LLC distributions that may flow to the judgment debtor by diverting any such future distributions to the creditor. In the typical case, the debtor remains the owner of the membership interest, with all of the associated rights, except that the creditor is entitled to the member's share of LLC distributions needed to pay the debt if and when the distributions are made. Limiting the issuance of charging orders under K.S.A. 16–76,113 to judgment debtor interests in Kansas-formed LLCs would further significantly hinder a judgment creditor in Kansas from attempting to collect its judgment from a debtor with interests in foreign LLCs. The judgment creditor would be forced to investigate where each LLC was formed and seek a charging order against the debtor's interest in each of those states. The Court concludes that the Kansas legislature likely did not intend such a result, which could significantly hinder the ability of a judgment creditor to collect its judgments.

This result was the recommendation of the Magistrate Judge, which as mentioned above was adopted by the U.S. District Court and became its Order.

ANALYSIS

As to the question of whether a court must have personal jurisdiction over the entity whose interests are charged to issue a charging order against the debtor's interests in that entity, we are now seeing a growing and fairly consistent body of law develop that reaches the conclusion that such jurisdiction is not needed -- the court need only have personal jurisdiction over the debtor.

Thus, folks who think that if they form an LLC in some faraway place that the creditor will have to go there to get the charging order, as opposed to just getting the charging order in the court that issued the judgment, they are very likely quite wrong. There may be other valid reasons for forming an LLC in another jurisdiction (alter ego questions, for instance, are determined by the laws of the state of formation), but this is not one of them.

As to the LLC vs. Foreign LLC issue that comes up in relation to Charging Orders, I strongly agree with Professor Carter Bishop and the U.S. District Court here on that point, and correspondingly believe that Heather Apartments and Rockstone Capital simply reached the incorrect result and future courts (as the Court here) should decline to follow those decisions.

It is quite likely that in future revisions of the so-called "Harmonized Acts", i.e., the Uniform Partnership Act, the Uniform Limited Liability Company Act, and the Uniform Limited Liability Company Act, this drafting glitch will be corrected. In the meantime, however, it will probably result in more needless litigation that pits an arguably superficial statutory construction analysis against practical sense.

CITE AS

Vision Marketing Resources, Inc. v. McMillin Group, LLC, 2015 WL 4390071 (D.Kan., July 15, 2015). Full Opinion at https://chargingorder.com/opinion-2015-kansas-vision-marketing-charging-order.html

This article at http://onforb.es/1jA4StF and http://goo.gl/gXAHlD

 

Follow me on Twitter or LinkedInCheck out my website or some of my other work here