A Charging order Is a tool used by lenders to collect judgments against LLC members. The charging order in LLC implies a lie on the judgment lender’s economic (or “transferable”) interests – this ruling essentially causes the judgment lender to distribute the LLC to the judging creditor until the debtor is satisfied. . If the debtor is not satisfied (for example, due to non-availability or inadequate distribution), the lender may eventually “avoid” the charging order and acquire permanent ownership of the member’s economic interests.
A UCC funding statement Is a different tool commonly used by general lenders to secure a loan taken by an LLC or LLC member. In a normal arrangement, the LLC member will pledge its interest in the LLC as security for the loan, and this commitment will be documented in the UCC financing statement, which is recorded with the Secretary of State. Like the charging order, the UCC funding statement acts as a license on the LLC member’s right to distribute.
A lawsuit was recently filed by California’s Second Appellate District. Rice v. pull down – Lender LLC competition against lender interest refers to “priority”, where one lender had a charging order after judgment and the other lender had a UCC financing statement. The court also ruled that even payments that are not called “distributions” are, in fact, subject to receipt of a charging order.
Charging command line
Gary Downs sued William Rice for “hundreds of thousands of dollars” and received a verdict in a lawsuit caused by a dispute over a cheap housing company.
Following the judgment, the trial court moved a motion for a charging order directing the various LLCs in which Rice was a member to pay for any distribution to which Rice has the right to direct downs until the judgment is satisfied. Not to be.
LLC “Payment” (Distribution?) To a third party
Downs eventually learned that Rice URL (Triton Community Development LLC) had paid سر 450,000 to Glasserville – a law firm representing Rice in his lawsuit against Downs.
Downs moved a motion in court to enforce his indictment, arguing that Galsler had violated Trenton’s $ 450,000 payment order. Downs argued that the payment was really a matter of distribution related to the charging order, and that Rice should pay the money to Downs or Glasser said he should pay the money to Downs.
UCC funding statement right
Glaser Will opposed the Downs move, citing two reasons:
First, it insisted that months before the 450,000 repayment, Triton agreed to oblige the law firm to share in Rice’s debt. Thus, Glasser Will argued, the payment was not a distribution subject to a charging order, but an independent payment on Triton’s debt.
Second, it emphasized that it had “absolute security interests” in the form of a UCC funding statement filed with the Secretary of State on the same date that Triton agreed to oblige the company to share in the Rice loan – months ago. And so the “senior” Downs charging command line.
Trial Court: Equality leads to the UCC line
The trial court moved a lower order to enforce the charging order, relying on its “equitable practice of judgment.”
The court said it would be unfair to allow the money to go into the hands as it did – “for the Glasser company to tell Mr Rice, pound the sand. I’ve got the money now. We’ve completed our loan.” You have to know something else. “
Court of Appeal: Changed Payment was “distributed” according to the charging order, but the UCC line was the first priority
The Court of Appeal reversed the order of the Court of Appeal.
The LLC payment was “distributed” according to the charging order …
Glaserville, on two grounds, rejected the first order, stating that Triton’s $ 450,000 payment was, in fact, “distributed with a charging order.”
The court ruled that Glasser’s “narrow reading” of the charging order “circle” does not take into account the fact that most LLCs, such as Triton, are entirely controlled by an individual who may distribute funds at his or her discretion. Under Glasser’s interpretation, such entities can easily avoid formal distributions and, if necessary, simply withdraw money from LLCs.
The court added: “Even if Triton paid Glasser Wells in accordance with its contractual obligations, the fact is that the payment was for Rice’s legal costs.” Had done.
As an additional, independent ground that supports its argument, the court also noted that the evidence supports the finding that “Triton was Rice’s replacement Anna,” and therefore the court could “bypass company formalities.” Think of the transaction as a distribution of rice money. From Triton to pay your legal bills. Triton and Rice were effectively one and the same.
… But the UCC funding statement line took precedence over the charging order.
The court found Glasser Weil’s second argument to be more plausible in terms of prioritizing his UCC funding statement line. The court noted that the UCC funding statement line has priority over the Downs Charge Order Line, and “there is no equitable basis for the trial court to lose this priority.”
In resolving Lane’s priority issue, the court followed a “first-time” rule – a starting point for “community priority” analysis in various California cases. Under this rule, “other things being equal, different rights in the same property take precedence over the time of their creation.”
Glasser completed his line in July 2019 by filling out his UCC funding statement. Downy received his charging order in October 2019, a few months later. The court concluded: “The former full security benefits of Glasser Valley are therefore a priority.”
Lesson
Below Rice v. pull downThe competitor’s preference for LLC benefits (here, the UCC funding statement against the charging order) will be determined by the “First Time” Act. Also, charging orders cannot be removed simply by reassigning what is actively distributed as any other form of payment.
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