Chancery Offers Guidance on the Effect of Charging Orders on Contractual Obligations
Charging orders authorized by 6 Del. C. § 18-703 of the Delaware Limited Liability Company Act offer judgment creditors of LLC members a collection method. These orders function as a lien against the membership interest and grant the judgment creditor the right to monetary distributions that would otherwise be funneled to the member. The imposition of a charging order does not, however, afford the judgment creditor the right to obtain possession of or exercise remedies, legal or equitable, with respect to the LLC’s property.
After obtaining a judgment against the individual defendant, the plaintiffs learned through discovery that the defendant owned 100% of the interest in LLCs that generated income through leases of senior care facilities governed by a master lease. The plaintiffs sought a temporary restraining order (“TRO”) and an interim charging order preventing the individual defendant from dissipating or otherwise disposing of his assets pending a determination on their request for a permanent charging order. After a hearing during which Vice Chancellor Sam Glasscock III ruled that the plaintiffs stated a colorable claim and faced irreparable harm in the absence of a TRO, he sought additional briefing on whether the balancing of the equities favored the plaintiffs after the individual defendant represented that the imposition of the charging lien would cause a default under the master lease in two ways: it would create a prohibited lien or constitute a prohibited transfer or assignment of interest.
After reviewing the terms of the master lease, the Vice Chancellor rejected both arguments. The Court concluded that the charging order did not qualify as a prohibited lien because it is a lien on the defendant’s right to distributions from the LLC and not a lien on any interest of the LLC itself under the master lease. As for why the charging lien was not an impermissible transfer, the Vice Chancellor looked to the plain language of the statute. Because charging orders do not give any right to participate in the LLC’s management, and because 6 Del. C. § 18-703(e) specifically prohibits a creditor of a member from obtaining possession of or exercising legal or equitable remedies with respect to the property of the LLC, the Court found that the charging order would not affect the individual defendant’s ability to control the LLC. Therefore, it would not constitute an impermissible transfer under the master lease.Share