Remote Control Not So Remote: Bankruptcy Remote Entities and Fiduciary Duties

remote_control_repairsSpecial purpose entities (“SPE” or “SPE’s”) are frequently utilized in financial transactions for any number of reasons including: tax issues, protection of assets, liability insulation (including environmental concerns), and for the benefit of creditors involved in the transaction. SPE’s involve the creation of a corporate entity usually taking the form of a limited liability company, corporation, or limited partnership designed solely to serve a special need between the parties in a transaction. They provide a layer of insulation between one or more of the parties owning the SPE and the outside world. One subset of SPE’s is the “bankruptcy remote entity” (“BRE” or “BRE’s”).  A BRE is most often created a the behest of a creditor/lender, and is used to protect that creditor’s collateral from other creditors or in an attempt to prevent a voluntary filing for bankruptcy protection. Typically, the creditor or someone friendly to the creditor is appointed as a director or member of the BRE with voting power as to the BRE’s major corporate affairs, commonly known as a “Special Member.” The creditor will also insist upon special powers for the Special Member including the requirement that any bankruptcy filing must be approved by all directors or members. By inserting this requirement, the creditor can, ideally, block a bankruptcy filing by voting against it. While conceptually this is a nuclear weapon against a bankruptcy, the question turns to whether this is practically possible.

In April 2016, the United States Bankruptcy Court for the Northern District of Illinois addressed this issue in In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016).  The debtor was a Michigan limited liability company created to hold and manage income producing property, namely a resort on Lake Michigan.  The debtor borrowed approximately $2,700,000.00 from secured creditor and pledged all business assets as collateral.  Debtor defaulted on its obligations in July 2015.  As a result of the default, the parties entered into a ninety (90) day forbearance agreement that required, among other things, the debtor to amend its operating agreement to make the secured creditor a “Special Member” of the debtor with the absolute right to approve or disapprove of any “material action” to be taken by debtor. Specifically, the applicable provision of the operating amendment stated that secured creditor had the exclusive right to approve or disapprove any action to “institute proceedings to have the Company adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency proceedings against the Company or file a petition seeking, or consent to, reorganization or relief with respect to the Company under any applicable federal or state law relating to bankruptcy…” Id. at 904.

In October 2015, the debtor breached the terms of the forbearance agreement, and the secured creditor set a foreclosure sale on the real estate for December 17, 2015. The debtor filed for relief under Chapter 11 of the United States Bankruptcy Code on December 16, 2015, with approval of all its members except the secured creditor.  Subsequently, the secured creditor moved to dismiss the bankruptcy filing for cause under 11 U.S.C. Section 1112(b) and because the filing was unauthorized since it violated the operating agreement’s amendment requiring approval of the “Special Member”. The debtor responded by stating that the operating agreement amendment was ineffectual because it was void as against public policy since it amounts to a total prohibition against the debtor’s ability to file for bankruptcy protection, and because the amendment is invalid under Michigan corporate law.

The court first undertook a very thorough analysis of the request for dismissal under Section 1112(b) finding that the case did not warrant dismissal “for cause.”  Next, the court turned its attention to the dismissal request asserting that the actual filing was unauthorized because it was not unanimously approved by all the Debtor’s members as required under the operating agreement’s third amendment.  The court first reviewed Michigan corporate law to determine if the provisions contained in the third amendment are void.  The court determined that the third amendment is not void because Michigan corporate law permits parties to override Michigan’s corporate law default provisions mandating a majority of voting interests to prevail.  The court held that the default provisions are the baseline for determining how a corporate entity will approve or disapprove corporate actions but the parties are free, under Michigan law, to alter these requirements making them more or less stringent.  Therefore, the requirement that unanimity of all members contained in the third amendment is not, in and of itself, void.

The court then shifted its focus from whether such provisions are generally prohibited under law to the actual language of the third amendment, essentially holding that one must look “beneath the surface” to determine if the third amendment is actually valid in its application.  The question can be framed as “does the unanimity requirement of the voting members for bankruptcy filings fail for violation of law?” Herein lies the heart of the matter and the new wrinkle presented by the court for SPE’s.  In evaluating this question, the court ultimately relied on Michigan state law’s requirement that directors/members exercise their independent duty of fiduciary responsibility in determining whether to vote in favor or against a particular action.  Simply because a “Special Member” exists, whose purpose is designed to protect the creditor, the fiduciary responsibility is not abrogated and the “Special Member” has the duty to independently exercise the required fiduciary duty to determine whether, as is the case here, the corporate action may benefit the SPE and damage the creditor. Given the financial distress of the SPE, the court determined that the provision violated the fiduciary duty imposed by corporate law, and thus was void.  In point of fact, the court went on to say that voting against filing for bankruptcy protection clearly failed to independently consider the benefits to the debtor as no reasonable person in the shoes of the “Special Member” could reasonably conclude that such a filing was unwarranted.

In light of the foregoing, two main issues arise.  First, does the finding of an independent fiduciary duty gut the anticipated purposes of SPE’s and BRE’s? The answer is somewhat unclear.  From a total prohibition standpoint, it does gut the efforts of a creditor to fully bankruptcy-proof a transaction and accompanying collateral.  Notwithstanding that, SPE’s and BRE’s still provide a great deal of protection to creditors from other dangers such as third-party attacks against collateral, tax issues, and environmental concerns, as well as other concerns.  In essence, creditors should be wary of attempts to completely negate the ability of SPE’s or BRE’s from bankruptcy, and should consult state corporate law to determine the extent and reach of “Special Members”.

Second, the case raises the question of whether there is potential liability to the “Special Member” and/or creditor for violation of the fiduciary duty imposed upon the “Special Member” by corporate law.  Of concern to creditors is whether they can be held liable for a breach of fiduciary duty (and the resulting decrease in value of the debtor’s assets) when the creditors’ “Special Member” votes not independently, but in the interests of the creditor. By potentially creating liability, creditors are exposed to potential litigation for efforts heretofore designed to protect themselves.  In essence the “hunter” may become the “hunted.”  As a result, care should be exercised in creating the powers and duties of the “Special Member,” giving particular attention to the corporate and fiduciary duties imposed by law upon all members/directors.

One thing is abundantly clear: SPE’s and BRE’s are not as safe as they once were. The remote may not be totally broken, but it is definitely lacking some functionality for creditors.

For more information regarding this article, please contact Ronn Steen.  He can be reached at (615) 465-6000 or by email at [email protected]


CFPB Proposes New Servicing Rule Affecting Mortgages and Foreclosures: The New Myth of Sisyphus

Mortgage PicIn Greek mythology, Sisyphus was punished by the gods as a result of his chronic deceitfulness. Sisyphus was required to push a humongous boulder up a slope every day only to have it roll back down once it reached the top and then repeat the process. The parallels between this myth and the mortgage service industry cannot be understated. As a result of the “mortgage meltdown” and “robo-signing” scandal, the Consumer Financial Protection Bureau (the “CFPB”) was created to give consumers an oversight agency to protect them from rogue mortgage servicers. The CFPB, has previously enacted several rules and regulations designed to end “deceitful” and damaging practices in the mortgage industry. Recently, the CFPB has proposed a new rule designed to provide greater protections to consumers in the default and foreclosure process.

The newly proposed rule, which has just been released for review and comment, would alter the Real Estate Settlement Procedures Act’s (“RESPA”) Regulation X, and the Truth In Lending Act’s (“TILA”) Regulation Z by placing greater responsibilities and actions on mortgage loan holders and servicers. Here are some of the highlights:

  • A new definition of “delinquency” applicable to both Regulation X and Regulation Z, which states that “a borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a payment sufficient to cover principal, interest, and, if applicable, escrow, becomes due and unpaid.”
  • Increased requirements for verifying “successors in interest” and greater coverage of Regulation X and Z to successors in interest.
  • New rules governing how a loan servicer responds to requests for information when Fannie Mae or Freddie Mac is involved.
  • Changes to implementing and obtaining “forced-placed insurance.”
  • Increasing the role and requirements of servicers in the loss mitigation stage of a delinquent account including additional steps during the foreclosure process.
  • Clarification of how servicers must treat periodic payments made by consumers who are “performing under either temporary loss mitigation programs or permanent loan modifications.”

These newly proposed changes could, if enacted, increase the burdens placed upon servicers prior to and during foreclosure or other phases of the collection and enforcement process once an account becomes delinquent. As a result, the already lengthy process would be even longer resulting in increased costs and fees to the consumer in the form of greater loan scrutiny on the front-end of the mortgage process and increased interest rates and costs, and to the mortgage loan holders and servicers through greater legal fees and “carrying costs” for delinquent mortgage loans.

If ultimately passed, the new rules are not likely to come into effect until, at the earliest, mid-year of 2015, so the actual impact on the mortgage industry is only speculative at this point. Like Sisyphus, the consumer mortgage industry may be forced to push a larger boulder up the hill only to watch it role back down again as it tries to comply with the greater requirements for delinquent and defaulted obligations. Mortgage-based litigation, i.e., litigation challenging delinquent accounts and subsequent foreclosures, is already at an all-time high, and these newly proposed rule modifications will only increase the problem.

The following link sets forth the proposed changes and the CFPB’s explanation of the changes:

For more information about this topic or any others, please contact Ronn Steen.  He can be reached at (615) 465-6010 or by email at [email protected]

Anonymity of SWAP Traders In the Post-Meltdown Age

SwapLet’s face it. Swaps are complicated. Few outside the financial industry fully understand them but they are an integral part of the financial and investment industry. The basic definition of a swap is “the exchange of one set of cash flows for another.” It is a future commodity, in which one party seeks to derive a benefit from an existing interest rate in a loan deal based upon what the interest rate may be on a future date. If the party is correct, it is deemed to be “in the money” and obtains a cash benefit. If incorrect, then the party will not, and be deemed to be “out of the money.”

Swaps are traded in the marketplace, though not on any well-known exchange, and oversight of the swaps marketplace falls to the Commodity Futures Trading Commission (“CFTC”).  When the financial markets melted down, Congress passed several laws in an attempt to provide greater transparency in the financial sector, especially dealing with those markets that, at that time, were not regulated and scrutinized.  One of those laws, and perhaps the most well known, was the “Dodd-Frank” legislation, which was passed in 2010.  Of the many things Dodd-Frank did, it required more transparency in, among, and between financial institutions and, ultimately, investors.  As a result, heretofore protected names and identities of investors purchasing swaps suddenly became available and known once a swap was purchased.  The unintended result of this “name give-up” is that the swap markets have slowed. Investors fear that losing their anonymity could result in damage to their business by letting competitors see their investment and trading strategies.

As a result, the CFTC has indicated that it will be “looking into” the “name give-up” requirement.  If reversed, the swap market could pick up, which would aid the marketplace but any changes to the current lack of anonymity will take time.  See the following link for more information:

For more information about this topic or any others, please contact Ronn Steen.  He can be reached at (615) 465-6010 or by email at [email protected]

Love and Marriage: The Two Shall Become One…Except When Applying for Credit.

wedding-ring-clipart-hmg19legIt is common practice for lenders to require personal guaranties as part of the credit and collateral package when making a loan. Oftentimes, more than one guarantor is needed to “shore up” the creditworthiness of the credit applicant.  Usually, multiple guarantors are not an issue except when one of the guarantors is a spouse of the applicant.  More than ever, lenders need to exercise caution when seeking the guaranty from the spouse of an applicant.

In 1974, Congress enacted the Equal Credit Opportunity Act (“ECOA”) in an effort to “eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Mays v. Buckeye Rural Elec. Coop., 277 F.3d 873, 876 (6th Cir. 2002).  The ECOA’s implementing regulation is known as “Regulation B,” and it aims “‘to promote the availability of credit to all creditworthy applicants without regard to … sex [or] marital status [and other factors] … [and] prohibits creditor practices that discriminate on the basis of any of these factors.'” RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380 (6th Cir. 2014)(quoting, 12 C.F.R. § 1002.1(b)).  Violations of the ECOA and/or Regulation B may result in damages against the offending creditor including actual damages, punitive damages, and attorneys’ fees, but only “applicants” can sue for these violations.

The problem arises when looking at the definition of “applicant” since ECOA and Regulation B could be construed to be different from one another.  The ECOA’s protections and remedies apply to “applicants” for credit, which is defined as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” 15 U.S.C. § 1691a(b).  Nowhere in this definition does the term “guarantor” appear, however Regulation B does include it for the enforcement of the spousal-guarantor rule.   See 12 C.F.R. § 202.2(e) and 12 C.F.R. § 1002.2(e).  This has caused uncertainty and confusion among the courts, with some stating that because the ECOA does not include “guarantors” in its definition, the spousal-guarantor defense does not apply, while other courts hold that Regulation B and the ECOA must be construed together.

Until Bridgemill, the 6th Circuit had not yet ruled on this issue leaving lenders and borrowers within its jurisdiction no clear direction on how to resolve this problem.  The 6th Circuit has resolved the issue holding that the ECOA, in conjunction with Regulation B, does include “guarantors”, which in turn results in the ability of spousal-guarantors to assert an affirmative defense of recoupment against lenders in actions to recover under the guaranties given by spouses to secure repayment of moneys loaned.  SeeBridgemill, 754 F.3d at 386-388.  Simply holding that spousal-guarantors can raise an affirmative defense does not equate to an absolute ruling in their favor.  The spousal-guarantor must still establish that the lender’s actions violated the ECOA.

The Bridgemill Court next turned to how the merits of such an affirmative defense/violation of ECOA claim should be determined.  While discrimination claims typically require the claimant to prove discrimination, which then results in a “burden-shifting framework” set out in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973), here the Court scrapped such an approach relying on Regulation B’s express language that no proof or inclusion of discrimination is required since it generally prohibits “‘requir[ing]’ the guaranty of a spouse as a general matter, regardless of whether the creditor’s motivation is benign or invidious.” Bridgemill, 754 F.3d at 389 (citing 12 C.F.R. § 202.7(d)(1), (5), 12 C.F.R. § 1002.7(d)(1), (5)).  As a result, in order to prove a violation, a spousal-guarantor “need only prove that [his/her] spouse applied for credit, and either the creditor ‘require[d] the signature of [the] applicant’s spouse’ if the applicant was individually creditworthy … or the creditor ‘require[d] that the spouse be the additional party’ when it determined that the applicant was not independently creditworthy and would need the support of an additional party.” Id. (citations omitted).  

Facially, it appears that a lender may simply be out of luck once the spousal-guarantor establishes any of the foregoing but such is not the case.  Lenders still have the ability to show that one of the exceptions to this rule applies but they bear the burden of proving it.  These exceptions include unsecured loans where reliance on creditworthiness of the applicant is based upon joint ownership with the spouse of property, secured loans where a spouse is necessary to permit a lien upon property (and subsequent enforcement), or, in the case of a corporation or other corporate entity, where one of the officers, shareholders/owners, is necessary to any extension of credit.  It should be noted that in any of the foregoing a lender cannot require a spouse to be a guarantor or co-maker, but instead, can only request it.

The impact of Bridgemill cannot be understated.  It resolves a crucial issue in the 6th Circuit, which heretofore was murky.  Lenders are now on notice that they may be subject to claims and affirmative defenses by spousal-guarantors when a loan goes bad, and would be well advised to revisit and revise their lending policies to ensure compliance with the ECOA and Regulation B.  With respect to lending policies, gone are the days “when the two shall become one.”  Generally speaking, married loan applicants stand alone for determining creditworthiness, and lenders should thoroughly weigh the pros and cons of extending credit in such situations.

Contact us for more information or to set up a review of lending procedures to ensure compliance with the ECOA and Regulation B.

For more information about this topic or any others, please contact Ronn Steen.  He can be reached at (615) 465-6010 or by email at [email protected]

Jesus, Lazarus and Judgment Liens: Is it possible to resurrect an expired judgment lien?

revivalIn the Gospel of John, we read about the story of Jesus and Lazarus.  Jesus and Lazarus were very close friends but Lazarus became sick and died.  After being in the grave for four days, Jesus raised Lazarus from the grave.  John 11: 1-44.  It is a wonderful story of the love of two friends; of power and hope.  Jesus’ actions were miraculous, and there was cause of great celebration since what was once dead was alive again. Unfortunately, there is no such miracle that can resurrect an expired judgment lien.  Once a judgment lien has expired, it must be recreated.

The life of judgment lien is tied directly to the life of the judgment itself.  Without a judgment, a judgment lien does not exist.  It is well-settled that a judgment lasts only ten (10) years from the date it was first issued.  Judgments can be extended or renewed for an additional ten- (10) year period provided the judgment creditor moves the court, within ten years of the judgment’s entry, for an “order requiring the judgment debtor to show cause why the judgment should not be extended.” Tenn.Rules Civ.Proc., Rule 69.04. 

To preserve the judgment, the creditor merely needs to file the motion for show cause order within ten-year period, not that debtor be served with show cause order before this ten-year period has expired. Tenn.Rules Civ.Proc., Rule 69.04. In re Hunt, 323 B.R. 665 (W.D. Tenn. 2005). Furthermore, the extension of the judgment takes effect from the expiration of ten years from the effective date of the original judgment rather than from the date of the court order granting the extension. Cook v. Alley, 419 S.W.3d 256 (Tenn. Ct. App. 2013). However, if the judgment has expired, the creditor cannot revive the judgment by filing a motion; instead the creditor must file a scire facias action for revival.  A scire facias action will lie to revive a judgment but “it is considered in law an action and it is treated as a new suit and not merely a continuation of the former; it is a judicial writ founded on some matter of record, a recognizance, judgment, etc., on which it lies to obtain execution, or for other purposes; and, because the defendant may plead thereto, it is considered in law a new action.” 16 Tenn. Jur. Judgments and Decrees § 72 (1998).  


While an action for scire facias is tantamount to a revival of a judgment, it is a discreet judgment in and of itself; distinct from the prior judgment it seeks to revive.  It is true that once a scire facias is granted that it equates to a revival of the original judgment, but it does not equal a revival or resurrection of a judgment lien.  See McIntosh v. Paul 74 Tenn. 45 (1880).

Prior to 2000, a judgment lien lasted only for three (3) years from the date it was created or the expiration of the ten- (10) year life of the judgment, whichever occurred first.  As of May 17, 2000, T.C.A. § 25-5-101(b) extended the life of a judgment lien from three (3) years to ten (10) years (or the remaining length of the judgment).  Therefore, the judgment lien properly created lives only as long as the judgment; no more.

So the question now becomes how to ensure that the judgment lien is preserved.  First, the creditor must make sure that the underlying judgment is protected and extended.  This is accomplished through the aforementioned motion to show cause why the judgment should not be extended.  Once the motion is granted, the creditor must record a copy of the order extending the judgment in the records of the register of deeds where the creditor originally recorded the judgment to create the lien.  T.C.A. § 25-5-101(b).  By doing this, the creditor preserves not only the lien but the lien’s priority.  

Now we turn to the more serious scenario of what happens if the judgment has expired?  As stated, the judgment lien does not survive the death of the judgment itself.  If this happens, the creditor is forced to file a scire facias action to first revive the judgment.  Once the judgment is revived, the creditor must recreate the judgment lien.  Tennessee case law holds that a judgment lien is not extended by a revival of the underlying judgment.  See, e.g., Davidson v. Shearon, 1 Tenn. Cas. 304 (1874). As a result, the entire process of recording an abstract with the scire facias and original judgment must take place.  The problem here is that the creditor, by having to “start over”, loses the priority it previously had before the judgment expired.  Loss of priority can be devastating since any other liens created subsequent to the creation of the judgment lien would accede to a higher place in the pecking order.

It is critical for creditors to monitor their judgments to make sure that they do not expire and risk the loss of priority.  One never knows when a debtor will acquire new found wealth or property, and while resurrection of a judgment is possible, there is no resurrection for the judgment lien; only recreation with a significantly high price tag.

For more information about this topic or any others, please contact Ronn Steen.  He can be reached at (615) 465-6010 or by email at [email protected]

Battle Royale: Piercing and Reverse Piercing of the Corporate Veil

Breaking WallModern day business can be complicated. Most business is conducted through corporate entities formed to provide a shield to the individuals “behind-the-scenes.” It is not uncommon to have more than one corporate entity created to shield the ultimate party.  These corporate entities serve much the same way as the great curtain in “The Wizard of Oz”; they provide a “wall” or “veil” behind which the individuals can safely transact business while appearing to be much larger or greater than they would be without such protection. The difficulty arises when assets are hidden in the corporate structure thus resulting in a shield for an individual debtor against a creditor’s collection efforts.  Jurisprudence has long recognized this potential problem, and case law exists to unwind this Gordian knot particularly when closely-held corporations are involved. These remedies are commonly known as “piercing the corporate veil.” To be successful, a creditor would need to prove that the corporation is merely a shell or instrumentality of the individuals that own it, and its use is merely designed to protect them. In essence, it is necessary to show that there is no separation between the corporate entity and those that “own” it; it is merely a shadow of the owners. The corporate veil would be torn down to reveal those behind it, and permit their assets to be “in play” to recover the corporate entities debts.

It is oftentimes worthwhile to check and see if a potential claim for piercing the corporate veil exists. The advantage of doing this is that, if successful, the creditor is able to pursue the assets of the corporation and the shareholder(s) since the corporation is merely a “shell corporation and an instrumentality” of the shareholder(s). See Genuine Auto Parts Co. v. Convenient Car Care, Inc., 2005 Tenn. App. LEXIS 368 (Tenn. Ct. App. 2005). The party asserting that the corporation is a mere “shell” or “instrumentality” of the shareholder(s) bears the burden of proof on this point. Schlater v. Haynie, 833 S.W.2d 919 (Tenn. Ct. App. 1991). While there is a presumption that a corporate entity is a distinct legal entity from the shareholders, this presumption is not absolute and can be overcome.  Amanda Constr., Inc. v. White, 2004 Tenn. App. LEXIS 818 (Tenn. Ct. App. 2004). Some of the factors relevant in determining whether the corporate veil can be pierced include:

(1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (7) the use of the corporation as an instrumentality of business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors …; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms’ length relationships among entities.

F.D.I.C. v. Allen, 584 F.Supp. 386, 397 (E.D. Tenn. 1984); see also Money & Tax Help, Inc. v. Moody, 2005 Tenn. App. LEXIS 72 (Tenn. Ct. App. 2005).

If the creditor is successful, then the prospective pool of assets available to satisfy a judgment is greatly increased. The creditor is not limited to pursuing just the assets of the corporation, but it can also pursue the shareholder’s assets. While this tool is not available in all circumstances, creditors would be wise to explore its viability before simply dismissing it.

Another situation that could increase the ability of a creditor to collect on its judgment is the theory of “reverse piercing” of the corporate veil. Remember that piercing the corporate veil, whether directly or in reverse, is undertaken with the goal of reaching assets that a creditor would not normally be permitted to reach but for a “sham” intermediary layer of corporate protection. In the case of “reverse piercing,” a creditor would attempt to pierce the corporate veil by attacking the stockholder’s role; it would attempt to prove that the sham exists so as to gain access to the corporation’s assets to satisfy the stockholder’s liability and debts.

For example, if a creditor has a lawsuit against an individual shareholder in a corporation, the creditor may seek to have the corporate veil pierced in order to include the assets of the corporation in the pool of assets available for recovery. Both Nadler v. Mountain Valley Chapel Business Trust, et al., 2004 WL 1488544 (Tenn. Ct. App. 2004), and Reagan v. Connelly, 2000 WL 1661524 (Tenn. Ct. App. 2000), deal with creditors’ attempts to “reverse pierce” the corporate veil. While the Tennessee Supreme Court has recognized this action in the context of a parent/subsidiary relationship, it has not yet recognized it in the context of the corporate entity/shareholder relationship. Yet a review of the Nadler and Reagan cases reveals that the door has been partially opened for the recognition of this action in the corporate entity/shareholder context.

The facts in the Nadler and Reagan cases do not lend themselves to establishing a reverse piercing case. The court in Reagan specifically noted that the application of “reverse piercing,” while not yet formally recognized in Tennessee, could be possible in the context of a corporate entity/shareholder relationship but several problems must first be addressed before it could be viable. Those problems include: (1) the bypassing of normal collection procedures; (2) prejudice to innocent third-party corporate creditors; (3) the unsettling nature of the risk of potential loss by corporate creditors if “reverse piercing” is allowed; and (4) the possibility that there are other theories which would work the same result without attacking the corporate form. Reagan, 200 WL 1661524, footnote 2. Once these issues are resolved, the door would be wide-open for the recognition and utilization of reverse piercing as a method of accessing corporate assets to satisfy a shareholder’s liabilities. Despite the fact that it has yet to be formally recognized by the Tennessee courts, it lurks in the ether waiting for the right set of facts to breathe life into it.  Creditors should still be aware of its potential, and should evaluate whether they have the “right” set of facts to argue it. If successful, it would change the scope of collection work and expand all creditors’ ability to reach presently untouchable assets.

For more information on this or any other related topic, please contact Ronn Steen.  He can be reached at 615.465.6010 or by email at [email protected] 



Creditor’s Bill to Subject: Little Used Remedy for Collections When the Chain is Broken

Broken-chainOftentimes a judgment creditor seems to reach the limits of available collection remedies when an execution is returned as “unsatisfied.”  In most creditors’ minds, such a return means that there simply aren’t any assets sufficient to apply towards the outstanding judgment.  As a result, most will simply wait a period of time before trying again or give up.  Like most states, Tennessee has a remedy that permits a creditor to “dig deeper” into a debtor’s assets and financial history.  It is commonly called a “creditor’s bill to subject,” and it can be found at Tenn. Code Ann. § 26-4-101.

A complaint for a creditor’s bill to subject is an equitable remedy that can only be granted by a court once it is established that a debtor’s property sought to satisfy the judgment cannot be reached by ordinary process, is insufficient or is not subject to levy and sale by execution at law.  Hutchins v. Wilson, 210 S.W. 155 (1918); Tenn. Code Ann. § 26-4-101.  A creditor’s bill to subject is necessary to preserve a judgment lien if a nulla bona return has been received or an execution has been made upon a debtor’s property but it is insufficient to satisfy the judgment in its entirety.

When pleading, it is essential that the creditor establish that the execution issued by the creditor has been returned as unsatisfied “in whole or in part.” Tenn. Code Ann. § 26-4-101; Stahlman v. Watson, 39 S.W. 1055 (Tenn. Ct. App. 1897)(holding that disclosure of basic information of the underlying judgment in the creditor’s bill must be sufficient to establish the right for maintaining such an action).  Most creditors miss this crucial step.  They forget that a nulla bona return or some such similar return (even a return stating that no such account can be found) qualifies as grounds for a creditor’s bill to subject.  Upon receipt of such a return, a creditor only has thirty (30) days to commence such an action to aid in its recovery and protect its judgment lien.

Conversely, if the asset(s) or property of the judgment debtor can be reached at law, then a creditor’s bill cannot be maintained unless the creditor seeks additional discovery to locate the judgment debtor’s property or assets to aid it in satisfying the judgment.  Jennings, Neff & Co. v. Crystal Ice Co., 159 S.W. 1088 (1913).  Thus, we see that not only can a creditor’s bill be used to actually subject and execute on a debtor’s property, but aid in discovering additional assets that can be liquidated to satisfy the judgment.  It is therefore paramount that a creditor clearly establish the reasons why a creditor’s bill is being sought.

After establishing the facts and circumstances surrounding the application for a creditor’s bill, the creditor may then seek an order from the court aiding it in discovering “any property, including stocks,” protecting the judgment lien itself, and subjecting the debtor’s property to the satisfaction of the judgment.  Id.; Tenn. Code Ann. § 26-4-102.  Included within the court’s broad equitable powers is the power to order a lien lis pendens “upon the property of the [debtor] situated in the county of the suit” or the power to order that property be sold to satisfy the judgment.  Jennings, Neff & Co., 159 S.W. 1088; Tenn. Code Ann. § 26-4-104; Cannon Mills, Inc. v. Spivey, 346 S.W.2d 266 (1961)(Lien is fixed at the time of filing the bill).

When filing a creditor’s bill to subject, the creditor must also decide where to file the lawsuit.  If the creditor is mainly seeking discovery to aid it in its collection efforts, then the action can be commenced in any court of general jurisdiction. Tenn. Code Ann. § 26-4-101.  If, however, the creditor seeks to subject (and have sold by court order) property of the debtor “which cannot be reached by [ordinary] execution,” then the action must be commenced in chancery court. Tenn. Code Ann. § 16-11-104.

The advantage of commencing a creditor’s bill to subject, beyond the obvious need to protect the judgment lien, is that a creditor is able to conduct an in-depth examination of the debtor or any other third-parties that may have assets or knowledge of assets belonging to the debtor.  Such an examination is conducted in court before the presiding judge.  The court is also able to issue “power of sale” orders on the spot, which circumvents the traditional applications made to the court through the clerk’s office.  The main detriment to commencing such an action is the cost involved since this is a separate lawsuit, and the normal service requirements and filing fees must be followed/paid.

Counting the costs in the collection phase of litigation is of paramount importance so creditors should weigh the potential costs and benefits before commencing a creditor’s bill to subject.  It is an extremely useful tool when used properly, and should be remembered when the first nulla bona return is issued.

For more information about this topic or any other topics related to creditor’s rights, please contact Ronn Steen.  He can be reached either by email at [email protected] or by telephone at (615) 465-6010.

Judgment Enforcement: Are Abstracts Reality for Execution?

Execution PhotoYou’ve reached the end of the actual litigation and received a judgment.  Now what? The initial answer is simple: enforcement and collection! There are many steps to take on the path to converting the judgment to cash.  Some of the prior articles on this blog illustrate the complexity of converting the judgment to cash, but one of THE most important steps to take is the creation of a judgment lien.  This article provides some hints and recommendations on how to subject a judgment debtor’s assets to a judgment lien.

The Tennessee Rules of Civil Procedure provide general insight into this process.  Rule 69 sets forth the various ways to execute on a judgment.  At first blush, these rules seem complete yet there are specific statutes that should also be considered to make sure the creditor is fully encumbering a debtor’s interests.  The general belief among most creditors is that recording a copy of the judgment in the Register of Deeds’ records in the county where the judgment debtor resides or has property is sufficient to create a judgment lien on real estate.  While this is a true statement, such an action alone does not create a complete lien!

In order to fully subject a judgment debtor’s legal AND equitable interests,  an abstract of judgment must be filed.  While both T.R.C.P. 69 and T.C.A. § 25-5-101(b) provide for the creation of a lien upon the debtor’s real estate once a certified copy of the judgment is recorded, they do not address equitable interests, and also do not address a debtor’s future acquired interests.  T.C.A. § 25-5-101(c) is the first to shed light on this by stating that third-parties will be subject to a judgment creditor’s lien only after an abstract is recorded.

Similarly, T.C.A. § 25-5-102 states that “[a] judgment or decree shall not bind the equitable interest of the debtor in real estate or other property until a[n] … abstract of the judgment or decree … is registered in the register’s office of the county where the real estate is situated.”  Thus, only after filing an abstract will the debtor’s complete interest be encumbered.  The contents of the abstract are found in T.C.A. § 25-5-108, and provides that the names of the parties to the action are to be listed along with the amount of the judgment and the date of the judgment.  The abstract must also be issued by the clerk of court (i.e., the clerk of the court from which the judgment was issued) or the sheriff.  A certified copy of the judgment should also be attached.

Filing an abstract not only subjects the real property, but also certain personal property.  T.C.A. § 25-5-103 provides that “[a]n execution [on the judgment] shall not bind the debtor’s legal or equitable interest in stock, choses in action, or other personal property, not liable at law, unless [an] abstract is registered within sixty (60) days from the rendition of the judgment.”  Such an abstract must be registered in the county where the debtor resides, or if the debtor resides out of state, then in the county wherein the property is located.

The cost to obtain an abstract is nominal, costing less than $100.00 to receive and register, but the failure to do so could be very high.  Solely relying on the recording of a certified judgment fails to capture the full benefit of the judgment lien, so creditors would be wise to go ahead and record an abstract.

For more information on this topic, please do not hesitate to contact us!  Ronn can be reached at [email protected] or at (615) 465-6010.


“Comfortably Numb”: Five Pink Floyd Songs relating to Creditors’ Rights Issues

handshakeFirst, let me state this disclaimer:  Each of the following songs by Pink Floyd are copyright-protected.  As a result, to avoid infringement on any marks or protected works, no artwork or song links are included. Sorry, you’ll have to dust off your LP’s, CD’s or digitally stored music library to listen to these songs.

Second, you are undoubtedly wondering how in the world the music of Pink Floyd relates to Creditors’ Rights issues.  Actually, they don’t. I just wanted to grab your attention.  Now that I have it, here are five things issues that you should be wary of when preparing or drafting loan documents in Tennessee.  It is very easy to become “comfortably numb” to these issues over time since much of the financial process becomes rote.

“Us and Them”

(The Dark Side of the Moon 1973):  UCC and Real Estate Title Searches.  

It is essential to spend some time and money on the front-end of any transaction to see what other creditors have claimed a security interest in the debtor’s personal and/or real property.  When it comes to priority of a creditor’s lien, it is truly an “us versus them” situation.  Depending upon the type of collateral to be pledged, knowing up front what is already pledged to other creditors is crucial.  For example, are you taking an interest in inventory?  If so, will the money advanced be used to purchase the inventory thereby providing a purchase money security interest?  Knowing if there is already a lien on inventory is essential since a creditor is required to give advance notice to other secured creditors of the anticipated purchase money security interest on inventory in order to preserve the purchase money priority in both the inventory and its proceeds.  Similarly, knowing where to search and file the UCC is crucial.  Exceptions for perfection notwithstanding, filing should be in the state where the debtor was created (if an entity) or the state of residence (if an individual).  Filing in the wrong place results in a zero sum for the creditor; relegating the creditor to “unsecured.”  Searching the title on real estate is crucial to understanding whether there are other lien holders, zoning and/or use restrictions, and if the chain of title is correct.  As the saying goes, “an ounce of prevention is worth a pound of cure.”

“Wish You Were Here”

(Wish You Were Here 1975)  Guarantors, Changes in Terms, and Reaffirmations of Guaranty Obligations.  

One of the problems creditors seem to overlook deals with guarantors.  Most commercial loans are accompanied by personal guaranties obligating others for the performance of the debtor.  Failing to properly secure guarantors’ responsibility if a default occurs can leave many creditors “wishing the guarantors were here” for recovery purposes.  Here are some issues to consider/avoid.  Recently, many guarantors/debtors have started utilizing the provisions of the Equal Credit Opportunity Act (“ECOA”) as a defense to guarantor lawsuits.  This is most noticeably present where you have a spouse or other entity/individual included as a guarantor where there appears to be a “tenuous-at-best” relationship between the company and the guarantor.  In order to avoid this issue, a creditor should properly document at the outset of the loan the prospective guarantor’s involvement with the debtor (e.g., is s/he an officer, shareholder or member of the debtor?) or that the prospective guarantor’s assets are a sufficient/necessary consideration for inducing the creditor to make the loan (e.g., does the prospective guarantor’s individual net worth surpass the other, related guarantor or debtor such that if default occurs that the prospective guarantor’s assets will ensure that recovery is possible?).  Oftentimes creditors and debtors will alter the terms of the loan transaction.  

When this occurs, it is important to obtain all guarantors’ consent and reaffirmation of the changes.  Simply having the guarantors co-sign the “change in terms” agreement is sufficient to avoid an argument later on that the guarantors did not consent to changing the terms and thus such changes nullified the guaranty agreement(s) because the guarantors’ exposure was increased without consent.  Preferably, a creditor should incorporate a “Guarantor Consent, Reaffirmation, and Waiver” section or stand-alone document into the change in terms (including when such change in terms is the result of a forbearance agreement).  By so doing, all doubt as to the guarantors’ consent to the newly changed terms is removed.


(Dark Side of the Moon 1973): Payment of Indebtedness Tax and Inclusion of Maximum Principal Indebtedness Statement. Cha-Ching.
Everyone wants their share of “Money” especially in a loan transaction.  Tennessee requires both payment of the indebtedness tax based upon the amount of principal loaned to the debtor and a statement of the “maximum principal indebtedness” on security instruments such as deeds of trust, assignment of rents and leases, and UCC statements.    A creditor only has to pay the tax once on the principal amount loaned but if mixed collateral secures the loan, i.e., real estate and personal property, but still must include the “maximum principal indebtedness” statement on all security instruments, and, for all security instruments following the payment of the tax, should reference the security instrument where the tax was paid.  Additionally, creditors should also note that if the loan amount is increased during the life of the loan, then the creditor must pay the additional increase in the principal amount loaned.

“Run Like Hell”

(The Wall 1979): Remedies and Waivers.  
When a deal goes bad, debtors and guarantors usually “Run Like Hell” from their obligations taking a scatter-gun approach to any and all defenses.  Creditors should always include waivers of defenses in the loan documents including waivers of presentment, notice, impairment of collateral, and waivers of any and all defenses to the Note or the obligations.  It is also important to provide for recovery of attorneys’ fees incurred by the creditor for whatever reason including defense of the note or defense of any claims brought against creditor or debtor affecting or potentially affecting the obligation, for costs of collection including an award for post-judgment fees incurred or to be incurred by creditor in recovering on any award or judgment, and for any actions taken to protect the creditor’s interest or position in or to the obligation including bankruptcy.  Casting this broad net provides for the potential to recover for any out-of-pocket fees incurred by the creditor when outside counsel is needed.  One other oft omitted provision should be that the debtor holds all collateral pledged, and the proceeds thereof, in trust for the benefit of the creditor.  There are various ways to achieve this, but it should be included as it gives the creditor a valuable weapon in its arsenal if the debtor defaults.

“Goodbye Blue Sky”

 (The Wall 1979): Forum Selection, Jury Waiver, and Personal Jurisdiction Statements.  
Once a deal goes bad, it’s “Goodbye Blue Sky” for the parties.  Oftentimes litigation results, and including provisions on where and how a case is to be tried can help shelter the creditor from the impending storm.  At the outset of the deal, and including any changes or amendments during the deal’s life, the parties can agree on where any disputes will be heard.  A creditor would be wise to select a forum and venue convenient to it.  These could include arbitration or a specific geographic area (e.g., any court of general jurisdiction in Davidson County, Tennessee, whether state or federal).  While now commonplace, occasionally creditors will forget to include a jury trial waiver in the loan documents.  Inclusion of a jury trial waiver can  be a tremendous cost-saving device.  Such waivers are enforceable, and can prevent distasteful results from jury nullifications.

These are only a few pointers for creditors to consider.  For more information on these and others, please do hesitate to contact me! Now go and enjoy some Pink Floyd!!

Charging Orders: The Key to Reaching a Judgment Debtor’s LLC Interest (Part II)

money_scalesII.        Reconciling Unintended Statutory Conflicts

This is the second part of the two-part series examining Tennessee’s sole remedy for creditors seeking to exercise post-judgment rights against a debtor’s interests in limited liability companies.  In this part, we examine some of the issues arising with the interpretation and interplay of the Limited Liability Act and the Revised Limited Liability Act.

One potential argument against issuing a charging order against a judgment debtor’s interest in a limited liability company is an apparent statutory conflict in the provisions of the Act and the Revised Act.  As previously stated, §§ 48-218-105 and 48-249-509 both provide that the sole remedy of a judgment creditor seeking to enforce a judgment against the membership interests of a judgment creditor is a charging order but this remedy is tempered by limiting the available rights to an assignee (the Act) or a transferee (New Act).

Of interest, and in relevant part, § 48-218-105 states that “the judgment creditor has only the rights of an assignee of such person’s financial rights under       § 48-218-101,” and § 48-249-509 states that a “judgment creditor has only the rights of a transferee of such person’s financial rights under § 48-249-507.”  By incorporating these two sections by reference, i.e., § 48-218-101 and § 48-249-507, the door is left open for a judgment debtor to argue that no charging order can be levied against the judgment debtor’s interest in a limited liability company.  For ease of reference, these two sections will be collectively referred to as the “Transfer Sections.”

The Transfer Sections detail whether and to what degree a member and/or a holder of financial rights in a limited liability company can transfer or assign those financial rights. Section 48-218-101 states:

48-218-101.  Assignment of financial rights. 

(a) Assignment of Financial Rights Permitted. Except as provided in subsection (c), a member’s financial rights are transferable in whole or in part.

(b) Effect of Assignment of Financial Rights. An assignment of a member’s financial rights entitles the assignee to receive, to the extent assigned, only the share of profits and losses and the distributions to which the assignor would otherwise be entitled. An assignment of a member’s financial rights does not dissolve the LLC and does not entitle or empower the assignee to become a member, to cause a dissolution, to exercise any governance rights, or, except as specifically provided by chapters 201-248 of this title, to receive any notices from the LLC, or to cause dissolution. The assignment may not allow the assignee to control the member’s exercise of governance rights, and any attempt to do so shall be null and void.

(c) Restrictions on Assignment of Financial Rights.  (1) A restriction on the assignment of financial rights may be imposed in the articles, in the operating agreement, by a written resolution adopted by the members, or by a written agreement among, or other written action by, members, or among them and the LLC.

(2) A restriction on the assignment of financial rights referenced in subdivision (c)(1) that is not manifestly unreasonable under the circumstances is enforceable against the owner of the restricted financial rights. A written restriction on the assignment of financial rights that is not manifestly unreasonable under the circumstances and is noted in the articles or operating agreement may be enforced against a successor or transferee of the owner of the restricted financial rights, including a pledgee or a legal representative, whether or not such successor or transferee of the owner had actual notice thereof. Unless noted in the articles or operating agreement, a restriction, even though permitted by this section, is ineffective against a person without knowledge of the restriction.

Similarly, § 48-249-107 states:

48-249-507.  Transfer of financial rights. 

(a) Transferability of financial rights. Except as provided in subsection (c) the financial rights of a member or a holder of financial rights are transferable in whole or in part.

(b) Effect of transfer of financial rights. A transfer of the financial rights of a member or a holder of financial rights entitles the transferee to receive, to the extent transferred, only the share of profits and losses and the distributions to which the transferor would otherwise be entitled, together with the right to transfer further the financial rights so transferred. A transfer of the financial rights of a member or a holder of financial rights does not dissolve the LLC and does not entitle or empower the transferee to become a member, to cause a dissolution, or to exercise any governance rights. Any attempt by the transferee to become a member, cause a dissolution or exercise any governance rights shall be null and void.

(c) Restrictions on transfer of financial rights.  (1) A restriction on the transfer of financial rights may be imposed in the LLC documents, by a written resolution adopted by all the members, or by a written agreement among, or other written action by, all the members, and, if so provided in the LLC documents, holders of financial rights.

(2) A restriction on the transfer of financial rights referenced in subdivision (c)(1) is enforceable against the owner of the restricted financial rights. A written restriction on the transfer of financial rights that is set forth in the LLC documents may be enforced against a successor or transferee of the owner of the restricted financial rights, including a pledgee or a personal representative, whether or not such successor or transferee of the owner had actual notice of the restricted financial rights. Except for a written restriction in the LLC documents, a restriction, even though permitted by this section, is ineffective against a person without knowledge of the restriction.

(d) Effective date of transfer. Any permissible transfer of financial rights under this section shall be effective as to and binding on the LLC, only when the transferee’s name, address, taxpayer identification number and the nature and extent of the transfer are reflected in the LLC documents or the records of the LLC.

Subsection (c) of the Transfer Sections creates the problem.  Since both §§ 48-19-105 and 48-249-509 incorporate by reference the Transfer Sections generally, the argument is that the Transfer Sections prevent the issuance of a charging order against a judgment debtor’s interest when the members of a limited liability company elect to restrict the transfer or assignment of members’ financial rights.  By interpreting these two statutes in such a manner, it effectively guts the sole remedy afforded to judgment creditors by enabling a judgment debtor, through subsections (c) of the Transfer Sections, with the ability to shield membership interests from creditors so long as the limited liability company membership votes to restrict transfers and assignments of membership interests.

It is well settled that interpretation of statutory provisions shall be undertaken so as to give meaning to all portions of the statute and companion or related statutes.  When interpreting provisions of an act, the provisions should be interpreted “as a whole, giving effect to each word and making every effort not to interpret a provision in a manner that renders other provisions of the same statute inconsistent, meaningless or superfluous.”  Lake Cumberland Trust, Inc. v. EPA, 954 F.2d1218, 1222 (6th Cir. 1992).  Additionally, when interpreting the Tennessee Code Annotated, the “provisions [should be read] in pari material and [presume] that the legislature intended for each word in the statute to have meaning … endeavor[ing] to effectuate the intent of the legislature by avoiding an interpretation that would render the statute’s language meaningless, redundant or superfluous.” In re Estate of Paul Harris Nelson, 2007 Tenn. App. LEXIS 147, 33-34 (Tenn. Ct. App. 2007)(citing, Faust v. Metro Gov’t of Nashville, 206 S.W.3d 473, 489-90 (Tenn. Ct. App. 2006); Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 507 (Tenn. 2004)(quoting Tidwell v. Collins, 522 S.W.2d 674, 676-77 (Tenn. 1975))).

There is a dearth of case law on this issue, not just within Tennessee but nationwide.  A helpful case in construing these potential statutory conflicts between §§ 48-19-105 and 48-249-509 and the Transfer Sections is Meyer v. Christie, 2011 WL 4857905 (D. Kan. Oct. 13, 2011).  In Meyer, the court addressed whether it could grant a charging order against the judgment debtor’s limited liability interest where the operating agreement prohibited the transfer or assignment of such interests.  Id. At *9.  Kansas has statutes mirroring § 48-218-105 and § 48-249-509 and the Transfer Sections. The Meyer court held that notwithstanding any assignment or transfer restrictions in the operating agreement, the judgment creditor was entitled to a charging order against the judgment debtor’s limited liability interest, stating, “although an operating agreement may absolutely prohibit transfers or assignments, such prohibition cannot prevail over applicable law.”  Id.  As cogently explained in Meyer:

The charging order remedy originated in the Uniform Partnership Act in 1914 (“UPA”).  Under UPA § 28 and interpreting case law, a charging order affects only the debtor’s partnership interest and does not permit the creditor to reach partnership assets.  After obtaining a charging order, the creditor is entitled only to the partner’s share of distributions and the partner’s share of assets on liquidation after all partnership debts have been paid.  After the entry of a charging order, the debtor partner continues to be a partner and retains all rights and obligations of a partner except the right to receive partnership distributions until the creditor has been paid its judgment and interest thereon.  The creditor is not entitled to participate in the management of the partnership.

Id. At *10 (citations omitted).

Employing the Meyer court’s reasoning, § 48-218-105 and § 48-249-509 would be preserved otherwise the interpretation of these statutes would lead to a perverse result. Since both § 48-218-105 and § 48-249-509 state that the judgment creditor is already a valid assignee/transferee, concerns about further assignments or transfers are relieved because under the provisions of § 48-218-101 and § 48-249-507, subsections (b) and (c), respectfully, a judgment creditor is limited as to further assignments or transfers once the charging order is entered.  By treating the judgment creditor as an existing assignee or transferee, the ability of the limited liability company to subsequently enforce the limits and restrictions on assigning and transferring company interests is preserved but still permits the judgment creditor to exercise its collection rights and remedies.

The judgment creditor is limited to receiving only the profits, losses, and distributions that the judgment debtor would receive.  It has no power, governance rights or further assignment or transfer rights.  In this sense, the charging order functionally acts as a “garnishment” of the judgment debtor’s financial rights in the limited liability company.  See 64 UCINLR at 452 (stating that a charging order “garnishes” the financial rights attaching to a member’s interest in a limited liability company).  Furthermore, the judgment creditor must wait until such time as the limited liability company makes a distribution or payment to the judgment debtor in accordance with the judgment debtor’s interest.

Despite the fact that these statutes seemingly create a problem for judgment creditors, the only logical interpretation is that there is no general anti-assignment/transfer right that will thwart a judgment creditor’s right to obtain a charging order.  The easiest solution to avoid this statutory interpretation problem would be for the Tennessee Legislature to amend § 48-218-105 and § 48-249-509 by limiting the inclusion of § 48-218-105 and § 48-249-507 to subsections (b), respectively, which merely provide for what rights an assignee or transferee have once the assignment/transfer is made but until that happens, the above-stated argument should be sufficient.

Recently, the United States District Court for the Middle District of Tennessee issued an unpublished opinion on this issue, which can be found in Fifth Third Bank v. Monet, et al., Case No. 3:12-cv-01074, Document No. 73, filed February 25, 2014.  In that case, the court agreed with the above-stated reasoning, and held that general anti-assignment/transfer provisions in a limited liability company’s operating agreement could not prevent the issuance of a charging order in favor of a judgment creditor. 


Judgment enforcement and collection is a complicated, difficult, and expensive process.  Oftentimes, the achievement of receiving a judgment is short-lived once the judgment creditor realizes that it must now undertake the process of converting the judgment into actual money.  Knowing and implementing all available post-judgment remedies is crucial to this process.  Charging orders are an important weapon in a judgment creditor’s arsenal, and knowing how and when to obtain one will aid the judgment creditor in reaching its final goal: realization of the damages it has incurred as evidenced by the judgment.


For more information or for help in collecting on a judgment, please do not hesitate to contact Ronn Steen.  He can be reached at (615) 465-6010 or [email protected].  Thompson Burton is a full-service law firm committed to innovative and practical legal solutions for clients.