The Colorado Supreme Court (the “Court”) has now weighted-in on the requirements for foreign courts to create enforceable charging orders against Colorado LLCs. In (2017 CO 22. No. 15SC816 (Colo. 2017)), the Court ruled that to be enforceable, foreign charging orders against a Colorado LLC must be either (i) procedurally domesticated in Colorado, or (ii) issued by a court with proper jurisdiction over the LLC or the membership interest in question.
Charging orders are judicial orders which creditors can obtain to place a lien on a judgment debtor’s membership interest in an LLC. As a result of obtaining and serving charging orders, a creditor may be able to collect any distributions to the debtor-member directly from the LLC, while the LLC will not have to admit the creditor as a member and the debtor-member can continue to be actively involved in the LLC.
In July of 2013, JPMorgan Chase Bank (“Chase”) obtained a judgment of roughly $20 million against Reginald D. Fowler (“Fowler”) in Arizona court. In November of 2013, an Arizona court issued charging orders against Fowler’s interest in three Colorado LLCs. Soon thereafter, the charging orders were served on the Colorado LLCs, but no order domesticating the Arizona charging orders was entered in Colorado until August of 2014.
In the meantime, in March of 2014, Douglas and Nancy McClure (the “McClures”) obtained a $1.5 million judgment against Fowler in Arizona. In April of 2014, the McClures domesticated their judgment by filing it in the Arapahoe County District Court and the court then issued charging orders against the three Colorado LLCs over the months of May and June of 2014. The McClures immediately served the orders on the LLCs.
When the LLCs paid distributions to Fowler into the Arapahoe County District Court registry and the McClures motioned to release the funds, Chase intervened. Chase argued that its charging orders were first in time, but the District Court found that the McClures’ orders had priority because they were the “first enforceable charging orders served on the LLCs.” The Court of Appeals affirmed, and Chase appealed.
At the Colorado Supreme Court, Chase argued that its orders were enforceable and properly served prior to the McClures’ charging orders. However, the Court disagreed, ruling that a foreign charging order is not enforceable against a Colorado LLC until the creditor has “taken sufficient steps to obligate the company to comply with that order.” While the Court noted that “the authorities are not uniform as to the steps to be taken,” the Court stated that the process employed by Chase was insufficient to create enforceable charging orders in Colorado because the Arizona court which issued the charging orders did not have adequate jurisdiction. Specifically, the Court concluded that (i) the Arizona court lacked personal jurisdiction over the LLCs because the LLCs were not authorized to, and did not, conduct any business in Arizona, (ii) the Arizona court lacked in rem jurisdiction over Fowler’s membership interests because the Court concluded that the interests were located in Colorado, and (iii) the Arizona court’s personal jurisdiction over Fowler was irrelevant vis-à-vis the Colorado LLCs.
This decision highlights the importance of quickly taking the correct procedural steps to create enforceable charging orders so that a creditor can secure its priority position and capture all available distributions. Where charging orders may be necessary to collect from a debtor-member of a Colorado LLC, practitioners should first carefully identify which jurisdictions will have the ability to create enforceable charging orders against the LLC.