Several judgment creditors obtained charging orders against their debtors’ interests in three LLCs, along with an order requiring the LLCs to provide quarterly cash flow statements. The LLCs objected to disclosure of their quarterly cash flows, and on appeal the Iowa Court of Appeals found that there was no statutory authority for the required disclosure and reversed the disclosure orders. Wells Fargo Bank, Nat’l Assoc. v. Continuous Control Solutions, Inc., No. 11-1285, 2012 WL 3195759 (Iowa Ct. App. Aug. 8, 2012).
Background. Iowa’s courts are authorized, on application by a judgment creditor of an LLC member or assignee, to enter a charging order against the judgment debtor’s economic interest in the LLC. Iowa Code § 489.503. A charging order requires the LLC to pay to the judgment creditor any distributions that would otherwise be paid to the judgment debtor. Id.
In Wells Fargo Bank the judgment creditors petitioned the trial court for charging orders, and also asked for an order requiring the three LLCs to provide quarterly cash flow statements “to verify no distributions have been made to the judgment debtors or any other entity or person with an ownership interest in these limited liability companies.” Wells Fargo Bank, 2012 WL 3195759, at *2. The judgment creditors may have been channeling Ronald Reagan and his mantra, “trust, but verify.” Or perhaps half of it.
The trial court relied on Iowa Code Section 489.503(2)(b), and included the disclosure requirement in its charging order. Id. Section 489.503(2) states:
To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subsection 1, the court may do all of the following:
- Appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made.
- Make all other orders necessary to give effect to the charging order.
The Court of Appeals. The judgment creditors relied on Section 489.503(2)(b), which authorizes the court to make all other orders “necessary to give effect to the charging order.” The Court of Appeals began its analysis by noting that that section does not specifically authorize the disclosure orders that were requested. The court gave only a nod to Section 489.503(2)(a), which refers to the “power to make all inquiries the judgment debtor might have made,” presumably because the judgment creditors’ argument did not rely on it.
The court reviewed the comments in NCCUSL’s Revised Uniform Limited Liability Company Act (RULLCA) § 503, which Section 489.503 is modeled on, and found no support for including rights to information in an order “necessary to give effect to the charging order.” The court concluded that Section 489.503(2)(b) only authorizes orders that affect economic rights, not governance rights such as rights to information. Id. at *3.
The court’s conclusion was supported by Section 489.502(1)(c)(2), which provides that a transferee of an LLC member’s interest is not entitled to access to records or other information concerning the LLC’s activities (except upon the LLC’s dissolution). A charging order is a lien on the judgment debtor’s economic interest, and since the holder of a member’s economic interest is not entitled to access to the LLC’s records, the holder of a lien on the member’s economic interest should similarly be denied access to the LLC’s records or other information. Id.
The court vacated the trial court’s disclosure orders, stating: “To effectuate a charging order, Iowa Code section 489.503 authorizes a court to order an L.L.C. to disclose financial information to a court-appointed receiver only. We conclude there is no statutory authority for the disclosure orders the district court issued in this case.” Id.
Comment. The court’s conclusion seems correct, given the “pick your partner” principle inherent in LLC law. An assignee of an LLC interest has no rights to information from the LLC, so why should the holder of a charging order, which puts the judgment creditor in a position similar to that of an assignee, have more rights to information than the assignee?
The court’s opinion leaves open, however, what the result would have been if the judgment creditors had asked for appointment of a receiver for the distributions, and the receiver had then asked for the financials under the authority of Section 489.503(2)(b): “with the power to make all inquiries the judgment debtor might have made.” The Court of Appeals acknowledged that the judgment debtor retains its management power and rights to information, even after the entry of a charging order against its interest. Wells Fargo Bank, 2012 WL 3195759, at *2. The NCCUSL comments to RULLCA section 503 don’t answer that question.