When Clyde and Teresa Heckert divorced in Texas, Clyde ended up owing Teresa $381,324.47. Clyde didn't pay up, and so Teresa sought a turnover order for Clyde's non-exempt assets. Clyde claimed that he didn't have any non-exempt assets, and Teresa was able to get a receiver appointed. The evidence showed that soon after Theresa won her monetary award against Clyde, he started to either cash his paychecks or deposit them into his new wife's account. Some $87,000 of Clyde's money went to pay down his new wife's mortgage, and in return Clyde got a 50% interest in his new wife's house. Clyde also transferred shares of investment stock into A2R, Ltd.
Eventually, the Court ordered Clyde to turn over to Teresa his Vanguard account, his interest in a limited partnership called A2R Ltd., and his 100% interest in Averse 2 Risk, LLC -- the latter two entities which Clyde created while the litigation was ongoing. However, the Court did not order Clyde to turn over his interest in a Fidelity Investment account.
Both Teresa and Clyde appealed.
I'm going to pass over the Texas Court of Appeals' discussion of the exemption issues, and instead go directly to the interesting part of this Opinion, which is whether a Court can force a debtor to turn over interests in a limited partnership and an LLC. Clyde quite correctly pointed out that Texas statutory law provides that a charging order is the "exclusive remedy" to collect on a debtor's partnership interests or LLC interests. A charging order essentially puts a lien on the debtor/member's right to distributions, such that any distributions made to that interest will be routed to the creditor instead, until the judgment is satisfied. A charging order does not, however, transfer the ownership of the debtor/member's interest to the creditor, only the right to distributions.
That is true, said the Court of Appeals, but there are exceptions to that rule, such as where both the creditor and the debtor are members of the same partnership or LLC. Since the purpose of charging order exclusivity is to protect the non-debtor members from having their business interfered with, there should be no exclusivity where there are no non-debtor member. Here, Clyde was effectively the only member of A2R Ltd., and Averse 2 Risk LLC, there were no non-debtor members who would be adversely effected, and so it didn't make any sense to limit Theresa to a charging order against Clyde's interests in these companies.
ANALYSIS
There is a split of authority as to how a single-member LLC ("SMLLC") should be treated for charging order purposes. The approach in this case makes the most sense, which is that the purpose of a charging order is to protect the non-debtor members from having their business interfered with, but if there are no non-debtor members then the charging order should not be the exclusive remedy. This approach follows that of the bankruptcy courts starting with a case known as In re Albright and its progeny.
The other approach simply looks at the text of the statute, and states that "exclusive remedy" means "exclusive remedy", and if the state legislature doesn't like that result then they can change it as Florida did in enacting the so-called Olmstead Patch which treats SMLLCs differently. A critic (including me) of this approach would point out that the vast majority of LLC laws were enacted before SMLLCs were allowed, and thus this wasn't an issue that was on the drafter's plate at the time of passage. To blindly swallow the statute on its face merely makes the judicial complicit with the legislature in not thinking.
But even beyond this, the Courts have widely recognized numerous theories of legal relief, such as alter ego and voidable transaction (was: fraudulent transfer) law, which are not subject to charging order exclusivity. The latter is, in fact, a body of law much like Swiss cheese with many holes, and it is fine example of the General Rule, which is that "general rules are generally inapplicable". It is simply not consistent to allow these other theories for relief against an LLC interest, and yet not allow a creditor to obtain a debtor/member's interest in a SMLLC.
My $0.02.
CITE AS
Heckert v. Heckert, 2017 WL 5184840 (Tex.App., Nov. 9, 2017). Full Opinion at https://chargingorder.com/opinion-2017-texas-heckert-charging-order.html
This article at https://goo.gl/HYn2F7
