Charging Order Against Interest Of LLC In Bankruptcy Held Not To Violate The Automatic Stay In Nilhan

If an LLC is in bankruptcy, can a creditor obtain a charging order against an interest in that partnership without violating a bankruptcy stay? Consider these facts: The primary individual debtor, Chuck Thakkar, owed a judgment to two creditors, collectively called Gateway, but Thakkar himself was not in bankruptcy. Thakkar and his family owned interests in a number of LLCs, all of which were managed by Thakkar and which LLCs were all in bankruptcy, including the one LLC which is relevant to this case, Nilhan Developers, LLC.

Gateway filed a state court motion for a charging order against Thakkar’s interest in Nilhan Developers, which was ultimately granted. In the meantime, the Bankruptcy Trustee for Nilhan and the other Thakkar companies obtain an Order Directing Mediation in the bankruptcy case, which had the effect of staying all the parties’ then-pending motions, including presumably the charging order motion. That mediation failed.

Thakkar then filed a motion for sanctions against Gateway, alleging that when Gateway sought and obtained the charging order against Thakkar’s interests in Nilhan Developers, Gateway had violated both the bankruptcy automatic stay which was in place in the Nilhan Developers bankruptcy case and also the stay created by the Order Directing Mediation in that same case.

That bring us to our issue: If an LLC is in bankruptcy, can a creditor obtain a charging order against an interest in that partnership without violating a bankruptcy stay?

A threshold issue is who has standing to complain about an alleged violation of the automatic stay. Such parties are generally limited to those who can complain about harm to the bankruptcy estate, i.e., something has happened or is going on that will diminish the assets of the bankruptcy estate. While Thakkar could complain about his own interest in Nilhan Developers being diminished by Gateway’s charging order against his interest, that is very different than the assets of Nilhan Developers itself being diminished by the charging order, and so Thakkar lacked standing to complain about Gateway’s alleged violation of the automatic state.

But for the same reason, Gateway’s charging order against Thakkar’s interest did not violate the automatic stay anyway. The reason is that a charging order doesn’t affect the entity itself, at all, and thus does not diminish the assets of the bankruptcy estate when the entity is in bankruptcy. As the Bankruptcy Court noted: “Once a charging order is entered, the LLC continues business as usual, except distributions due to the members are diverted to the judgment creditor.” While the Bankruptcy Court felt that how Gateway had obtained its charging order “was not in good form” (i.e., the Court was displeased) under the circumstances, the bottom line was that the charging order did not violate the automatic stay.

The Court was also unhappy with Gateway in regard to the stay created by the Mediation Order, finding that Gateway’s action violated the spirit of the order, but declined to hold Gateway in contempt because technically Gateway did not violate the order:

——- BEGIN QUOTE ——-

The Court concludes Gateway’s actions did not technically violate the Mediation Order, but that does not make its actions right. It was wrong for Gateway to proceed against Mr. Thakkar’s perceived interest in the Debtor while knowing he did not have an ownership interest in the Debtor; it was wrong to not include the Trustee in communications and notices about charging orders while aware the Trustee was the representative of the estate; and it was wrong to go forward and prosecute the motion for charging order on the eve of mediation.

——- END QUOTE ——-

Thus, in the end Gateway got a slap on the wrist but Thakkar’s motion to hold Gateway in contempt for violating the charging order was denied.

ANALYSIS

The key takeaway here is that a creditor who takes a charging order against an interest of an LLC that is in bankruptcy does not typically violate the automatic stay. This is fundamentally no different that a creditor who levies on the shares of stock of a debtor shareholder when the company is itself in bankruptcy, since the levy of the stock doesn’t affect the company and so does not adversely affect the bankruptcy estate.

But recalling the General Rule — which is that general rules are generally inapplicable — there may be exceptions when the debtor and the entity are basically one-and-the-same. The Court here commented on that as well:

——- BEGIN QUOTE ——-

Courts recognize an exception to the general rule, however, when there are unusual circumstances that warrant extending the stay to a non-debtor third party. Unusual circumstances may arise where there is such identity between the debtor and the third party defendant that the debtor may be said to be the real party defendant and a judgment or finding against the third party defendant will, in effect, be a judgment or a finding against the debtor.

——- END QUOTE ——-

Where there is any doubt as to whether the automatic stay might apply or not, the best practice is to file a protective motion seeking relief from the stay, the idea being that it is better to have the bankruptcy judge yell at you for filing a motion that is not needed than to be held in contempt and pay damages and attorney’s fees for violating the stay.

On the flip side, a debtor should not expect that that just because she has thrown an entity into bankruptcy that such will prevent a creditor from taking a charging order against her interest in the entity. As shown by this opinion, such is simply not the case.

CITE AS

In re Nilhan Developers, LLC, 2020 WL 6572235 (Bk.N.D.Ga., Nov. 9, 2020). Full opinion at https://chargingorder.com/opinion-2020-georgia-nilhan-charging-order-bankruptcy.html

Checkout latest world news below links :
World News || Latest News || U.S. News

Help us to become independent in PANDEMIC COVID-19. Contribute to diligent Authors.

[charitable_donation_form campaign_id=57167]

Source link

Back to top button
SoundCloud To Mp3