Prior Charging Order Trumps Later Divorce Court Order Involving Restaurant LLC Payouts

The Third District Appellate Court answers some important questions concerning the priority of competing creditors’ rights in the assets of a common debtor and the nature of appellate jurisdiction in FirstMerit Bank v. McEnery, 2014 IL App (3d) 130231-U.

There, a creditor obtained a $1.8M judgment against a defendant who had interests in several restaurant LLC ventures (the “LLCs”).  The creditor then moved for and received a charging order against all current and future distributions flowing from the LLCs until the judgment was satisfied.  The effect of the charging order was to place a lien or “hold” on the defendant’s distributions.  (See http://paulporvaznik.com/charging-orders-judgment-debtor-llc-member/5961).

A couple years later, defendant’s wife obtained an order in a divorce case that gave her a 50% interest in the LLCs.  About a year after that (divorce case) order, the trial court (presiding over the underlying suit) granted the plaintiff’s “turn over” motion (motion to require defendant to turn over future LLC distributions to the plaintiff/judgment-creditor.

The disputed issue: what took precedence?  The charging order against the LLCs or the later divorce court ruling giving defendant’s wife a 50% interest in the LLCs?  The trial court found that the prior charging order took priority over the defendant’s wife’s interest in the LLCs.  Defendant’s wife appealed.

Held: Affirmed.  Plaintiff’s charging order take priority over defendant’s wife’s interests in the LLCs

Reasons:

The Court first held that the trial court’s turn over order didn’t conflict with the divorce court order giving the wife a 50% share of the LLCs since that later order wasn’t “final” and appealable.

Illinois Supreme Court Rule 301 provides that every final judgment is appealable as of right;

An order is final where it either terminates the litigation between the parties on the merits or disposes of the rights of the parties – either the entire controversy, or a separate branch of the litigation;

– A notice of appeal must be filed within 30 days after the entry of a final order or within 30 days after entry of the order disposing of the last pending post-judgment motion;

– Where multiple parties and claims are involved, a party seeking an appeal must request a Rule 304(a) finding (that there is no reason to delay enforcement of or appeal from an order) from the trial judge;

– An order entered in a citation proceeding under Code Section 2-1402 is final when the citation petitioner is in a position to collect against the judgment debtor or third party or the petitioner has been foreclosed from doing so

(¶¶ 30-33)

Here, the divorce court order granting the defendant’s wife a 50% share in the LLCs – while entered before the turn over order – wasn’t final because it didn’t terminate the divorce case.  There was no order of marital dissolution and the divorce case continued for further status.  As a result, the divorce court’s 50% share order was subordinate to the trial court’s charging order and later turn over order.

Take-away:

This case rewards aggressive creditor enforcement steps.  By charging (liening) the debtor’s LLC interests, the creditor was in a position to take “first dibs” on the LLC distributions to the debtor, even though a court order later gave the debtor’s spouse a 50% share in the LLCs. 

The case also cements the proposition that a charging order impresses a lien on a debtor’s LLC distributions and that this charging lien will take primacy over any later judgment or lien filing related to the same LLC distributions.

 

 

 

 

 

 

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.