Charging Orders and the Contemptuous Partnership

Jan 30 2014, 11:59pm CST | by

Brothers Robert and Kenny Joslin owned an irrigation company together, Joshlin Brothers Irrigation, organized as a partnership. I’ll refer to that as the “Joshlin Partnership”.

Separately, Robert had an outside business unrelated to the partnership with his brother. For that other business, Robert borrowed some money from Sunbelt Rentals, failed to pay back Sunbelt Rentals, was sued by Sunbelt Rentals, and suffered a default judgment to Sunbelt Rentals.

To collect its judgment, Sunbelt Rentals obtained a Charging Order against Robert’s interest in the Joshlin Partnership. The terms of the Charging Order, as most do, specifically required the Joshlin Partnership to direct any payments that were due to Robert, to Sunbelt Rentals instead.

As a partner of the Joshlin Partnership, and in defiance of the Charging Order, Robert wrote checks to himself that were drawn on the Joshlin Partnership’s bank account.

Then, Robert committed suicide.

Sunbelt Rentals moved to hold the Joshlin Partnership in contempt. The Joshlin Partnership (read: surviving brother Kenny) argued that Robert’s actions were unauthorized and amounted to fraud by Robert on the Joshlin Partnership, and thus should not be imputed to it.

The trial court disagreed and held the Joshlin Partnership in contempt, and the Joshlin Partnership appealed.

I could talk about the appeal, but the bottom line is that the Joshlin Partnership didn’t raise any of its appellate arguments at the trial court level, and so they were all deemed waived.

ANALYSIS

The point of this case doesn’t go to any particular technical issue, but rather to how Charging Orders work in real life — as opposed to how they are usually wrongly described in asset protection seminars.

That point is that Charging Orders basically work to “seal up” the partnership (or LLC) from the debtor, so that the debtor can’t get any financial benefit from the partnership. If the debtor is due any benefit from the partnership, or the partnership pays or distributes something to the debtor, then it goes to the debtor’s creditor instead.

While Charging Orders are really very simple in theory, the actual language of such orders is often very long and complex, and covers everything to salary and management fees paid to the debtor, loans made to the debtor, payments of debtor’s credit cards, etc.

If the partnership violates the Charging Order, as here, then the partnership is in contempt — and to purge the contempt must make a like payment or distribution to the creditor to purge the contempt. Note that this means that the partnership can end up making what amounts to a “double payment”, i.e., one payment to the debtor and another to the creditor.

It is also important to note that a Charging Order binds the debtor. If the debtor receives something in violation of the Charging Order, the debtor must turn it over to the creditor immediately, or else face contempt.

However, a Charging Order does not allow a creditor to invade the assets of the partnership, so unless a payment or distribution is made to the debtor, the creditor gets nothing.

Of course, the debtor gets nothing, either, so then it can become a matter of who can wait the other out the longest. If the debtor needs funds from the partnership to live off of, as Robert apparently did in this case, the debtor is probably going to lose this standoff.

From the debtor-planning side, it is usually better to give the debtor a fixed salary. That way, the debtor will get some money to live off of, as the creditor’s garnishment of the debtor’s wages is limited to 25% of the debtor’s disposable income. Yes, the creditor will get some money, but considerable pressure will be off the debtor.

If you go to most of the asset protection seminars that are advertised in the sports pages or wherever, the speakers will usually talk about “Charging Order Protection” with great glee, and then with a wink and a nod hint around that even if a Charging Order is entered, the debtor will still have some ways of getting money out of the partnership.

Maybe, but more likely, maybe not. The Courts have little sympathy for debtors who play games instead of paying their debts, and as shown here, the contempt remedy is available against partnerships (and LLCs) that make payments to debtors in violation of Charging Orders.

Stashing valuable assets in a partnership or LLC without other significant structuring might just be putting assets into a lockbox for the the benefit of creditors, until the pressure on the debtor to pay builds up to where it is unbearable.

And that is nothing to wink and nod about.

 CITE AS

Joshlin Bros. Irrigation v. Sunbelt Rental, Inc., 2014 WL 248104, 2014 Ark. App. 65 (Ark.App., Unpublished, Jan. 22, 2014). Full Opinion at  http://goo.gl/aHI0tk

This article at http://onforb.es/1iRVXRE and http://goo.gl/Ed5xXD

Source: Forbes Business

 
 

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