Delaware Court of Chancery Imposes Charging Order on Distributions Related to Defendant’s LLC Membership Interest

By: Scott E. Waxman and Serena M. Hamann

In GFM ELCM Fund L.P. et al. v. ELCM HCRE GP LLC et al., C.A. No. 2018-0840-SG (Del. Ch. May 18, 2020), the Delaware Court of Chancery issued a Temporary Restraining Order (“TRO”) and imposed an Interim Charging Order on the limited liability company interest of an individual defendant and ordered that any distributions related to the defendant’s membership interest be made directly to the Plaintiffs in satisfaction of amounts due.

Previously, the Delaware Court of Chancery entered judgments against the individual defendant, Andrew White (“White”), exceeding $350,000 largely related to sanctions for White’s actions in the same matter. A portion of these funds was to be collected by the Plaintiffs, and White had not paid any portion of the judgment.

White is the 100% owner of EL FW Leasing LLC and its wholly owned subsidiary, EL FW Intermediary I LLC (“FW Intermediary” and together whether the parent LLC, the “FW Entities”). FW Intermediary entered a lease (the “Master Lease”) with National Health Investors, Inc. (“NHI”) and then subleased to a third party operator, Watermark. Watermark delivers a monthly sublease payment directly to NHI, and NHI retains the amount due under the Master Lease and distributes the balance to FW Intermediary. The Plaintiffs sought a charging order related to future distributions of these funds to White, as the sole member of the FW Entities.

Under Section 18-703 of the Delaware Limited Liability Company Act, a charging order acts as a lien against a limited liability company  interest giving the judgment creditors the right to receive any distributions the judgment debtor would otherwise have been entitled to receive. Such an order does not grant any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the LLC. In this case, a charging order would act as a lien against White’s limited liability company interests in the FW Entities, giving the Plaintiffs the right to receive distributions White would otherwise have been entitled to receive but no other rights with respect to the property of FW Entities.

When considering whether to grant a TRO, the Court of Chancery considers whether the Plaintiffs have stated a colorable claim and will suffer irreparable harm if the order is not granted and whether the balance of equities favors ordering a restraint. The Court previously found that the Plaintiffs stated a colorable claim because they had outstanding judgments and also faced irreparable harm because, in the absence of injunctive relief, White would likely act to make the assets unavailable to the Plaintiffs. The Court reserved judgment on the balancing of equities because White argued that a charging order would cause a default of the Master Lease, harming the FW Entities. Both parties provided supplemental briefing related to the Master Lease.

White argued that a charging order on his limited liability company interest would cause FW Intermediary to default on the Master Lease in two ways: by creating a prohibited lien and because the order would constitute a prohibited assignment of interest or change in control. The Court did not find these arguments persuasive and instead found that a charging order would be unlikely to cause a default under the Master Lease. The charging order would constitute a lien on White’s right to distributions from FW Intermediary, not a prohibited lien on any interest of FW Intermediary such as a lien on the facilities and rights related to the use and operation of the facilities. The charging order also would not constitute a prohibited transfer because it gives only the right to receive any distributions and no rights, equitable or legal, to transfer or control FW Intermediary.

The Court concluded that the balance of equities favored the Plaintiffs because the charging order was unlikely to cause a default of the Master Lease and granted the motion for a TRO and an Interim Charging Order. The Court ordered that any distributions White would otherwise have been entitled to with respect to his limited liability company interest would be made directly to the Plaintiffs in satisfaction of amounts outstanding.

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