Otis, Bedingfield & Peters, LLC is proud to announce that attorney Christian J. Schulte has been accepted to The Greeley Chamber of Commerce Board of Directors.
The Greeley Chamber of Commerce is an investment organization that is driven to meet the needs of the businesses in our community. The chamber is a great source of information for assisting and promoting businesses.
The Greeley Chamber of Commerce Board of Directors develops and oversees the implementation of the Chamber’s Strategic Plan. They identify policies and initiatives for the benefit of all Chamber investors.
“I am truly pleased to be involved with the Greeley Chamber, because it does so much to help our city thrive. It’s a great group of people to work with, and I’m looking forward to doing my part,” said Christian J. Schulte.
Otis, Bedingfield & Peters, LLC provides real estate law and business law services throughout Northern Colorado. OBP has 13 attorneys spread across its two offices in Greeley and Loveland. For more information, contact Christian J. Schulte at email@example.com or Jennifer Lynn Peters at firstname.lastname@example.org or 970-330-6700 or visit www.nocoattorneys.com.
By: John Kolanz on September 18, 2015
Oil and gas and agricultural interests in Colorado and four nearby states celebrated a Texas federal judge’s ruling last week vacating Endangered Species Act protections for the lesser prairie chicken. Environmental interests were less enthused. While the ruling may ease the regulatory burden for certain entities in the region, its real significance could reach much further.
The judge found that the U.S. Fish and Wildlife Service misapplied the factors that it must consider to determine whether a species qualifies for ESA protection (i.e., “listing”). The Act requires FWS to consider, among other things, the adequacy of existing regulatory protections. If non-ESA mechanisms sufficiently protect a species, it should not qualify for listing.
The ESA is widely considered the strictest of all environmental laws. Once its protections attach to a species, the Act can severely limit activities that may harm the species or its habitat. In the case of the prairie chicken, this had implications for routine oil and gas and agricultural operations within the species’ range.
In an effort to avert a listing, Colorado, Texas, New Mexico, Oklahoma and Kansas teamed with private interests to create a comprehensive rangewide conservation plan for the prairie chicken. When implemented, the plan would raise funds through enrollment and mitigation fees, and use these funds to develop conservation measures. Landowners would dedicate “offset land” consisting of prairie chicken habitat to be enhanced and preserved to counter unavoidable impacts to habitat elsewhere in the range. Landowners would receive payment and other economic incentives to provide offset land to the program.
Despite these efforts, FWS listed the bird as threatened in April 2014. At the time of the listing decision, the plan had not yet been implemented. Therefore, the service determined that participation in the plan, as well as its implementation and funding, were too uncertain to guarantee protection to the bird. FWS further concluded that not listing the bird would discourage participation in the plan. The judge rejected this analysis an improper application of the service’s own policy on evaluating forthcoming conservation efforts during listing decisions.
The judge held that for FWS to give weight to such emerging plans in its listing analysis, it need only find that the plans are likely to be implemented and effective. In assessing the likelihood of implementation, FWS should consider prior industry and landowner participation in similar conservation efforts, and whether the plan creates a “good deal” for landowners in which they will want to participate. The judge held that the Service’s application of a stricter standard rendered the lesser prairie chicken’s listing invalid.
The direct effect of the ruling will take some time to sort out. For instance, it is somewhat unclear whether it vacates the lesser prairie chicken’s listing only in Texas, or in all five states where the bird is present.
However, its larger impact will go beyond the present case. For starters, the ruling could influence the upcoming listing decision for the greater sage grouse, due this month, as well as the pending appeal of the recent decision to list the Gunnison sage grouse. Both have significant implications for Colorado.
Moreover, FWS is scheduled to make many more listing decisions for species across the country. Comprehensive mitigation plans have become a popular mechanism to help avoid listings, but have had varying success. The ruling should reinforce the importance of state, local, and private entity cooperation in developing comprehensive plans to protect vulnerable species. Properly crafted and implemented, these plans can provide numerous benefits.
They can create markets for property owners, who often bear a disproportionate burden under the Act, to get paid for the ecosystem benefits their lands provide. Moreover, these plans offer far more certainty to the regulated community in terms of the cost and timing of activities and projects that would otherwise require ESA review.
The plans also can help local and state governments minimize economic disruptions for their citizens and businesses. They can further help ensure that FWS allocates its limited resources to those species truly needing ESA protection. Finally, at-risk species can benefit from early conservation efforts that could be implemented more quickly than those produced through individual ESA review.
While opportunities presented by each species will vary, in many cases, the potential benefit of encouraging such plans is widespread and substantial. What some may consider a defeat for the lesser prairie chicken actually could be a win for all.
John Kolanz is a partner with Otis, Bedingfield & Peters LLC in Loveland. He can be reached at 970-663-7300 or via email at JKolanz@nocoattorneys.com.
Nathaniel Wallshein joins the firm as a litigation associate. Before joining Otis, Bedingfield & Peters, Nate worked as a judicial fellow for the Honorable Norman D. Haglund. He most recently served as law clerk for the Honorable R. Michael Mullins of the Denver District Court.
“We are excited to bring a talented young lawyer like Nate to Northern Colorado and our firm,” says managing member Jennifer Lynn Peters. “Nate’s energy and passion for the law is infectious, and in the short time he has been with us he has already made a big contribution to our ongoing complex cases.”
Nate was born and raised in Northern Virginia. He received his undergraduate degree from the University of Connecticut and he earned his J.D. from the University of Colorado Law School. During law school, he worked as a law clerk for the Office of the Solicitor at the U.S. Department of the Interior, and as a law clerk for the Office of Chief Counsel at the U.S. Department of Energy. Nate also worked as a student attorney for the Natural Resources Law Clinic. There he represented a variety of organizations in litigation concerning Forest Service approval of two coal leases within the Thunder Basin National Grassland.
Otis, Bedingfield & Peters, LLC provides real estate law and business law services throughout Northern Colorado. OBP has 12 attorneys spread across its two offices in Greeley and Loveland. For more information, contact Nathaniel Wallshein at email@example.com or Jennifer Lynn Peters at firstname.lastname@example.org or 970-330-6700 or visit www.nocoattorneys.com.
By: John Kolanz
It is largely about perspective. Some say the new federal rule defining the reach of the Clean Water Act will pave “the road to a regulatory and economic hell.” Others see it as a rollback of current protections that fails to close loopholes that have made the nation’s waters vulnerable to destruction by developers, corporate agriculture and general industry. Like most politically charged issues, however, the truth is somewhere in between.
Once effective later this summer, the new rule will provide the framework by which the federal government decides what waters receive CWA protection. This fundamental aspect of the Act remains confusing and contentious 40 years after its passage.
CWA regulation often brings to mind images of a sewage-treatment plant or large industrial facility discharging effluent into a river. While the Act certainly covers such activities, its application is much more extensive. For example, the Act also can apply to discharges of rainwater and snowmelt or placement of materials such as dirt, sand or gravel (“fill”) into protected waters.
This latter component of the Act, often called “dredge-and-fill” or “wetlands” permitting, is the component likely to be most affected by the new rule. This permitting program often covers routine activities related to oil and gas production and distribution, road building, agriculture, and all aspects of development, including construction of the family home. Therefore, changes in the Act’s coverage can impact many routine business activities, particularly in a region of dynamic growth, such as Northern Colorado.
The stakes can be high. Activities impacting protected waters require permits that can be difficult and expensive to obtain. Some projects may be denied permits. Even when issued, a permit creates binding obligations with potentially severe penalties for noncompliance.
The new rule is an attempt to clarify the reach of the Act because of uncertainty created largely by two U.S. Supreme Court opinions and subsequent government guidance on how to implement the Act in the wake of those opinions. The uncertainty led to many case-by-case determinations of coverage, creating permitting delays and inconsistent application of the Act.
To achieve clarity and certainty, the new rule draws bright lines to automatically protect certain waters. In some cases, these lines are based on distance to other protected waters, as opposed to scientific evaluation. However, despite the goal of certainty, the new rule also creates a potentially complicated test for extending the Act’s protections to a “catch-all” category that will include many waters not now typically captured.
On the other hand, the new rule specifically excludes some waters that the Act would otherwise cover. Perhaps most significantly in Colorado, the new rule excludes certain irrigation ditches, artificially irrigated areas that would revert to dry land in the absence of irrigation, and water-filled excavations created incidental to construction or mining. Moreover, the new rule leaves in place existing permitting exclusions, including rather extensive exclusions related to agriculture.
Some industry groups have condemned the new rule as an inappropriate (and illegal) extension of the Act, and have threatened to file suit to challenge the rule. Environmental groups who think the new rule does not go far enough may pursue similar challenges. Legislation to limit or prohibit implementation of the new rule also is a possibility.
Often missing from hyperbolic exchanges regarding the new rule is acknowledgment of the expansive reach of the existing rule. While the Act currently protects “more-obvious” waters such as the South Platte River, it also extends to “less-obvious” waters such as many irrigation ditches and even meadows that appear dry for much of the year.
Because of its different approach to identifying covered waters, the new rule will change the playing field for the regulated community. Just how much is difficult to know until the new rule is applied. Some waters currently covered by the Act no longer will be included, while some waters not currently covered will be. How any given project will be impacted will depend on its own unique circumstances.
John Kolanz is a partner with Otis, Bedingfield & Peters LLC in Loveland. He can be reached at 970-663-7300 or via email at JKolanz@nocoattorneys.com.
The Million Dollar Comma
With the advent of legal service websites like Legal Zoom, Rocket Lawyer, nolo.com, etc., almost anyone can draft a will, a durable power of attorney, or a real estate contract. People can even set up a limited liability company and draft their own divorce documents. The advent of “cost effective” online legal services should be signaling the demise of the brick and mortar, flesh and blood attorney, right?
We’ve all heard the old adages: “Pay now or pay later” and “Just enough information to be dangerous.” That has never been more applicable than with the proliferation of self-help legal websites. These websites offer form banks for standard documents and general legal and/or statutory guidelines. But there are times when that may not be enough. Have you ever heard of the “Million Dollar Comma”? Often touted as rumor or some sort of urban legend, it is anything but.
One part of the U.S. Tariff Act of June 6, 1872 contained a sentence that intended to exempt the importation of semi-tropical and tropical fruit plants from tariffs. The sentence was meant to read “Fruit plants, tropical and semi-tropical for the purpose of propagation or cultivation.” One comma, however, was mysteriously moved one word to the left during the copying process, thereby rendering the sentence as: “Fruit, plants tropical and semi-tropical for the purpose of propagation or cultivation.”
Importers of oranges and lemons and the like were quick to seize upon the misplacement and use it to their advantage. They contended that under the wording of the act, all tropical and semi-tropical fruit were exempt and thus could be brought into the U.S. without payment of the tariffs.
The Treasury initially ruled against this interpretation, but then later reversed itself and sided with the fruit importers. Most of the monies collected as duty on the import of tropical and semi-tropical fruit while the errant comma was in effect were refunded to those who had paid the fee. That memorable punctuation error deprived the U.S. government of an estimated $1 million in revenues.
Of course, most of us aren’t dealing with something on the scale of the above example and that really isn’t a case of not having adequate legal representation; however, similar consequences are well within the realm of possibility for anyone. Imagine, for example, that you have a modest estate and you love all three of your children equally. Your spouse predeceased you and you would like to update your will to reflect your current situation. So, you go online with the best intentions to draft a simple will that divides your estate equally among your three children. You draft your will to leave your entire estate “to Child A, Child B and Child C, in equal shares.” Despite your intentions, what you have now done constructively is to give Child A half of your estate while Child B and Child C will be left to divide the other half. The proper drafting to achieve your desired result would have been to leave your entire estate “to Child A, Child B, and Child C, in equal shares.” Thus, each child would thereby receive 33 1/3% of your estate. While this simple punctuation mistake may be overlooked by many, this missing comma could provide an heir with the legal grounds to contest the will. What was intended to be a simple will could potentially result in a contentious and costly court battle.
Legal websites will tell you that drafting basic legal documents rarely involves complicated legal rules and most people do not need a lawyer’s help to draft those types of documents. While that may be true, it’s not always the “complicated legal rules” that you need to look out for. Sometimes it just may be worth it to pay a professional for that added peace of mind.
Estate planning attorneys are frequently asked by clients to explain the difference between a “will” and a “trust.” This is normally in the context of planning for the disposition of assets upon the client’s death – so we surmise that clients are looking for information regarding the differences between and the benefits of both Wills and Living Trusts as testamentary instruments. Many times, our clients will have the general impression that Living Trusts are “better” than Wills and have a notion that they may save taxes, may protect assets in some way, insure privacy and avoid probate, but they aren’t sure and want to understand how they work; and frequently, what we think of them.
Let me state at the outset that my bias is, more often than not, to guide our clients towards a Will as the basic testamentary instrument. While Living Trusts certainly have their place, we don’t favor them as the default testamentary vehicle for reasons we will explain below. However, we have drafted many Living Trusts and believe they are the most appropriate instrument in certain circumstances. Of course, if a client really wants to work with a Living Trust as their preferred document, we will be happy to work with them. After all, there isn’t a “right” or “wrong” way to make these plans. Either document can help a client achieve most common estate planning objectives. The rest of this article will briefly describe probate and wills, and some of the benefits of Living Trusts, along with some of the perils – as opposed to Wills. Second, it will describe the situations in which Living Trusts may be preferable to a Will.
Before we discuss Revocable Living Trusts, it will be important to understand the probate process in our legal system and its role in property transfers. When a person dies owning property, particularly “real property” (real estate) or titled property (automobiles, trailers, bank and investment accounts) – and the property is intended to be given to heirs or other devisees – how can this be done if the owner is dead? The answer is through the probate process in most states. “Probate” comes from the latin verb “probare” which means to “prove, try, test or examine.” It is basically the process of submitting a will to the court for “testing” and distributing the assets as provided in the will of the deceased. In Colorado, Personal Representative, named in the Will, is appointed as the responsible party by the Court. This appointment grants the Personal Representative the authority to pay bills, settle accounts and distribute any property. The process in Colorado (and most states) is fairly simple, inexpensive and un-intrusive. Unless there are conflicts, the Court is not involved and the Personal Representative can handle most of the work, paying bills and distributing property according to the plan detailed in the Will. However, for various reasons, some people would still like to avoid the probate process. One way to do avoid the probate process is by establishing, and importantly, fully funding, a Living Trust.
Revocable Living Trusts
Essentially, a Revocable Living Trust is an entity into which one places all, or most, of one’s assets. As the name implies, the trust can be amended or fully revoked at any time as long as you are alive. The trust document, or “agreement” will normally give the grantor full control over all the assets and income in the trust. In other words, your control over the assets doesn’t change, they are simply “owned” by the trust rather than you as an individual. Ownership by the trust rather than the individual is what gives rise to both the benefits and potential problems of a Living Trust.
Because your assets are owned by the Trust rather than by you as an individual, the Trust doesn’t “die” when you do. Therefore, when you pass away, your successor trustee (named in the Trust Agreement) simply takes over managing your assets and/or distributing them as you direct in the Trust Agreement. In this way, the Living Trust avoid probate – there is no Will to “prove” and follow. A related benefit is that even if you don’t die, but if you either cannot, or will not, manage your financial affairs, your successor trustee (hopefully someone you trust) can step in and manage your affairs i.e. pay bills, manage property and investments and otherwise contract on your behalf.
These benefits are only available if all of your assets are actually in the name of the trust. This is the area where, in our experience, people may lose the potential benefits of a Living Trust. Over time, it is difficult to remember to have all your assets place in the name of the trust. Bank accounts, real estate, investment accounts, life insurance, retirement accounts . . . all need to be owned by the Trust. Sometimes, this just isn’t done at the beginning, or even if it is, over time, assets are bought and sold and habit takes over . . . people tend to forget to put them in the name of the trust. If there are assets titled outside the Trust, at death, it may be necessary to open probate to handle those assets, thus defeating some of the benefits of a Trust. In addition to requiring a bit more effort manage, Living Trusts typically cost more at the outset to set up than a Will which accomplish the same goals for the client.
Benefits of a Trust
Despite some of the burdens of preparing and administering a trust, there are two significant benefits to a Living Trust. The first is for people who own real property titled in a different state. Owning that property in a Living Trust rather than individually will allow that property to be distributed or managed after death without requiring opening a probate case in that state. As stated earlier, the Trust does not “die” and so whomever is successor trustee may simply sell or otherwise manage the property without Court approval through the probate process in that state.
The second benefit is for individuals who are concerned about the management of their assets when they either lose capacity or interest. While a Durable Power of Attorney can provide a trusted individual the necessary authority to manage one’s financial affairs, a Successor Trustee taking over under a trust agreement can be a simpler and smoother process.
Both Wills and Living Trusts can be effective documents for passing assets to heirs and devisees and both may be used to avoid or minimize estate taxes if properly drafted. Living Trusts may provide the benefit of simpler management of assets by a third party (a successor trustee) during your incapacity than is sometimes available under only a Power of Attorney; and Living Trusts can help you avoid probate in a different state if you own property there. Living Trusts will typically cost more to draft at the beginning and transfer your assets into the trust and can be more cumbersome to manage during your life. Both documents (along with a power of attorney) are effective tools for clients and attorneys in planning for a client’s death and/or disability – it will be up to you and your counsel to decide on the right approach for your circumstances.
BY JENNIFER LYNN PETERS, ESQ.
As the economy plunged and debtors looked for ways to avoid paying their obligations to lenders across the country, the courts saw an explosion of cases alleging breach of fiduciary duty, breach of the duty of good faith and fair dealing, and other “mismanagement” by directors, officers, and/or managers of financial institutions and other entities. A growing number of such claims by shareholders and others affected by the closure of a financial institution are also being filed. So what is a director, officer, or manager to do when faced with such claims? Often, the legal doctrine known as the Business Judgment Rule can provide the best, most effective, and first line of defense.
The Business Judgment Rule is a legal presumption that provides that so long as a director or officer of a company is disinterested, has acted on an informed basis, in good faith, and with an honest belief that the action taken was in the best interests of the company, the decisions made are not subject to challenge. In adopting the Business Judgment Rule, the Colorado Supreme Court described it as follows: the “business judgment doctrine bars judicial inquiry into the actions of [a manager] taken in good faith and in the exercise of honest judgment in furtherance of a lawful and legitimate corporate purpose.” Hirsch v. Jones Intercable, Inc., 984 P.2d 629 (Colo. 1999). When the Business Judgment Rule applies, decisions and actions of disinterested directors and officers will not be disturbed or questioned by a court if they can be attributed to “any rational business purpose.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The rule is meant to preclude a court from imposing its own judgment on the business and affairs of a company.
In order to demonstrate that the Business Judgment Rule applies, an officer, director, or manager must generally show three things. First, it must be shown that the officer, director, or manager is independent or disinterested. This typically involves a review of the financial interests of the officer, director, or manager whose actions are being challenged to show she did not have a financial interest in the underlying transaction. Second, it must be shown that the decision being challenged was made in good faith. This usually involves a simple showing that there was a reason for the decision or action and what the stated motivation for the decision or action was. Third, it must be shown that the decision or action was “informed” or exercised with “due care.” This typically requires some evidence that there was a reasonable effort to ascertain and consider all relevant information prior to the decision being made or action being taken.
It is important to keep in mind that the Business Judgment Rule does not apply where a director, officer, or manager being sued is shown to have an interest, usually a financial stake of some sort, in the transaction in dispute. A director, officer, or manager is not “disinterested” if they either stand on both sides of a transaction or expect to derive a personal financial benefit from it. In other words, if the director, officer, or manager is engaged in self-dealing, she cannot claim the benefit of the Business Judgment Rule as a defense to claims of mismanagement. However, self-interest alone is not sufficient to disqualify an officer, director, or manager from using the Business Judgment Rule as a defense. Merely alleging complete dominion or control over business decisions is also not enough to defeat the Business Judgment Rule. There must be evidence that there was disloyalty to the organization, and that the benefit received was material or significant, rather than minimal. Thus, where it is shown by some tangible evidence that a director, officer, or manager either received or could have received a direct and substantial benefit from the transaction, the Business Judgment Rule will not be available as a defense.
Under the Business Judgment Rule, the mere fact that, in hindsight, an officer, director, manager, or management group made a bad decision or a mistake is not sufficient to challenge that decision or allege breach of fiduciary duty or other mismanagement claims. Courts acknowledge that, while shareholders might disagree with a management decision, and while it may be apparent in hindsight that the decision was wrong, the decision can withstand an attack because it was made in good faith by disinterested persons. In the absence of fraud or bad faith, the Business Judgment Rule thus often provides a complete defense to rising claims of breach of fiduciary or other obligations being levied against directors, officers, and managers.
This article was published in the September/October 2011 edition of The Independent Report, the official newsletter of the Independent Bankers of Colorado and the June 2012 edition of the Colorado Bar Association Business Law Section Newsletter.
BY JENNIFER LYNN PETERS, ESQ.
Often the hard work of collecting money you are owed starts after a judgment is entered. Wise collection strategies are crucial in the current real estate market where it may no longer be a practical option to record a transcript of the judgment (thus obtaining a judgment lien), wait for the judgment-debtor’s property to be refinanced or sold, and collect from the equity. Today, the creditor who pushes the hardest and uses all available legal tools often is the first and only one who gets paid. So … what is a creditor to do when a judgment debtor has hidden all of his assets in a limited liability company? Charge!
How do I get to the debtor’s interest in the company? Use a charging order.
A common chant at sporting events, “Charge!” has become the mantra of lawyers advising creditor clients trying to collect a debt from an individual who holds limited liability company (LLC) interests.
A charging order is a court order directing the charged LLC to pay all assets or distributions of the LLC due to the judgment debtor to the creditor instead. Colorado Revised Statute §7-80-703 authorizes any creditor to obtain a charging order “on application.” In 1997 when this section was first added, the statute said “upon due application”, which was interpreted by the courts to require prior notice to anyone affected by the charging order. See First Nat’l Bank of Denver v. District Court, 652 P.2d 613 (Colo. 1982). In 1998, this provision was amended to simply say “on application,” leaving open the question of whether prior notice is still required. The charging order is effective upon service to the LLC and then creates a lien on the debtor’s membership interest. Here, service means personal service pursuant to Colorado Rule of Civil Procedure 4. Such service can be accomplished several ways: by personal delivery to the LLC’s registered agent or an officer or member of the LLC, or even to a direct secretary or assistant of the registered agent, officer or member. See In re Goodman Associates, LLC v. WP Mountain Properties, LLC, 222 P.3d 310 (Colo. 2010). Service by certified mail may also suffice if the registered agent cannot easily be found; however, if serving in this manner, one should obtain a court order approving such service and setting the date of service as five days from the date of mailing. See § 7-90-704(2), C.R.S.
A creditor with a charging order may seek appointment of a receiver to oversee the profits or other money due or to become due to the judgment-debtor member. An appointed receiver can ensure that a creditor can easily and without further court orders access information such as the financial records of the LLC. Additionally, the charged membership interest can be foreclosed, or ordered sold by the court, and the proceeds paid to the charging creditor. The statute also authorizes the sale of the charged membership interest by consent of all other members. Neither scenario triggers mandatory dissolution.
Historically, if the debtor’s membership interest was not sold, the charging creditor could not step into the shoes of the judgment debtor, but instead assumed the role of an assignee or transferee of the membership interest, meaning that the creditor could not control the LLC even if the charged membership interest was the majority interest or the judgment debtor was the manager of the LLC. Absent consent, even if the only other interest remaining in the LLC was infinitesimal, the creditor had no management or governance rights in the LLC, but only a right to payment of monies owed by the LLC to the judgment debtor. See In re Albright, 291 B.R. 538 (Bankr.D.Colo. 2003), citing § 7-80-702, C.R.S.
However, in 1998, language was added to the charging order statutes allowing a court to “make all other orders, directions, accounts and inquiries that the debtor member might have made or that the circumstances of the case may require.” While there are not yet any Colorado cases interpreting this change, it appears that there may be more flexibility for courts to order additional relief to the creditor as part of the charging order, including providing for additional or greater rights than historically allowed if the circumstances justify it. One example of such flexibility has recently arisen in the context of single-member LLCs. In a single-member LLC, the purpose and benefit of the charging order, derived from the Uniform Partnership Law and intended to benefit the non-debtor partners, is not applicable. The charging order is intended to avoid forcing partners of a judgment debtor becoming business partners with, or to involuntarily share governance of their business with, a creditor. Single-member LLCs need no such protection. Additionally, in a single-member LLC the effect of a charging order would be to leave the LLC without any disinterested person to manage it. As such, courts now appear willing simply to order a judgment debtor holding an interest in a single-member LLC to forfeit or assign the interest in the LLC to the creditor, rather than requiring foreclosure of the interest. See Olmstead v. Federal Trade Commission, 44 So.3d 76 (Fla. 2010) (court could order debtor to surrender all right, title and interest in debtor’s single-member LLC to satisfy an outstanding judgment). Since the management aspect is the same in multi-member LLCs where the judgment debtor is the only manager, the courts may also, given the flexibility in the current statute, provide such relief for multi-member LLCs.
The use of a charging order in the context of LLC interests is not yet well guided by case law. Consequently, courts look to the Uniform Partnership Law for guidance on issues such as priority of competing charging orders and the availability of other means to collect a judgment by going after the judgment debtor’s interest in an entity.
So what happens if more than one creditor serves a charging order?
With competing charging orders, he who serves first is prior. See Union Colony Bank v. United Bank of Greeley NA, 832 P.2d 1112 (Colo.App. 1992). The priority of charging orders is determined by the date of service of the order upon the LLC, and not by the date judgment was obtained or a transcript of judgment was recorded. Being the first to obtain and serve a charging order is critical in achieving the first and prior lien against the judgment debtor’s membership interest.
Is a charging order my only option?
The principal difference between the LLC and partnership statutes is that the Uniform Partnership Law specifies that the charging order is the only remedy available to a creditor to enforce the judgment against a partner’s interest. See § 7-64-504(5), C.R.S. The LLC statutes do not contain such a provision. Some creditors thus argue that a charging order is not the exclusive remedy available when pursuing a judgment-debtor’s LLC interest. Although Colorado courts have not yet opined about whether a charging order is the exclusive remedy for reaching a judgment debtor’s LLC interests, recent decisions from other states indicate that it is not . See Olmstead, supra; see also F.T.C. v. Peoples First Credit, LLC, 621 F.3d 1327 (11th Cir. 2010). A recent decision by the Colorado Bankruptcy Court and an early Colorado Supreme Court decision both indicate Colorado would follow these other states. See In re Albright, supra (noting the charging order statute serves no purpose in a single-member LLC) and Collard v. Hohnster, 174 P. 396 (Colo. 1918) (remedy provided by one statute does not abolish another or common law unless specifically provided).
So what other options do I have?
With the rising use of LLCs in Colorado, the ability to collect a judgment through LLC assets can mean the difference between getting paid or not. Often the charging order is the best option for pursuing collection against a judgment debtor hiding assets in an LLC. Unlike a garnishment, which expires 180 days after service and after which a competing creditor could step in front of you, charging orders do not expire and attach to all distributions or assets due or that become due to the judgment debtor until the judgment is satisfied. However, charging orders can be avoided if an LLC doesn’t make distributions. They are also often misunderstood by LLC managers, and achieving compliance can be difficult without cooperating non-debtor members or managers. Thus, garnishments can also be an effective tool when used in conjunction with the charging order.
A creditor can also foreclose the interest, but this can be tricky, time-consuming, and expensive. Colorado law is not clear about how to foreclose an LLC membership interest, what effect the foreclosure has on the LLC, and whether the foreclosing creditor can then demand dissolution and liquidation of the LLC from which the judgment might be satisfied.
In pursuing collection of judgments against debtors with assets tied up in LLCs, a charging order can be a powerful and useful tool. It is important to be sure your charging order contains sufficiently comprehensive enforcement mechanisms and provisions allowing a creditor to obtain information about the financial status of the LLC, however, to obtain the maximum benefit. Using the charging order in conjunction with other available collection remedies will greatly increase the likelihood of recovery. If you are interested in pursuing a charging order, or have received on and have questions about it, contact Jennifer Lynn Peters, Esq. 970-330-6700.
At Otis, Bedingfield & Peters, LLC, we believe every client deserves the highest quality legal services from a law firm that is part of their community. We know we can’t be everything to everyone everywhere. That’s why we focus on providing only real estate law and business law services in the Northern Colorado region. Our commitment to real estate law and business law and our Northern Colorado community permeates everything we do. We value personal relationships, knowledge, integrity, trust and loyalty. Read More >>