Debtor’s failure to object to charging order has disastrous consequences in Red Lion

Red Lion Hotels Franchising, Inc., obtained a judgment in 2019 for approximately $1.3 million against First Capital Real Estate Investments, LLC and its individual owners, Suneet Singal and Majique Ladnier, following the breach of a franchise. Four years prior, Singal and Ladnier had formed a revocable trust (a/k/a living trust), which held their interests in two LLCs, namely First Capital Master Advisor, LLC (“FCMA”) and SRS, LLC (“SRS “). Because a revocable trust is essentially treated as if it did not exist for creditor purposes, Red Lion sought an indictment order directly against the interests of the FCMA and SRS and, very importantly , as we will soon see, the defendants filed an objection. to load order.

With no objection filed by the defendants, the U.S. District Court for the Eastern District of California granted Red Lion’s motion and issued a charging order against Singal and Ladnier’s interests in FCMA and SRS. The arraignment order, as arraignment orders do, imposed a lien on Singal and Ladnier’s interests in FCMA and SRS and ordered that all distributions made to their interests be forwarded to Red Lion at place until the judgment is satisfied. This is all well and good, and quite commonplace so far, because that’s exactly what happens with billing orders on a fairly regular basis.

Where it gets interesting is that FCMA and SRS themselves held valuable assets, although FCMA and SRS were not parties to the judgment and only the interests of Singal and Ladnier (via the revocable trust) have been subject to the privilege of the charge order. FCMA owed a $25 million payment obligation to a third party called StHealth Capital Partners Group, LLC, and SRS owned stock in a company called Gadsen Growth Properties, Inc.

California law permits a remedy known as assignment orderwhereby a court may order that property be assigned to a creditor, so that the creditor becomes the beneficial owner of whatever is assigned, at least until the judgment is enforced.

In addition to the charging order, Red Lion also asked the court for an assignment order against FMCA’s interest in StHealth’s $25 million bond and SRS’ shares in Gadsen. Red Lion essentially argued that the charging order itself would be ineffective in satisfying the judgment (they rarely are), and so the court needed to take the next step and just award those assets of FMCA and SRS to Red Lion. After a quick analysis of whether the factors for an assignment order were met, the court granted Red Lion’s request and those assignments were also ordered.

ANALYSIS

This is where the defendants made a big mistake by not opposing the assignment order part of Red Lion’s motion, because they had a perfectly good defense. The California Revised Uniform Limited Liability Act (RULLCA) states that a charging order is the liability of a creditor exclusive remedy against a debtor’s interest in an LLC:

Cal.Civ.Pro. 17705.03(f). This section provides the exclusive remedy by which a person seeking to enforce a judgment against a member or assignee may, as a judgment creditor, satisfy the judgment from the transferable interest of the judgment debtor.

An assignment order, such as that sought and obtained by Red Lion, is another creditor remedy – and is therefore effectively blocked by California RULLCA’s “exclusive remedy” language. In making the surrender order, the court got this part wrong.

The error, however, was not on the part of the court as it was incumbent upon the debtors to oppose the part of Red Lion’s motion which related to the assignment order. For whatever reason, the debtors decided not to oppose Red Lion’s motion and thus waived their objections to the court’s assignment order, bad as it was.

What all of this demonstrates is that in disputes over charging orders, the debtor must be vigilant in opposing the motion insofar as he is seeking an order that contravenes the law, such as the language of the assignment order here. Usually, a debtor will not have a defense to the charge order itself, but the debtor can and should assert their rights to the correct form of charge order and that it be limited to what is permitted.

Here, if the debtors had objected on the grounds that the billing order is an exclusive remedy, then Red Lion would likely have been locked in pending distributions that would have been slow in coming. By not objecting, Red Lion now obtains an assignment order against two allegedly valuable assets. It’s the difference between being vigilant and not doing it.

As I write, I would also like to point out another aspect of this case, which is that, from the point of view of the creditor-debtor, a revocable trust is a big nothing. The law in most states essentially allows a creditor to completely ignore a revocable trust as if it never existed, although a savvy creditor will generally seek to add the revocable trust to judgment as what amounts to a debtor rescue. Here, the court essentially looked at the trust down to the interests of the LLC as if the trust did not exist, and that is the usual result in these cases.

CITE AS

Red Lion Hotels Franchising, Inc. v First Capital Real Estate Investments LLC, 2022 WL 298118 (EDCal., 1 February 2022). https://chargementordre.com/index.php?n=Site.2022CaliforniaRedLionExclusiveRemedy