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Second Circuit Says New York Can’t Shield Many LLCs with Charging Orders

Second Circuit Nixes New York Charging Order Protection For Many LLCs

The Second Circuit recently issued a significant opinion concerning post-judgment enforcement, specifically revolving around a charging order in a rare case that reached the U.S. Court of Appeals. The case involved a Delaware LLC, HNA North America, LLC, owned by HNA Group (International) Company Limited (HNA Int’l), a Hong Kong company. 245 Park Member LLC (245 Park), a creditor, held a 49% minority interest in a related entity, 245 Park JV LLC.

After the Company went bankrupt, 245 Park successfully bid $68 million for HNA Int’l’s 51% interest in HNA N.A., effectively owning 100% of the Company. Subsequently, 245 Park obtained a $185.4 million judgment against HNA Int’l from the U.S. District Court for the Southern District of New York, leading to a series of enforcement actions.

The District Court issued an attachment order on HNA Int’l’s assets, including a Conference Center in Rockland County, New York, and required HNA Int’l to provide a 14-day notice before selling any asset. When HNA Int’l attempted to sell the Conference Center without the required notice, the District Court enjoined the sale.

Second Circuit Says New York Can't Shield Many LLCs with Charging Orders

Second Circuit Says New York Can’t Shield Many LLCs with Charging Orders (Credits: Empire Center for Public Policy)

HNA Int’l sought relief from the judgment, arguing that 245 Park’s acquisition of the Company satisfied the judgment or reduced it by $40 million. However, the District Court denied the motion and ordered HNA Int’l to turn over its 100% membership interest in HNA N.A. to 245 Park to satisfy the judgment.

The Second Circuit affirmed the District Court’s decision, holding that the judgment had not been fully satisfied and that New York law governed the enforcement procedures. Under New York law, a judgment may be enforced against non-exempt property, and a court may order a judgment debtor to turn over property to satisfy the judgment.

Despite HNA N.A. being a Delaware LLC, the Second Circuit held that New York law applied because the LLC’s interest was considered property in New York. Under New York’s LLC law, a creditor has the discretion to request either a charging order or a turnover order, with no limitation to the charging order remedy.

The District Court’s exercise of discretion in issuing a turnover order was deemed appropriate, particularly considering HNA Int’l’s attempts to frustrate collection efforts. This ruling applies exclusively to New York judgment enforcement actions and highlights the complexities surrounding creditor remedies in LLCs under New York law.

The case underscores the need for potential statutory reforms in New York’s LLC law and the importance of staying updated on jurisdiction-specific regulations for both creditors and debtors.

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