Alabama Supreme Court Remands Case Back To Trial Court To Determine Whether A Limited Liability Company Member Should Be Held In Contempt Of Court For Failure to Abide By The Terms Of A Charging Order

Jan 3, 2022 Denver, CO

In SE Property Holdings, LLC v. Harrell[1], during 2006, Water’s Edge LLC, a real estate development company, entered into a construction loan agreement with a bank that later merged into SE Property Holdings, LLC (“SEPH”) for two construction loans totaling $17 million. David L. Harrell (“Harrell”), along with some other members of Water’s Edge LLC, served as guarantors on the loans.

In 2010, SEPH sued Water’s Edge LLC and the guarantors (including Harrell). The trial court entered judgment against Water’s Edge LLC for nearly $14 million. The trial court further entered judgment against the guarantors (including Harrell) for over $11 million.

In 2015, SEPH filed a motion seeking to obtain a “charging order” against Harrell as he had not yet satisfied the judgment. A charging order is a statutorily created means for a creditor of a judgment debtor who is a member with others to reach the debtor’s beneficial interest in a limited liability company. It is similar in result to an assignment of income because future distributions that would otherwise be made to the debtor-member are instead to be made to the creditor who obtained the charging order. According to SEPH, Harrell owned a member interest in numerous limited liability companies, including Southern Land Brokers, LLC (“SLB”). The trial court entered a charging order directing SLB and the other limited liability companies in which Harrell owned a member interest to

distribute to the Clerk of Court all income, officer’s fees, bonuses, distributions, salaries or dividends paid or otherwise conveyed to [Harrell] by reason of any interest [he] own[s] in the Limited Liability Companies until [SEPH’s] judgment is satisfied in full.[2]

Fast forward to 2020 and SEPH’s judgment was still not fully paid. At this time, SEPH motioned the trial court to hold Harrell in contempt of court and to sanction him for violating the charging order. SEPH asserted that Harrell and his spouse each owned 50% of SLB. SLB’s operating agreement required that all distributions, profits and income be distributed to each member in proportion to their respective member interest. SEPH alleged that Harrell, in his capacity as SLB’s managing member, violated the charging order by: (a) making distributions solely to his spouse in violation of SLB’s operating agreement; and (b) making payments on Harrell’s personal American Express account. With respect to the distributions made to Harrell’s wife, SEPH asserted that half of such distributions should have been made to Harrell. With respect to SLB’s payment of Harrell’s personal American Express account, SEPH asserted that as such expenses were not business related, they were essentially “de facto” distributions that should have been turned over to the Clerk of the Court in partial satisfaction of the charging order. SEPH attached various financial documents obtained from Harrell and SLB, including Schedule K-1 tax forms on which Harrell declared that he received distributions from SLB in the years subsequent to the entry of the charging order.

Harrell objected to SEPH’s motion by asserting that he had not transferred “any transferrable interest” he owned in SLB and he had not received an actual cash distribution from the profits earned by SLB. Harrell did not submit any documentary evidence or affidavits with his objection.

The trial court, without holding a hearing, denied SEPH’s petition. Thereafter, SEPH appealed the trial court’s ruling to the Alabama Supreme Court (hereinafter referred to as the “Court”), arguing that in denying its petition to hold Harrell in contempt for failing to comply with the charging order, the trial court (a) exceeded its discretion because the record contains undisputed evidence that Harrell violated the charging order; and (b) erred in denying the petition without first holding a hearing.

The Court indicated that the record demonstrated that Harrell and his wife each owned 50% of SLB, and SLB’s operating agreement made it clear that the profits and income earned by SLB were to be distributed between Harrell and his wife in proportion to their respective member interests. Indeed, the Schedule K-1 federal tax forms included in the record show that Harrell and his wife each declared income and distributions from SLB for the tax years between 2015 and 2017 (after the charging order was entered) in the total amount of approximately $415,000 each. As previously stated, Harrell did not submit any evidence supporting his assertion that he never received actual cash distributions from SLB. The Court indicated that the evidence did not support Harrell’s assertions, but instead demonstrated that Harrell failed to perform an act required by the court for the benefit of an opposing party. Therefore, based upon the materials introduced into evidence, the Court held that the trial court exceeded its discretion in denying SEPH’s petition.

The Court next addressed the issue of contempt by professing that pursuant to Alabama case law, an individual cannot be found in contempt of court without a hearing.[3] As a hearing was not held by the trial court, the Court reversed the trial court’s judgment and remanded the case back to the trial court for a hearing on the contempt issue.

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[1] 2021 WL 5145446 (Ala. November 5, 2021).

[2] Id. at *1.

[3] Id. at *5. See Thompson v. Thompson, 649 So. 2d 208, 210 (Ala. Civ. App. 1994) (citing Ala. R. Civ. P. Rule 70A(c)(2), which provides that “[u]pon the filing of a contempt petition, the clerk shall issue process in accordance with these rules, unless the petition is initiated by a counterclaim or cross-claim authorized under Rule 13 [Ala. R. Civ. P.]. In any case, the person against whom the petition is directed shall be notified (1) of the time and place for the hearing on the petition and (2) that failure to appear at the hearing may result in the issuance of a writ of arrest pursuant to Rule 70A(d), to compel the presence of the alleged contemnor.”).

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Alabama Supreme Court Remands Case Back To Trial Court To Determine Whether A Limited Liability Company Member Should Be Held In Contempt Of Court For Failure to Abide By The Terms Of A Charging Order

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