In Hanna v. Baier, C.A. No. S12J-03-058-RFS (Del. Super. Jan. 22, 2020), Delaware Superior Court Judge Richard F. Stokes considered whether the Superior Court was the appropriate forum for enforcement of a charging order requiring the court to consider the validity of conveyances between a limited liability company and its members. In granting a motion to transfer venue to the Delaware Court of Chancery, Stokes held that the Court of Chancery is the appropriate forum where the disputes between the parties involve the business decisions of an LLC encompassed within the LLC Act.

In 2011, the plaintiffs, Wagih and Bothina Hanna, obtained a judgment from a Massachusetts court against the defendant, Dieter Baier. Subsequently, the Hannas obtained a charging order against Baier from a Maryland court, creating a lien against his interest in Cabinetry Unlimited LLC, a Delaware limited liability company. The charging order was then domesticated in the Delaware Superior Court. Cabinetry did not make any payments to the Hannas, but it did make payments to Baier, the managing member of the LLC. The Hannas sought enforcement of the charging order, arguing that the payments from the LLC to Baier were in violation of the charging order.

Pursuant to Section 18-703 of the LLC Act, 6 Del. C. Section 18-703, the entry of a charging order is the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor's LLC interest, and no attachment, garnishment, foreclosure or other legal or equitable remedies are available to the judgment creditor. As Stokes explained, a charging order is analogous to a garnishment, a remedy traditionally available from the Superior Court, and the Superior Court has the authority to enforce charging orders. However, the Court of Chancery is the default forum for resolving LLC disputes. The Hannas argued that the payments to Baier arose from his membership interest in the LLC and should be garnished. Baier argued that the Hannas were actually challenging business transactions of the LLC and its managing member, which should be evaluated under the LLC Act by the Court of Chancery.

The question of the appropriate forum for the Hannas' claims had been litigated before. Earlier in the case, Judge M. Jane Brady had held that the proper jurisdiction to hear any matters relating to orders charging a member's interest in an LLC was exclusively in the Court of Chancery. In 2005, Section 18-703 was amended to add a new subsection, providing that "the Court of Chancery shall have jurisdiction to hear and determine any matter relating to any such charging order." Brady held that this language meant that any matters relating to orders charging a member's interest in an LLC were to be heard exclusively in the Court of Chancery, including both execution on a charging order and proceedings in aid of execution, in Hanna v. Baier, (Del. Super. Dec. 19, 2017).

Subsequent to Brady's decision in Hanna, Judge Diane Streett, in Bridev One v. Regency Centers, (Del. Super. March 26, 2018), held that the 2005 amendment did not expressly divest the Superior Court of its jurisdiction to issue charging orders and did not purport to vest the Court of Chancery with exclusive jurisdiction. Streett relied on the doctrine of stare decisis, since the Superior Court traditionally heard matters relating to charging orders, and the absence of any language in the amendment purporting to vest exclusive jurisdiction in the Court of Chancery. The proper reading of the amendment was that it granted concurrent jurisdiction to the Court of Chancery and the Superior Court to hear and decide all matters relating to charging orders. Debt Collection Services v. Owensby, (Del. Super. March 5, 2018) (report and recommendation), decided by Commissioner Bradley Manning at around the same time, reached the same conclusion.

As a result, the Hannas moved for relief from the Dec. 17, 2017, order pursuant to Rule 60. They argued that Brady's previous order misinterpreted the statute in holding that the Court of Chancery had exclusive jurisdiction over the matter. Stokes, who now had the case, granted the motion, vacated the Dec. 17, 2017, order, and allowed the Hannas to proceed with discovery to enforce the charging order in the Superior Court, see Hanna v. Baier, C.A. S12J-03-058-RFS (Del. Super. June 19, 2018), reargument den. (Jul. 2, 2018).

The payments the Hannas challenged included Cabinetry's payment of car loans for vehicles owned by Baier, payments of attorney fees and life insurance for Baier, investments in another corporation owned by Baier, payments to Baier as guaranteed payments to a partner, conventional distributions paid directly to Baier and unreported income entrusted to Baier.

Baier argued that these payments were not subject to the charging order. He argued that the transactions were ordinary business transactions pursuant to Cabinetry's LLC agreement and the LLC Act. For example, he argued that the payment of the car loans were for company vehicles and he received no benefit for them. The attorneys fees were for Cabinetry to defend itself in this action, and the LLC Act authorized payment of attorney fees for claims against the company and its manager. The life insurance payments were an obligation of the LLC and not a distribution, and the tax and vendor payments were made in the ordinary course of business. As for the alleged investment in the corporation owned by Baier, the Hannas misunderstood the transaction, which was not a distribution to him. Baier argued that the Superior Court was without jurisdiction to consider the challenges to these transactions, since they fell within the terms of the LLC Act, specifically Section 18-607, concerning limitations on distributions to members, and Section 18-111, concerning the interpretation and enforcement of LLC agreements.

Stokes summarized the types of disputes in which the Court of Chancery has jurisdiction. They include disputes involving the provisions of an LLC agreement; an LLC's duties and obligations to its members and managers; the duties and obligations between and among the members, managers and the LLC; the rights, powers or restrictions of the LLC or its member or managers; and any provision of the LLC Act or any other instrument, document, agreement or certificate contemplated by any provision of the LLC Act.

Stokes concluded that the challenged transactions were encompassed by the LLC Act. Although the Superior Court had jurisdiction to issue and enforce charging orders, the issues raised by the parties required the court to determine the validity of the transfers made from an LLC to its managing member. In other words, the question presented to the court was whether the transfers were distributions subject to the charging order or ordinary business transactions. The Hannas alleged that Cabinetry had made multiple distributions to Baier under the guise of ordinary business transactions, while Baier contended that the transfers were made pursuant to the LLC agreement and within the LLC Act.

Stokes held that even if he had authority to set aside the transfers made by Cabinetry, the challenged transactions were encompassed within Section 18-111 of the LLC Act, dealing with the interpretation and enforcement of LLC agreements, and thus implicated the Court of Chancery's exclusive jurisdiction over the internal affairs of an LLC. When disputes between parties involve the business decisions of an LLC encompassed within the LLC Act, the Court of Chancery is the appropriate forum. Moreover, to the extent that the Hannas sought to hold Baier liable for the payments made by Cabinetry, the court was being asked to pierce the corporate veil and hold the entity's member liable. Piercing the corporate veil is an argument that could be considered only in the Court of Chancery, and the Superior Court lacked jurisdiction to hold Baier liable for the actions of Cabinetry. Therefore, the case had to be transferred to the Court of Chancery.

Hanna underscores the fact that both the Superior Court and the Court of Chancery have concurrent jurisdiction over the issuance and enforcement of charging orders involving a member's interest in an LLC. However, Hanna requires the plaintiff seeking to enforce a charging order to examine carefully the nature of the remedy being sought. If it falls within the traditional jurisdiction of the Court of Chancery, then the Superior Court will lack the authority to hear the dispute despite its concurrent jurisdiction over charging orders. Given the decision in Hanna, the better course would seem to be to go straight to the Court of Chancery with any matter involving a charging order and avoid the potential jurisdictional fight.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.