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23 October 2024 / James T. Hart

Bourbon, Horse Racing, and... Charging Orders?

It's that time in the Bluegrass when the air is crisp, leaves begin to fall, horseracing is in full gear, the bourbon is poured, and basketball season is right around the corner. To celebrate the season, I figured I would give a little bourbon recommendation, horseracing history, and, of course, some legal knowledge.

First, there are a LOT of bourbons out there on the market, and they seem to be ever-populating. As a native Kentuckian born and raised in Lexington, many of my friends north of the Ohio River commonly ask me for my bourbon recommendations. While I am no expert, I pretend to be. There are, of course, bourbons from all areas of Kentucky (it ain't bourbon if it ain't from Kentucky) at all different price points.

I would like to recommend what I think is the best bang for your buck, which is bourbons you can fetch for under $100 a bottle. Without further ado, my recommendations in no particular order are Eagle Rare 10, New Riff Distilling Single Barrel, Boone County Distilling Pot Still Bourbon (or Single Barrel), Rabbit Hole Dareringer, and O.K.I. Single Barrel. If you have any others you recommend, feel free to send a bottle my way (strictly for research purposes). 

Next, it's horseracing season, and that means the majestic Keeneland Race Course is back to live action! For the uninitiated, Keeneland is one of the world's greatest race tracks, and it sits in the heart of Lexington. Since 1936, Keeneland has hosted live racing in April for its Spring Meet and October for its Fall Meet. We are currently in the middle of the 2024 Fall Meet, where Keeneland is offering the track's largest-ever purse total of $9.6 million over 22 stakes races.  Keeneland also boasts the world's most excellent auction house for thoroughbreds and hosts sales annually in January, April, September, and November.  Just this past September 2024, the yearling sale grossed $427,800,000.

Finally, this wouldn't be a blog on a law firm's website if I didn't discuss some new case law out there.    About seven years ago, you may have read my article on charging orders.  These are tools rarely utilized by creditors, but they can prove helpful in certain situations. While there is not a significant amount of case law on the subject, the Court of Appeals recently issued an opinion in Stich v. Mattingly et al., which gave a helpful overview of charging orders and, more specifically, addressed foreclosing a debtor's interest in an LLC and the rights of the purchaser of such interest.

Stich involved a judgment rendered on behalf of the judgment creditor, Mattingly, who leased specific commercial property to Stich, the debtor. After the judgment was rendered, Mattingly obtained a charging order to charge Stich's interest in seven separate limited liability companies. In one such LLC, neither the LLC nor its appointed receiver made any distributions to Mattingly under the charging order. After no distributions, Mattingly moved the trial court to foreclose Stich's interest in the LLC in which the court would sell Stich's interest in the LLC. The issue before the court concerned the limitations on charging orders relating to foreclosure, and specifically, whether the interest subject to foreclosure encompassed the debtor's full interest in the LLC or was limited to only the distributions up and to the amount of the judgment.

After going through a review of the statutory framework of KRS §275.260, the court reinforced that charging orders do have limitations, naming what rights the judgment-creditor obtains.The charging order operated as a lien on Stich's interest in Haunt Brothers [the LLC] and provided Mattingly the "right to receive distributions made with respect to [Stich's] limited liability company interest [in Haunt Brothers]." KRS 275.260(3). However, it did not in and of itself operate as an assignment, KRS 275.260(3), nor did it give Mattingly the right to participate in the management or to cause the dissolution of Haunt Brothers, KRS 275.260(2). The charging order simply gave Mattingly the right to receive Stich's share of any distributions up to the amount of the underlying judgment.

Thus, in general, a charging order is just a lien on any distributions. The judgment-creditor has no rights other than to those distributions up and until the judgment is satisfied. However, while a charging order alone does not operate as an assignment with all the rights of participation in the management of the LLC, foreclosure of the interest under KRS §275.260(4) provides expressly that the purchaser of the interest at sale does become an assignee with all such rights that affords.   

Even so, Stich maintained the foreclosure only applied "to his distribution rights up to the amount of the underlying judgment as set forth in the charging order." The court disagreed. The court affirmed that under the charging order, only distributions were to be made to Mattingly, but when no distributions were made, the appropriate remedy was foreclosure and applied to his entire interest in the LLC.

Stich asserts that the foreclosure order entered by the circuit court was in error because it ordered his entire interest in Haunt Brother[s] to be sold instead of limiting the foreclosable interest to the right to receive distributions up to the amount of the judgment. This interpretation ignores the fact that Mattingly already had a right to receive the distributions up to the amount of the judgment under the charging order pursuant to KRS 275.260(2). Adopting Stich's interpretation would render KRS 275.260(4) essentially meaningless and hollow, a result which we cannot countenance. Lewis v. Jackson Energy Co-op. Corp., 189 S.W.3d 87, 91 (Ky. 2005) ("Statutes should be construed in such a way that they do not become ineffectual or meaningless.").

Having examined all sections of KRS 275.260 within the greater context of the Kentucky Limited Liability Company Act, we are confident that "the limited liability company interest subject to the charging order" referred to in KRS 275.260(4) is the judgment debtor's entire transferable interest in the subject company. Stich illustrates how a creditor who has obtained a charging order under KRS §275.260 can subsequently use it to foreclose a debtor's entire interest in an LLC under KRS §275.260(4).

Again, it is a valuable tool for creditors pursuing judgment-debtors that retain interests in other LLCs and serves as a reminder to judgment debtors that not only are their distributions subject to being charged, but also their interest in the LLC itself can be pursued if those distributions are not made.

Our firm is constantly monitoring this topic. If you have any questions or would like to learn more about Weltman's consumer collections or commercial collections solutions, contact shareholder Jamie Hart at any time.

This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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