Opinion ID: 6500405
Heading Depth: 3
Heading Rank: 1

Heading: The settlement proceeds as distributions

Text: The Marion Bowen court concluded that the Aurora Park settlement payments “constitute[d] distributions.” The court concluded that, in addition to the direct payments to Baker, the JLG payments were “indirect payment[s]” to Baker because they “eliminated or reduc[ed] [his] debt to his lawyers.” For reasons not fully explained, the court relied on the Alaska Corporations Code’s definition of “distribution to [a corporation’s] shareholders,” which is “the transfer of cash or property by a corporation . . . to its shareholders . . . or the purchase or redemption of its shares for cash or property.”32 A share redemption is a transaction in which a corporation purchases shares of its stock from shareholders.33 The court analogized the settlement, which involved Baker transferring his membership interest in Aurora Park to Patricia, to a corporation’s share redemption and therefore a distribution under the Corporations Code. The court explained that its reasoning was appropriate because “Baker was originally supposed to satisfy the judgment in this case . . . by selling his shares in Aurora Park.” But the court’s statement was incorrect: Under the original assignment of proceeds Baker gave 31 See id. 32 AS 10.06.990(17). We note that unlike a corporation, which issues shares of stock to its owners, an LLC has “members” with membership interests. Compare AS 10.06.990(40)-(41) (defining shares as units of “proprietary interest[] in a corporation”), with AS 10.50.155 (stating that one requirement of LLC membership is an “interest” in LLC). 33 See generally AS 10.06.385, .388 (describing corporation’s redemption authority and ability to reissue redeemed or otherwise purchased shares). -12- 7602 Duffus, Duffus was to receive any Aurora Park distribution to Baker when Aurora Park sold the Apartments, and under the later agreement among Patricia, Aurora Park, and Duffus (but not Baker), Aurora Park was to sell the Apartments and distribute Baker’s share of the proceeds to Duffus. Baker makes two primary arguments why the Marion Bowen court’s reasoning is erroneous. Baker first contends that the court erroneously relied on the definition of “distribution” from the Corporations Code instead of looking first to Alaska LLC law or the Aurora Park operating agreement. Baker argues that Alaska LLC law “does not include a definition of ‘distribution’ in its definitions section or in its Article dedicated to distributions,” instead referring to “the LLC’s operating agreement,” and that the Aurora Park operating agreement defines distributions as payments of excess cash. Baker secondly points out that the settlement money was paid by “Patricia (individually) and [Northern Trust],” not Aurora Park, and could not have been an LLC distribution. We agree with Baker that the Corporations Code definition of “distribution” is inapplicable to LLCs; because Alaska LLC law addresses both charging orders34 and distributions,35 we look there first. But contrary to Baker’s assertion that Alaska LLC law does not “include a definition of ‘distribution,’ ” Alaska LLC law recognizes two types: interim distributions and final distributions.36 Interim distributions are “a 34 AS 10.50.380 (addressing judgment creditors’ rights). 35 AS 10.50.295-.340 (governing interim distributions); AS 10.50.425 (governing final distributions). 36 See supra note 35. -13- 7602 distribution of the assets of a limited liability company to the company’s members”;37 final distributions occur as part of the dissolution and winding up process.38 The settlement funds, if a distribution at all, were interim distributions. Interim distributions necessarily involve “a distribution of the assets of a limited liability company.”39 The Marion Bowen court apparently determined that Patricia’s and Northern Trust’s payments constructively were made by Aurora Park, even though the funds came directly from Patricia and Northern Trust. It may be that the funds Patricia and Northern Trust paid originated from Aurora Park, possibly qualifying them as distributions.40 But absent evidence tracing the funds to Aurora Park, they were not LLC distributions. Because the Marion Bowen court did not inquire into the funds’ origins and merely imputed them to Aurora Park, apparently as a matter of law without regard to the funds’ actual source, we cannot review the legal conclusion that the funds were LLC distributions.41 37 AS 10.50.990(8). 38 AS 10.50.425. 39 AS 10.50.990(8). 40 Alaska LLC law defines interim distributions as transfers of company assets “to the company’s members.” AS 10.50.990(8). Baker contends that the charging order’s timing, issued after he already had transferred his membership in Aurora Park to Patricia, made it invalid. Baker transferred his Aurora Park interest in the spring of 2019, but the charging order was not issued until December. If the settlement funds indeed were distributions — as defined under LLC law — when the settlement was reached and Baker still was an LLC member, the charging order may apply. Structuring the settlement as monthly installments occurring in part after Baker transferred his Aurora Park interest rather than as a lump sum does not meaningfully impact the analysis. 41 Cf. Horne v. Touhakis, 356 P.3d 280, 283-84 (Alaska 2015) (remanding (continued...) -14- 7602 We note also that Aurora Park’s operating agreement defines “interim distribution” differently from Alaska LLC law. The operating agreement allows interim distributions when “cash on hand exceeds the . . . needs for operating expenses, debt service, reserves, and additional capital expenses.” If the operating agreement’s definition controls, an evidentiary hearing would be needed not only to trace settlement funds to Aurora Park but also to demonstrate that the funds originated from excess cash. But whether the operating agreement’s definition controls is unclear at this juncture. Alaska laws give an LLC flexibility to deviate from the default requirement of paying each member an equal share of distributions, but the laws may not necessarily give an LLC the flexibility to change the definition of a distribution.42 Baker also argues that the charging order, even if valid, does not apply to the portion of the settlement funds payable to JLG. Because a charging order applies only to LLC distributions, we conclude that the charging order cannot apply to any part of the settlement funds unless they are a distribution traceable to Aurora Park assets. If the funds payable to JLG are traceable to Aurora Park, they might be subject to the charging order pending resolution of the timing and definition issues described above and the evidentiary issues related to the attorney’s lien discussed below. For the foregoing reasons, we remand to the superior court for an evidentiary hearing to determine whether the settlement funds are a distribution 41 (...continued) child support decision because superior court’s imputed income findings for obligor were not sufficiently based on evidence and discussing similar cases). 42 See AS 10.50.295 (stating “[t]he operating agreement of the company may authorize different interim distributions for different classes of members,” but indicating company may alter only “manner” in which interim distributions are paid, not “interim distribution” definition); AS 10.50.990(8) (defining “interim distribution” without taking into account presence of operating agreement). -15- 7602 originating from Aurora Park.