The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
2001 - Ohio - Webster
Webster v. Dalcoma Limited Partnership Four, No. CA2000-11-028 (Ohio App. Dist.12 09/17/2001).
CASE NO. CA2000-11-028
COURT OF APPEALS OF OHIO, TWELFTH APPELLATE DISTRICT, FAYETTE COUNTY
September 17, 2001, Decided
DISPOSITION: [*1] Judgment affirmed.
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JUDGES: POWELL, J. YOUNG, P.J., and WALSH, J., concur.
OPINION: POWELL, J.
Defendant-appellant, Cecil C. Beasley, Jr., appeals the order of the Fayette County Court of Common Pleas authorizing the receiver's sale of JTC Partnership's interests. We affirm the decision of the trial court.
On June 15, 1998, plaintiff-appellee, Geoffrey Webster, obtained a judgment against Dalcoma Limited Partnership Four, Thomas Dalcoma, Richard Soyoul, and Cecil Beasley, Jr. In furtherance of Webster's efforts to collect upon his judgment, the trial court ordered sold certain real estate held by Dalcoma, Soyoul, and Beasley in foreclosure pursuant to a promissory note and mortgage held by Webster. The foreclosure sale did not fully satisfy Webster's judgment.
Webster then sought to execute upon the interests held by Dalcoma, Soyoul, and Beasley in the JTC Partnership. The JTC Partnership owned fifty percent of the Jeffersonville Travel Center, Limited ("Travel Center"). [*2] Hawkstone Associates, Inc. ("Hawkstone") was the owner of the other fifty percent interest in the Travel Center. Hawkstone is an entity wholly owned by Ron Wittekind.
On July 14, 1999, Webster applied to the trial court for a charging order and the appointment of a receiver for the JTC Partnership interests in order to collect upon his judgment against Dalcoma, Soyoul, and Beasley. On August 16, 1999, the trial court issued a charging order in favor of Webster and appointed Charles Lease as receiver of the JTC Partnership interests. The charging order directed the receiver to facilitate the sale of Dalcoma, Soyoul, and Beasley's interests in the JTC Partnership. JTC Partnership's fifty percent share of Travel Center was to be sold to Hawkstone, owner of the other fifty percent share in Travel Center.
The receiver recommended that the trial court accept Hawkstone's offer to purchase the JTC Partnership's interest with a few modifications. The receiver determined there was additional undistributed income which JTC Partnership partners would be entitled to from the Travel Center, Ltd. and therefore the sale price was renegotiated and increased. Wittekind, the owner of Hawkstone, also [*3] wanted a debit of $ 24,100, which sum represented a loan to Soyoul, to be set off from the purchase price.
On October 21, 1999, the receiver applied to the trial court to confirm the sale of JTC Partnership's interest to Hawkstone. The trial court issued notice to all interested parties and held a hearing regarding the sale to Hawkstone. The trial court issued an order authorizing the sale of JTC Partnership interests held by Dalcoma, Soyoul, and Beasley to Hawkstone for approximately $ 406,000.
Beasley appeals the decision of the trial court and raises four assignments of error challenging the receiver's authority to act, to sell partnership real estate, to set off debts, and the receiver's due diligence.
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Assignment of Error No. 2:
A [*5] RECEIVER DOS [sic] NOT HAVE THE AUTHORITY UNDER OHIO LAW TO SELL REAL ESTATE OWNED BY AN OHIO GENERAL PARTNERSHIP WHICH IS NOT A PARTY TO THE PROCEEDING IN ORDER TO SATISFY A JUDGMENT AGAINST THE GENERAL PARTNERS.
In his second assignment of error, Beasley maintains a receiver does not have the authority under Ohio law to sell real estate owned by an Ohio general partnership that is not a party to the proceeding in order to satisfy a judgement against the general partners.
While it is true that a "partner may not assign his interest in particular assets of the partnership," such as real estate, he may assign his interest in the partnership, that is, his right to share in the partnership's profits and surplus. Farmers State Bank & Trust Co. v. Mikesell (1988), 51 Ohio App. 3d 69, 77, 554 N.E.2d 900. (Emphasis added.) R.C. 1775.23 provides that "the property rights of a partner are his rights in specific partnership property, his interest in the partnership, and his right to participate in management." R.C. 1775.25 states that these interests are "personal property."
R.C. 1775.27 [*6] provides that creditors of individual debtor-partners may satisfy their claims on the partnership assets and make the "individual partner's interest subject to a charging order under circumstances that fall within the statutory design of R.C. 1775.27." Buckman v. Goldblatt (1974), 39 Ohio App. 2d 1, 4, 314 N.E.2d 188.
(A) On due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, order, or decree, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts, and inquiries which the debtor partner might have made, or which the circumstances of the case may require. (Emphasis added.)
In the instant matter, Webster was a judgment creditor of each individual debtor partner of the JTC Partnership. Thus, while the JTC Partnership was not a named party to the proceeding, by attempting to satisfy his claims from each individual partner's interest, Dalcoma's 33.33 percent, Soyoul's 33.33 percent, and Beasley's 33.33 percent, Webster subjected one hundred percent of JTC Partnership's interest in the Travel Center to the charging order without naming the JTC Partnership a party to the proceeding. Therefore, one hundred percent of the rights in specific partnership property, the interest in the partnership, and the right to participate in management, which are all personal property to Dalcoma, Soyoul, and Beasley, were to be sold per the charging order to satisfy Webster's judgement debt against each individual partner.
Beasley further contends that "nothing in the Ohio Revised Code permits a receiver to sell a debtor partner's share in order to satisfy a judgment against the partner individually." However, it is apparent that R.C. 1775.27 anticipates and permits the sale of an individual partner's partnership interest. R.C. 1775.27(B) states that the "interest charged may be redeemed at any time before foreclosure, or in the case of a sale being directed by the court may be purchased without thereby causing a dissolution." (Emphasis added.)
In this matter, it just so happened that all of the partners' individual interests in the partnership, not the partnership's interest in the real estate, were charged and sold at the same time, and to the same entity, in order to satisfy the judgment. Therefore, it only appears that JTC Partnership's real estate was sold to Hawkstone instead of one hundred percent of the JTC Partership's interests in the Travel Center being sold.
We conclude that the receiver did have the authority under R.C. 1775.27 to sell the interests of the JTC Partnership, which was not a party to the proceeding, in order to satisfy the judgment against all the individual partners. Therefore, the second assignment of error is overruled.
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YOUNG, P.J., and WALSH, J., concur.
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More Articles On Charging Orders click here
LAW REVIEW ARTICLES
by Jay Adkisson
For more on the historical background of Charging Orders and contemporary issues involving the same, see Jay Adkisson's article, Charging Orders: The Peculiar Mechanism, 61 South Dakota Law Review 440 (2016). Available at SSRN: https://ssrn.com/abstract=2928487
Analysis of Uniform Limited Liability Company Act Sections re Charging Orders
The Uniform Acts re Charging Orders and Transferable Interests (without Jay's comments):
Effect of Bankruptcy On The Debtor-Member's LLC Interest here
Collected Court Opinions On Charging Orders here and below
NATURE OF REMEDY
Distributions/Economic Rights - Creditors rights to distributional interests/economic rights
Prejudgment Relief - Freezing the interest and distributions pending judgment
Procedure - The procedure for obtaining a charging order and ancillary provisions
Unknown Interest - Where the debtor's interest, if any, has not been ascertained
Order Form Generally - Most issues to the form of the charging order
Order Form Future Interests - How the charging order affects subsequently-acquired interests
Exemptions - Available state and federal protections that may apply to charging orders
Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute
Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs
Foreign Entities - Charging orders against out-of-state entities
Creditor Rights Restrictions - Limitations on creditors' management and informational rights
Information Rights - Creditors' ability to access information about the LLC
Management & Voting Rights - Rights of creditor after charging order issued
LIEN EFFECT AND PRIORITY
Lien - The lien effect of a charging order and priority issues
Compliance - Issues for the LLC and non-debtor members in complying with a charging order
Receiver - The role of the receiver in charging order proceedings
SINGLE MEMBER LLC
Single-Member LLCs - Enforcing the judgment against an LLC with a sole member
Foreclosure - Liquidation by judicial sale of the debtor's right to distributions
REPURCHASE AND REDEMPTION RIGHTS
Repurchase/Redemption Rights - Third-parties' ability to purchase the charged interest
Appeal - Issues relating to the appeal of a charging order
RELATION TO OTHER REMEDIES
Exclusivity - The charging order as the sole remedy available to creditors and exceptions
Voidable Transactions/Fraudulent Transfers - Issues relating to avoidable transfers of interests
Bankruptcy - Treatment of the debtor/member's interest in bankruptcy
Intra-Member Disputes - Where one member obtains a charging order against another
Taxes - Tax issues relating to charging orders for all involved parties
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Additional Court Opinions About charging orders (unsorted)
THE CHARGING ORDERS PRACTICE GUIDE
The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association, click here for more
Available for purchase directly from the ABA at https://goo.gl/faZzY6
Also available from Amazon at https://www.amazon.com/Charging-Orders-Practice-Guide-Understanding/dp/1641052643
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