The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
2012 - Illinois - Bank of America
Bank of America, N.A. v. Freed, ___ N.E.2d ____, 2012 IL App (1st) 110749, 2012 WL 6725894 (Ill.App. 1 Dist., 2012).
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
Appellate Court of Illinois, First District, Second Division.
BANK OF AMERICA, N.A., a National Banking Association, Successor by Merger to LaSalle Bank National Association, as Agent for Lenders, Plaintiff–Appellee,
Laurance H. FREED and, DDL LLC, an Illinois Limited Liability Company, Defendants–Appellants.
Nos. 1–11–0749, 1–11–2112, 1–11–3372.
Dec. 28, 2012.
Appeal from the Circuit Court of Cook County. No. 09 CH 39930, Margaret Brennan, Judge Presiding.
Justice QUINN delivered the judgment of the court, with opinion:
*1 Para. 1 This consolidated appeal arises out of an action by plaintiff, Bank of America, N.A., to foreclose a $205 million loan guaranteed by defendants, Laurance H. Freed and DDL LLC. On appeal, defendants argue that the trial court erred by: (1) entering a judgment against them in the amount of $206,700,222.39, pursuant to a "carve-out" provision of the guaranty that required them to pay the full amount due, plus costs and interest, if they took "any action" in connection with the appointment of a receiver or the foreclosure of the lien; (2) denying their motion for a substitution of judge as of right in the citation to discover assets proceeding that was commenced after the foreclosure judgment was entered; and (3) entering charging orders against 72 limited liability companies and limited partnerships in which defendants have an interest, where those entities were not made parties to the action. For the reasons set forth below, we affirm the trial court.
Para. 2 I. BACKGROUND
Para. 3 This case, which has been before this court on two previous occasions, arises out of the foreclosure of a mortgage on property located at 108 North State Street in Chicago, Illinois, commonly referred to as "Block 37." The Block 37 project has a long history FN1 but only a brief summary of recent events is needed to address the issues raised in this appeal. Block 37 was vacant for more than a decade when, in 2005, the City of Chicago (City) sold it to Mills Corporation (Mills), a Virginia-based real estate investment company. Pursuant to an agreement between Mills and the City, the property was to be developed into a shopping, dining, and entertainment destination, and a new subway station was to be built underneath. Mills ran into financial problems and in 2007 sold the property to Joseph Freed and Associates, LLC (JFA), a Chicago-based real estate developer. On or about March 22, 2007, JFA entered into a construction loan agreement with LaSalle Bank, N.A.,FN2 (Bank) with a maximum principal amount of $205 million. JFA's president, Laurance H. Freed, and JFA's parent company, DDL LLC, guaranteed the loan. Sections 1(a) and (b) of the guaranty placed a $50,325,000 limitation on the guarantors' liability, subject to section 1(c) of the guaranty. Section 1(c) contained four "carve-outs" to the liability limitation of the guaranty, one of which provided that the guaranty would become a full repayment guaranty if "the Borrowers contest, delay or otherwise hinder any action taken by the Agent or the Lenders in connection with the appointment of a receiver for the Premises or the foreclosure of the liens, mortgages or other security interests created by any of the Loan Documents."
FN1. Many articles and at least one book (see Ross Miller's Here's The Deal: The Buying and Selling of a Great American City (1996)), have been written about the development of Block 37, which stretches back as far as the 1960s.
FN2. Plaintiff, Bank of America, N.A., is the successor trustee by virtue of the October 2008 merger with LaSalle Bank, N.A.
Para. 4 The loan agreement required that the loan be "in balance" at all times, meaning that the amount of funds available under the loan had to equal or exceed the amount budgeted to complete the project. The loan was out of balance almost immediately after JFA acquired the property, and JFA and the Bank tried but were unable to agree to a loan modification. Instead, the parties entered into a series of separate letter agreements between March 2008 and August 2009, whereby the Bank continued to disburse funds despite the default. However, in October 2009, after the Bank and JFA could not agree on a plan to add a movie theater to the mall, which would have required additional funding, the Bank filed a two-count mortgage foreclosure complaint in the circuit court of Cook County. Count I sought to foreclose on the mortgage on Block 37; count II was against defendants as guarantors of the mortgage.FN3 Count II originally sought judgment on the guaranty for the limited principal amount of $50,325,000. However, on December 23, 2009, the Bank filed an amended count II, seeking the full amount of the loan from Freed and DDL, $144,263,189.76, plus interest, costs, and attorney fees. In its amended count II, the Bank asserted that because defendants had contested the foreclosure and the appointment of a receiver, they were liable for the full amount of the loan pursuant to Section 1(c)'s carve-out provision. Defendants filed a motion to dismiss amended count II, arguing that Section 1(c) of the guaranty was an unenforceable penalty. The trial court denied that motion.
FN3. The Bank also filed an emergency petition for the appointment of a receiver, which the trial court granted. Defendants filed an interlocutory appeal pursuant to Illinois Supreme Court Rule 307 (eff.Feb.26, 2010), and this court affirmed the trial court ( Bank of America, N.A. v. 108 N. State Retail, LLC, 401 Ill.App.3d 158 (2010), appeal denied 237 Ill.2d 552 (2010)).
*2 Para. 5 On September 8, 2010, the Bank filed a motion for summary judgment, which the trial court granted. Then on December 22, 2010, the trial court entered judgment against defendants in the amount of $206,700,222.39, pursuant to their guaranty of the loan.FN4 The order contained a finding under Illinois Supreme Court Rule 304(a) (eff.Feb.26, 2010), that there was no just reason to delay enforcement or appeal of the judgment. On January 21, 2011, defendants filed a motion to reconsider the Rule 304(a) certification, which the trial court denied on February 8, 2011. On March 9, 2011, defendants filed a notice of appeal of the November 19, 2010, order granting summary judgment and the December 22, 2011, judgment against them.
FN4. A foreclosure sale reduced the judgment to $110,956,772.20.
Para. 6 In the meantime, on January 3, 2011, the Bank served citations to discover assets on Freed and DDL. On January 13, 2011, defendants' new attorneys filed an appearance in the case, and on January 20, 2011, they filed a motion for substitution of judge as of right pursuant to section 2–1001(a) of the Code of Civil Procedure (735 ILCS 5/2–1001(a)(2) (West 2008)) (Code), asserting that service of the citations to discover assets commenced a new supplementary proceeding under section 2–1402(a) of the Code (735 ILCS 5/2–1402(a) (West 2008)), entitling them to substitution of judge before a trial or hearing has begun or the presiding judge has ruled on any substantial issue. Judge Brennan, who had presided over the mortgage foreclosure action, denied the motion for substitution, stating in part, as follows:
"I would take this proceeding as much more similar to a 2–1401 petition, where, yes, you do have certain provisions of the Code of Civil Procedure that apply, certainly service of summons and service of the citation, things of that nature. But not so much that it removes it to be an entirely kind of start-over. It's a continuing of the same proceeding, just as to enforcement of the judgment terms. * * * We have had your clients in this case since its inception and, therefore, your motion for substitution of judge as of right is denied."
Para. 7 On May 24, 2011, pursuant to section 30–20(a) of the Illinois Limited Liability Company Act (805 ILCS 180/30–20(a) (West 2008)) and section 2–1402 of the Code (735 ILCS 5/2–1402 (West 2008)), the Bank filed a motion for charging orders on the distributional interests of Freed and DDL in certain limited liability companies. The motion asked the court to order defendants to cause any distributions from those companies to be paid to the Bank and to bar defendants from transferring, disposing, or impairing any of JFA's assets. Shortly thereafter, on June 9, 2011, the Bank filed a motion for rule to show cause why Freed and DDL should not be held in contempt for dissipating almost $5 million in assets in violation of those citations. After an evidentiary hearing, the trial court entered an order on October 5, 2011, finding defendants in contempt and appointing a receiver. Defendants appealed, and this court affirmed but remanded to the trial court with orders to enter a proper purge provision. Bank of America, N.A. v. Freed, 2012 IL App (1st) 113178 (referred to below as the "second appeal").
*3 Para. 8 On June 22, 2011, the trial court imposed charging orders on defendants' distributional interests in 46 limited liability companies. On July 21, 2011, defendants filed a notice of appeal of that order, as well as the order denying their motion for substitution of judge. On October 24, 2011, the trial court imposed charging orders on 26 additional limited liability companies (LLCs) and limited partnerships in which defendants have an interest, ordered the foreclosure of all of the charging orders, and appointed a receiver for all of the interests, pursuant to section 30–20 of the Limited Liability Company Act (805 ILCS 180/30–20 (West 2008)). On November 23, 2011, defendants filed a notice of appeal of the October 24, 2011, order imposing additional charging orders, as well as the January 22, 2011, order denying their motion for substitution of judge. The following orders were consolidated in this appeal: (1) the November 19, 2010, order granting the Bank's motion for summary judgment and the December 22, 2010, judgment in the Bank's favor in the amount of $206,700,222.39; (2) the trial court's January 21, 2011, order denying defendants' motion for substitution of judge in the citation to discover assets proceeding; and (3) the June 22, 2011, and October 24, 2011, orders imposing charging orders and foreclosing upon distributional and transferable interests in 72 limited liability companies and limited partnerships in which Freed and DDL have an interest.
Para. 9 II. ANALYSIS
Para. 10 A. Standard of Review
[Omitted For Brevity]
Para. 12 B. Motion for Substitution of Judge
[Omitted For Brevity]
Para. 17 C. Judgment Against Guarantors for Full Amount Due on Loan
[Omitted For Brevity]
Para. 37 D. Charging Orders
Para. 38 Lastly, defendants argue that the trial court erred in entering charging orders against 72 LLCs and limited partnerships in which they have an interest, because the court did not have jurisdiction over those entities. Defendants assert that the LLCs and limited partnerships were "necessary parties" that must be joined in the litigation before charging orders can be entered. The Bank agrees with defendants' assertion that none of the 72 entities were made a party to the litigation and that service of the citation on the judgment debtor alone does not create a lien on the distributional interests of an LLC (see First Mid–Illinois Bank & Trust, N.A. v. Parker, 403 Ill.App.3d 784, 786 (2010)), but asserts that those entities are not necessary parties and need not be joined in the litigation in order for charging orders to be entered.
Para. 39 Section 30–20(a) of the Illinois Limited Liability Company Act provides, in part that "[o]n application by a judgment creditor of a member of a limited liability company or of a member's transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment." (Emphasis added.) 805 ILCS 180/30–20(a) (West 2008). Similarly, section 703(a) of the Uniform Limited Partnership Act (2001) provides, in part, that "On application to a court of competent jurisdiction by any judgment creditor of a partner or transferee, the court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment interest." 805 ILCS 215/703(a) (West 2008).
Para. 40 Defendants contend that pursuant to these two provisions, a court must obtain jurisdiction over an LLC or a limited partnership in order to charge a judgment debtor's distributional interests in them. Defendants assert that Schak v. Blom, 334 Ill.App.3d 129 (2002), is analogous and supports their argument. In Schak, the appellate court held that when a debtor has an interest in a land trust, a citation to discover assets must be served on both the trustee of the land trust and the judgment debtor. Id. at 133. Defendants contend that similarly in this case, the 72 LLCs and limited partnerships must be served with the citation to discover assets or else the trial court lacks jurisdiction to enter an order concerning the property rights of those entities.
Para. 41 However, Schak is distinguishable from the instant case, because charging orders on a distributional interest in an LLC or a limited partnership gives the lender very limited rights, which are different from the transfer of a beneficial interest in a land trust, which would make the transferee the owner of the beneficial interest itself, with power of direction over the trust and entitlement to control the trust property. Further, as the Bank asserts, charging orders on distributional interests do not affect the rights or interests of the LLC to the degree necessary to require that it be made a party. Under the Illinois Limited Liability Company Act (Act), a charging order only gives the judgment creditor the right to receive distributions to which the member would otherwise be entitled, and if the charging order is foreclosed, the purchaser would have only the rights of a transferee of distributional interests. Under section 30–1(a) of the Act, a member of an LLC "is not a co-owner of, and has no transferable interest in, property of a limited liability company." 805 ILCS 180/30–1(a) (West 2008). Further, section 30–5 of the Act provides that a transfer of a distributional interest in an LLC does not give the transferee any rights as a member but only the right to receive distributions by the LLC, while section 30–10 provides that transferee may become a member only if all other members consent (805 ILCS 180/30–10(a) (West 2008)). A "transferee who does not become a member is not entitled to participate in the management or conduct of the limited liability company's business, require access to information concerning the company's transactions, or inspect or copy any of the company's records." 805 ILCS 180/30–10(d) (West 2008). Therefore, an Illinois LLC has no interest that is affected when a charging order is entered on a judgment debtor's distributional interest because the party in whose favor the charging order is entered is not an owner of the LLC and has no authority over the LLC's affairs and can only receive distributions. Hence, the LLC has no interest to be protected and need not be made a party.
*13 Para. 42 Further, courts "are obliged to construe statutes to avoid absurd, unreasonable, or unjust results." Roselle Police Pension Board v. Village of Roselle, 232 Ill.2d 546, 558–59 (2009)). It would be impractical and unnecessarily costly to require a lender seeking charging orders to serve all of the entities in which a borrower has an interest, particularly in a case such as this one, where there are 72 LLCs and limited partnerships. The language of the Illinois Limited Liability Company Act supports a finding that a court only needs to have jurisdiction over the judgment debtor to enter charging orders against the judgment debtor's interest. Therefore, we find that the trial court did not err in entering charging orders against the 72 LLCs and limited partnerships even though they were not named as parties.
Para. 43 III. CONCLUSION
Para. 44 For the foregoing reasons, we affirm the trial court.
Para. 45 Affirmed.
by Jay Adkisson
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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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