The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
In re Singh, Case No. 11-15433 (N.D.Ohio, Sept. 19, 2012).
In re: KASHMIR SINGH, Chapter 7, Debtor.
Case No. 11-15433.
United States Bankruptcy Court, N.D. Ohio, Eastern Division.
September 19, 2012.
MEMORANDUM OF OPINION AND ORDER
PAT E. MORGENSTERN CLARREN, Bankruptcy Judge.
The debtor claimed a $15,000.00 exemption as to his interest in the partnership Airport Taxi Service and as to the partnership assets. The trustee objects. (Docket 83, 85, 87, 88). For the reasons stated below, the trustee's objection is overruled in part and sustained in part.FN1
Ohio Revised Code sec. 2329.66(A)(14) provides for an exemption of a "person's right in specific partnership property, as exempted by division (B)(3) of section 1775.24 of the Revised Code or the person's rights in a partnership pursuant to section 1776.50 of the Revised Code, except as otherwise set forth in section 1776.50 of the Revised Code[.]" OHIO REV. Code sec. 2329.66(A)(14).FN2 Section 1775.24(B)(3) in turn states that a partner's right in specific partnership property is exempt, except on a claim against the partnership. OHIO REV. CODE sec. 1775.24(B)(3).FN3 And sec. 1776.50 provides for a charging order against a partner's economic interest in a partnership:
(A) On application by a judgment creditor of a partner or of a partner's transferee, a court having jurisdiction may charge the economic interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require.
(B) A charging order constitutes a lien on the judgment debtor's economic interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.
(C) At any time before foreclosure, an interest charged may be redeemed by any of the following:
(1) The judgment debtor;
(2) One or more of the other partners by using property other than partnership property;
(3) One or more of the other partners, with the consent of all of the partners whose interests are not so charged, by using partnership property.
(D) Nothing in this chapter deprives a partner of any right under exemption laws with respect to the partner's interest in the partnership.
(E) This section provides the exclusive remedy by which a judgment creditor of a partner, or partner's transferee, may satisfy a judgment out of the judgment debtor's economic interest in the partnership.
OHIO REV. CODE sec. 1776.50.
The court heard this matter on September 18, 2012. At that time,FN4 the debtor claimed that he is entitled to an exemption as to both the partnership property and his partnership interest. The trustee acknowledged that the debtor's interest in partnership property is exempt, but argued that sec. 1776.50 affords him the ability to reach the debtor's interest in the partnership. The disputed issue is, therefore, whether the debtor's partnership interest is exempt under the terms of sec. 1776.50.
Judge Richard Speer addressed this issue in In re Foos, 405 B.R. 604 (Bankr. N.D. Ohio 2009), where, in a well-reasoned opinion, he concluded that sec. 1776.50 does not create an exemption for a partner's interest in a partnership. Instead, the section provides that a court may charge a partner's economic interest in the partnership, which charging order "does not function to protect a debtor's interest in a partnership, but rather is a statutorily created means for a creditor of a judgment debtor who is a partner of others to reach the debtor's beneficial interest in the partnership, without risking dissolution of the partnership." Id. at 609 (internal quotation marks and citation deleted). Under sec. 1776.50, "a charging order constitute[s] the `exclusive remedy for a judgment-creditor, and by extension a trustee in bankruptcy, against a debtor's economic interest in a partnership." Id. at 610. Conversely, "a debtor's right to claim their partnership interest exempt under sec. 2329.66(A)(14) is confined to the limited protections afforded to debtors with respect to `charging orders' under sec. 1776.50." Id.
Consequently, for the reasons stated, the trustee's objection to the debtor's claim of exemption in the partnership property is overruled, while the trustee's objection to the debtor's claim of exemption in his partnership interest in Airport Taxi Service is sustained.
IT IS SO ORDERED.
FN1 Jurisdiction exists under 28 U.S.C. sec. 1334 and General Order No. 2012-7 entered by the United States District Court for the Northern District of Ohio on April 4, 2012. This is a core proceeding under 28 U.S.C. sec. 157(b)(2)(B), and it is within the court's constitutional authority as analyzed by the United States Supreme Court in Stern v. Marshall, 131 S.Ct. 2594 (2011).
FN2 The debtor's right to exempt this property is governed by Ohio law. 11 U.S.C. sec. 522(b); OHIO REV. Code sec. 2329.662.
FN3 The trustee argued that sec. 1775.24(B)(3) no longer applies under sec. 2329.66(A)(14) because the section was repealed effective January 1, 2010. However, this argument fails under generally recognized principals of statutory construction. "Where a reference statute incorporates the terms of one statute into the provisions of another act, the two statutes co-exist as separate legislative enactments, each having its appointed sphere of action. As neither statute depends on the other's enactment for its existence, repeal of the provision in one enactment does not affect its operation in the other statute." 1A Sutherland Statutes and Statutory Construction sec. 23.33 (7th ed.) (quotation marks and citations deleted). The Ohio Supreme Court applies this statutory principal. See State, ex rel. Fritz v. Gongwer, 151 N.E. 752, 745 (Ohio 1926) (referring to legislation by reference and noting that "`For this purpose the law referred to is, in effect, incorporated with and becomes a part of the one in which reference is made, and so long as that statute continues, will remain a part of it."). Consequently, sec. 1775.24(B)(3) continues in effect as referenced in sec. 2329.66(A)(14).
FN4 These arguments differ somewhat from those stated in their filings.
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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
Abstention - Attempts to collaterally attack the charging order in federal court
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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