Opinion 2013 Ohio FirstMerit Bank Professional LLC Charging Order

 

Adkisson's

CHARGING ORDERS

The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership

 

2013 - Ohio - FirstMerit Bank

 

FirstMerit Bank NA v. Xyran, Ltd., 2013 Ohio 1039, 2013 WL 1183340 (Ohio.App., 2013).

 

CHECK OHIO SUPREME COURT RULES FOR REPORTING OF OPINIONS AND WEIGHT OF LEGAL AUTHORITY.

 

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

 

FIRSTMERIT BANK, N.A., Plaintiff–Appellee

 

v.

 

XYRAN, LTD., et al., Defendants–Appellants.

 

No. 98740.

 

Decided March 21, 2013.

 

Civil Appeal from the Cuyahoga County Court of Common Pleas, Case No. CV–726920.

 

Attorneys and Law Firms

 

Brent L. English, Law Offices of Brent L. English, Cleveland, OH, for appellants.

 

Brian J. Green, Shapero & Green, L.L.C., Beachwood, OH, for appellee.

 

Before E.T. GALLAGHER, J., S. GALLAGHER, P.J., and KILBANE, J.

 

Opinion

 

EILEEN T. GALLAGHER, J.

 

*1 {Para. 1} Defendants-appellants Xyran, Ltd. ("Xyran"), Bhupinder Sawhny, ("Bhupinder"), and Jaspreet Sawhny ("Jaspreet") (collectively "appellants") appeal the trial court's judgment granting plaintiff-appellee FirstMerit Bank, N.A. ("FirstMerit") a charging order against Bhupinder's interest in a private medical practice. We find no merit to the appeal and affirm.

 

{Para. 2} In February 2004, Xyran executed and delivered a promissory note in the amount of $480,000 to FirstMerit. Bhupinder and Jaspreet guaranteed the note. In May 2010, FirstMerit obtained a cognovit judgment on the note against appellants.

 

{Para. 3} FirstMerit foreclosed on the property securing the note and garnished Bhupinder's wages. However, FirstMerit stopped receiving garnished wages when Bhupinder left his former employer to open his own business. At a debtor's examination, FirstMerit discovered that Bhupinder, who is a neurosurgeon, had an ownership interest in The Center for Neurosurgery, L.L.C. ("The Center"), and filed a motion for a charging order against it. The court granted the motion without a hearing. Appellants now appeal and raise two assignments of error.

 

{Para. 4} In their first assignment of error, appellants argue the trial court erred in granting FirstMerit's motion for a charging order. They contend the charging order assigned Bhupinder's ownership interest in The Center to FirstMerit in violation of R.C. 4731.41, which prohibits the unauthorized practice of medicine. They also claim the charging order violates the operating agreement of The Center, which does not permit him to assign his interest to anyone who is not a licensed physician in Ohio.

 

{Para. 5} Pursuant to R.C. 1705.19, a judgment creditor of a member of a limited liability company may apply to a court of common pleas to charge the membership interest of the member for payment of an unsatisfied judgment. R.C. 1705.01(H) defines "membership interest" as "a member's share of the profits and losses of a limited liability company and the right to receive distributions from that company." R.C. 1705.18 similarly provides that "an assignment of a membership interest does not * * * entitle the assignee to become or to exercise any rights of a member." Hence, a "membership interest" does not include the member's right to manage the limited liability company ("governance rights"). Banc One Capital v. Russell, 8th Dist. No. 74086, 1999 Ohio App. LEXIS 2879 (June 24, 1999). Because the charging order merely allows FirstMerit to garnish Bhupinder's financial interest in The Center, it does not allow the unauthorized practice of medicine or violate the terms of the operating agreement.

 

{Para. 6} Accordingly, we overrule the first assignment of error.

 

{Para. 7} In the second assignment of error, appellants argue the trial court erred in granting the charging order without holding an evidentiary hearing. They contend the court violated their constitutional rights to due process by failing to hold a hearing.

 

*2 {Para. 8} However, appellants' brief in opposition to the motion for charging order failed, on its face, to set forth a legitimate basis for opposing the charging order. A trial court need not hold an evidentiary hearing when the materials submitted do not demonstrate that the movant is entitled to relief. State Alarm, Inc. v. Riley Indus. Servs., 8th Dist. No. 92760, 2010–Ohio–900, para. 11. In their brief in opposition, appellants argue that FirstMerit is prohibited from obtaining an assignment of Bhupinder's interest in the medical practice because such an assignment would allow FirstMerit to commit the unauthorized practice of medicine by partnering with other physicians. They also argue that the company's operating agreement prohibits Bhupinder from assigning his interest in the business to anyone who is not a licensed physician in Ohio.

 

{Para. 9} However, as previously explained, because R.C. 1705.19 only allows FirstMerit to garnish Bhupinder's profits in The Center and does not assign any governance rights to FirstMerit, it does not allow the unauthorized practice of medicine or violate the terms of the operating agreement. The law is clear on this issue. An evidentiary hearing was not warranted.

 

{Para. 10} Therefore, the second assignment of error is overruled.

 

{Para. 11} Judgment affirmed.

 

It is ordered that appellee recover from appellants costs herein taxed.

 

The court finds there were reasonable grounds for this appeal.

 

It is ordered that a special mandate be sent to said court to carry this judgment into execution.

 

A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the Rules of Appellate Procedure.

 

SEAN C. GALLAGHER, P.J., and MARY EILEEN KILBANE, 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

WEBSITE CONTENTS

 

General Information

 

Analysis of Uniform Limited Liability Company Act Sections re Charging Orders

  • Charging Orders (Section 503) contains the general charging order provisions.
  • Transfers of Transferable Interests (Section 502) includes definitions of "transfer" (102(23)), "transferable interests" (102(24)), and "transferees" (102(25)) defines to what the charging order attaches.
  • Definition of Distribution (Section 102(4)) specifies the economic right obtained through a charging order lien and/or foreclosure.

 

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

 

Charging Order Example Sample Form

 

TOPICAL RESEARCH

 

NATURE OF REMEDY

     Distributions/Economic Rights - Creditors rights to distributional interests/economic rights

PREJUDGMENT

     Prejudgment Relief - Freezing the interest and distributions pending judgment

MOTION MECHANICS

     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

INTERSTATE

     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 RESTRICTIONS

     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

     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

     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

     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

SUNDRY OTHER

     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

 

= = = = =

 

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

OTHER INFORMATIONAL WEBSITES

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