2000-2009 Opinions
2000 Site.Year2000to2009ChargingOrderOpinions
2000 To 2009 Charging Order Opinions
Green v. Bellerive Condominiums LP., 135 Md.App. 563, 763 A.2d 252 (Md.Sp.App., 2000).
♦ The Maryland Court of Special Appeals considered whether a receiver with a charging order against limited partnership interests must be notified of partnership opportunities, specifically the chance to purchase partnership debt at a discount. The appellant, Carlton M. Green, served as a receiver for judgment debtors who held interests in Bellerive Condominiums Limited Partnership. After the partnership defaulted on a mortgage note, several general partners negotiated to buy the note from the FDIC at a discounted rate and later profited when the partnership repaid the debt at face value. Green argued that the general partners breached fiduciary duties by failing to notify him of this opportunity and failing to secure the consent of the debtor partners. The court rejected these arguments, affirming that under the Revised Uniform Limited Partnership Act (RULPA), a charging order only grants the creditor the status of an assignee. As an assignee, a creditor's rights are limited to receiving distributions the debtor would have received and do not include management rights or the right to participate in partnership affairs. The court held that the right to receive information about partnership opportunities and the right to consent to transactions related to partnership debt are fundamental management rights that are not transferred to a creditor via a charging order. Therefore, the general partners had no legal duty to notify the receiver of the note purchase opportunity, and the receiver lacked standing to assert the management rights of the debtor partners. This decision reinforces the principle that charging orders are collection mechanisms for financial interests rather than vehicles for creditors to intervene in partnership management, thereby protecting the stability of partnership operations from interference by outside creditors. ♦
Keeler v. Academy of American Franciscan History, Inc. (In re Keeler), 257 B.R. 442 (Bk.D.Md., 2001).
♦ The bankruptcy court addressed whether a pre-bankruptcy charging order obtained by a judgment creditor against a debtor’s partnership interests is extinguished by the debtor’s subsequent Chapter 7 discharge. Robert Keeler filed Chapter 7 in December 1999, listing partnership interests (through Gaither Road Partnership) and listing the Academy and Wheeler & Korpeck, LLC (W&K) as unsecured creditors; he received a discharge and the case was closed in mid-2000. Keeler later moved to reopen, arguing that the Academy’s prepetition charging order (entered in 1989) could not survive discharge and that the Academy and W&K (as escrow agent distributing partnership proceeds) improperly continued diverting post-discharge distributions to the Academy. The court held the issue was purely legal and concluded Keeler’s “satisfaction” theory was wrong: discharge enjoins personal collection but does not extinguish the underlying debt or invalidate prepetition liens. Under bankruptcy principles, liens generally “ride through” bankruptcy unless avoided, and under Maryland law a charging order creates a lien-like interest in the partner’s partnership interest and related distributions. Because no order in the bankruptcy case avoided or altered the charging order lien, the Academy’s post-discharge enforcement of that prepetition lien through partnership distributions did not violate the discharge injunction; accordingly, the court denied Keeler’s motion and granted the Academy’s cross-motion for summary judgment. ♦
Webster v. Dalcoma Limited Partnership Four, No. CA2000-11-028 (Ohio App. Dist.12 09/17/2001).
♦ Involves an appeal by Cecil C. Beasley, Jr. against a court order authorizing a receiver sale of JTC Partnership interests to satisfy a legal judgment. The litigation began when Geoffrey Webster obtained a judgment against Dalcoma Limited Partnership Four along with individuals Thomas Dalcoma, Richard Soyoul, and Beasley. Following a foreclosure sale of real estate that failed to satisfy the full judgment amount, Webster sought to execute upon the debtors interests in the JTC Partnership. At the time, the JTC Partnership held a fifty percent stake in the Jeffersonville Travel Center, with the other half owned by Hawkstone Associates. The trial court issued a charging order and appointed a receiver to facilitate the sale of these specific partnership interests to help satisfy the outstanding debt. The receiver ultimately negotiated a sale of the interests to Hawkstone Associates for approximately $406,000. Beasley challenged this order, primarily arguing in his second assignment of error that a receiver lacks authority under Ohio law to sell real estate owned by a general partnership when that partnership is not a named party to the proceeding. The Court of Appeals of Ohio, Twelfth Appellate District, rejected this argument and affirmed the trial court decision. The court explained that while a partner cannot assign specific partnership assets like real property, their interest in the partnership itself—defined as rights to profits and surplus—is personal property subject to a charging order under R.C. 1775.27. Because Webster was a judgment creditor of every individual partner, the charging order effectively included one hundred percent of the partnership interests. The court concluded that the statute explicitly permits the sale of such interests and that the receiver acted within his legal authority by facilitating the transaction. ♦
Cadle Co. v. Ginsburg, 2002 WL 725500 (Conn., Unpublished, 2002).
♦ The plaintiff judgment creditor sought a charging order under Connecticut General Statutes § 34–171 against the defendant’s membership interest in Jai Alai Associates, LLC to satisfy an unsatisfied judgment (and a later attorneys’ fee award). The defendant objected, arguing that the LLC and the Internal Revenue Service had to be joined as parties and that a charging order would improperly allow an unlicensed person to hold an interest in a jai alai business contrary to state licensing law. The court rejected each objection, explaining that § 34–171 does not require making the LLC a party because a charging order simply gives the creditor the rights of an assignee—i.e., the right to receive distributions the member would otherwise receive—without conferring management rights or membership status. The court also held that the IRS need not be joined because any charging order would remain subject to whatever superior lien rights the IRS may have. Finally, the court concluded that jai alai licensing requirements do not bar issuance of a charging order because the order does not make the creditor a participating owner or manager of the jai alai operation. Accordingly, the court granted the application and ordered the LLC to remit to the plaintiff the distributions otherwise payable to the defendant until the judgment is satisfied, while declining (for lack of necessity shown) to appoint a receiver or compel disclosure of the LLC’s books and records at that time. ♦
Raccoon Recovery, LLC v. Navoi Mining & Metallurgical Kombinat, 244 F.Supp.2d 1130 (D.Colo., 2002).
♦ Raccoon Recovery, as assignee of a bankruptcy judgment, sought a charging order and discovery to enforce a judgment against Navoi, an Uzbek state-owned mining enterprise. Navoi removed the case to federal court and argued that it was an agency or instrumentality of the Republic of Uzbekistan entitled to sovereign immunity under the Foreign Sovereign Immunities Act (FSIA), that Raccoon failed to effect proper service under the FSIA, and that the assets targeted for execution—Navoi’s alleged interest in a gold-mining joint venture in Uzbekistan—were immune from attachment. After reviewing declarations, charters, and other evidence, the magistrate judge concluded that Navoi made a prima facie showing of foreign sovereign status and that Raccoon failed to meet its burden of establishing any applicable FSIA exception, including waiver or commercial-activity exceptions. The court found no sufficient nexus between the alleged commercial activity and the United States, rejected Raccoon’s request for jurisdictional discovery as an impermissible fishing expedition inconsistent with FSIA protections, and held that the charging order sought impermissibly targeted assets located outside the United States, which are immune from attachment under the FSIA. The magistrate judge therefore recommended denial of the charging order and discovery and dismissal of the action for lack of subject matter jurisdiction, and the district judge adopted that recommendation, dismissing the case. ♦
Herring v. Keasler, 563 S.E.2d 614 (N.C.App. 06/04/2002).
♦ The North Carolina Court of Appeals addressed a critical question regarding whether a judgment creditor could satisfy a debt through the seizure and sale of a debtor's membership interests in limited liability companies. The litigation arose after Max Herring, acting as an assignee of a default judgment originally obtained by Branch Banking and Trust Company against Bennett M. Keasler, Jr., sought a writ of execution to recover approximately twenty-nine thousand dollars plus interest. Herring specifically moved for the court to order the sale of Keasler's twenty percent membership interests in various real estate development limited liability companies. In response, Keasler filed a motion seeking to restrain Herring from proceeding with the sale. The trial court initially granted a temporary restraining order and subsequently entered a final order enjoining Herring from seeking the seizure or sale of those interests. Instead, the trial court granted Herring's motion for a charging order, which allowed him to receive only the financial distributions and allocations to which Keasler would otherwise be entitled, without granting Herring the rights of a member or owner. Herring appealed to the North Carolina Court of Appeals, arguing that general North Carolina law allowed for the execution and sale of such property. The appellate court, however, reasoned that while general execution statutes permit the sale of most assets, the North Carolina Limited Liability Company Act provides specific protections. Specifically, the court held that a forced sale of membership interests would improperly result in the admission of a new member without the required consent of other members. Therefore, the court concluded that the charging order remains the exclusive judicial remedy for a judgment creditor seeking to reach and collect upon a judgment debtor's interest in a limited liability company, affirming the trial court's decision in its entirety. ♦
Koh v. Inno-Pacific Holdings, Ltd., 114 Wash.App. 268, 54 P.3d 1270 (2002).
♦ The Washington Court of Appeals addressed whether a judgment creditor can obtain a charging order against a debtor's interest in a Washington limited liability company when the debtor is a foreign entity. The plaintiff, Kay Yew Koh, received a money judgment in California against Inno-Pacific Holdings, Ltd., a Singapore-based corporation, for wrongful termination. Koh discovered that Inno-Pacific held a fifty percent membership interest in Sawyer Falls, a domestic limited liability company registered in Washington that owned substantial undeveloped real property in the state. Koh sought a charging order in King County Superior Court to satisfy the California judgment, but the trial court quashed the order, ruling that the membership interest was personal property located outside Washington because the owner was domiciled in Singapore. On appeal, the Court of Appeals reversed this decision, clarifying the legal location of a membership interest for the purpose of debt collection. The court acknowledged that while personal property is often deemed to follow the owner’s domicile for taxation, it may be found where it is physically located or where the entity is formally organized for purposes of levy or attachment. Since Sawyer Falls was formed under Washington law, maintained a registered agent in the state, and held local assets, the court determined that the membership interest was located in Washington. Furthermore, the court held that exercising jurisdiction did not violate due process. Citing the United States Supreme Court decision in Shaffer v. Heitner, the court explained that once a court of competent jurisdiction has established a debt, there is no unfairness in allowing a creditor to realize on that debt in any state where the debtor has property. By applying the Full Faith and Credit Clause and Washington's Foreign Judgments Act, the court concluded that Koh could validly register his California judgment and obtain the charging order against the local property interest. ♦
In re Albright, 291 B.R. 538 (Bk.D.Colo., 2003).
♦ The U.S. Bankruptcy Court considered whether a Chapter 7 trustee could control and liquidate real property owned not by the debtor personally, but by Western Blue Sky LLC, a Colorado limited liability company of which debtor Ashley Albright was the sole member and manager when she filed bankruptcy (the LLC itself was not a bankruptcy debtor). The trustee argued that the debtor’s bankruptcy transferred her entire LLC membership interest to the estate under 11 U.S.C. § 541(a), making the trustee a substituted member with full governance rights, including the ability to cause the LLC to sell the property and remit net proceeds to the bankruptcy estate (or alternatively to dissolve/distribute the property to the estate and liquidate it directly). The debtor countered that the trustee was limited to a charging order against distributions and could not assume management or force a sale, also asserting the LLC’s “non-profit” nature meant her interest had no value. The court held that Colorado’s charging-order protection is aimed at protecting other non-debtor members from involuntary governance with outsiders; because this was a single-member LLC, there were no other members to protect, and unanimous-consent requirements were inapplicable. Accordingly, the court authorized the trustee to control the LLC and liquidate its real property, granted the motion to appoint a real estate broker, and noted the debtor could file a claim for post-petition payments made to preserve the property, without deciding that issue. ♦
Monroe v. Berger, 297 B.R. 97 (S.D.Ohio, 2003).
♦ The Southern District of Ohio reviewed and denied defendants’ appeal from a bankruptcy-court order that had enjoined their post-bankruptcy collection efforts. The dispute centered on a 1991 charging order obtained by Provident Bank against the plaintiff’s limited partnership interest in Amelia Estates; during the plaintiff’s Chapter 7 case, the parties agreed the partnership interest was valueless and the bank would be treated as a general unsecured creditor, ultimately receiving a distribution on that unsecured claim. After the bank later assigned the charging order to defendants and the partnership interest became valuable, defendants attempted to collect the remaining balance and pursued state-court actions (including efforts to revive a dormant judgment and appoint a receiver). The bankruptcy court found these actions violated the discharge injunction, concluding the charging order did not survive as an enforceable lien under Ohio law and, even if it did, the underlying judgment’s dormancy eliminated any viability; it therefore enjoined further enforcement and held defendants potentially liable for the plaintiff’s attorney fees. Applying clear-error review for fact findings and de novo review for legal conclusions, the district court agreed that Ohio law does not establish a charging order as a lien that “rides through” bankruptcy, that defendants lacked standing as “judgment creditors” after discharge, and that bankruptcy’s “fresh start” policy bars converting an agreed unsecured claim into a secured recovery after discharge; it affirmed the injunction and the fee-liability ruling (with the fee amount to be set by the bankruptcy court). ♦
Stewart v. Lanier Park Medical Office Building, Ltd., 578 S.E.2d 572 (Ga.App., 2003).
♦ Involved a protracted legal dispute between a medical office limited partnership and one of its limited partners, Richard Stewart, who also served as a tenant leasing professional office space from the entity. Stewart failed to comply with his obligations to pay agreed-upon rent and his share of operating expenses, eventually accumulating a significant arrearage exceeding eighty-seven thousand dollars. This led him to execute a promissory note in 1995 to evidence the debt. Following Stewart's default on the note and continued use of the office space, Lanier Park initiated litigation in 1997 to recover the balance due along with subsequent rent and costs. Stewart filed counterclaims seeking partnership dissolution, a full accounting, and damages for issues including breach of fiduciary duty. A jury ultimately awarded Lanier Park a total of $172,794 for the debt and attorney fees, plus an additional $20,150 for litigation costs due to Stewart's bad faith and stubborn litigiousness. While the trial court entered judgment on this verdict, it reserved the matters of final accounting and asset distribution for a later date. When Stewart failed to satisfy the judgment, the court granted Lanier Park's application for a charging order against Stewart's thirty percent partnership interest under O.C.G.A. section 14-9A-52 and subsequently ordered the foreclosure and judicial sale of that interest. On appeal, Stewart argued that Lanier Park was not yet a judgment creditor because the initial judgment was not final. The Court of Appeals of Georgia affirmed the trial court's decision, ruling that the judgment was final regarding Stewart's liability and that the partnership qualified as a judgment creditor. The court further held that the broad statutory language authorized judicial sale as a reasonable enforcement means when distributions alone would be ineffective, concluding that the trial court did not abuse its discretion. ♦
Ainslie v. Inman, 265 Va. 347, 577 S.E.2d 246 (Va., 2003).
♦ Involves a legal dispute over the priority of claims to a partner's interest in a Virginia general partnership. The appellants, the Ainslies, held a security interest in Robert Buchanan's fifty percent partnership interest, which they perfected by filing financing statements in 1995 to secure loans. The appellee, Kevin Rack, obtained a judgment against Buchanan in 1997 and secured a charging order against the same partnership interest in 1998. Although the Ainslies also obtained a judgment and a charging order later, their original financing statement lapsed in 2000 because they failed to file a continuation statement as required by the Uniform Commercial Code. The Supreme Court of Virginia affirmed the trial court's ruling that Rack's claim held priority over the Ainslies' interest. The Court reasoned that once the five-year effectiveness of the financing statement expired without a continuation, the Ainslies' security interest became unperfected against Rack, who had already established his status as a lien creditor before the lapse occurred. The Court further clarified that the relation-back provision of the code did not apply because the Ainslies lacked a perfected interest at the time of their 2001 charging order, as the lapse had already rendered their status junior. The Court also rejected the Ainslies' claim that they had successfully executed a strict foreclosure in 1998. It found that the Ainslies' notice letter was legally insufficient because it did not clearly and explicitly inform the debtor of their intent to retain the collateral in full satisfaction of the debt, which is a mandatory requirement for strict foreclosure under Virginia law. Lastly, the Court declined to consider alternative foreclosure arguments under different statutory sections because they were not properly pleaded in the initial petition. The decision highlights the necessity of strictly adhering to perfection and notice requirements to maintain lien priority. ♦
In re Ehmann (Movitz v. Fiesta Investments, LLC), 319 B.R. 200 (Bkrpt.D.Ariz., 2005).
♦ The United States Bankruptcy Court for the District of Arizona addressed whether a Chapter 7 Trustee acquires full membership rights in a limited liability company or is limited to the status of a mere assignee with only a right to distributions. The Trustee for debtor Gregory Leo Ehmann filed suit against Fiesta Investments, LLC, seeking a declaration of membership status and the authority to dissolve or liquidate the entity based on allegations that assets were being misapplied or diverted. Fiesta moved to dismiss the action, contending that under the specific terms of its operating agreement and Arizona state law, a bankruptcy trustee is restricted to the status of an assignee who cannot participate in management. The central legal dispute was whether the operating agreement constituted an executory contract governed by Section 365 of the Bankruptcy Code or general property of the estate under Section 541. To resolve this, the court applied the Countryman Test, which defines a contract as executory only if the obligations of both parties are so far unperformed that a failure by either would constitute a material breach. After a thorough examination, the court discovered that the operating agreement imposed significant obligations on the company manager but none on the non-managing members. Since the debtor was not a manager, he had no material duties to perform for the company. Consequently, the court held that the agreement was not an executory contract, meaning the restrictive provisions of Section 365 did not apply. Instead, Section 541(c)(1) controlled, which ensures that a debtor's interest becomes property of the estate notwithstanding any contractual or legal restrictions on transfer. Therefore, the Trustee acquired all legal and equitable rights the debtor held at the start of the case. By denying the motion to dismiss, the court affirmed that the Trustee could pursue remedies such as appointing a receiver or seeking a redemption of the membership interest to satisfy creditor claims. ♦
In re Baldwin (Miller v. Bill and Carolyn LP), 2006 WL 2034217 (10th Cir.BAP (Okla.), 2006) (Unpublished Disposition).
♦ Involves a legal dispute over a debtor's 99 percent limited partnership interest in a family-owned entity, the Bill and Carolyn Limited Partnership, which was initially established for estate planning and real estate management purposes. Following the bankruptcy filing of Trenton and Carolyn Baldwin, the trustee, Gerald R. Miller, sought to claim this interest for the bankruptcy estate and subsequently move for the dissolution of the partnership. The primary legal issues addressed across multiple appellate stages included whether the trustee stepped into the shoes of the debtor, whether the partnership could be judicially dissolved under Oklahoma law, and whether the trustee could enforce a withdrawal provision within the partnership agreement. Initially, the Bankruptcy Appellate Panel for the Tenth Circuit determined that while the debtor's interest did indeed become property of the bankruptcy estate, judicial dissolution was not warranted because the partnership continued to operate within its stated business purposes of managing and improving real property. This decision was later affirmed by the United States Court of Appeals for the Tenth Circuit, which clarified that the inability of a new limited partner to change long-term investment strategies does not make it impracticable to carry on the business. However, the litigation shifted focus to the partnership agreement's withdrawal clause, where the trustee issued a buy-sell offer to either purchase the general partner's one percent interest or sell the estate's 99 percent interest at a pro-rata rate of 3,000 dollars per percentage point. The Tenth Circuit ultimately held that the trustee possessed the right to withdraw and that the buy-sell offer was valid and enforceable. The court rejected arguments that the offer was inequitable or that identical terms required an identical total amount, concluding instead that pro-rata pricing and matching payment terms satisfied the contractual requirements. Consequently, the appellate court affirmed the enforceability of the trustee's withdrawal notice, allowing the liquidation of the debtor's interest to proceed. ♦