Friday, January 4, 2013

Partnership or LLC Not Necessary Party to Action Seeking a Charging Order

Partnership or Limited Partnership Subject to Requirement
of Charging Order Not a Necessary Party
      In a recent decision of the Illinois Court of Appeals, it considered and rejected the suggestion that, if a charging order is to be entered against a judgment-creditor’s interest in a partnership or a LLC, that partnership or LLC must itself be a party to the action.  Bank of America, N.A. v. Freed, ___ N.E.2d ___, 2012 WL 6725894 (Ill. App. I Dist., Dec. 28, 2012).  My thanks to Jay Adkisson for identifying this decision.
      The Bank of America sought to enforce a guarantee given by Laurance Freed and DDL LLC, Freed’s affiliate company.  After a judgment in the bank’s favor, charging orders were entered against 72 limited liability companies and limited partnerships in which either Freed or DDL had an interest.  In addition, the trial court ordered foreclosure on all of those charging orders and the appointment of a receiver in connection therewith.
      In opposition to these actions, the:
Defendants assert that the LLCs and limited partnerships where “necessary parties” that must be joined in the litigation before the charging orders can be entered.
       Having reviewed the terms of the charging order provisions of the Illinois LLC and Limited Partnership Acts, the court determined that it is not necessary that the LLCs or limited partnerships be parties to the action and that the entry of the charging orders would not impact upon the rights of or governance with respect to those organizations.  Rather:
… 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.” 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.  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.”  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. (citations omitted)
      Fortunately, this question need never arise in Kentucky.  Recent amendments to the various charging order statutes provide, inter alia, that the LLC/limited partnership/partnership need not be a party to the action.  See, e.g., KRS § 275.260(6) (“The [LLC] is not a necessary party to an application for a charging order.”).

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