Monday, June 22, 2015

Foreclosure of Missouri LLC Charging Order: Failure to Affirmatively Authorize Treated as No Authorization

Foreclosure of Missouri LLC Charging Order:  Failure to Affirmatively
Authorize Treated as No Authorization

      A recent decision from the Missouri Court of Appeals interpreted the Missouri LLC Act and its charging order provision, concluding that as it did not affirmatively provide for foreclosure, foreclosure is not possible.  DiSalvo Properties, LLC v. BluffView Commercial, LLC, No. ED 101977, 2015 WL 3795402 (Mo. App. June 16, 2015).
      DiSalvo was awarded a default judgment against BluffView.  Seeking to collect thereon, DiSalvo sought and was awarded charging orders against Bluff View’s interests in two other LLCs, Perrydise Properties, LLC and WR Management, LLC. When DiSalvo sought as well a foreclosure sale on those interests he was stymied, the trial court holding that a sheriff’s sale of LLC interests is not available under the charging order provision of the Missouri LLC Act.  It was that determination that would be appealed and ultimately affirmed.
      The Court of Appeals compared the provisions of the Missouri LLC Act’s charging order provision, it not addressing the foreclosure of the lien, with that under the Missouri partnership and limited partnership acts, where foreclosure is addressed and provided for.  The charging order provision of the Missouri partnership act provides for foreclosure of the charging order lien.  While the charging order provision of the Missouri limited partnership act is silent as to foreclosure, the limited partnership act is “linked” to the general partnership act to the effect that if the rule is not set forth in the limited partnership act proper, refer to the general partnership act.  By this mechanism the foreclosure of a charging order against a limited partnership interest is provided for.  In reliance upon that differential, namely that the LLC Act is silent as to foreclosure and does not link to a foreclosure statute, it was held that there is no foreclosure of an LLC charging order.
      As the language in the partnership/limited partnership acts as to foreclosure was in place at the time Missouri adopted its LLC Act:

[W]e presume the 1993 General Assembly legislated with knowledge of those existing laws as explained in Section II.B.1.b., those provisions of the Uniform Partnership Law and Uniform Limited Partnership Law expressly and implicitly authorize a foreclosure and court-ordered sale of charged partnership interests in a general partnership and limited partnership. The legislature could have enacted similar language expressly or implicitly authorizing a foreclosure and court-ordered sale of charged membership interests in an LLC but failed to do so. Given that the legislature was fully aware of the provisions of sections 358.280.2 and 358.060.2 of the Uniform Partnership Law and section 359.671 of the Uniform Limited Partnership Law when enacting the Missouri LLC Act, then under the rule of expressio unius est exclusio alterius, we find the legislature must have intentionally omitted foreclosures and court-ordered sales as a remedy with respect to charged membership interests in an LLC. (citation omitted). 2015 WL 3759402, *4.


            The Plaintiff’s argument that an equitable lien is generally subject to foreclosure was rejected on the basis that the specific statutory language controls.
            This decision is noteworthy in its determination that the absence of an affirmative grant of a capacity is equivalent to denial of that capacity.  Also, and as this I could be entirely off base, I have understood expressio unius est exclusio alterius to be a rule of construction within a statute but not between statutes.
            Professor Carter Bishop, a recognized authority, has critiqued this decision as follows:
IMHO, a poorly reasoned opinion by a court more familiar with litigation than business law.
A quick scan of my charging order statutes table reveals that nearly all states originally borrowed the limited partnership charging order statute and implanted it in the new LLC Act. Why? The limited partnership was at least an entity with a partial liability shield. At that time, LLPs did not exist so the limited partnership model (foreclosure not directly contemplated) was a more attractive model than the general partnership model (foreclosure permitted). The charging order was not the driving force behind the LLC movement and was more an afterthought.
Of course I could be wrong, but I doubt many business entity lawyers had in mind the obscure limited partnership-general partnership backward linkage for cases not covered. In fact, it is perfectly reasonable to argue that the backward LP-to-GP linkage only authorizes foreclosure on the GP interest in a limited partnership but not on the LP interest because GP law does not mention or contemplate a limited partnership in any form. But the law has evolved otherwise and, as the Court properly states, foreclosure is permitted against a general or limited partner interest in a limited partnership.
It is naive to suggest that in 1993 the Missouri legislature was aware of this specific LP-GP charging order linkage (Step 1). It is worse to then conclude that by adopting the LP charging order language (silent on foreclosure) the legislature “intended” to preclude foreclosure (Step 2).
Why isn’t it preferable to conclude that the legislature never contemplated the subtle LP-GP charging order linkage? If so, by adopting the LP language, the legislature may have “intended” an LLC interest be treated the same as an LP interest - foreclosure permitted. At the very least, this history can be used to create a latent statutory ambiguity to allow the courts to place the burden of proof on the party seeking the charging order that interpretation is more reasonable.
Of course, this confusion merits a legislative fix. Indeed, in states that adopt a version of the updated uniform limited partnership act, the old GP linkage is destroyed, the new LP act is completely self-contained, and foreclosure is authorized.
In the meantime, if I was forced to decide this issue, the preferred statutory interpretation would be that by adopting the LP language, the legislature intended that an LLC interest should be treated the same as an LP interest - foreclosure permitted.

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