Fun and Games and Charging Orders: Calling it a “Salary” Does Not Mean It Is Not a Distribution

Fun and Games and Charging Orders:

Calling it a “Salary” Does Not Mean It Is Not a Distribution

 

       A recent decision from Ohio reviewed  and rejected an effort by a judgment – debtor to characterize the funds he received from his LLC as “salary” not subject to the charging order and its application to “distributions.” Firstmerit Bank, N.A. v. Xyran, Ltd., No. 102905, 2016 WL 763092 (Ohio Ct. App. Feb. 25, 2016).

      Xyran borrowed $480,000 from Firstmerit; Dr. Sawhny guaranteed the debt. Eventually the bank would foreclose on the real property purchased with the borrowed funds and would pursue Sawhny on the guarantee.

      Sawhny founded and practiced through The Center for Neurosurgery, LLC – he was the only member. Firstmerit sought and was awarded a charging order against Sawhny’s interest in the LLC, it extending to all “distributions” and “profits.” No payments were made to the bank. Upon a debtor examination it was learned that Sawhny was receiving a$12,000 per month salary from the LLC, but it being asserted that this was not a “distribution.” As characterized by the court.

At the close of the Bank’s examination of Dr. Sawhny, appellants moved to dismiss on the ground that, “there is no evidence at all that there has been any profit paid or earned by the Center. Dr. Sawhny is receiving a salary. They can go furnish his salary, if they wish.” (Tr. 15.) “The charging order doesn’t apply to the salary. It applies to distribution[s] from the company over and above.” Id.

       After disposing of a jurisdictional challenge, the court turned its attention to the question of whether the charging order had been violated. The trial court had found (i) the “salary” was a “distribution” to which the charging order attached and (ii) Sawhny acted in contempt of the charging order.

      The court of appeals upheld the determination that the “salary” was a “distribution” on the basis of Sawhny’s testimony that it came from the LLC’s “profits.” Because of the now-existence of support for Sawhny’s argument, the finding of contempt was likewise upheld.