ORDER
This matter is now before the Court on Appellants Richard LaHood (“Richard”)
Procedural Background
On August 9, 2007, Michael LaHood (“Michael”) and his wife filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. At that time, Michael and Richard were the only members of FLLZ, a member managed, Illinois limited liability company, with each holding 50% of the shares. Prior to this time, FLLZ’s principal asset was certain real estate commonly known as Route 26, East Peoria, Illinois (the “Real Estate”). Richard held a mortgage securing a mortgage note dated January 5, 2006, in the original principal amount of $427,079.49, which was made and delivered by Michael in favor of Richard and granted Richard first mortgage lien on the Real Estate. The mortgage note was further secured by a Security Agreement, dated January 5, 2006, executed by Michael in favor of Richard. At the time Michael filed his petition, Richard was owed $427,079.49 in principal plus interest.
On October 4, 2007, Richard executed a Declaration of Dissolution of FLLZ without consulting the Trustee or seeking the approval of the Bankruptcy Court. The same day, Richard caused FLLZ to execute two deeds, one conveying one-half interest in the Real Estate to himself and the other conveying a one-half interest in the Real Estate to Michael. Heartland is a creditor of Michael and claims that a lien in its favor attached to Michael’s 50% membership interest in FLLZ as a result of a Judgment by Confession and Citation to Discover Assets on March 20, 2007.
The Trustee and Heartland argued that the distribution of the FLLZ Real Estate to Richard and Michael on October 4, 2007, was improper because it violated the automatic stay provisions. This argument was predicated on the suggestion that the Trustee, having stepped into the shoes of Michael as the debtor, had a right to participate in the winding-up of FLLZ. Richard and FLLZ argued that Michael was wrongfully dissociated from FLLZ upon filing the petition, making the distribution proper.
Heartland filed a Motion for Summary Judgment on its Complaint to determine the validity, priority, and extent of liens in the underlying adversary proceeding. On February 6, 2008, the Trustee and Heartland entered into a compromise, stipulating that Heartland’s lien is valid and perfected as to 80% of the value of the estate’s 50% membership interest in FLLZ and that Heartland is entitled to 80% of the proceeds of the winding-up of FLLZ, with the remaining 20% of the proceeds going to the estate. Based on a May 15, 2008, appraisal, the fair market value of the Real Estate was $1,180,000. This compromise was not accepted by the Bankruptcy Court.
In this appeal, Heartland asserts that a valid lien attached to Michael’s interest in FLLZ after it served a citation to discover assets on him on March 20, 2007, pursuant to 735 ILCS 5/2-1402(m). On March 19, 2009, the Bankruptcy Court found against Richard and FLLZ, concluding that Michael’s dissociation from FLLZ was not wrongful under the Operating Agreement, vesting the Trustee with the right to par
These appeals follow.
Jurisdiction and Standard of Review
This Court has jurisdiction to review the decision of the Bankruptcy Judge pursuant to 28 U.S.C. § 158(a). District courts are to apply a dual standard of review when considering a bankruptcy appeal. The findings of fact of the Bankruptcy Judge are reviewed for clear error, while the conclusions of law are reviewed
de novo. In re Midway Airlines,
Discussion
I. Appeal by Richard LaHood and FLLZ
Richard and FLLZ appeal raising several interrelated issues: (1) the Bankruptcy Court erred in finding that Michael was not a wrongfully dissociated member of FLLZ at the time the Petition was filed; (2) the Bankruptcy Court erred in finding that the Trustee has a right to participate in the winding up of FLLZ; (3) the Bankruptcy Court erred in finding that the Real Estate was not properly distributed on October 4, 2007; (4) the Bankruptcy Court erred in concluding that the post-petition conveyance by FLLZ to Michael was in violation of the automatic stay and void; and (5) the Bankruptcy Court erred in ruling on “merger” as it had not been briefed.
A. Wrongful Dissociation
Richard and FLLZ take the position that under the Illinois Limited Liability Company Act, 805 ILCS § 180/1-1 et seq. (hereinafter the “LLC Act”), as well as the terms of the FLLZ Operating Agreement, Michael dissociated from FLLZ on August 9, 2007, when he filed his Petition. 805 ILCS § 180/35-35(7)(A). Section 180/35 — 55(b) of the LLC Act then provides that if a member is dissociated from an LLC, the member’s right to participate in the management and conduct of the company’s business terminates with the exception of participating in the “winding up” of the company’s business so long as the dissociation was not wrongful; the member ceases to be a member and is treated the same as a transferee of a member.
Richard and FLLZ contend that Michael’s dissociation was wrongful. Under the LLC Act, dissociation is wrongful only if it is in breach of an express provision of the Operating Agreement. 805 ILCS § 180/35 — 50(b). Richard and FLLZ cite § 6.01 of the Operating Agreement, which provides in relevant part:
No Member ... may sell, assign, transfer, give, exchange, pledge, or otherwisedispose of any Units or any interest therein now held or hereafter acquired by him (whether voluntary, involuntary, or by operation of law) without first giving written notice thereof (“Notice of Proposed Transfer”) to the Company and otherwise complying with the notice procedures and other terms and conditions of this Article VI.
Similarly, § 6.05 of the Operating Agreement states that an assignee of a membership interest becomes a substituted Member entitled to all the rights of a Member only if all of the other Members consent in writing to the substitution. In essence, they assert that Michael voluntarily transferred his interest to the bankruptcy estate by operation of law without giving the notice required under the Operating Agreement, thereby acting in breach of an express provision and making his dissociation wrongful.
The Bankruptcy Court properly noted that Article IV of the Operating Agreement, which contains both §§ 6.01 and 6.05, addresses voluntary transfers by a member. The transfer at issue here was not this type of voluntary transfer, but rather a transfer that was compelled by operation of law, which is covered by Article VIII of the Operating Agreement. Section 8.01 provides that where a member files a petition for bankruptcy, the company has the option to purchase all or any part of the units owned by the member at a stipulated price.
Based on the existence of a separate article addressing transfers by operation of law, the Bankruptcy Court found that the specific notice and consent provisions relied on by Richard and FLLZ simply do not apply under the facts of this case. However, § 6.01 clearly indicates that the notice and offer provisions apply to any attempt to “sell, assign, transfer, give, exchange, pledge, or otherwise dispose of any Units or any interest therein now held or hereafter acquired by him (whether voluntary, involuntary, or by operation of law) ...” This suggests that the requirements apply whether the assignment was voluntary, involuntary, or by operation of law. Yet this does not necessarily mean that the Bankruptcy Court’s holding was erroneous.
Sections 541(e)(l)(A)-(B) of the Bankruptcy Code provide in relevant part:
[A]n interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law ... that restricts or conditions transfer of such interest by the debtor; or that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.
According to the Trustee, § 541(c) trumps any contrary provisions in the Operating Agreement, precluding Michael’s alleged breach of the notice and offer provisions from rendering his dissociation wrongful.
This issue appears to present a case of first impression in this Circuit. In fact, there is precious little case law addressing this precise question in any jurisdiction. In
In re Ehmann,
Similarly, in
In re Klingerman,
In
In re Daugherty Construction, Inc.,
Even
Garrison-Ashburn,
which ultimately concluded that the estate only had the rights of an assignee, acknowledged that § 541(a) “clearly encompasses all of [the debtor’s] interest in [the company], whatever that interest may be, whether economic or noneconomic.”
The Court finds the reasoning in these cases to be persuasive. Accordingly, the Court concludes that the provisions of the Operating Agreement purporting to place limitations or restrictions on Michael’s interest as a result of his bankruptcy filing are unenforceable in this proceeding. Richard and FLLZ therefore cannot use the alleged violation of §§ 6.01 and 6.05 of the Operating Agreement to establish that Michael’s dissociation was wrongful, and the Bankruptcy Court’s holding that Michael’s dissociation was not wrongful was not in error.
B. Winding Up
Richard and FLLZ’s disagreement with the Bankruptcy Court’s conclusion that the Trustee has a right to participate in the winding up of FLLZ’s affairs is based on their assertion that Michael’s dissociation from the company was wrongful. As the Court has now rejected that argument and found that Michael’s dissociation was not wrongful, this basis for appeal lacks merit and warrants no further discussion.
C. Proper Distribution
The next appeal by Richard and FLLZ concerns the finding by the Bankruptcy Court that the distribution of the Real Estate was improper based on the failure to apply the assets to discharge the claims of creditors before distributing to members under the LLC Act. Specifical
Section 35-4(c) of the LLC Act provides:
A person winding up a limited liability company’s business may preserve the company’s business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative, settle and close the company’s business, dispose of and transfer the company’s property, discharge the company’s liabilities, distribute the assets of the company pursuant to Section 35-10, settle disputes by mediation or arbitration, and perform other necessary acts.
805 ILCS § 180/35-4(c). Section 35-10(a) then provides that in winding up an LLC’s business, “the assets of the company must be applied to discharge its obligations to creditors, including members who are creditors. Any surplus must be applied to pay in money the net amount distributable to members in accordance with their right to distributions under subsection (b) of this Section.”
Additionally, § 12.03(a) of the Operating Agreement directs that when the company is dissolved, creditors, including members who are creditors, have first priority for distribution whether the assets are distributed in kind or by converting them to cash and distributing the proceeds thereof. Distributions to members in satisfaction of the company’s obligations due and owing under § 4.01 and Article IX are next in line, followed by proportional distributions to members having positive capital account balances. Operating Agreement §§ 12.03(b)-(c).
The argument by Richard and FLLZ on this issue is half-hearted and can best be characterized as a throw-away argument. They take a portion of § 12.03 of the Operating Agreement out of context, ignoring the established priority for distribution in racing to their conclusion that an in kind distribution was permissible under the terms of the Operating Agreement, before summarily asserting without citation to any authority that Richard was not a creditor of FLLZ. Perhaps this is because there is really no credible basis for an argument that flies in the face of the very document that they purport to rely on. This kind of perfunctory and undeveloped legal argument is utterly insufficient, and it is well-settled that responses of this type result in the waiver of the argument.
See, Finance Investment Co. v. Geberit AG,
D. Automatic Stay
Richard and FLLZ next challenge the Bankruptcy Court’s finding that Richard’s actions in distributing the Real Estate violated the automatic stay. “It is well settled that the automatic stay has a dual purpose: it temporarily relieves the debtor of financial hardship and collection activity while simultaneously preventing creditors from improving their positions relative to one another.”
In re Mid-City Parking, Inc.,
Here, it is undisputed that Michael filed his petition in bankruptcy on August 9, 2007, and the automatic stay went into effect. It is further undisputed that Richard executed the Declaration of Dissolution of FLLZ and two deeds conveying the interest in the Real Estate to himself and Michael on October 4, 2007, without consulting the Trustee or seeking the approval of the Bankruptcy Court. Richard and FLLZ argue that prior to the distribution, the Real Estate was not an asset of the bankruptcy estate, but rather an asset of FLLZ.
While several of the provisions of § 362(a) are couched in terms of the assets of the estate or the debtor, subsection (6) is stated much more broadly and refers to claims against the debtor rather than assets of the estate. “[A]ny act to collect, assess, or recover a claim against the debt- or that arose before the commencement of the case” violates the automatic stay provisions pursuant to 11 U.S.C. § 362(a)(6). Richard and FLLZ admit that Richard held a Mortgage that was secured by a first mortgage lien on FLLZ’s Real Estate and that his Mortgage secures a debt in the original amount of $427,079.49 owed by Michael to Richard. Stipulation of Undisputed Facts [Bnkrtcy. Doc. 47] at ¶¶ 6-9. As such, it is difficult to suggest in good faith that Richard did not have a claim against Michael that arose before the filing of the bankruptcy petition. As Richard and FLLZ further acknowledge that the execution of the deeds was done to effect a merger so that the Mortgage would be payable solely from Michael’s interest in the Real Estate, it is equally difficult to suggest in good faith that Richard’s actions were not an act to collect or recover his claim against Michael and maximize his recovery at the expense of the bankruptcy estate. Thus, the Court finds no error in the Bankruptcy Court’s determination that Richard’s actions violated the automatic stay and are void.
E. Merger
Richard and FLLZ suggest that the Bankruptcy Court erred in addressing the doctrine of merger, as it had not yet been briefed. However, they had clearly raised the issue in their Joint Memorandum of Law [Bnkrtcy. Doc. 58 at 8-9], concluding that Richard’s Mortgage had merged with his membership interest pursuant to the doctrine of merger and summarily stating that the issue was not before the court at that time. The Bankruptcy Court disagreed, finding that it was necessary to determine whether this theory was correct in order to address the remaining issues. Richard and FLLZ, who initially raised the issue of merger, cannot reasonably suggest that they were unaware of the issue or lacked an opportunity to address the issue.
“A party may not move for summary judgment on an issue and take a ‘calculated risk’ that the issue it failed to brief will not be dispositive.”
Sethness-Greenleaf, Inc. v. Green River Corp.,
Heartland asserts that a valid lien attached to Michael’s interest in FLLZ after it served a citation to discover assets on him on March 20, 2007, pursuant to 735 ILCS 5/2-1402(m). Section 5/2-1402(m) provides:
The judgment or balance due on the judgment becomes a lien when a citation is served in accordance with subsection (a)of this Section. The lien binds nonexempt personal property, including money, choses in action, and effects of the judgment debtor as follows:
(1) When the citation is directed against the judgment debtor, upon all personal property belonging to the judgment debtor in the possession or control of the judgment debtor or which may thereafter be acquired or come due to the judgment debtor to the time of the disposition of the citation.
(2) When the citation is directed against a third party, upon all personal property belonging to the judgment debtor in the possession or control of the third party or which thereafter may be acquired or come due the judgment debtor and comes into the possession or control of the third party to the time of the disposition of the citation.
The lien established under this Section does not affect the rights of citation respondents in property prior to the service of the citation upon them and does not affect the rights of bona fide purchasers or lenders without notice of the citation. The lien is effective for the period specified by Supreme Court Rule.
The Bankruptcy Court found that the general rule in § 5/2-1402(m) was trumped by § 30-20 of the LLC Act, as it provides the exclusive mechanism for impressing a Men upon a judgment debtor’s interest in an Illinois LLC. Section 30-20 states:
(a) On application by a judgment creditor of a member of a limited liability company or of a member’s transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor and make all other orders, directions, accounts, and inquiries the judgment debt- or might have made or which the circumstances may require to give effect to the charging order.
(b) A charging order constitutes a lien on the judgment debtor’s distributional interest. The court may order a foreclosure of a lien on a distributional interest subject to the charging order at any time. A purchaser at the foreclosure sale has the rights of a transferee.
(c) at any time before foreclosure, a distributional interest in a limited liability company that is charged may be redeemed:
(1) by the judgment debtor;
(2) with property other than the company’s property, by one or more of the other members; or
(3) with the company’s property, but only if permitted by the operating agreement.
(d) This Act does not affect a member’s right under exemption laws with respect to the member’s distributional interest in a limited liability company.
(e) This Section provides the exclusive remedy by which a judgment creditor of a member or a transferee may satisfy a judgment out of the judgment debtor’s distributional interest in a limited liability company.
805 ILCS 180/30-20. This dispute essentially presents another issue of first impression on which there is very little authority that is even marginally relevant.
Although also not completely analogous, the Court finds the opinion in
Bobak Sausage Co. v. Bobak Orland Park, Inc.,
Section 30-20 provides the “exclusive remedy” of a judgment creditor of a LLC member seeking to satisfy a judgment via the member’s interest. 805 ILCS 180/30-20(e). A court with jurisdiction “may charge the distributional interest of the judgment debtor to satisfy the judgment.” Id. 180/30-20,301 Ill.Dec. 731 ,847 N.E.2d 741 (a). The statute defines “distributional interest” as a member’s rights to monetary distributions from the LLC. Id. 180/1-5,301 Ill.Dec. 731 ,847 N.E.2d 741 . “A charging order constitutes a lien on the judgment debtor’s distributional interest.” Id. 180/30-20,301 Ill.Dec. 731 ,847 N.E.2d 741 (b). Section 180/30-20(b) further provides that a court may order a foreclosure on that lien at any time. Id. Courts in other states with similar LLC statutes have interpreted this provision to allow a court to order the distributional interest charged with the payment of a judgment. See Herring v. Keasler,150 N.C.App. 598 , 600-01,563 S.E.2d 614 , 615-16 (2002) (holding that forced sale of a judgment debtor’s membership interest was prohibited under North Carolina’s LLC statute and that charging the distributional interest was the proper remedy). Section 30-20 also allows a court to appoint a receiver for the distributional interest. 805 ILCS 180/30-20(a). Though the Illinois Supreme Court has not spoken on the matter, these provisions seems to contradict Dowling’s assertion that the only permissible method of disposal for an interest in an LLC is a public sale administered by the sheriff.
Id.,
at *5.
See also, In re Pischke,
There is no dispute that the service of a citation imposes a lien on the judgment debtor’s personal property under Illinois law.
Bobak,
If the Bankruptcy Court finds in favor of Heartland on these questions, as well as any other previously unaddressed issues that may be necessary in this regard, the question will then logically become how the lien will be treated in terms of satisfaction or remedy. The decision in
Pischke
relied on a provision similar to § 30-20 under Virginia law in concluding that “a charging order supersedes the general procedure for execution on intangibles.”
It has been stated that a charging order statute “constitute(s) ... repeal by implication of any previous procedures designed to” reach a partner’s interest in a partnership.... An analysis of this principle considered in conjunction with the fact that it is the creation of the lien and not its enforcement which is critical in the bankruptcy setting indicates that the better and most logical application is that the Virginia charging order statute ... supersedes other legislation in the area concerning satisfaction of a judgment creditor’s claim against a partner’s interest in a partnership.
Id., at 917. Pischke further advises that creditors “shall obtain priority, if at all, in the sequence in which they were granted charging orders by a court of competent jurisdiction,” suggesting that the failure to obtain a charging order prevents a judgment creditor from obtaining priority in terms of executing or satisfying the judgment. Id. Under this rationale, Heartland’s judgment lien would not be entitled to priority absent a charging order, as § 30-20 would foreclose the possibility that any lien obtained by a citation could be an alternative to a lien obtained through a charging order in terms of being in a position to satisfy the lien or obtain a remedy. To find differently would render the “exclusive remedy” provision of § 30-20(e) meaningless.
While Heartland has not obtained a charging order at this time,
Pischke
indicates that it may be possible for a judgment creditor to avail themselves of the opportunity to request that the automatic stay be lifted to allow the creditor to seek a charging order from a court of compe
Conclusion
For the reasons stated herein, the Order of the Bankruptcy Court is AFFIRMED in Case No. 09-1264, and the portion of the Order of the Bankruptcy Court appealed is REVERSED and REMANDED in Case No. 09-1265. This matter is now TERMINATED.