LLCs have become the entity of choice for most new businesses, and as a result charging orders are being sought more and more frequently. A novel charging-order question came up recently when the Ohio Court of Appeals was faced with an objection to a charging order against a physician’s member interest in a medical LLC. FirstMerit Bank, N.A. v. Xyran, Ltd., No. 98740, 2013 WL 1183340 (Ohio Ct. App. Mar. 21, 2013).
Background. In May 2010 FirstMerit Bank obtained a judgment against neurosurgeon Bhupinder Sawhny on his guaranty of a promissory note. The bank garnished Sawhny’s wages, and Sawhny later left his employer and opened his own business, The Center for Neurosurgery, L.L.C.
FirstMerit then filed a motion with the trial court for a charging order against Sawhny’s member interest in The Center. The court granted the motion without a hearing.
Charging Orders. Ohio’s LLC Act gives a judgment creditor of an LLC member the right to obtain a charging order against the member’s LLC interest, for payment of the unsatisfied amount of the judgment. Ohio Rev. Code § 1705.19. A charging order gives the judgment creditor only the rights of an assignee, meaning that any distributions by the LLC that would otherwise go to the member must instead be paid to the creditor. The creditor is not admitted as a member, has no right to participate in management of the LLC, and cannot force the LLC to make any distributions. In 2012 Ohio amended its LLC Act to clarify that a charging order is a judgment creditor’s exclusive remedy to satisfy a judgment against the membership interest of an LLC member, which I wrote about, here. Most state LLC acts authorize charging orders.
Charging order issues keep coming up. In the past two years I have written about (a) whether an Illinois LLC whose member interest is being charged must be a party to the suit, here, (b) whether a judgment creditor’s charging order entitles it to quarterly financials from an Iowa LLC, here, (c) whether the holder of a charging order against a single-member Kansas LLC can assert rights to manage the LLC, here, and (d) whether the holder of a charging order against a Florida single-member LLC can foreclose on the member’s interest and take over complete ownership of the LLC, here.
Court of Appeals. Sawhny appealed the grant of the charging order. He contended that the charging order assigned his ownership interest in The Center to FirstMerit in violation of Ohio’s statute barring the unauthorized practice of medicine, Ohio Rev. Code § 4731.41. He also argued that The Center’s operating agreement did not permit him to assign his member interest to anyone who is not a licensed physician in Ohio.
The court’s analysis ran as follows: Under Section 1705.19 a judgment creditor receives only “the rights of an assignee of the membership interest as set forth in section 1705.18.” “Membership interest” is defined in Section 1705.01 as “a member’s share of the profits and losses of a limited liability company and the right to receive distributions from that company.” Under Section 1705.18 an assignee is not entitled to become a member or to exercise any rights of a member, unless authorized by the LLC’s operating agreement, and therefore FirstMerit had no right to manage the Center. The court concluded that the charging order merely allowed FirstMerit to garnish Sawhny’s financial interest in The Center, and therefore did not allow the unauthorized practice of medicine or violate The Center’s operating agreement. FirstMerit Bank, 2013 WL 1183340 at *1.
Sawhny also argued that the trial court violated his constitutional rights to due process by failing to hold a hearing on FirstMerit’s motion for a charging order. Id. But, said the Court of Appeals, Sawhny’s brief failed to set forth a legitimate basis for opposing the charging order, because the only objections raised were those relating to the unauthorized practice of medicine and the prohibition in the LLC’s operating agreement. Id. at *2. Both of those issues had been resolved by the court in the first part of its opinion, and there was no reason for an evidentiary hearing. Id.
Sawhny’s ownership of his member interest in The Center had already been established at a debtor’s examination. In Ohio an examination of a judgment debtor takes place pursuant to a court order requiring the debtor to appear and answer concerning his property, in front of the judge or a referee appointed by the judge. Ohio Rev. Code § 2333.09.
The court affirmed the trial court’s grant of the charging order.
Comment. The court’s ruling on the unauthorized practice of medicine issue seems right, given the lien-like nature of a charging order and the limitations on the charging order. Statutes barring the unauthorized practice of medicine are intended to prevent non-physicians from controlling how physicians practice. The holder of a charging order is not admitted as a member and does not have the right to vote or participate in management, so FirstMerit’s charging order could not control how Sawhny practiced medicine.