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Law v. Zemp

Supreme Court of Oregon

January 11, 2018

Robert LAW, on behalf of the Robert M. Law Proft Sharing Plan, Respondent on Review,
v.
Ronald ZEMP, Defendant, and FOREVER YOUNG OREGON, LLC; The Ron Zemp Family 1 Limited Partnership; The Ron Zemp Family 2 Limited Partnership; The Ron Zemp 3 Family Limited Partnership; and The Ron Zemp 4 Family Limited Partnership, Petitioners on Review. Robert LAW, on behalf of the Robert M. Law Proft Sharing Plan, Petitioner on Review,
v.
Ronald ZEMP, Defendant, and FOREVER YOUNG OREGON, LLC; The Ron Zemp Family 1 Limited Partnership; The Ron Zemp Family 2 Limited Partnership; The Ron Zemp 3 Family Limited Partnership; and The Ron Zemp 4 Family Limited Partnership, Respondents on Review.

         [362 Or. 303]Argued and submitted May 11, 2017

         On review from the Court of Appeals.[*] (S064415) (CC C12-1752CV; CA A153071; (Control), S064415)

          Natalie C. Scott, The Scott Law Group, Eugene, argued the cause and fled the briefs on behalf of Forever Young Oregon, LLC, and the Ron Zemp Family Limited Partnerships.

          Bruce H. Orr, Wyse Kadish, LLP, Portland, argued the cause and fled the briefs on behalf of Robert Law.

          Before Balmer, Chief Justice, and Kistler, Walters, and Nakamoto, Justices, and Landau Senior Justice pro tem-pore, and Ortega, Judge of the Court of Appeals, Justice pro t empore. [**]

         The decision of the Court of Appeals is reversed. The order of the circuit court is vacated, and the case is remanded to the circuit court for further proceedings.

         Case Summary: Plaintiff obtained a money judgment against Ronald Zemp, who was a general partner in four limited partnerships and a member of a limited liability company. On plaintiff's motion, the circuit court issued an order under two statutes, ORS 70.295 and ORS 63.259, charging Zemp's interests in the limited partnerships and limited liability company (the companies) to satisfy the judgment, and imposing certain ancillary requirements - that the companies to provide extensive financial information to plaintiff and refrain from certain kinds of transactions. The companies appealed the charging order, arguing, primarily, that the ancillary requirements were not authorized. The Court of Appeals agreed with the companies in part, holding that (1) none of the ancillary provisions were authorized with respect to the limited liability partnership under ORS 63.259; and (2) to the extent that the trial court had failed to make required determinations before imposing certain of the ancillary provisions on the limited partnerships under ORS 70.295, those provisions were unauthorized. Plaintiff sought review, arguing that all of the ancillary provisions were authorized, either under the two charging order statutes or under other sources of law. The companies also sought review, arguing that none of the ancillary provisions were authorized under the charging order statutes and that other sources of law were not applicable. Held: Although the circuit court had authority to issue other orders in aid of the charging order under ORS 70.295, with respect to the limited partnerships, and under ORS 1.160, with respect to the limited liability company, it could only impose ancillary orders that it determined were required to effectuate the purpose of allowing the judgment creditor access to the debtor-partner's or debtor-member's distributional interest in the limited partnership or limited liability company without unduly interfering with management, and the record before the circuit court would not have supported such a determination with

         [362 Or. 304] WALTERS, J.

         This review proceeding arises out of a post-judgment order charging a judgment debtor's interests in four limited partnerships and a limited liability company to satisfy the judgment creditor's judgment against him. The charging order was issued over the limited partnerships' and limited liability company's objections that ancillary provisions included in the charging order, which required them to refrain from certain kinds of transactions and provide extensive financial information to the judgment creditor, were not authorized under the controlling statutes. On appeal, the Court of Appeals held that some, but not all, of the ancillary provisions were authorized. Law v. Zemp, 276 Or.App. 652, 368 P.3d 821, adh'd to on recons, 279 Or.App. 808, 381 P.3d 1099 (2016). We hold that a trial court has either general or specific statutory authority to include, in a charging order, ancillary provisions that it finds necessary to allow a judgment creditor access to a debtor-partner's distributional interest in a company, as long as those provisions do not unduly interfere with the company's management. We further hold that, in this case, the record does not establish that that standard was met and, therefore, that the trial court erred in imposing the challenged ancillary provisions. We reverse the decision of the Court of Appeals and vacate the circuit court order, and remand to the circuit court for further proceedings.

         I. HISTORICAL FACTS

         In 2012, plaintiff obtained a money judgment against defendant Ronald Zemp. After his initial attempts to collect the judgment were unsuccessful, plaintiff moved the trial court under ORS 70.295 and ORS 63.259 for an order directing Zemp to show cause why an order charging his interest in certain named companies to satisfy the judgment should not be entered.[1] The named companies were [362 Or. 305] four limited partnerships (LPs), The Ron Zemp Family Limited Partnership 1, 2, 3 and 4, and a limited liability company (LLC), Forever Young Oregon LLC. In support of the motion, plaintiff submitted copies of public business registry records which identified Zemp as the general partner of each of the LPs and as the manager of the LLC. Plaintiff also submitted a proposed charging order which required the companies to pay all "distributions, credits, drawings or payments" they otherwise would have paid to Zemp to plaintiff until plaintiff's judgment against Zemp was satisfied in full. The proposed charging order also included the following ancillary provisions:

"3. Until said judgments are satisfied in full, *** the companies shall make no loans to any partner or anyone else.
"4. Until said judgments are satisfied in full, *** the companies shall make no capital acquisitions without either Court approval or the approval of [plaintiff].
"5. Until said judgments are satisfied in full, *** neither the companies nor its members shall undertake, enter into, or consummate any sale, encumbrance, hypothecation, or modification of any partnership interest without either Court approval or the approval of [plaintiff].
"6. * * * [T]he companies * * * shall supply to [plaintiff] full, complete, and accurate copies of the applicable membership or partnership agreements, including any and all amendments or modifications thereto; true, complete and accurate copies of any and all Federal and State income tax or informational income tax returns filed within the past two years; balance sheets and profit and loss statements for the past two years; and balance sheets and profit and loss statements for the most recent present periods for which same has been computed. Further, upon ten (10) days notice * * *, all books and records shall be produced for inspection, copying examination in the office of [plaintiff].
[362 Or. 306] "7. Until said judgments are satisfied in full, *** all future statements reflecting cash position, balance sheet position, and profit and loss, the companies shall supply to [plaintiff] within thirty (30) days of the close of their respect accounting periods for which said data is or may be generated.[2]"

         The trial court issued the requested show cause order, setting a hearing date on the proposed charging order some three weeks out. The order was served on Zemp through each of the companies' registered agent.

         Although Zemp himself did not appear in the ensuing proceeding, the companies filed objections and attended the hearing. The companies initially sought to establish, through a declaration by Zemp's business advisor, that Zemp had no personal ownership interest in any of the companies. Plaintiff moved to strike the declaration on a variety of grounds and also argued, on the merits, that the declaration did not disprove Zemp's status vis-a-vis the companies. The trial court granted plaintiff's motion to strike and moved on to the companies' second objection to the charging order-that, insofar as plaintiff's proposed charging order included ancillary provisions that would affect the companies' operations, it went beyond what the charging order statutes authorized. In response to that objection, plaintiff had argued that the provisions would help insure that Zemp did not use his control of the companies to keep his interests in them out of plaintiff's reach, without plaintiff having any way to know what had been done.[3] The companies insisted, however, that the provisions would invade the rights of the companies' other partners and members, and that, at the very least, they should not be allowed without the posting of a bond and a protective order. Thereafter, the hearing evolved into a more practical editorial session, with the trial court removing one provision (paragraph 4) in the proposed [362 Or. 307] order, adjusting certain due dates set in the proposed order, and instructing the parties to devise a protective order for the financial disclosure requirements. The court approved and issued the charging order as edited.

         The companies later filed a motion for reconsideration, arguing that, insofar as the provisions that remained affected the rights of partners in the companies who had not been made parties to the proceedings, inclusion of those provisions, particularly on such short notice, amounted to a violation of due process. But plaintiff responded, and the trial court agreed, that the companies could have and should have raised those objections in the original hearing, and that they presented no basis for reconsideration. Accordingly, the motion for reconsideration was denied.

         II. THE COURT OF APPEALS DECISION

         The companies decided to appeal and moved for a stay of the charging order as issued. Unable to persuade the trial court or the Court of Appeals to grant such a stay, they finally reached a partial settlement with plaintiff, under which plaintiff agreed to a stay of the objectionable ancillary provisions that remained in the order (paragraphs 3, 5, 6, and 7) in return for certain concessions, including the company's waiver of any right to challenge the basic provisions of the charging order (and, thus, to argue that Zemp was not a member or partner in the companies). The resulting stipulated order specified, however, that the companies "may argue on appeal that the trial court was without authority to include paragraphs 3, 5, 6, and 7 in the Charging Order [i.e., the ancillary provisions barring certain transactions and requiring financial disclosures] because such paragraphs exceed what is allowable under the Oregon [Limited Liability Company] Act, Oregon's limited partnership statutes, or any other applicable law."

         The companies then made that argument on appeal, and the Court of Appeals was persuaded in part. In a nutshell, the Court of Appeals held, with regard to the charging order as it applied to the LPs, that (1) the court's authority is controlled by a provision of the limited partnership statute, ORS 70.295, which impliedly incorporates a provision in [362 Or. 308] the general partnership statutes, ORS 67.205, under which courts issuing charging orders are authorized to "make all other orders, directions, accounts and inquiries the judgment debtor might have made or that the circumstances of the case might require"; (2) because the ancillary provisions in the charging order requiring disclosure of financial information (paragraphs 6 and 7) were ones that the judgment debtor might have made as a general partner in the limited partnership, the court was authorized to include those provisions in the charging order against the LPs; (3) because the ancillary provisions restricting the limited partnerships from making loans and transferring partnership interests (paragraphs 3 and 5) were not ones that the judgment debtor might have made, and because the trial court had not made any clear determination that those provisions were required under the circumstances to ensure compliance with the charging order, the trial court lacked "discretion" to issue them; (4) on remand, if plaintiff demonstrated to the trial court's satisfaction that the latter provisions were ones that "might [be] require [d]" to ensure that the LPs comply with the charging order, the trial court could reimpose those provisions. 276 Or.App. at 666-69.

         With regard to the charging order as it applied to the LLC, the court held that, because that trial court's authority was controlled by a provision of the Oregon Limited Liability Company Act, ORS 63.259, that does not itself contain any wording authorizing the issuance of ancillary orders to enforce a charging order against a limited liability company, and does not incorporate by implication any provision that grants such authority, the trial court lacked authority to issue any of the ancillary orders that it did against the LLC. Id. at 670-71. Finally, the Court of Appeals declined to consider the companies' arguments invoking due process and the Oregon Rules of Civil Procedure, holding that the trial court had acted within its discretion in declining to consider those arguments when the companies raised them for the first time in a motion for reconsideration. Id. at 664-65.

         The Court of Appeals subsequently allowed the parties' separate petitions for reconsideration to clarify a point regarding the standard of review it had applied. Law, 279 Or.App. at 809. Although, in its original opinion, the court [362 Or. 309] had referred to the trial court's imposition of some of the ancillary requirements as "beyond the court's discretion, " it explained that, in fact, its holding was that the court had "legally erred by imposing the provisions in a manner that did not comport with the statute." Id. That holding, the court explained, was predicated on a conclusion that the trial court had imposed those provisions without first making the required prerequisite determination that the provisions were ones that either the judgment debtor might have made or that the circumstances of the case "may require." Id. at 809-10. After the opinion on reconsideration issued, both parties filed petitions for review, which we allowed.

         III. THE PARTIES' ARGUMENTS TO THIS COURT

         Before this court, the companies appear to be satisfied with the Court of Appeals' evaluation of the ancillary provisions as they apply to the LLC. However, the companies challenge the Court of Appeals' evaluation of the ancillary provisions in the charging order as they apply to the LPs. They contend that, contrary to the Court of Appeals' analysis, ORS 70.295 does not authorize a trial court to include ancillary provisions in a charging order against a limited partnership in any circumstance.[[4]]

         Before this court, plaintiff argues that the Court of Appeals erred in its analysis of the ancillary provisions in the charging order as applied to both the LLC and the LPs. As to both types of entities, plaintiff criticizes the court's exclusive focus on whether the ancillary orders were authorized by the relevant charging order statutes, and argues that the court should have also considered whether the orders were authorized by other sources of law, including the inherent authority of courts to enforce their own orders. As to the LPs, plaintiff asserts that the court erred in remanding to the trial court to allow it to determine whether the ancillary restrictions on the operations of those entities were required to ensure compliance with the charging order. Plaintiff [362 Or. 310] contends that the remand was inappropriate because it arose in connection with an issue that the companies never raised and that, in any event, was based on an incorrect assumption-that the kind of ancillary orders at issue may only be included if the trial court first makes a specific finding, on the record, that the provisions are necessary under the circumstances.

         Many of the issues that are before us in this case turn on the meaning of two charging order statutes, ORS 70.295 and 63.259, which pertain, respectively, to limited partnerships and limited liability companies. For reasons that will become apparent, those statutes must be considered in the context of the general history and purposes of the charging order remedy, including the history of the uniform acts from which one of the statutes is derived. Before turning to the particular issues of statutory construction that the parties have raised, we set out that contextual material.

         IV. THE STATUTORY BACKDROP

         A charging order is a creature of statute that was originally developed in the context of partnership law. Prior to the adoption of the charging order mechanism, common-law courts generally allowed a judgment creditor whose debtor was a partner in a business to enforce the judgment against the assets of the entire partnership. J. Gordon Gose, The Charging Order under the Uniform Partnership Act, 28 Wash L Rev 1, 1-2 (1953). The practice constituted an obvious invasion of the rights and interests of nondebtor partners and resulted in disruption of the partnership business and, often, a forced dissolution of the partnership. Id. at 2. Efforts to reform that problematic common-law approach culminated in the idea of a new statutory remedy for a judgment creditor seeking to collect from the judgment debtor's interest in a partnership-a judicial order charging the judgment debtor's distributional interest in the partnership with payment of the judgment, without disturbing the partnership's property or management.

         A. The Uniform Partnership Act

         The charging order remedy first appeared in the United States as a provision of the Uniform Partnership Act (UPA), adopted by the National Conference of Commissioners [362 Or. 311] on Uniform State Laws (NCCUSL) in 1914. The provision in that original version of the UPA begins by instructing that a partner's individual right in partnership property is not subject to attachment or execution-thus precluding the seizure of partnership property to satisfy a judgment against a single partner. UPA § 25(c) (1914). It then allows for an order charging a debtor-partner's "interest" in a partnership itself with payment of the judgment debt, where the partner's "interest" is defined as the partner's share of the partnership's profits and surplus. Id. at §§ 28(1), 26. Finally, it provides that a court issuing a charging order also is authorized to (1) appoint a receiver of the profits due to the debtor-partner from the partnership and (2) "make all other orders, directions, accounts and inquiries which the debtor partner might have made or which the circumstances of the case may require." Id. at § 28(1).[5]

         The charging order provision of the UPA is notably short on detail with respect to the procedures that were intended. But, although admittedly sparse, the cases and commentary in the years after the UPA's adoption suggest a general consensus that the provision gives courts broad authority to do what was necessary to obtain payment of the debt from the debtor-partner's share of the partnership profits without interfering with the rights of nondebtor partners. For example, shortly after the UPA's adoption, its principal architect, William Draper Lewis, described the intended operation of its charging order provisions:

"'[W]hen a judgment is secured against a partner by his separate creditor, all that a creditor will have to do is to apply to the court which gave him the judgment * * * to issue an order on the other partners to pay him the profits which would otherwise be paid to his debtor, or to make any further order which will result in his securing the payment of his judgment without unduly interfering with the rights of the remaining partners in partnership property.'"

         Gose, 28 Wash L Rev at 11 (quoting statement made by William Draper Lewis one year after the UPA was adopted). And some forty years later, another prominent commentator, [362 Or. 312] surveying the UPA's charging order provision and the few decisions by American courts that relied on it, concluded that the provision contemplated a "highly flexible and elastic procedure" under which the debtor-partner's share of the profits would be either diverted to the creditor or sold for the creditor's benefit, with the court being authorized to appoint a receiver and/or issue a broad range of orders as aids to either of those methods of collecting the debt. Gose, 28 Wash L Rev at 10.

         B. The Uniform Limited Partnership Act

         In 1916, two years after it adopted the UPA, the NCCUSL adopted the Uniform Limited Partnership Act (1916) ("ULPA").[6] The original ULPA contains its own provision for charging orders, but it provides only for a charging order against a limited partner's interest in the limited partnership, [7] and is silent with respect to charging orders against a general partner's interest. However, the UPA charging order provision arguably becomes applicable in such circumstances: Section 6(b) of the UPA provides that, assuming that limited partnerships are provided for by statute, the UPA "shall apply to limited partnerships except insofar as the statutes relating to such partnerships are inconsistent [t] herewith." And section 9 of the ULPA provides that a general partner in a limited partnership "shall have all the rights and powers and be subject to all [362 Or. 313] the restrictions and liabilities of a partner in a partnership without limited partners."[8]

         C. Enactment of the UPA and Revised UPA in Oregon

         The Oregon Legislature enacted the original UPA into Oregon law in 1939. Or Laws 1939, ch 550, §§ 1-43. In 1997, the Oregon Legislature repealed the original UPA and replaced it with NCCUSL's then most current revision of the UPA, the Revised Uniform Partnership Act (1994) ("Revised Uniform Partnership Act" or "RUPA"), with some minor revisions that are not relevant here. Or Laws 1997, ch 775, §§ 1-103. See generally I Oregon State Bar, Advising Oregon Businesses ยง 67 (2001) ...


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