Opinion
No. 1486
04-30-2021
GEORGE H. DRAKES v. GLOVER GROUP INVESTMENTS, LLC
Circuit Court for Prince George's County
Case No.: CAL1702860
UNREPORTED
Nazarian, Gould, Wright, Alexander Jr. (Senior Judge, Specially Assigned), JJ. Opinion by Gould, J. *This is an unreported opinion, and it may not be cited in any paper, brief, motion, or other document filed in this Court or any other Maryland Court as either precedent within the rule of stare decisis or as persuasive authority. Md. Rule 1-104.
Securing a damages award in a lawsuit is one thing; recovering the damages from the judgment debtor is another. The former doesn't guarantee the latter, and the latter sometimes requires persistence and the use of the collection tools provided by statute and the Maryland Rules of Procedure. Such tools include the ability to garnish wages and other property, and the ability to levy upon and sell both the real and personal property of the judgment debtor, among others. See, e.g., Md. Rules 2-645, 2-645.1, 2-646, and 2-621. These tools enable the judgment creditor to reach and liquidate the judgment creditor's things for the purpose of satisfying the judgment.
But what if the judgment debtor doesn't own such things, but does have an interest in a business entity that, in turn, owns valuable things? How can a judgment creditor reach such property? The short answer is that it can't, for the simple reason that only the judgment debtor's things are within the judgment creditor's reach. The judgment creditor can, however, reach the judgment debtor's economic interest in that business entity. The mechanism for doing so is known as a "charging order."
This case concerns the scope and reach of a charging order against a judgment debtor's membership interest in a limited liability company ("LLC"). Specifically, we address whether a charging order against a judgment debtor's membership interest in one LLC can be enforced against another LLC that the judgment creditor alleges is either the mere continuation of, or the recipient of a fraudulent conveyance from, the former. The circuit court answered that question in the negative, and on the facts of this case, we agree. We therefore affirm the judgment of the circuit court on the merits, and remand for entry of an appropriate declaratory judgment.
BACKGROUND
THE LOAN, THE LOAN DEFAULT, AND THE TRANSFER OF PROPERTY
Dr. George H. Drakes, M.D., appellant, made a series of unsecured loans to Beverly B. Ejiniwe, now deceased, to finance the development of four parcels of real property she owned in Charles County, Maryland ("the Property"). Ms. Ejiniwe defaulted on those loans, prompting Dr. Drakes to sue her in the Circuit Court for Prince George's County in early 2008.
In April 2009, Dr. Drakes prevailed on his claims and secured a judgment against Ms. Ejiniwe in the amount of $142,968.29.
Dr. Drakes anticipated that there would be enough equity in the Property to satisfy his judgment. He promptly recorded the judgment in Charles County, and imposed a lien on the Property pursuant to Maryland Rule 2-621. Unfortunately, his plan was thwarted because, soon after filing suit and unbeknownst to Dr. Drakes, Ms. Ejiniwe had transferred the Property to a newly formed LLC named Burleson Estates One, LLC ("Burleson Estates"), of which Ms. Ejiniwe owned a 100 percent membership interest. Thus, the recorded judgment did not impose a lien on the Property. To add further insult to injury (from Dr. Drakes' perspective, at least), Burleson Estates then encumbered the Property with a deed of trust to secure a purported loan from appellee, Glover Group, LLC ("Glover Group"). Upon making the loan, Glover Group also purportedly acquired a 49.9 percent membership interest in Burleson Estates. Ms. Ejiniwe, however, had no membership interest in Glover Group.
THE CHARGING ORDER
Two years later, in 2011, Dr. Drakes moved to set aside the transfer of the Property from Ms. Ejiniwe to Burleson Estates as a fraudulent conveyance or, alternatively, for issuance of a charging order against Ms. Ejiniwe's membership interest in Burleson Estates. In March 2012, the court granted the motion for the charging order, but did not set aside the transfer. Among other things, the charging order entitled Dr. Drakes to "receive any and all contributions or other payments now due or that may become due to [Ms.] Ejiniwe by virtue of her interest in Burleson Estates[.]"
The charging order was amended the following month to correct a misnomer.
The Charging Order provided the following:
[It is] ORDERED that, pursuant to § 4A-607 of the Corporations and Associations Article (2011), [Dr.] Drakes shall be entitled to receive any and all contributions or other payments now due or that may become due to [Ms.] Ejiniwe by virtue of her interest in Burleson Estates One, LLC, a Maryland limited liability company, and it is further,
ORDERED that a lien is hereby established upon any interest that [Ms.] Ejiniwe has in Burleson Estates One, LLC, in favor of [Dr.] Drakes in the amount of $142,968.29 as of April 15, 2009, plus 10 per cent per annum commencing that date; and it is further,
ORDERED that [Dr. Drakes' counsel] shall be, and hereby is, appointed receiver for the purpose of collecting and distributing any funds due under this order, and it is further,
ORDERED that said receiver shall be, and hereby is, authorized to make all other orders, directions, accounts, and inquiries that [Ms.] Ejiniwe is or would have been entitled to make in regard to her interest in Burleson Estates One, LLC, and it is further,
ORDERED that in the event that the receiver is unable to make recovery of any substantial amounts due to [Dr. Drakes] within a reasonable period of time, receiver shall promptly initiate foreclosure procedures against any and all interest that [Ms.] Ejiniwe may have in Burleson Estates One, LLC.
Dr. Drake's efforts to collect from Ms. Ejiniwe continued through early 2013, and included initiating contempt proceedings against Ms. Ejiniwe for her alleged failure to produce certain financial records. Dr. Drakes eventually withdrew the contempt proceedings after learning that Ms. Ejiniwe was gravely ill. Ms. Ejiniwe succumbed to cancer on May 5, 2013.
BURLESON ESTATES TRANSFERS THE PROPERTY TO GLOVER GROUP
Unbeknownst to Dr. Drakes, just weeks before Ms. Ejiniwe died, Glover Group took title to the Property from Burleson Estates because Burleson Estates had allegedly defaulted on its loan. Dr. Drakes alleges that he did not learn about the transfer to Glover Group until late 2016.
Dr. Drakes raises a host of potentially problematic issues about the nature of the transaction under which Glover Group ultimately became the owner of the Property. Because none of those issues are relevant to the resolution of this appeal, we will not address them.
DR. DRAKES' LAWSUIT AGAINST GLOVER GROUP
In February 2017, Dr. Drakes filed a "Complaint for Declaratory Judgment and Accounting" against Glover Group in the Circuit Court for Prince George's County. The complaint contained three counts. In count one, entitled "Successor Liability—Mere Continuation", Dr. Drakes alleged that Glover Group was a mere continuation of Burleson Estates, and therefore, the charging order "should be applied to Glover Group as the successor entity in the same manner as [it] applied to [Burleson Estates]." In the ad damnum clause for count one, Dr. Drakes sought three things: (1) that Ms. Ejiniwe be declared to be a member of Glover Group, and that Glover Group should be considered the successor entity to Burleson Estates; (2) that Dr. Drakes be permitted to enforce his charging order against Ms. Ejiniwe's newly declared interest in Glover Group; (3) that a lien be imposed in Dr. Drakes' favor against the Property for the amount of the judgment ($142,968.29), plus post-judgment interest.
Dr. Drakes' prayer for relief at the conclusion of count one was imprecise and confusing, thus our characterization of the requested relief represents our interpretation and understanding of the same. For example, the first paragraph in the ad damnum clause of count one requests an order "declaring that Drakes shall be entitled to any and all payments due to Ejiniwe by virtue of her interest in Burleson Estates One as of the date that the amending charging order was entered, or accruing thereafter[.]" The only way we can make sense out of such a request in this lawsuit—in which Glover Group, not Burleson Estates, is the defendant—is if Dr. Drakes is effectively requesting the court to impute to Ms. Ejiniwe an ownership interest in Glover Group and to enforce the charging order against Ms. Ejiniwe's imputed interest in Glover Group under a successor liability theory.
The second and third paragraphs in the ad damnum clause of Count One request an order:
b. Declaring a lien against the Burleson Estates One property, however titled, equal to Ejiniwe's interest in Burleson Estates One as of the date of the amended charging order, up to a total of $142,968.29 plus 10 per cent per annum commencing April 15, 2009;
c. Declaring that Drakes shall have the right "to make all other orders, directions accounts, and inquiries that" Ejiniwe could have made, were she a member of Glover Group[.]
In count two, entitled "Successor Liability—Fraudulent Conveyance," Dr. Drakes alleged that the transfer from Burleson Estates to Glover Group was "a fraudulent conveyance in violation of Maryland Uniform Conveyance Act, § 15-101, et seq., of the Commercial Law Article[,]" and therefore, that the charging order should apply to Glover Group "in the same manner" as it applied to Burleson Estates. Dr. Drakes sought the identical relief in count two as he did in count one.
In count three, entitled "Accounting," Dr. Drakes alleged that Glover Group was aware of the salient facts pertaining to the loans he extended to Ms. Ejiniwe and his efforts to enforce his judgment against her, and therefore, that it was "equitable and just to require Glover Group to give a complete and transparent accounting of its transactions with [Ms.] Ejiniwe and Burleson Estates One, as well as its development" of the Property "from May 2008 through the present day." Dr. Drakes' prayer for relief stated:
WHEREFORE, Drakes respectfully requests that this Court enter an order:
a. Requiring Glover Group to prepare and file with the Court a written accounting of all financial transactions entered in at any time with Ejiniwe and/or Burleson Estates One, including but not limited to the following information for the period starting February 27, 2008:
(1) Payments made at any time to Ejiniwe and/or Burleson Estates One or to any third party for the benefit of Ejiniwe and/or Burleson Estates One;
(2) Loan agreements between Glover Group and Ejiniwe or Burleson Estates One;
(3) Disbursements of funds by Burleson Estates One or Glover Group relating to the development of the Burleson Estates One property;
(4) Receipts of funds by Burleson Estates One or Glover Group in respect to the development of the Burleson Estates One property; and
b. Requiring Glover Group to submit to Drakes through counsel, but not file with the Court, full documentation of financial dealings involving Ejiniwe, Burleson Estates One, and/or Glover Group, including but not limited to bank statements, checks, deposit tickets, written agreements,
deeds, deeds of trusts, promissory notes, partnership tax returns for 2008 through 2016 for both Burleson Estates One and Glover Group, and contemporaneous memoranda concerning decisions made and actions taken by Burleson Estates One and Glover Group; and
c. Granting any other fair and just relief.
Glover Group moved for summary judgment, which Dr. Drakes opposed. The court orally granted Glover Group's motion at the conclusion of a hearing. The court found that because Dr. Drakes was not a creditor of Burleson Estates, he was not entitled to any relief from Glover Group under a theory of successor liability. The court also found that Dr. Drakes' fraudulent conveyance claim was barred by the three-year statute of limitations for civil actions. The court entered an order granting the motion, but did not enter a separate paper containing a declaration of the parties' respective rights.
Dr. Drakes filed a motion to alter or amend the judgment, which the court denied.
Dr. Drakes then filed a timely notice of appeal, and now presents us with the following questions:
1. Did the trial court err in failing to issue a judgment declaring each party's rights and responsibilities?
2. Did the trial court err in granting summary judgment to Glover Group based on the statute of limitations?
3. Did the trial court err in granting summary judgment to Glover Group on the issue of successor liability?
DISCUSSION
I.
STANDARD OF REVIEW
We review a trial court's grant of summary judgment without deference. Myers v. Kayhoe, 391 Md. 188, 203 (2006). Our review involves a determination of (1) "whether a dispute of material fact exists," and (2) "whether the trial court was legally correct." Frederick Rd. Ltd. P'ship v. Brown & Sturm, 360 Md. 76, 93 (2000); see also Md. Rule 2-501(f). For the purposes of summary judgment, a material fact is "a fact the resolution of which will somehow affect the outcome of the case." USA Cartage Leasing, LLC v. Baer, 202 Md. App. 138, 174 (2011) (quoting Barbre v. Pope, 402 Md. 157, 171-72 (2007)), aff'd, 429 Md. 199 (2012). "[W]e independently review the record to determine whether the parties properly generated a dispute of material fact and, if not, whether the moving party is entitled to judgment as a matter of law." Myers, 391 Md. at 203. We view the record "in the light most favorable to the non-moving party and construe any reasonable inferences that may be draw from the facts against the moving party." Rhoads v. Sommer, 401 Md. 131, 148 (2007).
II.
ANALYSIS
As the circuit court recognized, the fatal flaw in Dr. Drakes' complaint was that he invoked theories of recovery that, under the facts of this case, are designed to protect creditors of Burleson Estates, not creditors of the members of Burleson Estates. As Dr. Drakes falls in the latter category, his claims fail as a matter of law.
As noted above, in count one of his complaint, Dr. Drakes alleged that Glover Group was liable under "mere continuation" theory of successor liability. "Generally, a corporation which acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation." Martin v. TWP Enters. Inc., 227 Md. App. 33, 49 (2016) (internal quotations omitted). However, Maryland recognizes four exceptions to this general rule. A successor entity will be liable for the debts and liabilities of its predecessors "when (1) there is an expressed or implied assumption of liability; (2) the transaction amounts to a consolidation or merger; (3) the purchasing corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for debts." Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282, 290 (1989). Notably, under this doctrine, the liability that is passed to the successor belongs, in the first instance, to the predecessor. Here, with respect to the transfer of the Property, the predecessor of Glover Group was Burleson Estates, not Ms. Ejiniwe.
Maryland courts have applied successor liability in the context of LLCs in the same way as it is applied to corporations. See e.g., Martin, 227 Md. App. at 60-63; Cushman & Wakefield of Maryland, Inc. v. DRV Greentec, LLC, 463 Md. 1, 6 (2019).
In count two, Dr. Drakes sought to impose successor liability based on a theory of fraudulent conveyance, looking to accomplish the same result he sought in count one. The conveyance that Dr. Drakes alleged was fraudulent was the transfer of the Property by Burleson Estates to Glover Group, both of which are LLCs. Dr. Drakes' fraudulent conveyance claim is governed, therefore, by Section 15-208 of the Commercial Law Article of the Maryland Annotated Code (1975, 2013 Repl. Vol.), which states, in relevant part:
(b) Every conveyance of limited liability company property and every limited liability company obligation incurred when the limited liability company is or will be rendered insolvent by it, is fraudulent as to creditors of the limited liability company , if the conveyance is made or the obligation is incurred to:
(Emphasis added).(1) A member, whether with or without a promise by him to pay the limited liability company's debts, unless the conveyance or obligation represents fair and reasonable compensation for services provided or to be provided by the member to the limited liability company and the services are provided or will be provided within 120 days before or after the date the conveyance is made or the obligation is incurred or;
(2) A person not a member, without fair consideration to the limited liability company as distinguished from consideration to the individual members.
By the express terms of this statute, a conveyance is fraudulent only as to creditors of the limited liability company that conveyed the subject property. See Lutherville Supply & Equip. Co. v. Dimon, 232 Md. 195, 197 (1963) ("The object of the statute was to protect creditors from fraudulent conveyances by debtors to friends or relatives upon the pretext of discharging a moral obligation."). Again, here, the Property was conveyed by the LLC (Burleson Estates), not Ms. Ejiniwe. Thus, the creditors of Burleson Estates, not of Ms. Ejiniwe, are protected by this statutory provision.
The decisive issue, therefore, is whether the charging order issued to Dr. Drakes transformed him into a creditor of Burleson Estates, thus permitting Dr. Drakes' successor liability theories. A charging order is not a money judgment, but merely provides a statutory mechanism for a creditor to reach the debtor's ownership interest in an entity "without destroying [the entity] to the detriment of third parties unconnected with the debt[.]" Rector v. Azzato, 74 Md. App. 684, 692 (1988); see also Keeler v. Acad. of Am. Franciscan Hist., Inc., 178 Md. App. 648, 653 (2008). Charging orders protect business entities and "prevent the disruption that would result" if an individual member's creditors were able to directly access a company's assets. Keeler, 178 Md. App. at 653 (quoting Lauer Constr., Inc. v. Schrift, 123 Md. App. 112, 115 (1998)). Thus, a charging order provides a judgment creditor with a mechanism to tap into the value of a judgment debtor's ownership interest in an entity without converting the judgment creditor into a creditor of that entity.
Section 4A-607 of the Corporations and Associations Article ("C&A") of the Maryland Annotated Code was not enacted until the passage of the 2011 Limited Liability Company Act. 2011 Maryland Laws Ch. 597 (H.B. 637). Prior to that enactment, a judgment creditor could not receive a charging order against a debtor's membership interest in an LLC. See, e.g.,R & D 2001, LLC v. Rice, 402 Md. 648, 655 (2008). Although the statutory provisions governing charging orders for LLCs, partnerships, and limited partnerships differ in some respects, in most respects they are—for all intents and purposes—the same. Compare Md. Code Ann., C&A § 4A-607 (1975, 2014 Repl. Vol), with C&A § 9A-504, and C&A § 10-705. Thus, the caselaw on charging orders in the general or limited partnership contexts is applicable to their counterpart provisions in the Maryland Limited Liability Company Act.
We turn now to the statutory provision that authorized the charging order obtained by Dr. Drakes: C&A § 4A-607. This statute provides, in relevant part:
(b)(1) On application by a creditor of a debtor holding an economic interest in a limited liability company, a court having jurisdiction may charge the economic interest of the debtor in the limited liability company for the unsatisfied amount of debt.
(2) The court may appoint a receiver for the distributions due or to become due to the debtor with respect to the limited liability company and make all other orders, directions, accounts, and inquiries that the debtor would
have been entitled to make or that the circumstances of the case may require.
(c)(1) A charging order constitutes a lien on the economic interest of the debtor in the limited liability company and requires the limited liability company to pay over to the creditor only any distributions that would otherwise be payable to the debtor whose economic interest is charged.
(2) Subject to paragraph (3) of this subsection, the noneconomic interest of a debtor whose economic interest is subject to a charging order is unaffected and is retained by the debtor.
(3) (i) Unless otherwise agreed, on a showing that the distributions under a charging order will not pay the amount owed to the creditor within a reasonable time, the court may order foreclosure of the economic interest subject to the charging order and order the sale of the economic interest of the debtor.
(ii) The purchaser of the economic interest of the debtor at the foreclosure sale is an assignee as provided in §§ 4A-603 and 4A-604 of this subtitle.
* * *
(f) This section provides the exclusive remedy by which a creditor of a member may attach the membership interest of the member or otherwise satisfy the outstanding debt of the member out of the membership interest of the member.
As a creature of statute, we limit the scope and reach of charging orders to the precise purpose indicated in the statute. Bank of Bethesda v. Koch, 44 Md. App. 350, 354 (1979). By the express terms of the statute, the word "debtor" refers to the holder of an economic interest in an LLC, not to the LLC itself. And, of course, the word "creditor" refers to a creditor of one who holds economic interest in the LLC, not to a creditor of the LLC. Thus, unsurprisingly, the charging order issued to Dr. Drakes under this statute granted him rights only vis-à-vis Ms. Ejiniwe and her membership interest in Burleson Estates. It did not transform Dr. Drakes into a creditor of Burleson Estates. For this reason, the circuit court correctly determined that Drakes could not pursue a claim of successor liability against Glover Group, and that Glover Group was entitled to summary judgment as a matter of law as to counts one and two. Because Dr. Drakes' claim for an accounting in count three was predicated on the success of either count one or count two, count three likewise fails as a matter of law.
In Koch, we found that a charging order against a judgment debtor's interest in a limited partnership had no effect because it was obtained after the judgment debtor had assigned away its interest in the limited partnership. 44 Md. App. at 354-55. In reaching that decision, we explained that a charging order only serves "the precise purpose statutorily indicated, [i.e.] to 'charge' an interest with a debt[,]" and therefore there was nothing to be charged once the debtor assigned his interest. Id. at 354. In so holding, the court expressly declined the creditor's "invitation to expand a limited statutory right" created by a charging order. Id. at 355.
As noted above (see footnote 2), the charging order provided the following: (1) that Dr. Drakes was entitled to receive any payments that were due or would become due from Burleson Estates to Ms. Ejiniwe by virtue of her membership interest in Burleson Estates; (2) that a lien was imposed against Ms. Ejiniwe's interest in Burleson Estates in favor of Dr. Drakes in the amount of his underlying judgment against her; (3) that Dr. Drakes' attorney was appointed as a receiver on Dr. Drakes' behalf to collect and distribute funds due under the charging order and (4) Dr. Drakes' attorney was authorized to make inquiries or issue directions to Burleson Estates that Ms. Ejiniwe would have been entitled to make or issue by virtue of her interest in Burleson Estates; and (5) if the above failed to yield a substantial recovery for Dr. Drakes on his judgment against Ms. Ejiniwe, then Dr. Drakes could foreclose on her interest in Burleson Estates.
Recently, the Georgia Court of Appeals made this very point:
A charging order does not create a debtor-creditor relationship between the judgment creditor who obtained the charging order and the LLC whose member's interests are being charged. . . . [if] a creditor of a member of the LLC does not also have a debtor-creditor relationship with the LLC, the creditor does not also become a creditor of the LLC by obtaining a charging order against the LLC.Merrill Ranch Props., LLC v. Austell, 784 S.E.2d 125, 131-32 (Ga. App. 2016).
Even though the circuit court did not say so expressly, we believe that the court's finding of no successor liability applied to both counts one and two. We reach this conclusion because Dr. Drakes included "successor liability" in the titles of both counts, and both counts sought identical relief.
Because we conclude that the claims asserted by Dr. Drakes fail as a matter of law and affirm on that basis, we need not review the circuit court's finding that the fraudulent conveyance count was barred by the statute of limitations. We do, however, believe that Dr. Drakes has a point that the circuit court erred by not issuing a separate declaration of the parties' respective rights. The Court of Appeals has "made clear on numerous occasions" that:
when a declaratory judgment action is brought and the controversy is appropriate for resolution by declaratory judgment, the court must enter a declaratory judgment and that judgment, defining the rights and obligations of the parties or the status of the thing in controversy, must be in writing. It is not permissible for the court to issue an oral declaration . . . When entering a declaratory judgment, the court must, in a separate document, state in writing its declaration of the rights of the parties.Griffith Energy Servs., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 224 Md. App. 252, 271 (2015) (quoting Bowen v. City of Annapolis, 402 Md. 587, 608-09 (2007)). This requirement stands even when the trial court grants a summary judgment motion against the party seeking the declaratory judgment. See Catalyst Health Sols., Inc. v. Magill, 414 Md. 457, 472 (2010).
Here, Dr. Drakes sought various forms of declaratory relief in both counts one and two. Thus, upon granting Glover Group's motion for summary judgment, entry of a separate written document declaring the "rights and obligations" of both Dr. Drakes and Glover Group was required. See Griffith Energy Servs., 224 Md. App. at 271. However, this omission does not deprive us of jurisdiction to address the merits of this appeal, and it can be easily corrected on remand. See id. at 272; Bontempo v. Lare, 444 Md. 344, 379 (2015). Accordingly, we remand this case for the circuit court to enter a separate declaratory judgment consistent with this opinion.
Specifically, Dr. Drakes filed a "Complaint for Declaratory Judgment and Accounting" and requested that the court enter a judgment: 1) "[d]eclaring that [Dr.] Drakes shall be entitled to any and all payments due to [Ms.] Ejiniwe by virtue of her interest in Burleson Estates One . . ."; 2) "[d]eclaring a lien against the Burleson Estates One property, however titled, equal to [Ms.] Ejiniwe's interest in Burleson Estates One" up to the total amount of Dr. Drakes' charging order; 3) declaring that Dr. Drakes "shall have the right 'to make all other orders directions, accounts, and inquiries that' [Ms.] Ejiniwe could have made, were she a member of Glover Group"; and 4) "[g]ranting any other fair and just relief."
JUDGMENT OF THE CIRCUIT COURT FOR PRINCE GEORGE'S COUNTY AFFIRMED. CASE REMANDED TO THAT COURT FOR THE LIMITED PURPOSE OF ENTERING A DECLARATORY JUDGMENT CONSISTENT WITH THIS OPINION. COSTS TO BE PAID BY APPELLANT.