Levy v. Carolinian, LLC

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Shaul Levy and Meir Levy, Appellants,
v.
Carolinian, LLC, Respondent.
Appellate Case No. 2013-000650
Appeal from Horry County
Steven H. John, Circuit Court Judge
Opinion No. 27442
Heard June 25, 2014 – Filed September 3, 2014
REVERSED
R. Wayne Byrd, Mark B. Goddard, and Carlyle Cromer,
all of Turner Padget Graham & Laney, P.A., of Myrtle
Beach; and R. Hawthorne Barrett of Turner Padget
Graham & Laney, P.A., of Columbia, for Appellants.
Benjamin A. Baroody, of Bellamy, Rutenberg, Copeland,
Epps, Gravely & Bowers, P.A. of Myrtle Beach, for
Respondent.
JUSTICE KITTREDGE: This case is about the efforts of Respondent
Carolinian, LLC (Carolinian) to acquire the distributional interest of Bhupendra
Patel (Patel), a member of Carolinian, from judgment creditors, Appellants Shaul
and Meir Levy (collectively "Levys"), who purchased Patel's distributional interest
at a foreclosure sale. The circuit court found that, pursuant to Carolinian's
Operating Agreement, Carolinian could compel the Levys to sell their
distributional interest after the foreclosure sale. We reverse.
I.
Carolinian is a closely held, manager-managed limited liability company (LLC),
which is organized under the laws of South Carolina and which owns and manages
various hotel and rental properties in Horry County, South Carolina. In February
2010, the Levys obtained a judgment against Patel1 in the amount of $2.5 million.
Thereafter, the Levys obtained a charging order in the circuit court, which
constituted a lien against Patel's distributional interest in Carolinian.
Subsequently, the Levys filed a petition to foreclose the charging lien, and the
foreclosure sale was held in April 2012. The Levys were the successful bidders,
purchasing Patel's distributional interest for $215,000. Carolinian was represented
at the foreclosure sale by its registered agent and its attorney, who unsuccessfully
bid $190,000 on Carolinian's behalf.
Regarding the right to redeem or disencumber a member's distributional interest,
Section 3.5 of Carolinian's Operating Agreement provides that a member's
financial rights can be redeemed at any time up until foreclosure sale:
Redemption of Member's Financial Rights Subjected to Charging
Order. In the event a Member's Financial Rights are subjected to a
charging order under Section 33-44-504 of the [South Carolina Code],
the Management Committee may cause the Company to redeem the
Member's Financial Rights so charged, with Company Property, at
any time prior to foreclosure of said Financial Rights in accordance
with Section 33-44-504(c) of the [South Carolina Code].
1
Patel and two other persons are jointly and severally liable to the Levys for the
judgment debt. However, because the two others are not involved in this lawsuit,
we refer to Patel as the sole judgment debtor for ease of reference.
(emphasis added). It is undisputed neither Carolinian nor any of the remaining
members redeemed Patel's interest prior to the foreclosure sale, and the Levys did
not thereafter seek to be admitted as members of Carolinian.
Regarding a judgment creditor's acquisition of a member's distributional interest,
Carolinian's Operating Agreement provides:
[N]o creditor of a Member who obtains any portion of a Membership
Share, including any Financial Rights, by charging order pursuant to
Section 33-44-504 of the [South Carolina Code] . . . may become a
full Member in the Company without the unanimous written consent
of the Members, obtained after the transfer. . . . If the transferee of all
or any part of a Member's Membership Share is not admitted as a
Member, he shall be entitled to receive only the distributions to which
the transferor would otherwise be entitled. The transferee shall not
have any Voting Rights and shall not be entitled to participate in the
management of the Company or to exercise any rights of a Member.
(emphasis added).
Following the foreclosure sale, Carolinian asserted it was entitled to purchase
Patel's distributional interest from the Levys pursuant to Article 11 of the
Operating Agreement. Article 11 of the Operating Agreement, which speaks to the
rights of a "member" to transfer his membership share, provides in relevant part:
11.1 Restrictions on Transfer. No Member may voluntarily or
involuntarily sell, transfer, gift, assign, pledge, mortgage, hypothecate,
or otherwise convey or encumber any portion or all of his
Membership Share to any Person without the prior written consent of
those Members who own more than sixty-seven (67%) percent of the
Voting Rights in the Company (without regard to the transferor
Member). If [no] such consent is obtained, . . . any attempted
conveyance or encumbrance of all or a portion of a Membership Share
in contravention of this ARTICLE XI shall be null, void and without
effect.
11.2 Right to Buy
....
(b) Company and Members Right to Buy. If a Member attempts to
transfer all or a portion of his Membership Share without obtaining
the other Members' consent as required in SECTION 11.1, . . . such
Member is deemed to have offered to the Company all of his Member
Share . . . .
Carolinian contended that, since the Levys failed to obtain the consent required
under Section 11.1 of the Operating Agreement, their distributional interest was
deemed to have been offered to Carolinian, and Carolinian was entitled to purchase
that interest under Section 11.2.
The Levys objected to Carolinian's attempt to force them to sell their interest,
arguing they were not subject to the terms of Article 11 of the Operating
Agreement and, thus, were not required to seek consent thereunder. The Levys
subsequently filed suit, seeking a declaratory judgment that they were the lawful
owners of Patel's distributional interest and that any right Carolinian had to compel
the sale of the distributional interest terminated upon the foreclosure sale under the
terms of Section 3.5 of the Operating Agreement.
Following a hearing, the trial court found the foreclosure sale, which resulted in the
transfer of Patel's distributional interest in Carolinian to the Levys, changed the
Levys' status from that of mere judgment creditors to transferees of Patel's
distributional interest. The trial court further found that, as transferees, the Levys
became subject to the provisions of Article 11 of the Operating Agreement.
Specifically, the trial court held that Carolinian could force the Levys to sell Patel's
distributional interest pursuant to Sections 11.1 and 11.2 of the Operating
Agreement.
The Levys' appeal was certified to this Court pursuant to Rule 204(b), SCACR.
II.
The dispositive issue in this case is whether Carolinian may compel the Levys to
sell the distributional interest they acquired through the foreclosure sale. The
Levys admit Carolinian had the right to redeem Patel's distributional interest at any
time prior to the foreclosure sale; however, the Levys contend the ability to
redeem that interest was extinguished by virtue of the judicial sale. Thus, the
Levys argue the circuit court committed an error of law in finding that, pursuant to
Article 11 of the Operating Agreement, Carolinian may compel the Levys to sell
their distributional interest. We agree.
The South Carolina Uniform Limited Liability Company Act of 1996 ("LLC
Act")2 provides the exclusive remedy by which a judgment creditor of a member
may satisfy a judgment out of the judgment debtor's distributional interest in an
LLC. S.C. Code Ann. § 33-44-504(e) (2006 & Supp. 2013); see also Kriti Ripley,
LLC v. Emerald Invs., LLC, 404 S.C. 367, 381, 746 S.E.2d 26, 33 (2013) (finding
the exclusive remedy for a judgment creditor seeking to satisfy a judgment through
the debtor's interest in an LLC is the process set forth in S.C. Code Ann. section
33-44-504).
The LLC Act provides in relevant part:
(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. . . . .
(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.
2
S.C. Code Ann. §§ 33-44-101 to -1208 (2006 & Supp. 2013).
S.C. Code Ann. § 33-44-504 (emphasis added). In terms of disencumbering a
member's interest that is subject to a charging lien, consistent with Section 3.5 of
Carolinian's Operating Agreement, the LLC Act provides that a member's
distributional interest in an LLC may be redeemed at any time prior to foreclosure.
Id. § 33-44-504(c).
The LLC Act defines a member's distributional interest as "all of a member's
interest in distributions by the [LLC]." Id. § 33-44-101(6). A distributional
interest in an LLC is personal property and may be transferred in whole or in part.
Id. § 33-44-501(b). A distributional interest does not include the member's broader
rights to participate in management of the LLC. Id. § 33-44-501 cmt. "A transfer
entitles the transferee to receive, to the extent transferred, only the distributions to
which the transferor would be entitled." Id. § 33-44-502.
"A transfer of a distributional interest does not entitle the transferee to become or
to exercise any rights of a member." Id. A transferee may become a member of
the LLC if and only to the extent all other members consent or as otherwise set
forth in the LLC operating agreement. Id. § 33-44-503(a). The operating
agreement is the essential contract that governs the affairs of an LLC. Id. § 33-44-
103 cmt. Although an LLC is generally free to modify the default provisions of
the LLC Act by its operating agreement, an LLC may not "restrict [the] rights of a
person, other than a manager, member, and transferee of a member's distributional
interest" through the terms of its operating agreement. Id. § 33-44-103(b)
(enumerating various non-waivable provisions of the LLC Act).
We find the trial court committed an error of law in finding the provisions of
Article 11 of the Operating Agreement applied and restricted the Levys right to
foreclose their charging lien without the consent of Carolinian or its members.
First, the transfer restrictions of Section 11.1, by their express and unambiguous
terms, apply only to "members," and unquestionably, the Levys have never been or
sought to be members of Carolinian; they merely became transferees of Patel's
distributional interest by virtue of the foreclosure sale. See Schulmeyer v. State
Farm Fire & Cas. Co., 353 S.C. 491, 495, 579 S.E.2d 132, 134 (2003) (noting
courts are bound to give effect to the meaning of an agreement's terms, which are
to be taken and understood in their plain, ordinary, and popular sense (citing
C.A.N. Enters., Inc. v. S.C. Health & Human Servs. Fin. Comm'n, 296 S.C. 373,
377, 373 S.E.2d 584, 586 (1988))). Further, the Levys did not attain the status of
transferees until after the foreclosure sale; thus, Carolinian could not, through its
Operating Agreement, restrict the statutory rights of the Levys by requiring
consent from Carolinian or its members before the foreclosure sale, as the Levys
were mere judgment creditors at that time. See S.C. Code Ann. § 33-44-103(b)(7)
(prohibiting an operating agreement from restricting the rights of a person other
than managers, members, and transferees of a member's distributional interest).
Thus, the Levys were not subject to the transfer restrictions of Section 11.1 at the
time they foreclosed their charging lien.
Moreover, because the Levys were not required under Section 11.1 to obtain
consent from Carolinian or its members prior to the foreclosure sale, we find
Carolinian may not now invoke the right to purchase under Section 11.2, as that
section, by its terms, applies only where consent under Section 11.1 is required and
not obtained prior to the transfer. We hold that Carolinian's ability to purchase
Patel's interest is not controlled by any part of Article 11, but rather by Section 3.5
of the Operating Agreement, which provided Carolinian the opportunity to
purchase Patel's interest before the foreclosure sale, not after.3 From the record, it
appears Carolinian was simply unwilling or unable to pay the amount necessary to
redeem Patel's distributional interest prior to the foreclosure sale; however, neither
the law nor the Operating Agreement gives Carolinian the unilateral right,
following the foreclosure sale, to purchase the distributional interest the Levys
lawfully acquired in an effort to satisfy their judgment against Patel. See Kriti
Ripley, 404 S.C. at 381–82, 746 S.E.2d at 33–34 ("A judgment creditor has a right
to collect on his judgment . . . . Foreclosure is not a penalty, but rather is simply
the ultimate remedy for collection of a debt owed. Foreclosure on an LLC
member's interest does not divest the member of the interest without compensation
or cause him to lose his interest. The member simply has a debt that must be
paid.").
III.
We reverse the trial court and find that the provisions of Article 11 of the
Operating Agreement did not restrict the Levys' right to foreclose their charging
3
We note Carolinian also had the opportunity to obtain Patel's interest through the
foreclosure sale; this opportunity was limited only by Carolinian's decision to cap
the amount of its bid at $190,000.
lien against Patel's distributional interest, and we further find that Carolinian may
not now invoke the provisions of Article 11 to compel the Levys to sell the
distributional interest they acquired through the foreclosure sale.
REVERSED.
TOAL, C.J., PLEICONES, BEATTY and HEARN, JJ., concur.