Green v. Bellerive Condominiums Ltd. Partnership

ADKINS, Judge. In this appeal, we again consider the nature and extent of rights conferred by a charging order against a limited partnership interest. The new question presented by this case is whether a receiver with a charging order against limited partnership interests has a right to be notified of a partnership opportunity-in this case, an opportunity to purchase the partnership’s debt. Affirming the trial court, we hold that general partners of a limited partnership do not have a duty to notify a charging creditor about that partnership opportunity, and that the charging creditor does not have standing to assert the debtor partners’ management rights to participate in or object to such a purchase.

FACTS AND BACKGROUND In 1988, Arnold D. Wolfe co-founded Bellerive Condominiums Limited Partnership (“Bellerive” or the “Partnership”), appellee. A corporation controlled by Wolfe, U.S. Investment Group, Inc. (“USIG”), was one of Bellerive’s three general partners. The other two general partners were Capital Management and Development Corporation (“Capital Management”), a Delaware corporation controlled by its president, Bechara Nammour, and Express Development Corporation, a New York corporation controlled by its president, Richard J. Seikaly. Wolfe borrowed $50,000 from Richard C. Beavers and Richard P. Beavers, and contributed the funds to the Partnership.

In turn, the Partnership used the funds to put a deposit on real property in Anne Arundel County. The Partnership’s business plan was to develop and sell the property as condominiums. ⁵⁶⁶ As a result of the $50,000 capital contribution, Wolfe also became one of eight limited partners in Bellerive. 1 Under the terms of Bellerive’s Partnership Agreement, as amended (the “Partnership Agreement”), Wolfe had priority to the first $50,000 in Partnership profits. Like Wolfe, Nammour and Seikaly also held both general and limited partnership interests through their business entities. 2 To complete the purchase and develop the property, the Partnership borrowed from the National Bank of Washington (“NBW”). A $300,000 loan was evidenced by a September 24, 1988 note and deed of trust on the property (the “Loan,” “Note,” and “Deed of Trust”).

The Loan was increased to $400,000 in November 1989. But the development plans did not proceed as the Bellerive partners had planned. The Partnership operated at a loss, despite capital calls and loans from its partners. With no Partnership profits from which to pay the Beavers, Wolfe defaulted on his repayment obligation.

In May 1991, the Beavers obtained a judgment against Wolfe and USIG, in ⁵⁶⁷ the amount of $124,040.74. Attorney Carlton M. Green, appellant, represented the Beavers in that action. In his collection efforts, Green became aware that Wolfe’s priority right to Partnership profits might be used to satisfy the judgment, and that there might be profits if the Partnership’s development and sale plans were successful. Green sought a charging order against Wolfe’s interest as a limited partner and USIG’s interest as a general partner.

On October 28, 1993, the Circuit Court for Anne Arundel County entered a charging order (the “Charging Order”) appointing Green as the receiver for any share of Partnership profits payable to either Wolfe or USIG, and lor “any other money that is or becomes due to said judgment debtors by reason of their partnership interest.” In November, the Partnership was advised of the Charging Order. Meanwhile, unable to develop and sell the property as planned, the Partnership defaulted on the Note. At about the same time, NBW was dissolved, and the FDIC acquired the Note. By April 1994, the Loan balance exceeded $590,000.

The FDIC scheduled a foreclosure sale for July 19, 1994. Seeking to avoid foreclosure, Seikaly and Nammour negotiated with the FDIC to purchase the Note at a discount. The FDIC agreed to sell the Note for $375,000. On May 31, 1994, Seikaly and Nammour entered into an agreement to purchase the Note from the FDIC.

The scheduled settlement date was July 15th. If settlement did not occur by July 19th, the FDIC planned to proceed with foreclosure scheduled for that date. Seikaly and Nammour then invited all of the Bellerive partners to participate in the purchase of the Note. In a letter dated June 11, 1994, they informed the partners about the opportunity to purchase the Partnership’s Note at a discount, and invited each partner to participate pro rata in the purchase.

The letter specified the amount each partner would have to contribute, and included payment instructions. At the end of the letter, there were lines to indicate whether the partner “acknowledged, accepted and agreed” or “decline[d] the offer to purchase a share of the Note.” The letter further ⁵⁶⁸ stated that if payment was not made by July 1, Messrs. Nammour and Seikaly “shall assume you choose not to participate in the Note purchase----” By this time, neither Wolfe nor USIG was active in Partnership affairs. Seikaly testified that USIG “went out of business so they ceased to be a general partner.” The notice letters for Wolfe and USIG were sent via certified mail to the most recent address specified for Partnership correspondence.

But both letters were returned, marked “moved, not forwardable.” No notice of the opportunity to purchase the Note was sent to the receiver. ■The FDIC required the consent of the Partnership to the purchase and assignment of the Note. The partners other than Wolfe and USIG consented to the Note purchase. All but three of the partners participated in purchasing the Note at the discounted price. 3 With the Note and Deed of Trust now held in friendly hands, the Partnership continued efforts to develop and market the property. Those efforts included redesigning the development concept as townhomes, and re-marketing the property.

In January, April, and October, 1995, the receiver wrote to the Partnership’s counsel to inquire about the status of the Partnership, but received no response. In June 1996, the receiver filed a complaint for dissolution of the Partnership. He alleged that it was not reasonable to carry on the business at a loss, and that Capital Management had acted unreasonably and had failed to account to the Partnership for any income or expenses. The purpose of the petition was to force a sale of the property and distribution of the proceeds in accordance with the Partnership Agreement.

Shortly after filing the complaint, the receiver learned about the discounted Note purchase. 4 By Consent Order dated December 20, 1996, ⁵⁶⁹ the receiver agreed to stay his dissolution effort. ■ in order to give the Partnership more time to sell the property. In December 1997, the Partnership was able to sell the property under the redesigned development concept, at a contract price of $825,000. A Consent Order authorized the sale, but required escrow of $60,000 of the settlement proceeds pending judicial determination of the receiver’s claims. On December 30, 1997, $676,374.45 of the settlement proceeds was used toward paying off the Note at its full face value, with none of the loan discount passed through to the Partnership.

There was an additional balance due on the Note. As a result of the discount purchase, the sale of the property, and repayment of the Note three and a half years later, each of the Purchasing Partners benefitted. After settlement, the receiver sought repayment of the $50,000 owed to Wolfe from the $60,000 in escrowed funds. He complained that the Purchasing Partners had breached their fiduciary duties by (1) failing to notify him of the opportunity to purchase the Note; and (2) failing to obtain the consent of Wolfe or USIG to the purchase.

He asserted that because Wolfe and USIG had not consented to the Note purchase, the Purchasing Partners held any monies they made on the Note for the benefit of the Partnership. If the amount of the Loan discount were credited back to the Partnership, the receiver argued, there would be ample Partnership profit from which to make the priority repayment of Wolfe’s $50,000. After an evidentiary hearing, Judge Joseph P. Manck of the Circuit Court for Anne Arundel County rejected the receiver’s contentions in a written Memorandum Opinion and Order dated June 18, 1998 (the “Order”). The court ruled inter alia that the receiver was not entitled to notice of the Note purchase, that the Purchasing Partners were not obligated to credit any proceeds from the Partnership’s repayment of the Note back to the Partnership, and that any benefit that the ⁵⁷⁰ Purchasing Partners made on the Note was not “Partnership profit.” The court also ruled that $37,500 in settlement proceeds had been improperly paid to Express Development for work to redesign the project concept, and ordered that amount to be credited back to the Partnership.

The receiver’s motion for reconsideration of the Order was denied. The court subsequently ordered an accounting. On July 14, 1999, Tim Murphy, CPA, submitted his report' and recommendations (the “Murphy Report”). Murphy recommended that the escrowed $60,000, plus the $37,500 credited back to the Partnership as a result of the Order, should be used inter alia to pay the remaining debt to the Purchasing Partners on the Note.

Because the debt on the Note exceeded the total amount available for distribution, Murphy concluded that there were no Partnership profits, and thus, that there was no “profit” with which to pay the receiver’s priority claim. On October 14, 1999, the court ordered distribution of the escrowed funds as recommended in the Murphy Report and entered a final order in accordance with its previous Order. The receiver filed this appeal. DISCUSSION I. Standard Of Review In an appeal from a bench trial, we “review the case on both the law and the evidence.” Md. Rule 8-131(c).

If the issue to which appellant excepts, and on which the court ruled, is a purely legal issue, our review is expansive. See In re Michael G., 107 Md.App. 257, 265 , 667 A.2d 956 (1995). “The clearly erroneous standard for appellate review ... does not apply to a trial court’s determinations of legal questions or conclusions of law based on findings of fact.” See Heat & Power Corp. v. Air Prods. & Chems., Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990). Because there is no dispute over the trial court’s findings of fact in this case, and the issues raised by appellant involve only legal questions, we must determine ⁵⁷¹ whether the trial court was “legally correct.” See id. at 592 , 578 A.2d 1202 .

II

Receiver’s Rights Under The Charging Order A. Collection Rights A charging order is a unique tool. Although it has some characteristics of both an assignment and an attachment, it is neither. See Bank of Bethesda v. Koch, 44 Md.App. 350, 354 , 408 A.2d 767 (1979). Charging orders originated as a statutory solution to cumbersome common law collection procedures “that were ill-suited for reaching partnership interests.” 91st Street Joint Venture v. Goldstein, 114 Md.App. 561, 567 , 691 A.2d 272 (1997) (detailing development of charging orders and relevant case law and commentary).

They are purely statutory tools that judgment creditors use to reach partnership interests of indebted partners. See id. Indeed, we have characterized a charging order against a limited partnership interest as “nothing more than a legislative means of providing a creditor some means of getting at a debtor’s ill-defined interest in a statutory bastard, surnamed ‘partnership,’ but corporately protecting participants by limiting their liability as are corporate shareholders.” Bank of Bethesda, 44 Md.App. at 354 , 408 A.2d 767 . Charging orders against a limited partnership interest are governed by Title 10 of the Corporations and Associations Article (“CA”), known as the Revised Uniform Limited Partnership Act (RULPA). 5 Under section 10-705, judgment ⁵⁷² creditors may obtain a charging order against the partnership interest of either a general or limited partner of a limited partnership.

See Lauer Construction v. Schrift, 123 Md.App. 112, 116 , 716 A.2d 1096 , cert. denied sub nom. Gibson’s Lodging v. Lauer, 352 Md. 310 , 721 A.2d 989 (1998). A charging order gives the charging creditor only limited access to the partnership interest of the indebted partner. Section 10-705 restricts the rights conferred under a charging order against an interest in a limited partnership.

On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an. assignee of the partnership interest.... CA § 10-705 (emphasis added). Under section 10-702, the rights of an assignee of a limited partnership interest are also explicitly limited by design.

An assignment of a partnership interest does not dissolve a limited partnership or entitle the assignee to become a partner or, unless otherwise provided in the partnership agreement, exercise any rights of a partner. Unless otherwise provided in the partnership agreement, an assignment entitles the assignee to receive, to the extent assigned, only the distributions to which the assignor would be entitled. CA § 10-702 (emphasis added). An assignee of a limited partnership interest generally cannot become a partner without the consent of all other partners.

See CA § 10-703(a). In two recent decisions, this Court has examined limitations on the rights conferred by a charging order against a partnership interest. In 91st Street Joint Venture, supra, we addressed for the first time the scope of judicial authority to fashion relief under a charging order. See 91st Street, 114 ⁵⁷³ Md.App. at 570, 691 A.2d 272 .

We outlined the two basic methods by which a creditor may proceed to collect from an indebted partner. See id. at 572, 691 A.2d 272 . The preferred collection method is to use a charging order to divert the debtor partner’s right to partnership profits to the judgment creditor. See id. “ ‘If this method is ineffectual there is another more drastic course of action....’” Id.

(quoting Gose, The Charging Order Under the Uniform Partnership Act, 28 Wash.L.Rev. 1, 10 (1953)). That alternative is “the ultimate transfer of the debtor partner’s interest....” Id. We recognized that the court’s powers to appoint a receiver, to order an accounting, and to make other orders as “the circumstances of the case may require” are merely “subsidiary aids to the collecting process,” which the court may exercise in its discretion. Id.

(quoting Gose, supra). Examining cases from other jurisdictions, we held that under section 9-505 of the Revised Uniform Partnership Act, 6 “the ordering of a sale is [also] something that the trial court may do as a supplement to charging the interest of the ⁵⁷⁴ partnership and appointing a receiver for profits,” but that “any transfer of the debtor partner’s interest is to take place pursuant to the rules governing judicial sales.” Id. at 577, 691 A.2d 272 . Accordingly, we held that a receiver must obtain judicial permission for such a forced transfer of the debtor partner’s interest, and that a receiver with a charging order against an interest in a general partnership is not entitled to assign the charged partnership interest without court order or the consent of the remaining partners. See id. at 573, 576-78 , 691 A.2d 272 .

But we also noted in 91st Street that under section 10-705, the rights of a creditor against a limited partnership interest are “more limited ... than that provided for in the UPA and ULPA” governing general partnerships. Id. at 570 n. 2, 691 A.2d 272 . The next year, in Lauer Construction, supra, we addressed for the first time the nature and extent of those rights. We held that creditors with a charging order against a limited partnership interest are entitled to the same collection remedy as creditors with a charging order against a general partnership interest, with the same limitations.

See Lauer Construction, 123 Md.App. at 119 , 716 A.2d 1096 . We based our decision on the absence of explicit enforcement or collection mechanisms in section 10-705 and similarities in the right to receive partnership distributions under both RULPA and RUPA. But our holdings in both 91st Street and Lauer Constniction addressed only the scope of a creditor’s “collection remedy,” i.e., a creditor’s right to “liquidate” the debtor partner’s financial interest in the partnership, because that partner’s right to partnership distributions “collateralizes” the judgment debt as a result of a charging order. Both cases considered how a creditor could use his unique charging order tool to collect the debt by reaching the indebted partner’s financial interest in the partnership.

Both cases concluded that these collection rights may be exercised only through the courts, and must be judicially determined on a case by case basis. In examining these judicially supervised collection methods, we were not presented with, and therefore did not address, ⁵⁷⁵ whether a creditor also could use the same charging order as a tool to demand information about partnership debt, partnership opportunities, or other partnership affairs, or to participate in the partnership’s decisions regarding those matters. In addressing the collection rights of a charging creditor, neither case addressed whether the charging creditor may exercise the management rights of the debtor partner. We address that question now.

B. Management Rights In this case, the receiver seeks more than the collection rights that we addressed in 91st Street and Lauer Construction . In the trial court, he asserted that by virtue of the Charging Order, he had the same right as USIG and Wolfe to be notified of the opportunity to purchase the Note, and that he was entitled to “stand in the shoes” of Wolfe and USIG to demand that the amount of the loan discount be credited back to the Partnership because the Purchasing Partners did not obtain their consent to the Note purchase. After an evidentiary hearing, the trial court concluded that the receiver “was not entitled to any notice” of the Note purchase or any credit for the difference between the amount that the Purchasing Partners paid for the Note and the amount they received at the December 1997 settlement. The receiver moved to reconsider, arguing that the real issue was not whether the receiver received notice of the opportunity, but whether the debtor partners had consented to the Note purchase.

As authority for his consent argument, he relied on section 9-404, which provides that [e]very partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. CA § 9-404. At a hearing on the motion to reconsider, counsel for the Partnership responded that the duty of general partners under section 9-404 is to “fully disclose and give the ⁵⁷⁶ opportunity to the partners,” and that is exactly what the Bellerive general partners had done. The Partnership argued that the partners’ fiduciary duty was to disclose and offer the opportunity to the other partners, that section 9-404 does not require “literal consent,” and that even if it did, the receiver had no standing to assert the rights of the debtor partners under section 9-404.

The trial court issued a second written opinion and order, finding inter alia that “the partners discharged their fiduciary duty to Mr. Wolfe and USI[G] by offering [them] the opportunity to join in the purchase of the note.” The court also stated that it was “not convinced that [p]laintiff, as receiver, has a right to challenge the purchase of the note.... ” On appeal, the receiver renews his notice and consent arguments. Relying on section 9-404 and language in Rector v. Azzato, 74 Md.App. 684 , 539 A.2d 1162 (1988), and Leventhal v. Five Seasons Partnership, 84 Md.App. 603 , 581 A.2d 449 (1990), the receiver repeatedly asserts that he was entitled to notice of the purchase and to assert the debtor partners’ rights under section 9-404, because the Charging Order placed him “in the shoes of the debtor” and entitled him “to do that which the debtor/partner could have done.” See Leventhal, 84 Md.App. at 606 , 581 A.2d 449 . The receiver’s reliance on this language is misplaced. Neither Rector nor Leventhal defined the nature and scope of the charging creditor’s rights so broadly.

Neither case held that a receiver with a charging order against limited partnership interests stands in the debtor partners’ shoes for all purposes. Neither case involved the debtor partner’s right to receive information about limited partnership opportunities, or to participate in limited partnership affairs. In fact, neither case involved a partnership opportunity, and Leventhal did not even involve a limited partnership. Cf.

Rector, supra (judgment creditor of assignee of limited partnership interest may obtain charging order against that interest); Leventhal, supra (receiver with charging order against interests in general partnership' may petition for dissolution of general partnership). ⁵⁷⁷ Like the trial court, we reject the receiver’s “substituted shoes” argument, because it is contrary to unambiguous statutory limitations on a charging order against a limited partnership interest and to sound principles of limited partnership law. Distilled to its essence, the receiver’s argument is that the Charging Order operated as either a judicial assignment of the debtor partners’ management rights in the Partnership, or as a judicial substitution of the receiver for the debtor partners for all purposes. We decline the receiver’s request to expand the rights conferred by a charging order beyond the collection rights we discussed in Lauer Construction to include the management rights of a debtor partner. As reflected in the unambiguous language of sections 10-702, 10-703, and 10-705, a charging order against a limited partnership interest does not operate as an unlimited assignment of all partnership rights, or as a judicial “swap” of the creditor for the debtor partner.

When read in pan materia, these sections make it clear that a charging order against a limited partnership interest does not entitle the creditor “to become a partner, or ... exercise any rights of a partner. ” § 10-702 (emphasis added). The “rights of a partner” include the right to information and the right to participate in partnership decisions that the