A judgment was entered in Maine in favor of Preservation Holdings, LLC and against Pamela Gleichman and others. The Maine court entered charging orders against Gleichman's interests in some 51 different limited liability companies (LLCs) and limited partnerships (LPs).
The Maine judgment being still unsatisfied, that judgment was then registered in Illinois. The Cook County court entered its own charging orders against Gleichman's interests in the 51 LLCs and LPs pursuant to the Illinois law, which charging orders created liens in favor of Preservation Holdings against Gleichman's interests.
Next, the Cook County court granted Preservation Holdings' petition to foreclose its charging order liens on Gleichman's interests. The proposed order suggested by Preservation Holdings was that the Cook County sheriff would hold a public auction and sell the interests one-by-one (a/k/a seriatim).
Gleichman filed an objection to the petition, arguing among other things that two of the LLCs were not owned by her individually, but instead was owned by the SNH Trust, which was a revocable trust for Gleichman's benefit, and an individual by the name of Rosa Scarcelli. As the Cook County court had already ruled against Gleichman on this issue (revocable trusts provide no creditor protection to the settlor/beneficiary of such trusts), her objections to the petition were overruled, and the proposed order was signed by the court.
Thereafter, the sheriff held the auction and Gleichman's interests were sold off as a group, i.e., a single block of combined assets, to a buyer called the Promenade Trust for $4.8 million. In fact, the Promenade Trust was the only buyer who showed up for the auction.
When Preservation Trust moved to confirm the auction and sale, Gleichman objected on the basis that there were both irregularities in the sale and the price obtained at the auction was unconscionably low. In support of her objections, Gleichman submitted an affidavit from a real estate expert, Sean Hamilton, opined that the fair market value of the interests was about $25.5 million, and further that the auction was flawed because it did not seek high-dollar buyers for the types of properties that were owned by the LLCs and LPs.
The Cook County court overruled Gleichman's objections and confirmed the auction and sale. Gleichman appealed. The Appellate Court of Illinois then issued the opinion that I shall next relate.
The Appellate Court noted that Illinois has a three-part test for determining whether a judicial sale, such as an auction sale, was proper:
(1) Was notice of the sale properly given?
(2) Were the terms of the sale unconscionable?
(3) Was the sale conducted fraudulently?
The first and last questions didn't pose any problems, but the main argument was around whether the terms of the sale were unconscionable due to the price received. Here, the Appellate Court agreed that whenever there is a forced sale, the fair market price may not be obtained for the reason that buyers usually do not have the opportunity they might otherwise have to learn all they need to about the asset being sold. Nonetheless, in the absence of fraud or other irregularities in the sale, the price obtained at an auction is deemed to be the "conclusive measure of its value".
The bottom line was that the burden was on Gleichman to prove that there were irregularities in the sale, but she failed to adequately do so. As far as the affidavit of her expert witness, Hamilton, he opined on the underlying real estate in the LLCs and LPs which was not being sold⸺ instead of the value of the interests in the LLCs and LPs which was being sold. According to the Appellate Court:
This is a distinction with a significant difference. A bidder who acquires a distributional partnership interest at a judicial sale does not step into the shoes of his predecessor because the bidder acquires no management role and no right to receive or inspect the books and records of the partnership.
Further, because many (all?) of Gleichman's interests were partial interests, i.e., less than 100% of the interests in the LLCs and LPs, these would garner an even lower value, because the buyer would have to put up with other members and partners and be bound by their decisions.
Gleichman also objected to the sale on the basis that her interests in the LLCs and LPs should have been sold one-by-one (seriatim) instead of as a giant block (en masse). The problem for Gleichman here, however, was that procedurally she failed to object to the en masse sale at the confirmation hearing, and thus waived her objection. While the Appellate Court noted that the sheriff had screwed the sale up by not following the court's order (which required the sale to be done seriatim), it was still up to Gleichman to timely object:
The sale was open to the public, and nothing prevented Gleichman from monitoring it to ensure that the sheriff conducted it in punctilious conformity with the court's order. We therefore find the point forfeited and will not disturb the confirmation of the sale on this basis.
Similarly, the Appellate Court overruled Gleichman's objection to the sale of the two LLCs because she did not own an interest in them, but they were owned through her revocable trust, for the reason that her objection was not timely asserted.
The Appellate Court then affirmed the Cook County court's order confirming the judicial sale.
ANALYSIS
Certainly, there was some questionable lawyering going on here, but the real truth is that judicial sales are some of that sausage that you don't want to see made. Most of them have their defects at some level or another, and almost none of them net anything close to fair market value, i.e., what the property would have obtained in a normal sale. That's just a fact of the judicial system, but a necessary evil when folks don't pay their debts and there is no choice but for creditors to foreclose.
The most important takeaway from this case is a biggy and should not be missed: The sale of LLC and LP interests is very likely to garner a much lower price at a judicial sale than the sale of the underlying assets, for the reason that such interests are restricted and the purchaser will never be in a better situation than that of an involuntary assignee with no control rights, i.e., a purely passive investor lacking even minimal voting rights.
This is where the creditor-protective benefits of LLCs and LPs turn around to bite the debtor, since at a judicial sale the debtor is actually worse off (and, arguably, much worse off) than if the underlying assets were sold directly, since the price paid at the auction for such interests will be at best a poor fraction of the value of the underlying assets. A debtor who has the ability to do so might be well advised in particular cases to distribute the assets out of the LLCs or LPs before the charging order is entered, if later foreclosure of the interests is inevitable.
Remember this the next time we go through a bust (and we will).
CITE AS
Preservation Holdings, LLC v. Norberg, 2019 IL App (1st) 181136 (June 14, 2019). Full opinion at https://chargingorder.com/opinion-2019-illinois-preservation-holdings-charging-order.html
