Boone Cnty. Utilities, LLC v. Branham Corp. (In re Boone Cnty. Utilities, LLC), Bankruptcy No. 03–16707–RLM–11.

CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Southern District of Indiana
Writing for the CourtROBYN L. MOBERLY
Citation518 B.R. 511
Docket NumberBankruptcy No. 03–16707–RLM–11.,Adversary No. 12–50128.
Decision Date17 September 2014
PartiesIn re BOONE COUNTY UTILITIES, LLC, Debtor. Boone County Utilities, LLC, Plaintiff v. The Branham Corporation, Defendant.

518 B.R. 511

In re BOONE COUNTY UTILITIES, LLC, Debtor.
Boone County Utilities, LLC, Plaintiff
v.
The Branham Corporation, Defendant.

Bankruptcy No. 03–16707–RLM–11.
Adversary No. 12–50128.

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.

Signed Sept. 17, 2014


So ordered.

[518 B.R. 513]

John E. Bator, Bator Law, LLC, Greenfield, IN, for Plaintiff.

Michael W. Hile, Katz & Korin PC, Michael A. Kiefer, Indianapolis, IN, for Defendant.


ORDER GRANTING MOTION TO QUASH SUBPOENA AND PROTECTIVE ORDER
ROBYN L. MOBERLY, Bankruptcy Judge.
Background

The current legal battle between The Branham Corporation (“Branham”) and Boone County Utilities (“BCU”) emanates from Branham's continuing efforts to collect a judgment it holds against BCU's sole member, Newland Resources, LLC. (“Newland”). Branham wants to take a 30(b)(6) deposition of a representative of BCU to accomplish its purpose and conduct other discovery, and BCU is resisting Branham's efforts. In state court, Branham has initiated proceedings supplemental against Newland and presumably joined BCU as a garnishee defendant. Although the exact procedural posture of the state court action has not been detailed for this court, it appears that this would be the correct state court proceeding to get to where we are today.

Discussion Proceedings Supplemental

Proceedings supplemental concepts originate in equity. Stuard v. Jackson & Wickliff Auctioneers, Inc., 670 N.E.2d 953, 955 (Ind.Ct.App.1996). “These proceedings allow the creditor to discover assets, reach equitable and other interests not otherwise subject to levy and sale at law, and to set aside fraudulent conveyances.” Id.

The procedures set forth in Indiana Trial Rule 69 and in statutes are the result of these equitable concepts. Proceedings supplemental to execution are detailed in Indiana Trial Rule 69, which states:

“(E) Proceedings supplemental to execution. Notwithstanding any other statute to the contrary, proceedings supplemental to execution may be enforced by verified motion or with affidavits in the court where the judgment is rendered alleging generally:

(1) that the plaintiff owns the described judgment against the defendant;

(2) that the plaintiff has no cause to believe that levy of execution against the

[518 B.R. 514]

defendant will satisfy the judgment; that the defendant be ordered to appear before the court to answer as to his non-exempt property subject to execution or proceedings supplemental to execution or to apply any such specified or unspecified property towards satisfaction of the judgment; and,

(4) if any person is named as garnishee, that garnishee has or will have specified or unspecified nonexempt property of, or an obligation owing to the judgment debtor subject to execution or proceedings supplemental to execution, and that the garnishee be ordered to appear and answer concerning the same or answer interrogatories submitted with the motion.”

As was recited in this court's Findings of Fact and Conclusions of Law on Plaintiff's Motion to Dismiss entered on April 1, 2014, BCU filed Chapter 11 bankruptcy on September 8, 2003. Its only member then, and now, was Newland LLC. Subsequent to the confirmation of BCU's Chapter 11 Amended Liquidating Plan of Reorganization on September 14, 2004 and subsequent to the distribution of all of the remaining assets of BCU to Newland under the Plan more than nine years ago, Branham obtained a judgment against Newland. Branham is aggressively pursuing its rights against Newland to collect its judgment and has targeted the BCU bankruptcy proceeding as a possible source of funds to satisfy that judgment.1

On August 5, 2013, BCU filed its Amended Complaint against Branham asking this Court to enter a declaratory judgment that the Amended Liquidating Plan of Reorganization, as well as a host of other minute details and matters occurring in the bankruptcy proceeding, is not subject to challenge or collateral attack by Branham. Additionally, BCU requests sanctions against Branham for actions which BCU states “deliberately, intentionally and willfully attacked the Orders of this Court, the U.S. District Court and the Seventh Circuit Court of Appeals without cause or justification, and deliberately misled the Boone Circuit Court in the Complaint, Pro Supp Motion and subsequent pleadings and hearings”.

Branham's Answer is equally thorough and contains a preview of its arguments in this matter. Branham filed a Counterclaim requesting this Court grant it relief to conduct discovery and to garnish Newland's economic interest in BCU.

The current issue before this court is whether Branham should be allowed to take the 30(b)(6) deposition of a representative of BCU and conduct paper discovery. The answer to this question is a narrow and qualified yes. To answer this question requires an understanding of the rights a judgment creditor of a limited liability company acquires when it executes against the interest of the debtor.

Rights of a Judgment Creditor of an LLC

Indiana Code § 23–18–6–7 states that a judgment creditor may seek a charging order against a limited liability company upon application to the court. To the extent a charging order is granted, the judgment creditor has only the rights of an assignee of the member's economic interest (the right to payment and distribution) in the LLC and cannot become a member via execution. Brant v. Krilich, 835 N.E.2d 582, 592 (Ind.Ct.App.2005); Crider v. Crider, 15 N.E.3d 1042 (Ind.Ct.App.2014). Both parties agree that Branham

[518 B.R. 515]

has a “charging order” against Newland out of the state court in Boone county, Indiana.

Article 18 of Title 23 of the Indiana Code, known as the Indiana Business Flexibility Act, controls the creation and operation of LLCs in Indiana. Indiana Code § 23–18–6–2 states that the “interest of a member in a limited liability company is personal property.” Since the interest in an LLC is personal property, it is subject to execution. However, the execution against the interest in an LLC would be indistinguishable from a charging order against an LLC because of the limitation of the term “interest” by the General Assembly.

All LLC statutes provide that a membership interest in a LLC is the member's personal property, and members generally have been found to have no direct interest in the LLC's assets; this includes members who own all the interests in single member LLCs. Callison & Sullivan, Limited Liability Companies, § 4:1 (2014 ed). Specifically, in Indiana, Indiana Code § 23–18–1–10 defines “[i]nterest” as a “member's economic rights in the limited liability company, including the member's share of the profits and losses of the limited liability company and the right to receive distributions from the limited liability company.” Thus, while personal property is subject to execution according to Indiana Code § 34–55–8–2, the interest here is limited by I.C. § 23–18–1–10 to the economic rights and nothing more. Crider v. Crider, id.

Through execution Branham may not receive any of Newland's rights to participate in management, nor may Branham inspect the books or records of Newland. See Callison, supra, § 4:5 at 59 (stating that judgment creditors obtain no right to participate in management, inspect the books or records, or to force a sale of the membership interest). The effect of this is essentially that a charging order is the only remedy for a judgment creditor against a member's interest in an LLC, albeit a very limited and possibly unsatisfactory remedy. Therefore, Branham is not entitled to membership in Newland, is not entitled to participate in corporate actions, is not entitled to force a distribution, may not insist upon inspecting Newland's books and records, may not participate in the management, governance, or direction of Newland, and does not acquire any rights to Newland's membership in BCU or to participate in corporate actions, management, governance, or direction of BCU.

Scope of Discovery under Fed. R. Civ. P. 26

Now, Branham seeks to depose a BCU representative under Fed.R.Civ.P. 30(b)(6) regarding (1) all facts respecting BCU's corporate governance from commencement of BCU's chapter 11 case to present (“corporate governance”); (2) all facts respecting BCU's operations post confirmation and (3) all facts asserted in BCU's amended complaint (“blanket request”). BCU has moved to quash the subpoena.

Branham has cited the court to authority for the proposition that discovery is very broad. Conversely, BCU has cited the court to authority for the proposition that discovery must be relevant, must be designed to lead to admissible evidence, and should not be unduly cumbersome or burdensome upon the recipient. Ultimately, there is not just one universe of discovery at issue. The first level of discovery sought by Branham is related to defending itself in this action. The second level of inquiry is to what extent Branham's valid interest in attaching the economic interests of Newland in BCU, if there are any,

[518 B.R. 516]

may be pursued in state court without running afoul of the injunction entered as part of the Confirmed Amended Liquidating Plan of Reorganization in BCU's bankruptcy case. The Court will address the discovery relevant to securing information and evidence to defend itself in this action brought by BCU for sanctions.

Fed.R.Civ.P. 26(b)(1), limits the scope of discovery, including Rule 30(b)(6) depositions, to any non-privileged matter that is relevant to the party's claim or defense. Relevant information need not be admissible but only reasonably calculated to lead to the discovery of admissible evidence. Dixon v. Experian Information Solutions, Inc., et al, 2014 WL 2881589 at *9 (N.D.Ind. June 25, 2014). A court may, for good cause, issue a protective order under Fed.R.Civ.P. 26(c) if the discovery sought will cause “undue expense”. Hence, an inquiry into what the outer limits of Branham's rights might be as a creditor of...

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