PARTNERSHIPS AND JUDGMENT LIENS: WHOSE LIEN IS IT ANYWAY? 
by Barry Whalen, ATG Law Clerk

As business ventures become increasingly risky, entrepreneurs are looking for the most efficient way to run their businesses. While public corporations offer the limited liability that many business owners prefer, it also lessens an owner's control of the company. On the other hand, having a business organized as a sole propriety offers great control but unlimited liability. Today, many business owners have turned to partnerships as a middle ground between public corporations and sole proprietorships. In a partnership, business owners share control only with the other partners.

While partners are not afforded the benefits of limited liability, they are also not subject to unlimited liability. The liability of partnerships is a gray area that is subject to many prerequisites and exceptions. Judgment liens on partnerships are a prime example of the intricacies of partnership liability.

Creation of a Judgment Lien

A judgment is a decree of the court that settles the issues presented and fixes the rights of the parties involved in the controversy. Board of Trustees of Community College Dist No 508 v Rosewell, 262 Ill App 3d 938, 635 NE2d 413, 424, 200 Ill Dec 74 (1st D 1992); see generally Cleavenger v Rueth, 185 NE2d 305, 307 (Ind App Ct 1962); Nelson v McLaughlin, 211 Wis 2d 487, 565 NW2d 123, 129 (Wis App Ct 1997). There are two requirements for a judgment to become a lien on property. First, the judgment must be a final judgment for a definite amount of money. Dunn v Thompson, 174 Ill App 3d 944, 529 NE2d 297, 299, 124 Ill Dec 477 (4th D 1988); see generally Mosser v Mosser, 729 NE2d 197, 201 (Ind Ct App 2000); Wis Stat § 806.10. Second, because a judgment lien is a creature of statute, the events enumerated in the statute must be followed for the judgment to become a lien. Dunn v Thompson, 174 Ill App 3d 944, 529 NE2d 297, 300, 124 Ill Dec 477 (4th D 1988); see generally Bell v Bingham, 484 NE2d 624, 627 (Ind App Ct 1985).

Illinois, Indiana, and Wisconsin all have similar statutory requirements for a judgment to become lien. Generally, all three states require a judgment to be recorded with the state before it can be considered a lien. Indiana and Wisconsin require a judgment to be entered and indexed in the judgment docket. IC 34-55-9-2; see generally Wis Stat § 806.10. In Illinois, a judgment becomes a lien when it is filed in the office of the recorder in the county in which the real estate is located. 735 ILCS 5/12-101. Thus, once a final judgment for a definite amount of money has been recorded in the required location, it becomes a lien on all property of the debtor in that county.

Effect of Judgment Liens on Partnerships

While judgment liens are created very similarly in Wisconsin, Indiana, and Illinois, the effect a judgment lien has on a partnership is different in each state. The Uniform Partnership Act governs partnerships in all three states. Generally, the Act defines two types of partnerships: general partnerships and limited liability partnerships. For the most part, the type of the partnership determines the liability of the partners for judgment liens.

General Partnerships

Formation - All three states define a general partnership as an "association of two or more persons to carry on as co-owners a business for profit." 805 ILCS 206/101; see generally IC 23-4-1-6; Wis Stat § 178.03. In determining whether a partnership exists, "[t]he receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business." 805 ILCS 206/202; see generally IC 23-4-1-7; Wis Stat § 178.04. Furthermore, a written agreement is not necessary to form a partnership. Saballus v Timke, 122 Ill App 3d 109, 460 NE2d 755, 759, 77 Ill Dec 451 (1st D 1983). A partnership will be formed "if, from consideration of all facts and circumstances, it appears that parties intended, between themselves, that there should be community of interests of both property and profits of common business or venture." Weinig v Weinig, 674 NE2d 991, 995 (Ind Ct App 1996); see generally In re Estate of Goldstein, 293 Ill App 3d 700, 688 NE2d 684, 690, 227 Ill Dec 991 (1st D 1997); Heck & Paetow Claim Service, Inc v Heck, 93 Wis 2d 349, 286 NW2d 831, 836 (Wis App Ct 1981).

It is not necessary that the partners intend to form a partnership, but just that they intend the activities that constitute a partnership. Weinig v Weinig, 674 NE2d 991, 995 (Ind Ct App 1996). Thus, to determine if a particular person is involved in a partnership, their activity in all business ventures involving two or more persons (namely sharing in profits), needs to be carefully examined.

Partnership Property Versus Personal Property

A judgment lien affects partnership property and a partner's personal property differently, so it is important to know how to distinguish the two. Illinois, Indiana, and Wisconsin define two different ways a partnership can hold title to property. Illinois uses the "partnership as an entity" approach while Indiana and Wisconsin do not consider the partnership distinct from the partners.

Illinois - With the recent passage of the Business Organizations Partnership Act, Illinois distinguishes a partnership as an "entity distinct from its partners." 805 ILCS 206/201. In creating a distinct entity, the act has separated personal property from partnership property. Partnership property is property acquired in the name of the partnership, in the name of a partner with an indication that he or she is part of a partnership, or with partnership funds. 805 ILCS 206/204. However, "[p]roperty acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes." 805 ILCS 206/204. Therefore, to determine if property is an individual partner's property or partnership property, one must determine how the property was acquired.

Indiana and Wisconsin - Indiana and Wisconsin have similar but not identical requirements for a partnership to hold title. Unlike Illinois, Indiana and Wisconsin have not enacted a law establishing a partnership as distinct from the partners. Even so, Indiana and Wisconsin have similar categories of partnership property as Illinois. First, "[a]ll property originally brought into the partnership stock or subsequently acquired by purchase or otherwise, on account of the partnership, is partnership property." IC 23-4-1-8; see generally Wis Stat § 178.05. Second, "[u]nless the contrary intention appears, property acquired with partnership funds is partnership property." IC 23-4-1-8; see generally Wis Stat § 178.05. Third, property acquired in the partnership name is also partnership property. IC 23-4-1-8; see generally Wis Stat § 178.05. Again, as in Illinois, the way property is acquired determines whether the individual partner holds title or the partnership holds title.

Judgment Lien against a General Partnership

Whether property is partnership property or personal property determines the effect of a judgment lien against a general partnership. A judgment lien against the name of the general partnership will not affect the personal property of the partners, but it will attach to any partnership property.

Illinois - Section 306 of the Business Organizations Partnership Act states that "all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law." 805 ILCS 206/306. However, "[a] judgment entered against a partnership in its firm name is enforceable only against property of the partnership and does not constitute a lien upon real estate other than that held in the firm name. Therefore, where judgment is entered against a partnership, but not against the individual partners, the judgment may not be satisfied by the personal assets of the individual partners." Johnson v St. Therese Medical Center, 296 Ill App 3d 341, 694 NE2d 1088, 1091, 230 Ill Dec 810 (2nd D 1998).

The Business Organizations Partnership Act has elaborated on the Johnson holding stating that for a judgment to be rendered against a partner, the partner must be "personally liable for the claim under Section 306 (above) and one of the following: (1) a judgment based on the same claim must have been obtained against the partnership and a writ of execution on the judgment must have been returned unsatisfied in whole or in part; (2) the partnership must be a debtor in bankruptcy; (3) the partner must have agreed that the creditor need not exhaust partnership assets; (4) a court must grant permission to the judgment creditor to levy execution against the assets of a partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of partnership assets is excessively burdensome, or that the grant of permission is an appropriate exercise of the court's equitable powers; or (5) liability must be imposed on the partner by law or contract independent of the existence of the partnership." 805 ILCS 206/307. In summary, a debt solely in the partnership name can be satisfied only by property to which the partnership holds title. However, a debt that is in the name of the partnership and partners can be satisfied by partnership property or the personal property of the individual partners.

Indiana and Wisconsin - A judgment lien against a general partnership affects property very differently in Indiana and Wisconsin. As in Illinois, partners in Indiana and Wisconsin are liable "jointly and severally for everything chargeable to the partnership." IC 23-4-1-15; see generally Wis Stat § 178.12. However, Indiana and Wisconsin do not recognize the partnership as distinct from the partners. Inbusch v Farwell, 66 US 566, 573, 17 L Ed 188 (US SCt Wis 1861) stated that partnership property should be used to satisfy partnership debts in preference to individual debts. Inbusch involved a partnership that was in debt to a promisee. The partnership defaulted on repayment of the debt and the promisee brought suit against only one of the partners because the others were out of the court's jurisdiction. Id at 569. The promisee won the suit and obtained a judgment lien on the partnership property. Id at 570. The partnership appealed and argued that the property of the individual partner should be used to pay the debt because he was the only defendant in the suit. Id at 570. Inbusch held that "[a]lthough the other partners were not prosecuted to judgment, because they were out of the jurisdiction of the court, still the judgment was rendered upon a partnership debt, to which it would be the duty of the marshal to apply partnership property in preference to the debts of the individual partners." Id at 573. Therefore when a partnership debt arises, partnership property should be used first to satisfy the debt.

The preference to use partnership property to pay off partnerships debt in Wisconsin has also been upheld in Indiana. Thompson v Wayne Smith Const Co, Inc, 640 NE2d 408, 411, 412 (Ind App Ct 1994) held that there are two ways an individual partner's assets could be used to satisfy a judgment against the partnership. Id at 411. First, a partner's individual assets can be used to satisfy a judgment if "the partner, in his individual capacity, entered into a separate contract with the creditor." Id at 411. Second, "[o]nce partnership assets have been exhausted, . . . a partnership creditor becomes a creditor of the individual partner with the same rights and upon the same level as the partner's other individual creditors." Id at 412. In Thompson, a creditor procured a judgment against a partnership. Id at 410. First partnership property was used to satisfy the judgment. Id at 410. However, the partnership property did not completely satisfy the judgment. Id at 410. Thompson held that because the partnership property did not completely satisfy the judgment, the creditor could satisfy the remainder of the judgment against the partners individually. Id at 413. Thus, Wisconsin and Indiana both apply the principle that when satisfying a judgment lien on a partnership, partnership property should be exhausted before using the individual property of the partners, absent exigent circumstances (such as a partner acting outside of his/her authority).

Liability of a General Partnership for a Partner's Acts

While partners are often liable for the debts of partnerships, partnerships are liable only for the debt of a partner in very limited circumstances. The Uniform Partnership Act states that the partnership is liable for "any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership," or any act by a partner that was authorized by the partnership. 805 ILCS 206/305; see generally IC 23-4-1-13; Wis Stat § 178.10. Furthermore, In re Georgou, 145 BR 36, 37 (Bkrtcy ND Ill 1992) stated that a "partnership is protected from being mulcted for the wrongful conduct of a partner which does not occur in the ordinary course of the business of the partnership." Id at 37. In this case, a plaintiff won a malpractice complaint against a partner in a law firm and obtained a judgment against the law firm partnership. Id at 37. In a hearing for a motion to dismiss a legal malpractice action, the partnership argued that partnership property should not be used to satisfy the judgment because the judgment was a result of a single partner's willful misconduct. Id at 37. In denying the motion to dismiss, the court held that the phrase "ordinary course of business" requires "that a partner be 'acting in the ordinary course,' not that the wrongful act itself be ordinary course." Id at 37. Thus, partnership property can be used only to satisfy individual debts of a partner when the partner was acting in the ordinary course of business or the partnership authorized the partner's activity.

Limited Liability Partnerships

While general partnerships provide some protection from liability for the partners, limited liability partnerships provide even more. Where general partners are jointly and severally liable for partnership debts, limited liability partners are only liable for the amount they invest in the partnership.

Formation - Limited liability partnerships are similar in definition to a general partnership. A limited liability partnership is an "association of two or more persons to carry on as co-owners a business for profit." 805 ILCS 206/101; IC 23-4-1-6; Wis Stat § 178.03. However, the formation of the limited liability partnership is substantially different. To be classified as a limited liability partnership, the partnership must go through an extensive registration process. To register, the partnership must file a statement of qualification with the Secretary of State in Illinois and Indiana, and with the Department of Financial Institutions in Wisconsin. 805 ILCS 206/1001; IC 23-4-1-45; Wis Stat § 178.40.

The statement of qualification must include the name of the limited liability partnership. In Indiana and Wisconsin the name must contain the words "Registered Limited Liability Partnership" or the abbreviation "L.L.P." or the designation "LLP". IC 23-4-1-45; Wis Stat § 178.42. In Illinois, the name of a limited liability partnership must end with one of the following: "Registered Limited Liability Partnership", "Limited Liability Partnership", "R.L.L.P.", "L.L.P.", "RLLP", or "LLP". 805 ILCS 206/1002. Along with the name of the partnership, the statement must also include the type of business the partnership engages in, the address of the partnership, and which partners are general and which are limited. 805 ILCS 206/1002; IC 23-4-1-45; Wis Stat § 178.42. Once all filings have been completed, a limited liability partnership is formed.

Liability - The main difference between a general partnership and a limited liability partnership is that partners in a limited liability partnership are designated as general or limited. 805 ILCS 206/1002; IC 23-4-1-45; Wis Stat § 178.42. General partners are governed by the same laws as partners in a general partnership. In contrast, limited partners are not liable for judgment liens against limited liability partnerships. The Uniform Partnership Act states that a limited partner "in a registered limited liability partnership is not personally liable directly or indirectly, or by way of indemnification, contribution, assessment or otherwise, for any debt, obligation or liability of the partnership, whether in tort, contract or otherwise, and including any debt, obligation or liability arising from omissions, negligence, wrongful acts, misconduct or malpractice, arising while the partnership is a registered limited liability partnership." 805 ILCS 206/306; IC 23-4-1-15; Wis Stat § 178.12. Only partnership property (including the amount the limited partners invested) and the general partner's property can be used to satisfy a lien against a limited liability partnership.

However, Wisconsin and Indiana have established statutory exceptions to this general rule. In both states, a limited liability partner is liable for his or her own "omissions, negligence, wrongful acts, misconduct or malpractice. The omissions, negligence, wrongful acts, misconduct or malpractice of any person acting under the partner's actual supervision and control in the specific activity in which the omissions, negligence, wrongful acts, misconduct or malpractice occurred. Any other debts, obligations and liabilities resulting from the partner's acts or conduct other than as a partner." IC 23-4-1-15; Wis Stat § 178.12. In these rare circumstances, the limited partner may be personally liable.

Determining if There Is a Judgment Lien on Partnership Property

Another issue concerning judgment liens on partnership property is how a title searcher discovers whether there is a lien on a given partner or partnership. As stated earlier, judgment liens are indexed, in the judgment docket in Indiana and Wisconsin and in the recorder's office in Illinois, by the name of the judgment debtor. 735 ILCS 5/12-101; IC 34-55-9-2; Wis Stat § 806.10.

While defining the methods for conveying partnership property, the Uniform Partnership Act explains three ways a partnership may hold title to a property. First, "property held in the name of the partnership may be transferred by an instrument of transfer executed by a partner in the partnership name." 805 ILCS 206/302; see generally IC 23-4-1-10; Wis Stat § 178.07. Secondly, "[p]artnership property held in the name of one or more partners with an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, but without an indication of the name of the partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held." 805 ILCS 206/302; see generally IC 23-4-1-10; Wis Stat § 178.07. Thirdly, partnership property held in the name of one or more persons other than the partnership, without an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held. 805 ILCS 206/302; see generally IC 23-4-1-10; Wis Stat § 178.07. The Uniform Partnership Act has thus set forth only three ways to convey property, and the method of conveyance depends solely on how title to a given property is held. Therefore, there are three ways to take title to partnership property as follows: property can be held in the name of the partnership; in the name of a partner with indication that he or she is part of a partnership; or in the name of the partner with no indication that he or she is part of a partnership. See generally 805 ILCS 206/302; IC 23-4-1-10; Wis Stat § 178.07.

When searching for a lien on partnership property, the first step is to determine whether the titleholder is a partnership. If title is held in the name of a partnership, or in the name of a partner with the indication that it is partnership property, then the property is partnership property. If an individual with no indication of a partnership holds title, you may not know whether it is partnership property. However, if the property is non-residential, and particularly if it is the location of a business, you should inquire with the titleholder about the possibility of a partnership. Then use the guidelines above to review the facts you have gathered and determine whether the property is partnership property or personal property. Once you have found that the property you are searching is partnership property, verify the names of the partnership and each partner.

The second step in searching for liens is to search the judgment lien index for the names of each of the partners and the name of the partnership. List all liens open against each of these names, and obtain copies of the memoranda of judgment.

The third step in your judgment lien search is to review each judgment to determine if it is a partnership liability or a personal liability of one of the partners, based on the law outlined above for the state where the property is located. If you have any questions about this process or about a judgment lien you are reviewing, please contact the Underwriting Department at 800.252.0402 or legal@atgf.com.

Conclusion

While the creation of judgment liens if a fairly straightforward process, the way they affect partnerships is dependant on several factors including: the type of partnership, who the lien is against, how title to property is held and what name the action is brought against. These factors also have an effect on determining if a judgment lien exists against a partnership. Therefore, the relationship of each partner to each other, and to the partnership as a whole, must be carefully examined to determine the effects a judgment lien will have against a partnership.

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