Monday, October 31, 2011

Charging orders against the interest of single member LLCs

To extend the discussion of charging orders and LLCs a bit, how does a charging order apply to single member LLCs (SMLLC)? As mentioned before, a charging order places a lien against the distributions of a debtor-business owner. The result is the other owners are not held hostage by a unwanted third party creditor who has foreclosed on their partner's interest. The business can keep running, distributions may or may not be distributed to the debtor-owner, and eventually the matter is resolved. But what about the very small businesses, the ones with a single owner? Will a court really grant a creditor a charging order when there is only one business owner to whom distributions will be made? Part of the logic behind charging orders was to avoid punishing the non debtor-owners for the debtor-owner's debts. But where there is only a single owner, there are no non debtor-owners to worry about disrupting. If a charging order is not applicable, what is the result?

The Florida Supreme Court in Olmstead v. Federal Trade Commission decided to liquidate the interest of the single member. Their logic pitted a few Florida statutes against each other to reach their result, but the decision startled asset protection and business law attorneys across the country. Nevada leapt to action this year passing SB 405 which, in part, provides specifically that the charging order is the creditor's exclusive remedy to satisfy a judgment against a debtor-owner's interest, even for SMLLCs (NRS 86.401). The statute doesn't quibble, stating in part:

No other remedy, including, without limitation, foreclosure on the member’s interest ... is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s interest in the limited-liability company, and no other remedy may be ordered by a court.

Practically speaking, a lien against a SMLLC distributions will really tie up cash for the debtor-owner, but it is comforting that a creditor won't be able to seize the company completely. Of course, depending on the circumstances, it's also advisable to simply add an additional member, even at a very small percentage, to avoid such a lockdown of profits.

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