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Q: LLC's ( Answered,   0 Comments )
Subject: LLC's
Category: Business and Money > Small Businesses
Asked by: rji-ga
List Price: $10.00
Posted: 17 Apr 2005 07:37 PDT
Expires: 17 May 2005 07:37 PDT
Question ID: 510405
Is an LLC liable for any of the personal liabilities and obligations
of any its owners or of its principle owner if it has one?
Subject: Re: LLC's
Answered By: richard-ga on 17 Apr 2005 11:35 PDT
Hello and thank you for your question.

At first I thought you were asking the usual question, how the
personal assets of the owner of an LLC cannot be attached or taken by
a creditor of the LLC.

But I see you're interested in the opposite situation:  What right
does the creditor of an individual debtor have against an LLC in which
the debtor has an ownership interest, whether or not the debtor is the
sole owner of the LLC.

The answer(I'll use Delaware as an example) is that the creditor can
get a charging order against the LLC:

"The LLC also provides protection to its owners for debts unrelated to
the business in that LLC property and LLC interests themselves
generally cannot be directly seized or attached by creditors of debtor
members. Instead, such creditors are limited to a ?charging order?
issued by a court requiring the LLC to divert payments to the debtor
member to the creditor.
However, the charging order does not provide the creditor with voting
rights, such as the right to vote for a distribution. If no
distributions are made to the debtor member, neither are distributions
made to the creditor. Furthermore, in some cases, the creditor may be
taxable on the debtor member?s share of LLC income, whether he
receives a distribution or not. Thus the charging order is not a
particularly attractive remedy for a creditor."
Delaware Series LLC

"A charging order is a remedy available to a judgment creditor of an
LLC member or transferee and serves not only to delineate a channel of
collection but also to protect the LLC and its assets from
interference by creditors who have no rights in or as to those assets.
Under ULLCA  504(e), a charging order 'provides the exclusive remedy
by which a judgment creditor of a member or a transferee may satisfy a
judgment out of the judgment debtor's distributional interest in a
limited liability company.'?

Does the same rule apply when the LLC has only one owner?  Generally
it's the same - - the creditor can only get a charging order against
the LLC, and cannot attach the underlying LLC assets.  But not all
states and all courts have seen it this way.  For example:
"The efficacy of a single-member limited liability company ("LLC") as
an asset-protection vehicle has been thrown into doubt by a Colorado
bankruptcy-court decision. In In re Ashley Albright, 291 B.R. 538
(Bankr. D. Colo. 2003), the debtor, who filed a Chapter 13 bankruptcy
petition that was later converted to a Chapter 7 liquidation, was the
sole member and manager of a Colorado LLC at the time of the filing.
The LLC was not a debtor in bankruptcy. The Chapter 7 trustee
contended that because the debtor was the sole member and manager at
the time the debtor filed bankruptcy, the trustee now controlled the
LLC and could therefore sell the real property owned by the LLC and
distribute the net sales proceeds to the bankruptcy estate. The debtor
argued that the trustee acted only for the debtor's creditors and at
most was entitled to a statutory charging order (against distributions
made on account of the debtor's LLC membership interest) and could not
assume management of the LLC or sell its property. The court referred
to the Colorado LLC statute, under which the debtor's membership
interest constituted the personal property of the member. According to
the court, "[b]ecause there are no other members in the LLC, the
entire membership interest passed to the bankruptcy estate, and the
trustee became a 'substituted member.'" Id. at 540. The court also
stated that, "upon the Debtor's bankruptcy filing, the Trustee now
controls, directly or indirectly, all governance of that entity,
including decisions regarding liquidation of the entity's assets." Id.
at 541. The court reasoned that because there were no other members in
the LLC, no written unanimous approval of the transfer was necessary,
as would be the case under Colorado law if there were other members -
no matter how small such other membership interests may be."

So at least in Colorado, there is the possibility that when an LLC is
100% owned by one person, and that person is bankrupt, the bankruptcy
trustee can force a liquidation of the LLC, and thereby claim the
assets of the LLC for the LLC owner's creditors.

This would be a good reason to organzie your LLC in Delaware among others.

Search terms used:
"charging order" delaware llc

Thanks again for bringing us your question.

There are no comments at this time.

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