I have written a few articles on the importance of selecting a state that has strong charging order protections. A charging order for those of you not familiar with this term mandates that any distributions by a LLC that would otherwise be distributed to its member shall instead flow to the member’s creditor. Thus, unless the LLC makes distributions, the member’s creditor will not receive any benefit from his charging order. Sounds appealing if you are a debtor and faced with malicious attorneys seeking to take your hard earned assets because, in point of fact, as the LLC’s sole member it’s unlikely that you will make distributions, since those would to your creditor.
Thus, selecting the appropriate state for your LLC should be self-evident. If a need for protection arises, you definitely want to be in a position to control distributions and protect your interests. Herein lies the problem for many – selecting the appropriate state. Consider the Kansas case of Meyer v. Christie, No. 07-2230-CM, 2011 U.S. Dist. LEXIS 118590 (D. Kan. Oct. 13, 2011) wherein the U.S. District Court in Kansas found a way to circumvent the plain language of a charging order statute to award the plaintiff Mr. Christie’s interests in his multiple single member LLCs.
In the case at hand, Mr. Myer obtained a $7 million judgment against Mr. Christie. Mr. Meyer then sought to obtain a charging order against Mr. Christie’s LLC interest and subsequently gains control of the LLCs thereby giving him the ability to force distributions. Under Kansas’s LLC Act a charging order will apply as follows:
Rights of judgment creditor. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. This act does not deprive any member of the benefit of any exemption laws applicable to the member’s limited liability company interest. The rights provided by this section to the judgment creditor shall be the sole and exclusive remedy of a judgment creditor with respect to the member’s limited liability company interest.
Kan. Stat. Ann. § 17-76,113 (emphasis added).
Upon a straight forward reading of this statue one could be led to believe that the only remedy available to Mr. Meyer is a charging order which in turn will result in collecting nothing unless Mr. Christie decides to make distributions. Think Again.
Nothing can be taken for granted in a court of law. Some Judges are imbued with an innate ability to reach outcomes that leave most people scratching their heads and asking themselves “do we coexist in the same universe.” Such is the outcome here wherein the court acknowledged the Kansas LLC Act’s clear statement that the charging order is the only remedy by which a member’s judgment creditor can reach the member’s LLC interest, but then when onto find that in the case of a LLC with only one member a different outcome is merited. They did this by looking to a specific provision in the Kansas LLC Act:
If the assignor of a limited liability company interest is the only member of the limited liability company at the time of the assignment, the assignee shall have the right to participate in the management of the business and affairs of the limited liability company as a member.
That was all the court needed to justify its conclusion that Mr. Meyer could take control of Mr. Christie’s LLCs as the assignee of his interest. To use one of my daughters euphuisms “WOW.” How did we get from having only the rights of the assignee in the charging order statute to actually becoming an assignee and hence gaining control? The answer – a different universe. This court flatly ignored or did not understand charging orders and ended up granting a true assignment of interest to a creditor. OUCH!
Thankfully, some states, like Nevada, have solved this problem by enacting legislation for business courts that are chaired by justices familiar and well versed in such topics in addition to enacting LLC statutes that specifically omit any assignment language (we don’t want our justices becoming confused). If you are concerned about the protections offered in your state, a simple solution is to adopt a holding LLC that will own your various LLC interests. In the present case had Mr. Christie opted to have his Kansas LLCs owned by a Nevada LLC the result would have undoubtedly been much different.