Letting creditors go directly against the company’s assets isn’t anything new in corporate law, but it is a new problem in LLC law
(PRWEB) October 20, 2012
Lee Phillips announces new multi member LLC product. Currently single member LLC’s charging order protection is under attack by the courts and legislatures. Though the attacks are only in a few states, wise small business owners who are using a single member LLC should take heed. There are legal problems for single member LLCs because courts are finding that they do not qualify for charging order protection. The current attack started with two legal cases.
The first attack against the single member LLC was in Colorado. In re Albright, 2003 Bankr. LEXIS 291 (April 4, 2003). This was a personal bankruptcy case, the bankruptcy trustee wanted to take control of the single member LLC to satisfy the personal debts. Had the LLC been a multi member LLC this ruling may never have occurred. The judge ruled for the bankruptcy trustee, thereby voiding the charging order protection of single member LLC’s
Another attack in Florida, Olmstead vs. Federal Trade Commission (Supreme Court of Florida, Case No. SC08 1009, 2010 WL 2518106 (Fla.) held that creditors of the only member in a single member LLC could go directly against the LLC and the member’s LLC assets.
The Nevada Supreme Court ruled in Weddell v. H2O, Inc., 128 Nev. Adv. Op. #9, (Nev. March 1, 2012) that a judgment creditor is like an assignee of a membership interest. The creditor is entitled to the share of the distributions the member would otherwise have received. It goes without saying that other state courts will consider these cases in their rulings thereby putting the single member LLC charging order protection in danger.
Learn more about single member LLC's here
Since 1914, in the United States, charging orders have been the preferred judicial remedy for partnership entities. That is when the Conference Commissioners on Uniform State Laws (the “Commissioners”) approved the Uniform Partnership Act (UPA). The charging order allows the creditor to act as an assignee of the LLC debtor on the member’s interest in the LLC.
Charging orders do not allow a creditor to invade the LLC assets or obtain managerial or voting rights in the entity to satisfy outside debts. This is known as charging order protection. It protects the non-debtor partners from the creditor by preventing him from seizing partnership assets and thereby keeping the creditor out of partnership affairs.
Mr. Phillips notes, “Letting creditors go directly against the company’s assets isn’t anything new in corporate law, but it is a new problem in LLC law. If the single shareholder of a closely held corporation gets in trouble, his creditors have always been able to take his stock away. Once the creditor gets a controlling interest in the corporation’s stock, the creditor will simply elect new officers and directors and control the corporation – along with all of its assets. ”.
In today’s environment this is why the multi member LLC is so important. The new LLC operating agreement available from LLCWizard can give LLC members the basics of what’s required to insure the greatest liability protection. There is also a customizable version available with audio tutorial that covers in more detail the many aspects of this important business document.