Asset Protection and Limited Liability Companies, Revisited
A few months back, my partner and I collaborated on an article regarding the asset protection benefits of limited liability companies. In that article, we discussed a significant difference for creditors’ remedies in pursuing a debtor’s equity interests in business entities, particularly the fact that a judgment creditor is limited to obtaining a charging order against a debtor’s LLC interest. This charging order essentially acts as a garnishment of any monies paid to the debtor from the LLC and does not give the judgment creditor the full rights of membership (such as voting and the like) in the LLC.
About the time we were writing that article, a significant decision came out of the Eleventh Circuit Court of Appeals related to a judgment creditor having broader remedies against a debtor’s interest in a single member LLC. This decision, Federal Trade Commission v. Peoples Credit First LLC, et al, provides that where a single member LLC is involved, the court may order a judgment-debtor to surrender all right, title and interest in the debtor’s non-party single-member LLC to satisfy a judgment creditor’s claims.
It would seem to make sense that a judgment creditor would have greater rights in a single-member LLC interest than a judgment-debtor’s multi-member LLC interest. With a multi-member LLC, the other non-party LLC members could have their rights affected if a judgment creditor was allowed to penetrate the LLC and affect its operations. By contrast, with a single member LLC, there are no non-parties (other than the LLC itself) which would be affected if the judgment creditor were able to seize control of the entity.
A secondary consequence of this decision – if applied in other jurisdictions – is that a judgment creditor may be able to seize assets which, if held in the judgment debtor’s own name, would be exempt under state and/or Federal law. As such, individuals must be aware of the risks of subjecting non-exempt assets to the reach of judgment creditors when seeking to title these assets in the name of an LLC.