Have the Illinois Courts Eliminated Charging Orders in Single-Member LLCs?

Have the Illinois Courts Eliminated Charging Orders in Single-Member LLCs?

      In a recent decision by the Federal District Court for the Central District of Illinois, it considered the rights of the receiver over limited partnerships controlled by, apparently, married taxpayers.  Its reasoning, however, may lead to the conclusion that the charging order is ineffective in a single-member LLC in Illinois.  United States v. Zabka, ___ F. Supp. 2d ___, 2012 WL 5246918 (C.D. Ill. Sept. 11, 2012). 

      Federal tax liens were assessed against Robert and Deborah Zabka for numerous years of their personal tax liability.  Judgment having been entered in favor of the government, the matter before the Court involved the appointment of a receiver to collect, manage and ultimately sell the Zabka’s property in order to satisfy the federal tax liens.  One argument made by the Zabkas was that the federal receiver must comply with the Illinois charging order statute under the Limited Partnership Act, namely 805 Ill. Comp. Stat. 215/703.  This statute expressly provides that it is the “exclusive remedy” of a judgment-creditor. 

      In rejecting that argument, the Court noted that the government’s lien attached to all of the Zabka’s property, which “property and rights to property included their 100 percent ownership interest in the Limited Partnerships.”  2012 WL 5246918, *5.  The Court went on to note that the statutory language addresses the rights of a judgment-creditor of “a” (i.e., a singular) partner or transferee.  From there, the Court wrote:

The plain language of that statute – which refers to a judgment-creditor of an individual partner – demonstrates that it was designed to protect other partners in a partnership when one, but perhaps not all of the partners, have become encumbered with a judgment-creditor.  In that respect, the Court finds that the state statute is irrelevant to the circumstances of the instant case because the Government’s federal tax lien attached to the Zabka’s 100 percent ownership interest of the Limited Partnerships.

      By this reasoning, if a judgment-debtor is the sole member of an LLC, the judgment-creditor is not restricted to a charging order.  Whether, in that situation, the judgment-creditor is able to seize the entirely of the LLC transferable interest, thereby becoming an assignee of all the economic benefits of the venture, seize as well the management rights in the company or something else, is left to be determined.  What is clear, however, is that the dangerous step of eliminating the charging order in the single-member LLC, simply because it is a single-member LLC, appears to have been taken.