Monday, April 5, 2021

The Sine Qui Non of the Charging Order is Asset Segregation, Not “Pick Your Partner”


The Sine Qua Non of the Charging Order is Asset Segregation, Not “Pick Your Partner”

It is not uncommon for courts to focus upon the in personam delectus (a/k/a “pick your partner”) principle as the basis for the charging order, and to the discount the charging order in the single-member LLC context.  See, e.g., AOK Property Investments, LLC v. Boudreaux, 308 So.3d 1214, 1216 (La. Ct. App. 5th Cir. Dec. 9, 2020) (“The trial court found that the charging order statute is not relevant in a single-member LLC. The court reasoned that there are no other members to protect in a single-member LLC when a creditor attempts to seize the entire membership interest, and a single-member judgment-debtor’s membership interest should not be shielded from seizure by a judgment creditor.”).  This focus is improper.  Charging orders exist not to protect in personam delectus, but rather the treatment of an LLC, even a single member LLC, as a legal entity separate and apart from its member(s).

The beginning point of the analysis is that an LLC is a legal entity distinct and apart from its member(s).  The LLC owns its property for itself (not on behalf of the members as a nominee) and has its own debts and obligations (i.e., asset segregation).  The second point is that an assignee of a membership interest does not succeed to management of the LLC.  If a creditor of a member were able to seize the debtor’s membership interest that creditor would not succeed to a voice in the LLC’s management.  Rather, that control would continue to be vested in the members. Different LLC acts have different treatments of the debtor-member in that situation, but none afford that involuntary assignee management rights in the LLC. 

 A straight-forward (well, as straight-forward as anything can be when discussing charging orders) application of the LLC act demonstrates the fallacy of this reliance.  Assume a single member LLC in which the judgment-debtor is that sole member.  Assume as well that the sole asset of the LLC is $1 million in cash, and amount which happens to be the amount of the judgment.  However, the LLC has trade debts of $500,000.  Even if the judgment-creditor can gain control of the LLC, he or she cannot apply the LLC’s $1 million to satisfaction of the judgment.  Rather, that $1 million is an asset of the LLC, and its assets must be applied first to the satisfaction of its debts and obligations.  Nothing about the charging order allows the LLC to make distributions that will impair the claims of its creditors.  Further, the judgment-creditor’s charging order lien on distributions made to the judgment-debtor is not a lien on the LLC’s assets or give rise to the capacity to compel that those assets be distributed in satisfaction of the judgment even as the creditors do have the ability to compel the LLC to satisfy their claims from that same pool of assets.

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