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Single Member LLCs - Meyer V. Christie

This has resulted in many practitioners to question whether the same charging order protections offered to multi-member LLCs are available to SMLLCs.
By JIM DUGGAN, JD - M.B.A., J.D.
Published: November 06, 2011
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In the recent case of Meyer V. Christie [1] the District Court of Kansas issued a charging order against a single member limited liability company (“SMLLC”) which allowed the creditor to reach the assets of the debt or’s limited liability company (“LLC”). This has resulted in many practitioners questioning whether the same charging order protections offered to multi-member LLCs are also available to SMLLCs. When evaluated in the proper context, the holdings of the court in Meyer should have been anticipated.
 
SMLLC Case Law

In Albright [2] the Colorado court interpreted the Colorado statute and determined that the charging order protections were not available in the context of the SMLLC at issue. In Olmstead[3], the court reached a similar conclusion. Specifically, the Supreme Court of Florida states that its “charging order provision establishes a nonexclusive remedial mechanism,” and goes on to state “there is no express provision in the statutory text providing that the charging order is the only remedy that can be utilized.”
 
The courts in both Albright and Olmstead were necessarily interpreting the LLC statutes in existence at the time in their respective states. Neither state’s statute provided express language making it clear that the charging order is the sole and exclusive remedy of an LLC. This author believes that the results in Albright and Olmstead are appropriate results that will actually assist in the development of SMLLC law because they punctuate the point that the court must necessarily look to the governing statute to enforce a remedy. Therefore, in order to anticipate how a court will rule on charging order protections in SMLLC planning, one must simply look to the state’s LLC statutes for guidance.
 
The Meyer Court Interpreted the State Statute Correctly
 
In Meyer, the plaintiff asked the court to issue a charging order against the defendant’s Kansas LLC to satisfy a judgment. The court ruled in favor of the plaintiff and issued a charging order. So what is the problem – isn’t the charging order an intended result in SMLLC planning? The court permitted the plaintiff to garnish the assets of the LLC through the charging order. How is this possible?
 
The court noted that the Kansas Revised Limited Liability Act [4] (“KRLLCA”) contains a provision recognizing the charging order as the sole and exclusive remedy by which a judgment creditor can reach the member’s interest in the LLC[5]. The court explained that the charging order remedy originated in the Uniform Partnership Act in 1914 (“UPA”) and was further developed through case law. In interpreting the UPA, the court recognized that a charging order affects only the debtor’s partnership interest and does not permit the creditor to reach partnership assets. The court also acknowledged that the creditor is only entitled to the partner’s share of distributions and is not entitled to participate in the management of the partnership. However, the court opined that, in the case of a SMLLC, an additional section of the KRLLCA applied to charging orders issued under Kansas law. That section of the KRLLCA provides that where the member/debtor is the sole member of the LLC at the time of the assignment under the charging order, the assignee/creditor shall have the right to participate in the management of the business and affairs of the LLC as a member.
 
The author views the result in Meyer as an appropriate result which will continue to assist in the development of SMLLC. It is the appropriate result because the statue permitted the court to apply a remedy with more weight than the charging order. The ruling will help the SMLLC cause because it, like Albright and Olmstead, it emphasizes the point that the court must necessarily look to the governing state statute to enforce a remedy. Thus, when planning for a client situation that will involve an SMLLC, it is critical for you to choose a jurisdiction with express statutory provisions stating the charging order is the exclusive remedy of the court and that other sections within the statute do not supersede the charging order remedy.
 
[1] Citation
[2] In re: Ashley Albright, Debtor, Case No. 01-11367-ABC, Chapter No. 7 (2003 Bankr.D.Co.LEXIS 291).
[3] Shaun Olmstead vs. Federal Trade Commission, No. SC08-1009, June 24, 2010.
[4] Kan. Stat. Ann. § 17-7662. 
[5] Kan. Stat. Ann. § 17-76, 113.

 

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