June 8, 2017
In the bankruptcy case of In re Cleveland, a debtor found just how non-protective a limited liability company (LLC) one-member can be in the face of creditors. The court ruled that such an LLC provides absolutely no protection from the LLC-owner’s creditors.
By way of some background on LLCs and asset protection, the general rule has been that when a member in an LLC encounters a creditor problem, the creditor is held at bay with regard to any attempt to seize or to attach any assets in that LLC in satisfaction of the creditor’s claims against the debtor-member. The creditor instead may be able to only obtain a “charging order” against the LLC interest (meaning that the creditor would receive LLC assets in satisfaction of the creditor’s judgment only at the time and to the extent that a distribution is been made from the LLC to that debtor). The debtor-member, as manager of that LLC, typically controls when any such distributions are made. This can be very frustrating to the creditor.
However, a general trend has been developing that allows (when an LLC has only one owner) the creditor in a federal bankruptcy setting can have unfettered access to the LLC assets. The owner of the LLC may not be shielded by any charging order limitation to which the creditor would otherwise be subject, notwithstanding that the applicable state law (Nevada) specifies that charging order is the exclusive remedy. Federal bankruptcy law pre-empts the state law protection.
Cite: In re Cleveland, 2014 WL 4809924 (D. Nev. Sept. 29, 2014).