September 20, 2017
The use of a limited liability company can provide what is known as charging order protection against creditors of individual members who have assets inside the LLC. When the LLC can be shown to have a business, investment or marketing purpose beyond simply being a holding company for passive investments, it may be more difficult for a creditor to find an open door to the LLC assets in satisfaction of the creditor’s judgment against any one of the LLC’s owners. However, when the LLC owner owes a debt and owns virtually all of the LLC and controls the LLC as the manager, a court is more likely to open a back door.
In the recent Curci Investments, LLC case from California, cited below, a California debtor had created a Delaware LLC. The debtor (Baldwin) owned 99% and his wife owned 1% of the LLC. Baldwin was also the manager of the LLC, and therefore in control of making distributions from the LLC. The LLC was simply a holding company for various personal investments.
Baldwin had borrowed $5.5 million, but later defaulted on the repayment obligations. Curci Investments, LLC (the Creditor) sued to collect on that debt, which had now grown to $7.2 million. Charging orders were obtained to intercept any distributions made by the LLC. The LLC (under Baldwin’s control) ceased making any distributions.
To further assist with gaining access to the LLC assets, the Creditor made use of another California remedy that allowed the Creditor to treat the LLC as a co-debtor along-side Baldwin.
The Court concluded that when there are no other practical remedies for a creditor, an LLC can be pierced as a “last resort” through a “reverse piercing” remedy, which allows a creditor access to the LLC assets to satisfy a judgment notwithstanding and charging order restrictions. The Court therefore remanded the case to the lower court to determine whether the Baldwin situation was in fact one of those “last resort” situations.
Cite: Curci Investments, LLC v. Baldwin, 2017 WL 3431457 (Cal. App., Dist. 4, August 10, 2017)
By Edward D. Brown, Esq., LLM. CPA
Check out our latest blog, “Asset Protection Aspects of a Trust Pierced by IRS”