The Double-Whammy’d Charging Order: Forget About Protecting the Assets in that LLC

August 21, 2017

Once again, the confidence one may have in relying on an LLC created in the United States as being the untouchable storehouse where assets can be safely tucked away, is misplaced. In the new ruling in the case of Peach REO, LLC v. Rice, Peach REO, LLC sought to attach the LLC interests that Malcolm Rice owned in various LLCs (in Tennessee, Mississippi and Delaware).   This attachment of the LLCs was through a charging order.

The first whammy is that some of the LLCs were formed in states that were outside of Tennessee where the court presided. As mentioned in a prior posting, the Colorado JPMorgan Chase Bank v. McClure case ruled that a charging order cannot be lodged by a court that presides in a state outside the state where the LLC was formed. Here however in this Peach REO case, the Tennessee court takes a different view. It views the charging order as a lien that can be pinned onto any Tennessee debtor to attach his interest in an LLC, no matter in what state the LLC was formed.

The second whammy is that the court also included in its charging order that the debtor was required to “report to [Peach REO] any amount that is now due or may become due or distributable to” the debtor because of his ownership in the LLCs. Therefore, not only did Peach REO have the right to intercept any distributions to the debtor, but the debtor also must make darn sure he informs Peach REO about any anticipated distribution.

This highlights once again the massive differences in the asset protection that can be achieved in offshore LLCs as opposed to domestic LLCs. For example, if a person had created a foreign trust, with a trust company outside the United States serving as the administering trustee, and that trust owned 100% of a foreign LLC that has a manager located offshore, then imagine if the double whammy descended on the person who had created such an offshore structure. One, the lien (in the form of a charging order) issued by the US court could not be binding on any actions by the offshore professionals (trustee/manager), and two, even if the foreign LLC were to make a distribution to the offshore trust, how would the debtor know that occurred (and therefore he is not in the position to be required to report anything to the creditor). The trust can always then use the funds it received from the LLC for the debtor’s benefit.

Even if the debtor was mandated by the court to have a continuing obligation to report LLC distributions (although that does not appear to be the situation in Peach REO), again in the above hypothetical, the debtor would not necessarily know when distributions are made by the LLC to the trust, even if such funds were then being used for the debtor’s benefit. This assumes of course that the trust had some other assets as well, and the debtor has no way of knowing if the trust is using LLC or non-LLC funds in carrying out the trustee’s fiduciary duties to act in the debtor’s (and other trust beneficiaries’) best interests.

In short, this hypothetical serves as just one example of the added latitude and advantages a person can achieve in a properly structured plan designed to mitigate risks and to accomplish estate planning goals.

Cite: Peach REO, LLC v. Rice, 2017 WL 2963511 (W.D. Tenn., July 11, 2017)

By Edward D. Brown, Esq., LLM. CPA

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