LLCs, Charging Orders, and Debt Collection
I’m going to continue the last post’s theme with another item that I know about but have yet to see applied. Actually, that’s not entirely correct. I have tried to apply this one; however, the cases in which I used it settled before I actually got to the mechanics of how it works.
For this entry we’ll be looking at the Virginia Limited Liability Company Act (Virginia Code Section 13.1-1000 et seq.). I’ll set up another hypothetical fact pattern. Let’s pretend you have a judgment against an individual defendant in his personal capacity. This defendant has some interest in a Virginia LLC.
Section 13.01-1041.1 provides what I think is a little-known avenue of recovery against the debtor. Since it isn’t a long section, I’ll just cut-and-paste:
A. On application by a judgment creditor of a member or of a member's assignee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. To the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of the interest.
B. A charging order constitutes a lien on the judgment debtor's transferable interest in the limited liability company.
C. This chapter does not deprive a member or a member's assignee of a right under exemption laws with respect to the judgment debtor's interest in the limited liability company.
D. The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member's assignee may satisfy a judgment out of the judgment debtor's transferable interest in the limited liability company.
E. No creditor of a member or of a member's assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.
Section 13.1-1038 further clarifies the nature of the interest as follows: “The only transferable interest of a member in the limited liability company is the member's share of the profits and losses of the limited liability company and the member's right to receive distributions.”
This is yet another issue for which a Fastcase search returns no caselaw (that I could find, at least). It seems fairly simple: a lien may be placed against those sums the debtor is entitled to receive from the LLC. On at least two occasions, I have convinced a court to enter such a Charging Order.
The application is where things break down. For starters, I haven’t had the opportunity to take things beyond entry of the Charging Order. Those cases I referenced settled under other circumstances before I could worry about actually trying to enforce the lien. The chief problem I see is that using the Charging Order is going to require information on just what sums the debtor is entitled to receive from the LLC. Theoretically, getting that information should be easy (e.g. debtor interrogatories or a subpoena duces tecum). In practice though, for a small LLC at least, you are likely to run into a wall of questionable bookkeeping and unresponsiveness. That isn’t to say you can’t get the necessary info; I just suspect you’ll have to pursue it doggedly with all means at your disposal (probably including a Show Cause for failure to respond).