Your LLC – It Protects You; Now, Protect IT- Part 2
In part 1, we confirmed that for LLCs with more than one member, the sole remedy available to the judgment creditor of a member is a charging order. The charging order is more than a judgment; it is more than a lien; it must be entered by the court. It very much affects the flow of money out of the LLC to its owners. But it has its limits.
Once the court enters the charging order, what exactly does the judgment creditor have? The court in McClandon v. Dakem & Associates, LLC, Case No. 5D16-3300 ( FL 5th DCA May 26, 2017), shed light on this question. The statute on point, section 605.0503, states that the charging order requires the LLC to pay over to the judgment creditor the distribution that would otherwise be paid to the member/judgment debtor. In McClandon, the lower court entered the charging order against the LLC (actually as to numerous LLCs in which the judgment debtor was a member) and then went a bit further. The lower court appointed a receiver for four of the LLCs; the receiver by court order took control of the LLCs’ finances, acted as the de facto CFO, and made financial management decisions. To a large extent, the receiver managed the four LLCs.
In McClandon, the appellate court upheld the appointment of the receiver; this was within the authority of the lower court under section 605.0503. The lower court went too far, however, when it granted authority to the receiver to have managerial control over the LLCs. The charging order and the receiver appointed in relation thereto, should have “only divested [the judgment debtor] of her economic opportunity to obtain profits and distributions from the LLC, charging only her membership interest, not her managerial rights“. Id.
The appellate court noted that section 605.0503 by its own terms did not limit the availability of equitable principles or the continuing authority of the court to enforce the charging order. Query whether the appellate court might have upheld broader authority for the receiver if there were some evidence that the managers of the LLCs were wrongfully manipulating its finances to shut off or decrease the distributions to members or to the judgment creditor holding the charging order.
Increasing officer or employee salaries, incurring additional company indebtedness, or other management decisions could severely affect potential distributions. At what point should the court authorize the receiver to not only monitor but also participate in the management of the LLC. Future case law will address this. It is only a matter of time.
In the interim, what is clear is this – as a member, your creditors will have more potential control over your ownership in the LLC if you are the only member. So, create your LLC; sign your operating agreement; keep good books and records ( and insurance coverage), and consider having more than one member.
This is not intended to be legal advice for any specific situation and the reader should consult their attorney regarding their situation.