Lesson. A charging order is the only remedy for a judgment creditor against a member’s interest in an Indiana limited liability company (LLC), and the remedy is quite limited.
Case cite. In Re: Boone County Utilities, 2014 Bankr. LEXIS 3943 (S.D. Ind. 2014) (.pdf).
Legal issue. What are the rights of a judgment creditor against the interest of a member of an Indiana LLC?
Vital facts. Judgment creditor held a judgment against an LLC and sought to collect that judgment from a member of the LLC.
Procedural history. Boone was a bankruptcy court’s decision arising out of the judgment creditor’s desire to take the deposition of a representative of a garnishee defendant LLC. The underlying judgment was against the garnishee defendant’s sole member, another LLC, which I’ll call the judgment debtor. The purpose of the Boone opinion was to rule on the discovery dispute between the judgment creditor and the garnishee defendant. The case dealt with whether a deposition could occur and, if so, what topics could be covered in the deposition.
Key rules. The discovery battle in Boone gave rise to a great discussion by the Court of Indiana LLC law, including how far courts can go in enforcing a judgment against an LLC through proceedings supplemental. Here are some of rules:
- Ind. Code 23-18-6-7 says that a judgment creditor can seek a charging order against an LLC.
- A charging order grants to the judgment creditor “only the rights of an assignee of the member’s economic interest (the right to payment and distribution) in the LLC.”
- A charging order does not result in the judgment creditor becoming a member of the LLC.
Indiana’s Business Flexibility Act (Ind. Code 23-18), which controls LLCs, provides that, while a membership interest in an LLC is the member’s personal property subject to execution, members have no direct interest in the LLC’s assets.
- Thus a member’s interest in an LLC is limited by Ind. Code 23-18-1-10 “to the economic rights [to payments/distributions from the LLC] and nothing more.”
Holding. The Court concluded that a charging order was the only remedy for the judgment creditor against the member’s interest in the LLC - “a very limited and possibly unsatisfactory remedy.” The judgment creditor was not entitled to membership in the judgment debtor and was not entitled to participate in corporate actions. The judgment creditor was not permitted to force a monetary distribution or to insist upon inspecting the judgment debtor’s books and records. Moreover, the judgment creditor did not acquire rights to the judgment debtor’s membership in the garnishee defendant or to participate in the corporate actions, management, governance or direction of that LLC. At best, the judgment creditor could obtain the judgment debtor’s distributions to the garnishee defendant, if any. As to the discovery dispute, the Court generally concluded that the judgment debtor could inquire into facts reasonably calculated to lead to admissible evidence about any such distributions, but little else.
Policy/rationale. The Court in Boone did not address much policy in its opinion. I think the point here is that the law generally is set up to shield investors and owners of a business against personal liability, unless there is proof that the corporate veil should be pierced. As a practical matter, charging orders against members of an Indiana LLC generally have little value. In seemingly rare instances, if a judgment debtor LLC has money, and if it decides to distribute that money to its members, a charging order requires the LLC to redirect such payment to the judgment creditor. When and how this would happen, if ever, could be the subject of its own post. If you’ve seen or heard of a charging order netting money to a judgment creditor, please share your story in the comment section below. I’d love to hear about it as I’ve yet to see the tool work myself.