Charging Orders: Rights Of A Judgment Creditor Against A Membership Interest Of An Indiana Limited Liability Company
November 25, 2015
Lesson. A charging order is the only remedy for a judgment creditor against a judgment debtor's 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 a judgment debtor's membership interest in an Indiana LLC? More specifically, can a judgment creditor garnish a judgment debtor's interest in an LLC?
Vital facts. Judgment creditor (Branham) held a judgment against an LLC (Newland), which was the sole member of BCU, another LLC. Branham sought to garnish Newland's interest in BCU in order to collect on the judgment.
Procedural history. The purpose of the Boone opinion was to rule on a discovery dispute between Branham and BCU, which was named as a garnishee defendant. The case dealt with whether a deposition of a representative of BCU 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 judgment enforcement and charging orders. 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 Branham against Newland's member interest in BCU - “a very limited and possibly unsatisfactory remedy.” Branham was not entitled to membership in Newland and was not entitled to participate in corporate actions. Branham was not permitted to force a monetary distribution or to insist upon inspecting Newland's books and records. Moreover, the Branham did not acquire rights to the Newland's membership in BCU or to participate in the corporate actions, management, governance or direction of BCU. At best, Branham could obtain BCU's distributions to Newland, if any. As to the discovery dispute, the Court generally concluded that Branham 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 corporate entity against personal liability, unless there is proof that the corporate veil should be pierced. As a practical matter, charging orders against an Indiana LLC generally have little value. In seemingly rare instances, if an LLC has money, and if it decides to distribute that money to its members, a charging order requires the LLC to redirect such payment from the judgment debtor 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.