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In California, assume the following situation:
A zero net worth, soon-to-be judgement debtor forms a Florida LLC while
domiciled in Florida. The manager member of the the multi-member LLC
headed by soon-to-be judgement debtor relocates to California with
respective Florida LLC articles of organization, and starts conducting
business and generates profits, and accumulates capital held in the LLC
(not distributed to members).
With respect to a charging-lien, or other attachment/garnishment
mechanism, how vulnerable are the assets held by the LLC?
What likely actions are likely to be taken by an aggressive judgement
creditor, and what is the likely result?
Thanks-in-advance!
Michelle
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In California, assume the following situation:
A zero net worth, soon-to-be judgement debtor forms a Florida
LLC while
domiciled in Florida. The manager member of the the multi-member
LLC
headed by soon-to-be judgement debtor relocates to California
with
respective Florida LLC articles of organization, and starts
conducting
business and generates profits, and accumulates capital held in
the LLC
(not distributed to members).
With respect to a charging-lien, or other attachment/garnishment
mechanism, how vulnerable are the assets held by the LLC?
What likely actions are likely to be taken by an aggressive
judgement
creditor, and what is the likely result?
Thanks-in-advance!
Michelle
If the LLC is properly formed and maintained, the assets of the
LLC are not available to creditors, regardless of what state the
LLC is formed in, and regardless of what state the LLC is
operating in. That's because the assets of the LLC do not belong
to the debtor. The creditor can attach distributions from the LLC
to the debtor. It's also possible to attach the debtor's
ownership interest in the LLC.
McGyver
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McGyver, Thanks for your anxiously awaited reply! Can you suggest
specifics to determine whether the multi-member LLC I am dealing with
has been properly formed, or can you otherwise suggest a good source
(text?) from which to glean knowledge?
Also, would that same source or another one describe the proper LLC
maintenance methods?
How does one determine how much of an ownership interest a particular
member has of a particular multi-member LLC? It isn't delineated in
the Articles of Organization, but there are only two members in this
case, if that makes a difference.
If the debtor's ownership interest is attached, doesn't that ownership
interest represent a voting-power to liquidate some or all of the LLC's
assets?
Michelle
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McGyver, Thanks for your anxiously awaited reply! Can you suggest
specifics to determine whether the multi-member LLC I am dealing
with
has been properly formed, or can you otherwise suggest a good source
(text?) from which to glean knowledge?
An LLC is properly formed if (a) articles of organization are filed
with the state secretary of state and the filing is accepted, (b) the
members enter into an operating agreement, and (c) the members
contribute whatever the operating agreement requires them to
contribute.
Also, would that same source or another one describe the proper LLC
maintenance methods?
Maintenance depends on state law. In my state there is no need for
formal meetings and minutes. Other states might consider those
formalities to be required. Other than the meetings and minutes
issue, maintenance means (a) doing business in the LLC name rather
than just having it exist in the background, (b) no co-mingling of
assets with those of the members, (c) adequate funding, (d) decisions
are made by the person or in the manner required by the operating
agreement rather than in a manner which ignores the existance of the
LLC.
How does one determine how much of an ownership interest a
particular
member has of a particular multi-member LLC? It isn't delineated in
the Articles of Organization, but there are only two members in this
case, if that makes a difference.
Percentage interests and contribution amounts are not public
information. Normally, you can't find out if the members don't want
to tell you. If you sue the LLC or a member, you can find out that
sort of thing in discovery.
If the debtor's ownership interest is attached, doesn't that
ownership
interest represent a voting-power to liquidate some or all of the
LLC's
assets?
Attachment of the membership interest does not normally include voting
rights or liquidation rights. At least, not if the operating
agreement is properly drafted. The attachment amounts to a charging
order. That means that the proceeds are attached. If the LLC pays
anything to the debtor, that distribution must go to the creditor. If
the LLC pays nothing to any member, and if that is permitted by the
operating agreement, the creditor gets nothing.
McGyver
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In this site http://www.assetprotectionbook.com/california.htm , they
are saying the California courts make crazy interpretations of LLC law
and actually do liquidate the assets of an LLC to satisfy a member's
creditors.
Can you have a read through that page and tell me if it looks plausible
that a creditor's remedy would indeed possibly not be limited to a
charging order, but actual liquidation. I am not sure about that site;
they may just be pushing an agenda, like to sell something.
Michelle
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I don't know if the site is right about one or more California
courts ordering liquidation of an LLC. They don't provide
references that would be needed for verification. There are
circumstances where liquidation can be ordered, in every state. I
can't tell whether they are referring to a situation where the LLC
is 100% owned by one person, or whether the LLC is a co-defendant
in a fraudulent transfer case, or even whether the LLC was in good
standing. The statements made on the site cannot be verified by
me. I don't personally know how the state compares with the
practices and attitudes in other states.
McGyver
In this site http://www.assetprotectionbook.com/california.htm ,
they
are saying the California courts make crazy interpretations of
LLC law
and actually do liquidate the assets of an LLC to satisfy a
member's
creditors.
Can you have a read through that page and tell me if it looks
plausible
that a creditor's remedy would indeed possibly not be limited to
a
charging order, but actual liquidation. I am not sure about
that site;
they may just be pushing an agenda, like to sell something.
Michelle
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It is always unwise to have a single-member LLC. The point of using an LLC
for asset protection is to limit creditor remedies to a charging order. See,
e.g.
http://tinyurl.com/6vr3e
(Jay Adkisson's site is trustworthy; I don't know the quality of the one
cited below)
Here's a reference to what California did:
"Recent Developments
"In some states, the law still limits a creditor of a partner or member to a
'charging order' which will not be a useful remedy for most plaintiffs.
However, in many states, a creditor is permitted to foreclose on a
partnership or LLC interest. A foreclosure is a seizure of the debtors
interest and that is a very powerful weapon for the plaintiff. (See e.g.
Hellman v. Anderson, 233 Cal. App. 3d 840; California Corporations Code
Section 17302 (Foreclosure of LLC interest)) An FLP and/or LLC can be
useful within the context of a larger plan. But, every plan which involves
an FLP or LLC must protect ownership interests with a trust designed for
that purpose."
As for the California mangling of the Uniform Fraudulent Transfer law to
abolish the four-year statute of limitations (with legislative history
specifically says is supposed to extinguish the right, not the remedy), that
is correct. New Jersey has done the same thing. It remains to be seen
whether California's unique 7-year absolute statutory bar will be honored by
the courts.
Anyone with assets at risk would be well advised to protect them elsewhere,
and to use layers. Still, California-sited property will always be at risk,
even if titled through a non-California entity. And California courts can
always imprison a debtor until s/he repatriates assets.
Some cases:
http://www.fraudulenttransfers.com/
and
http://tinyurl.com/6pefl
On 31/12/04 5:07 am, in article 33k59eF421tb1U1@individual.net, "McGyver"
<Greyprof@msn.com> wrote:
I don't know if the site is right about one or more California
courts ordering liquidation of an LLC. They don't provide
references that would be needed for verification. There are
circumstances where liquidation can be ordered, in every state. I
can't tell whether they are referring to a situation where the LLC
is 100% owned by one person, or whether the LLC is a co-defendant
in a fraudulent transfer case, or even whether the LLC was in good
standing. The statements made on the site cannot be verified by
me. I don't personally know how the state compares with the
practices and attitudes in other states.
McGyver
In this site http://www.assetprotectionbook.com/california.htm ,
they are saying the California courts make crazy interpretations of
LLC law and actually do liquidate the assets of an LLC to satisfy a
member's creditors.
Can you have a read through that page and tell me if it looks
plausible that a creditor's remedy would indeed possibly not be limited to
a charging order, but actual liquidation. I am not sure about
that site; they may just be pushing an agenda, like to sell something.
Michelle
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On 31/12/04 9:52 am, in article BDFAD1C5.3EAE6%biwah@hotmail.com, "Biwah"
<biwah@hotmail.com> wrote:
(Jay Adkisson's site is trustworthy; I don't know the quality of the one
cited below)
I now see that both sites belong to Adkisson. While he ought to have
provided a citation (the one that I have since given) he can be relied on as
trustworthy and knowledgeable.
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