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Methods Creditors Use to Try and Collect Personal Debts from Multiple Member LLCs

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Like many other states, Florida doesn’t necessarily allow creditors to take the money or property of a multi-member LLC to pay off personal debts or liabilities incurred by one of the LLC’s owners. However, there is one method creditors may try to use in order to collect against the LLC for the individual’s debts.

Obtain a Charging Order

Florida allows for personal creditors of an LLC owner to obtain what’s called a charging order. This is an order against the debtor’s membership interest, and is issued by a court who then directs the LLC’s manager to pay the personal creditor any income or profit distributions that are owned to the debtor-owner. However, the creditor doesn’t automatically collect on their judgment order, as they may be far down the list of monies owed.

Also, the creditor can only obtain financial rights with a charging order, they cannot participate in management of the LLC. This means they can’t direct the other members to pay the monies owed, so other members could decide not to pay out a single dollar. Unless the judgment debtor tries to take funds out of the LLC, the creditor could be waiting for years. This is not necessarily a strong remedy for enforcing a judgment debtor’s financial obligations. In some instances, other LLC members may opt to pay off the debt and try to settle with the creditor for a lower amount, just to get the matter resolved.

Turnover Orders and Foreclosures

Some states allow for turnover orders and foreclosures of the debtor-owner’s LLC membership interest, however, in recent years, Florida has amended the LLC law to state that a charging order is the exclusive remedy for personal creditors of a multiple-member LLC.

Why a Charging Order is the Exclusive Remedy

The rationale behind the law on limiting personal creditor remedies to a charging order is pretty self-explanatory. Other LLC owners shouldn’t be penalized due to the personal debts of one owner that have no relation to the business itself. They can’t try to take over management or have it dissolved without the other members’ consent.

When it comes to single-member LLCs, the law didn’t necessarily make sense, and creditors have additional remedies that may include a court order to sell the LLC interest at a foreclosure sale.

In the case of Young v. Levy, the District Court of Appeals ruled that the lower court erred in granting a writ of garnishment on the debtor-owner’s interest in a multiple-member LLC because, as of 2011, the charging order was the exclusive remedy per Florida Statute.

Florida Statute section 605.0503 is the one that deals with charging orders and the LLC Act. 605.0503(3) notes, for a multiple-member LLC, a charging order is the sole and exclusive remedy by which a “judgment creditor of a member or member’s transferee may satisfy a judgment from the judgement debtor’s interest in a limited liability company or rights to distribution from the LLC.”

Retaining a Business Litigation Attorney

If your LLC is facing problems with judgment creditors trying to enforce a charging order or pursue other unauthorized methods of collection of personal debts against members of an LLC, it’s wise to retain a Florida business litigation attorney. The team at McCabe Rabin, P.A. is comprised of trusted West Palm Beach business attorneys who are very experienced in LLC matters. Contact our office today to schedule a consultation.

Resource:

forbes.com/sites/jayadkisson/2014/06/21/the-charging-order-is-wear-its-at-llc-in-intra-member-dispute/#3fe00ec17fdb

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