Can a creditor seize your ownership interest in an LLC?

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The Statue of Justice - lady justice or Iustitia / Justitia the Roman goddess of Justice

Many business persons have ownership interest in many different businesses. Business persons take calculated risk in order to make a financial gain. it is important that those business persons understand what’s at risk when doing so.

There is a common misconception that if an individual is personally liable for a debt that his ownership interest in any of his companies could also be liable. For example, if your construction company purchases supplies from a vendor, which requires a personal guarantee, and you become unable to make those payments, the debt remains the obligation of the individual and the construction company.. For clarification if you owned and interest in another company that owned property or other assets, it would not be a guarantor of those debts.

In AOK Property Investments , LLC v. Donald J Boudreaux, Jr., et al, the Louisiana 5th Circuit addressed the issue of whether a creditor is precluded by Louisiana charging order statutes from having a single member LLC’s 100% membership interest in the LLC seized.

In Boudreaux, the Court restated the accepted jurisprudence that a member’s interest in an LLC is personal property that is separate and distinct from the property of the LLC.  Pursuant to La R.S. 12:1331, a court may charge the membership interest of the LLC’s member with payment of the unsatisfied amount of judgment with interest.

To the extent so charged, the judgment creditor shall have only the rights of an assignee of the membership interest. Ownership interest in an LLC is separated into two categories: financial rights and management rights. An assignee is granted only the member’s financial rights. Thus, a judgment creditor who obtains a charging order is only entitled to share in the profits and losses and receive the distributions to which the member was entitled.

As explained by Glenn G. Morris in his Louisiana civil law treatise,

“the one feature of the LLC system that poses a special issue is its treatment of creditors. Judgment creditors of an LLC member may not cause the debtors members LLC interest to be seized and sold in the ordinary way that most assets of a judgment debtor may be seized. Judgment creditors are entitled to obtain a charge against an LLC’s members interest, and this charge entitles the charging credit are only to be treated as an assignee.”

Therefore, a creditor may be able to obtain your rights as an assignee of an LLC.  However, this assignment will only entitle them to financial benefits and will not allow them to make management decisions or have influence over how the LLC is run.

Should you have any questions regarding the potential effects of a Judgment against your interest in an LLC, please give us a call.

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