Corporate stock can be seized by a judgment creditor to satisfy the judgment. The ownership interest of a properly structured multi-member limited liability company, formed in an appropriate state, is protected from judgment creditors and is not subject to being seized by a judgment creditor.
1
Choose the proper state (jurisdiction) for formation of the limited liability company.
Choosing the proper state to form the limited liability company (LLC) is important. Only seven (7) states currently provide that the sole remedy for a judgment creditor against an ownership interest of an LLC is the "charging order" remedy. It is the charging order that provides protection against seizure of the ownership interest by the judgment creditor. A charging order provides that a judgment creditor, who has a judgment against the LLC owner, can receive only certain benefits through the exercise of the charging order. There are no other remedies available to the judgment creditor insofar as the ownership interest of the LLC is concerned.
2
There must be more than one member (owner) of the LLC for the charging order remedy to be effective.
The charging order comes from partnership law. Under partnership law partners of a partnership owe a "fiduciary duty" to each partner. A "fiduciary duty" is the highest duty the law recognizes. It is a duty of trust and trustworthiness. A fiduciary duty requires all partners are fiduciaries of each other and must act in the best interests of the partners and the partnership, without regard to their own rights and obligations. The law will not impose a fiduciary duty. When a creditor of an LLC member (partner) has a judgment against that partner, the charging order remedy precludes the creditor from seizing the LLC ownership interest. Allowing the creditor to seize the ownership interest would force a new partner on the remaining partners - the judgment creditor - and mpose a fiduciary duty between unknown parties. If there is only one member of the LLC, there are no partners between whom a fiduciary duty exists, and no charging order remedy.
3
Structure the operating agreement properly.
The operating agreement for the LLC must be properly structured in order to receive the full asset protection value of the charging order being the sole remedy for a judgment creditor. There are various requirements that must be met for the charging order remedy to be effective against all creditors, and in particular against a bankruptcy trustee. For instance, at least one bankruptcy court case has held that a bankruptcy trustee may not be restrained from seizing the ownership interest of an LLC unless there is a "continuing" fiduciary duty between and among the members (partners) of the LLC. There are numerous other issues that should be considered and properly drafted into the operating agreement. The failure to do so could result in the failure of the application of the charging order remedy. Such a failure could result in the loss of the ownership interest of the LLC to the bankruptcy trustee or a judgment creditor.
4
Maintain and honor the legal entity.
Often, a judgment creditor will seek to "pierce the corporate veil" or establish that a legal entity is the "alter ego" of the individual owners. If the creditor can establish for the judge or jury's satisfaction that the owners have not properly maintained the legal entity, the court may allow the creditor to pierce the veil of the legal entity or treat the legal entity as the individual's alter ego. That allows the creditor to pursue collection of the judgment against the individual owners' assets. To avoid that result, the owners of the LLC must ensure that it is properly maintained and treated for all purposes as a separate legal entity. That means the owners should have regular (at least annually) meetings where the entity's business affairs are reviewed and approved; that the entity has its own bank accounts, books and records, that it files it's own tax returns, enters into contracts in its own name, and is otherwise treated as a separate legal entity by the owners.
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