The Business Divorce Law Report
Court Issues Writ of Execution on Minority LLC Interest of Ex-Spouse
One of the perceived benefits of the limited liability form of doing business is the limited remedy that a creditor has when attempting to use the LLC member’s interest as a source to satisfy a judgment. The majority position has been that the judgment creditor may be able to secure a charging order, but can neither foreclose on the interest (that is a force a judicial sale) or divest the debtor of their management rights.
A decision by a Chancery judge in Ocean County involving a New Jersey limited liability company affirms that the “sole remedy” is the charging order – something that is about to change under recent amendments to the LLC statute – but finds that a court may issue a writ of execution. Leonard v. Leonard, Docket No. FM:15-450-05 (App. Div. June 13, 2012)(approved for publication).
Charging Order Sole Remedy under LLC Act
Under the current law, a judgment creditor that receives a charging order is entitled to receive the distributions that the the debtor-LLC member would otherwise receive, if anything. However, beginning with limited liability companies organized after March 2013, and the following year with all New Jersey LLCs, judgment creditors will be able in some circumstances foreclose the interest of the LLC member.
The issue in this case was the ability of a judgment creditor — in this case a custodial parent seeking to enforce a child support award – to levy against the interest of a minority member of a New Jersey limited liability company. The plaintiff and defendant divorced in 2004, with the plaintiff agreeing to pay alimony and child support. The plaintiff, however, alleged that as of 2012, the defendant had unpaid support totaling $110,000. Plaintiff moved to secure a judgment and a writ of execution against the defendant’s 10% interest in a real estate limited liability company, Blydan Okay Group, LLC.
Judgment Creditor Levies Minority LLC Interest
Under N.J.S.A. 42:2B-45, a court may charge the interest of a judgment creditor with the payment of the unsatisfied amount. The judgment creditor becomes an assignee to the extent of the judgment, but has no management right or ability to either force a dissolution or to obtain an order of foreclosure of the debtor’s interest.
The Court entered judgment on the amount of the unpaid support and found that the issuance of a writ of execution against the judgment debtor’s interest was an appropriate equitable remedy. The writ, although not specifically provided for by the statute was necessary protect the interest of the judgment creditor, the court reasoned.
Creditors Rights Will Change Under Revised LLC Act
The Chancery Division did not consider the substantial changes that were incorporated in the Revised Uniform Limited Liability Company Law that was enacted in September 2012. The new statute, which will be effective March 18, 2013, contains a number of significant changes.
First, the revised statute expressly provides that a charging order constitutes a lien on the interest of the judgment debtor and authorizes foreclosure and sale of a member’s interest in an action by a judgment creditor “upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time.” The ability to foreclose an interest is one of the more controversial aspects of the uniform law among lawyers and academics.
Courts will also have express authority to appoint a receiver “to make all inquires the judgment debtor might have made” and to “make all other orders necessary to give effect to the charging order.” The former provision permitting appointment of a receiver to gather information is of questionable import in light of the fact that the recipient of a charging order has virtually no rights other than to take what distributions might be made. On the other hand, the broad authority to make “all other orders necessary to give effect to the charging order” is most certainly going to lead to some interesting decisions since it appears to give the court unfettered discretion to protect the interest of the judgment creditor.
As always, we welcome questions and comments.