Single-Member LLCs And Charging Orders

Topic SMLLC TopicsSingleMemberLLCSMLLC

Since the sine qua non of charging order exclusivity is to protect the interest of non-debtor partners pursuant to the "pick you partnership" doctrine, the charging order remedy should not apply to a single-member LLC (SMLLC).

The ULLCA establishes a two-part procedure for dealing with SMLLCs: First, the creditor obtains a charging order lien under § 503(a); and, second, the creditor forecloses on the lien under § 503(f), which makes the creditor the new single member of the LLC, which then is presumably wound up so that its assets may be distributed to creditors.

It is suggested that this procedure is wasteful and somewhat duplicative, and that a creditor should simply be allowed to levy on the single interest in the same fashion as any general intangible. Consideration should also be given to simply allowing the creditor to levy directly upon the LLC's assets.

Note that there is an issue as to when the single member status of the entity is to be tested, considering that a wily debtor will attempt to have a strawman buy a 1% or other small interest in the LLC for value so as to destroy the single-member status. Whether the existing provisions are retained or new provisions are adopted, this issue should be addressed.