UCLLA 503(c) Foreclosure Of Charging Order Lien
Foreclosure Code ULLCASection503cForeclosure
(c) Upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time, the court may foreclose the lien and order the sale of the transferable interest. Except as otherwise provided in subsection (f), the purchaser at the foreclosure sale obtains only the transferable interest, does not thereby become a member, and is subject to Section 502.
Reporter's Comment to Subsection (c)
The phrase “that distributions under the charging order will not pay the judgment debt within a reasonable period of time” comes from case law. See, e.g., Stewart v. Lanier Park Med. Office Bldg., Ltd., 578 S.E.2d 572, 574 (Ga. Ct. App. 2003) (“Judicial sale may be appropriate where . . . it is apparent that distributions under the charging order will not pay the judgment debt within a reasonable amount of time.”); Nigri v. Lotz, 453 S.E.2d 780, 783 (Ga. Ct. App. 1995). ).
A purchaser at a foreclosure sale obtains only the very limited rights of a transferee under Section 502 and is in some ways more vulnerable and less powerful than the holder of a charging order.
After foreclosure and sale, Subsection (b) no longer applies.
More generally, the court is no longer involved in the matter.
For the vulnerability of a transferee, see Section 107(b), comment.
Few things have caused so much consternation among planners as the foreclosure of the charging order lien, and, indeed, some states have modified their ULLCA or RULLCA to prohibit such foreclosures (which was probably a bad move for reasons beyond the discussion here). Foreclosure of the charging order lien has the effect of making the involuntary assignment permanent, i.e., the purchaser at the foreclosure sale will continue to hold the assignment of the transferable interest and receive dividends even after the judgment is fully satisfied. By contrast, if the charging order lien is not foreclosed upon, that lien will terminate when the judgment is fully paid off.
In practice, however, few creditors actually even attempt to foreclose on the lien, since there are tax hazards to the purchaser at the judicial sale, which might be the creditor. Which is to say that at ordinary judicial sales, the credit will bid a portion of the judgment against the debtor's asset (known as a "credit bid") and walk away from the auction with the asset. However, since the purchaser at the judicial sale become an involuntary assignee of the debtor's former transferable interest in the LLC, the purchaser thus goes on the hook for any tax consequences spinning off from that LLC interest, and which might include "phantom income" and no cash, also known as the "K.O. by the K-1". Brave indeed (or simply foolish) is the creditor who forecloses and takes the debtor's former interest in all but a single-member LLC.
within a reasonable time -- What constitutes a "reasonable time" is depending upon the facts of a particular case, and may range from now to never and all temporal points in between. Anecdotally, based on my own experiences, judges will not grant foreclosures of the charging order lien concurrently with the granting of the charging order, but instead (seemingly confused by the "reasonable time" language) will make the creditor wait at least a couple of months before allowing the foreclosure.
Example: Debtor owns an interest in an LLC that operates as a hedge fund, which throws off $10,000 per year in dividends. Creditor has a judgment against Debtor for $16,000 plus annual interest at 5%. Since the dividends will pay off the judgment in two years, foreclosure of the interest should be denied.
Example: Same facts, except that the LLC pays only $500 dividends per year, and Creditor holds a judgment against Debtor for $150,000 plus annual interest at 5%. Since the dividends cannot reasonably be expected to pay off the judgment, immediate foreclosure of the charging order lien should be allowed.
does not become a member -- The purchaser at the judicial sale becomes no more than a permanent involuntary assignee of the debtor's former transferable interest, and does not become a member or obtain any additional information rights, etc.
- DiSalvo Properties, LLC v. Bluff View Commercial, LLC, 2015 WL 3759402 (Mo.App., 2015).
- Earthgrains Baking Co. v. Sycamore Family Bakery, Inc., D.Utah Case No. 09CV523 (Aug. 21, 2015).
- Earthgrains Baking Companies, Inc. v. Sycamore Family Bakery, Inc., 2019 WL 6001940 (D.Utah, Nov. 14, 2019).
- Givens v. National Loan Investors, L.P., 724 So.2d 610 (Fla.App. Dist.5 12/18/1998).
- Hellman v. Anderson, 233 Cal. App. 3d 840, 284 Cal. Rptr. 830 (Cal.App.Dist.3 08/26/1991).
- Herring v. Keasler, 563 S.E.2d 614 (N.C.App. 06/04/2002).
- In re Talbut, 2016 WL 937373 (N.D.Ohio, Slip Copy, 2016).
- Kriti Ripley, LLC v. Emerald Investments, LLC, 2013 WL 3200596 (S.C., June 26, 2013).
- Lauer Construction Inc. v. Schrift, 123 Md.App. 112, 716 A.2d 1096 (Md.Sp.App. 09/02/1998).
- Levy v. Carolinian, LLC, 2014 WL 4347503 (S.C., 2014).
- Macharg v. Macharg, 2016 WL 6777526, 2016 PA Super 254 (Pa.Super., Nov. 16, 2016).
- Madison Hills LTD v. Madison Hills, Inc., 644 A.2d 363 (Conn.App. 06/06/1994).
- Nigri v. Lotz, 453 S.E.2d 780 (Ga.App. 02/01/1995).
- Preservation Holdings, LLC v. Norberg, 2019 IL App (1st) 181136 (June 14, 2019).
- Saadi v. Maroun, 2018 WL 1282325 (M.D.Fla., March 13, 2018).
- Sanders v. Ohmite Holding, LLC, 2011 WL 598436 (Del.Ch., Unpublished, 2011).
- Stewart v. Lanier Park Medical Office Building, Ltd., 578 S.E.2d 572 (Ga.App., 2003).
- Timberland Bank v. Mesaros, 2018 WL 2215463 (Wa.App., May 15, 2018).
- ULLCA 503f Foreclosure of SMLLC Interest
- Webster v. Dalcoma Limited Partnership Four, No. CA2000-11-028 (Ohio App. Dist.12 09/17/2001).
- Wells Fargo Bank v. Barber, 2015 WL 470589 (M.D.Fla., Feb. 4, 2015).