ULLCA 503f Foreclosure of SMLLC Interest

Foreclosure_SMLLC SMLLC Foreclosure ULLCASection503fForeclosureSMLLC

503(f). If a court orders foreclosure of a charging order lien against the sole member of a limited liability company:

(1) the court shall confirm the sale;

(2) the purchaser at the sale obtains the member's entire interest, not only the member's transferable interest;

(3) the purchaser thereby becomes a member; and

(4) the person whose interest was subject to the foreclosed charging order is disassociated as a member.

Reporter's Comment to § 503(f) ¶ 1.

The charging order remedy—and, more particularly, the exclusiveness of the remedy—protect the “pick your partner” principle.
That principle is inapposite when a limited liability company has only one member.
The exclusivity of the charging order remedy was never intended to protect a judgment debtor, but rather only to protect the interests of the judgment debtor’s co-owners.

Reporter's Comment to § 503(f) ¶ 2.

Put another way, the charging order remedy was never intended as an “asset protection” device for judgment debtors. See Olmstead v. F.T.C., 44 So. 3d 76, 83 (Fla. 2010) (recognizing “the full scope of a judgment creditor's rights with respect to a judgment debtor's freely alienable membership interest in a single-member LLC”); In re Albright, 291 B.R. 538, 540 (Bankr. D. Colo. 2003) (holding that, “[b]ecause there are no other members in the LLC, . . . the Debtor’s bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights, including the right to control the management of the LLC”).
Accordingly, when a charging order against an LLC’s sole member is foreclosed, the member’s entire ownership interest is sold and the buyer replaces the judgment debtor as the LLC’s sole member.

Reporter's Comment to § 503(f) ¶ 3.

This subsection was added during the Harmonization Project but not for the purposes of harmonization.
The subsection addresses an issue that does not exist with partnerships; neither a general nor a limited partnership can continue perpetually in existence with only one partner. See ULPA (2001) (Last Amended 2013) § 801(a)(5) (stating that dissolution is caused upon “the passage of 90 consecutive days during which the partnership has only one partner”); UPA (1997) (Last Amended 2013) § 801(6) (stating that dissolution is caused upon “the passage of 90 consecutive days during which the partnership does not have at least two partners”).