ULLCA 503(h) Exclusive Remedy
Exclusive_Remedy Code ULLCASection503hExclusiveRemedy
(h) This section provides the exclusive remedy by which a person seeking in the capacity of judgment creditor to enforce a judgment against a member or transferee may satisfy the judgment from the judgment debtor's transferable interest.
Reporter's Comment to Section 503 generally
The charging order concept dates back to the English Partnership Act of 1890 and in the United States has been a fundamental part of law of unincorporated business organizations since 1914. See UPA (1914) § 28.
As much a remedy limitation as a remedy, the charging order is the sole method by which a person acting as judgment creditor of a member or transferee can extract value from the member's or transferee's ownership interest in a limited liability company. See the comment to Subsection (h).
Reporter's Comment to Subsection (h) ¶1.
This subsection does not override Uniform Commercial Code, Article 9, which may provide different remedies for a secured creditor acting in that capacity.
A secured creditor with a judgment might decide to proceed under Article 9 alone, under this section alone, or under both Article 9 and this section. In the last-mentioned circumstance, the constraints of this section would apply to the charging order but not to the Article 9 remedies.
Reporter's Comment to Subsection (h) ¶2.
This subsection is not intended to prevent a court from effecting a "reverse pierce" where appropriate.
In a reverse pierce, the court conflates the entity and its owner to hold the entity liable for a debt of the owner. Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298, 312 (Conn. App. Ct. 2002) (approving a reverse pierce where a judgment debtor had established a limited liability company in a patent attempt to frustrate the judgment creditor), overruled on other grounds by, Robinson v. Coughlin, 830 A.2d 1114 (Conn. 2003).
Likewise, this subsection does not supplant fraudulent transfer law.
Paragraph (h) is one of the primary reasons that LLCs and partnerships are such popular business entities, which is that the creditor's remedy is limited to a charging order. However, the enormous limitation of ¶ (h) must be realized, which is that ¶ (h) applies only and exclusively to the creditor's attempt to reach the debtor's transferable interest, which is utterly different than a creditor's attempt to access the value of the assets of the LLC. The latter may be accomplished, as the Reporter's Comment notes, through a number of theories, the most popular of which is so-called "reverse veil-piercing" (or "reverse alter ego") theories.
For further discussion on the exclusivity of charging orders click here.
EXCLUSIVE REMEDY OPINIONS
- Chandler Medical Building Partners v. Chandler Dental Group, 855 P.2d 787, 175 Ariz. 273 (Ariz.App.Div.1, 1993).
- Christensen v. Oedekoven, 95 Wy. 3 (Wyo.App., 1995).
- Devoll v. Demonbreun, 2016 WL 4538805 (Tex.App., Aug. 31, 2016).
- Earthgrains Baking Co., v. Sycamore, 2022 WL 433486 (10th Cir., Feb. 14, 2022).
- Golfwood Square LLC v. O'Malley, 2018 IL App (1st) 172220-U, 2018 WL 4370875 (Ill.App., Unpublished, Sept. 11, 2018).
- Grengs v. Grengs, 2020 ND 242, 2020 WL 6793355 (N.D., Nov. 19, 2020).
- Heckert v. Heckert, 2017 WL 5184840 (Tex.App., Nov. 9, 2017).
- Jiao v. Xu, 2022 WL 764997 (5th Cir., March 11, 2022).
- Klinek v. Luxeyard, Inc., 2023 WL 4497063 (Tex.App. 14th Distr., July 13, 2023).
- Leonard v. Leonard, (N.J.Super.A.D., 2012).
- Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021).
- McLeod v. Bruce, 2022 WL 731517 (M.D.Ga., March 10, 2022).
- Pansky v. Barry S. Franklin & Assoc., 2019 WL 581620 (Fla.App., Feb. 13, 2019).
- Ramos v. Mississippi Real Estate Dispositions, LLC, 2021 WL 112763 (Fla.App., Jan. 13. 2021).
- Red Lion Hotels Franchising, Inc. v. First Capital Real Estate Investments LLC, 2022 WL 298118 (E.D.Cal., Feb. 1, 2022).
- U.S. v. Wilhite, 2017 WL 5517410 (D.Colo., Nov. 17, 2017).