The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
2020 - Florida - AOK Property - Single Member LLC - Late Arriving Member
AOK Property Investments, LLC v. Boudreaux, ___ So.3d ____, 2020 WL 7240057, 20-237 (La.App. 5 Cir. Dec. 9, 2020).
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
Court of Appeal of Louisiana, Fifth Circuit.
AOK PROPERTY INVESTMENTS, LLC
Donald J. BOUDREAUX, Jr., et al.
December 09, 2020
ON APPLICATION FOR SUPERVISORY REVIEW FROM THE FORTIETH JUDICIAL DISTRICT COURT, PARISH OF ST. JOHN THE BAPTIST, STATE OF LOUISIANA, NO. 72,900, DIVISION “C”, HONORABLE J. STERLING SNOWDY, JUDGE PRESIDING
Attorneys and Law Firms
COUNSEL FOR PLAINTIFF/RESPONDENT, AOK PROPERTY INVESTMENTS, LLC, Todd Fontenot, Lake Charles
COUNSEL FOR DEFENDANT/RELATOR, DONALD J. BOUDREAUX, JR., Tyler J. Arbour, Ashley L. Belleau, Ryan M. Tucker
COUNSEL FOR DEFENDANT/RESPONDENT, SOUTHERN CHEMICAL INDUSTRIES, LLC, Scott Falgoust
Panel composed of Judges Marc E. Johnson, Robert A. Chaisson, and John J. Molaison, Jr.
*1 **1 Relator, Donald J. Boudreaux, Jr., seeks review of the June 25, 2020 judgment that denied his motion for summary judgment, which was rendered in the 40th Judicial District Court, Division “C”. For the following reasons, we reverse the trial court’s judgment and render summary judgment in favor of Mr. Boudreaux.
According to the facts recounted by the trial court in its reasons for judgment, Mr. Boudreaux was the sole member of SCI Leasing, LLC (“SCI”), and he owned 100% of the limited liability company’s membership interest. On October 19, 2017, Mr. Boudreaux and his father, Donald Boudreaux, Sr. (“Boudreaux, Sr.”) executed an instrument transferring 5% of SCI’s membership interest to Boudreaux, Sr. On April 10, 2018, the 29th Judicial District Court rendered a judgment against Mr. Boudreaux and in favor of Respondent, AOK Property Investments, LLC (“AOK”). A few months later, on July 19, 2018, Mr. Boudreaux and Boudreaux, Sr. admitted Thomas LeBoeuf as a member with a 10% membership interest in SCI.
After the transfers were made, AOK filed its “Petition for Revocatory Action,” which sought to annul the transfers to Boudreaux, Sr. and Mr. LeBoeuf and restore Mr. Boudreaux as the sole member of SCI. The objective of restoring Mr. Boudreaux as the sole member of SCI is to seize his entire membership interest in the limited liability company (“LLC”) in satisfaction of the judgment rendered in the 29th JDC. The instant motion for summary judgment is being litgated prior to the trial on the revocatory action.
The parties limited the motion for summary judgment to one legal issue: whether a creditor is precluded by Louisiana charging order statutes from having a single-member LLC’s 100% membership interest in the LLC seized like any other non-exempt asset. The trial court found that the charging order statute is not **2 relevant in a single-member LLC. The court reasoned that there are no other members to protect in a single-member LLC when a creditor attempts to seize the entire membership interest, and a single-member judgment-debtor’s membership interest should not be shielded from seizure by a judgment creditor.
To support its position, the trial court relied upon a Florida Supreme Court case, Olmstead v. Federal Trade Commission, 44 So.3d 76 (Fla. 2010), superseded by statute as stated in Capstone Bank v. Perry-Clinton Enterprises, LLC, 230 So.3d 970 (Fla. Dist. Ct. App. 2017). In Olmstead, the appellate court considered a question of law certified by the United States Courts of Appeals for the 11th Circuit concerning whether, pursuant to Florida law, a court may order a judgment-debtor to surrender all “right, title, and interest” in the debtor’s single-member LLC to satisfy an outstanding judgment. The Florida court concluded that the statutory charging order provision did not preclude application of the creditor’s remedy of execution on an interest in a single-member LLC, and found that Florida law, at that time, permitted a court to order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member limited liability company to satisfy an outstanding judgment. The court interpreted the language of its charging order provision, which is similar to Louisiana’s charging order provision, to not suggest that the charging order was an exclusive remedy when compared with statutes for other entities. Although Florida’s charging order provision is similar, our Louisiana Supreme Court has not interepreted Louisiana’s charging order provision in the same manner.
*2 Under Louisiana law, a member’s interest in an LLC is personal property that is separate and distinct from the property of the LLC. Channelside Servs., LLC v. Chrysochoos Grp., Inc., 15-64 (La. App. 4 Cir. 5/13/16); 194 So.3d 751, 758, citing La. R.S. 12:1329. Pursuant to La. R.S. 12:1331, a court of competent jurisdiction may charge the membership interest of the LLC’s member with **3 payment of the unsatisfied amount of judgment with interest. To the extent so charged, the judgment creditor shall have only the rights of an assignee of the membership interest. Id. Furthermore, La. R.S. 12:1332 states that, except otherwise provided in the articles of organization or a written operating agreement, an assignee of an LLC shall not become a member or participate in the management of the LLC; and, until the assignee of an interest in an LLC becomes a member, the assignor shall continue to be a member and shall not be released from his liability to the LLC under La. R.S. 12:1322 and 1328.
According to La. R.S. 12:1330 through 1332, the assignment of a member’s interest in the LLC effectively separates the membership interest into two sets of rights: financial and management rights. Channelside Servs., LLC, 194 So.3d at 759. The assignee is granted only the member’s financial rights, while the original member retains management rights and powers, unless and until the assignee becomes a member. Id. A judgment creditor who obtains a charging order, thereby becoming an assignee of a member’s interest, is entitled to share in the profits and losses and receive the distributions to which the member was entitled. Id.
While Louisiana’s charging provision for LLCs does not contain the term “exclusive remedy,” it does provide that a judgment creditor shall have “only” the rights of an assignee of the membership interest. Consequently, that language is all that the Louisiana Legislature provided us to rely upon, and it can be viewed as the only remedy allowed to judgment creditors. This rationale can be explained by the following excerpt:
The one feature of the LLC system that poses a special issue is its treatment of creditors. Judgment creditors of an LLC member may not cause the debtor’s member’s LLC interest to be seized and sold in the ordinary way that most assests of a judgment debtor may be seized. Judgment creditors are entitled only to obtain a “charge” against an LLC member’s interest, and this charge entitles the charging creditor only to be treated as an assignee.
**4 Glenn G. Morris, Business Organizations § 44:20, in 8 Louisiana Civil Law Treatise (2020). (Emphasis added).
Because there has been no reverse piercing of the veil in this matter, we find that a plain reading of Louisiana’s charging provision for LLCs provides the exclusive remedy of a judgment creditor. Accordingly, we reverse the trial court’s June 25, 2020 judgment, find that a creditor is precluded by Louisiana charging order statutes from seizing a single-member LLC’s 100% membership interest in the LLC, and grant Mr. Boudreaux’s motion for summary judgment.
WRIT GRANTED; JUDGMENT REVERSED; SUMMARY JUDGMENT RENDERED
by Jay Adkisson
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More Articles On Charging Orders click here
LAW REVIEW ARTICLES
by Jay Adkisson
For more on the historical background of Charging Orders and contemporary issues involving the same, see Jay Adkisson's article, Charging Orders: The Peculiar Mechanism, 61 South Dakota Law Review 440 (2016). Available at SSRN: https://ssrn.com/abstract=2928487
Analysis of Uniform Limited Liability Company Act Sections re Charging Orders
The Uniform Acts re Charging Orders and Transferable Interests (without Jay's comments):
Effect of Bankruptcy On The Debtor-Member's LLC Interest here
Collected Court Opinions On Charging Orders here and below
NATURE OF REMEDY
Distributions/Economic Rights - Creditors rights to distributional interests/economic rights
Prejudgment Relief - Freezing the interest and distributions pending judgment
Procedure - The procedure for obtaining a charging order and ancillary provisions
Unknown Interest - Where the debtor's interest, if any, has not been ascertained
Order Form Generally - Most issues to the form of the charging order
Order Form Future Interests - How the charging order affects subsequently-acquired interests
Exemptions - Available state and federal protections that may apply to charging orders
Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute
Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs
Foreign Entities - Charging orders against out-of-state entities
Creditor Rights Restrictions - Limitations on creditors' management and informational rights
Information Rights - Creditors' ability to access information about the LLC
Management & Voting Rights - Rights of creditor after charging order issued
LIEN EFFECT AND PRIORITY
Lien - The lien effect of a charging order and priority issues
Compliance - Issues for the LLC and non-debtor members in complying with a charging order
Receiver - The role of the receiver in charging order proceedings
SINGLE MEMBER LLC
Single-Member LLCs - Enforcing the judgment against an LLC with a sole member
Foreclosure - Liquidation by judicial sale of the debtor's right to distributions
REPURCHASE AND REDEMPTION RIGHTS
Repurchase/Redemption Rights - Third-parties' ability to purchase the charged interest
Appeal - Issues relating to the appeal of a charging order
RELATION TO OTHER REMEDIES
Exclusivity - The charging order as the sole remedy available to creditors and exceptions
Voidable Transactions/Fraudulent Transfers - Issues relating to avoidable transfers of interests
Abstention - Attempts to collaterally attack the charging order in federal court
Bankruptcy - Treatment of the debtor/member's interest in bankruptcy
Intra-Member Disputes - Where one member obtains a charging order against another
Taxes - Tax issues relating to charging orders for all involved parties
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Additional Court Opinions About charging orders (unsorted)
THE CHARGING ORDERS PRACTICE GUIDE
The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association, click here for more
Available for purchase directly from the ABA at https://goo.gl/faZzY6
Also available from Amazon at https://www.amazon.com/Charging-Orders-Practice-Guide-Understanding/dp/1641052643
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