LLCs and asset protection

Here at Shenwick & Associates, many of our clients are looking to protect their assets (as we've covered extensively in our recent e-mails). This month, we're going to look at the intersection of business law and debtor and creditor law in discussing the use of limited liability companies (LLCs) as a tool for asset protection.

Unfortunately, New York law provides LLCs with less protection from a member's personal creditors than many other states. In most states, an LLC's money or property can't be taken by creditors to pay off the personal debts or liabilities of a member of the LLC. Instead, creditors are limited to obtaining a charging order against the LLC.

A charging order is the vehicle that gives a creditor a lien against the debtor/member's LLC economic interest in the LLC, which lasts until the judgment is satisfied. This lien is only against whatever distributions that the LLC makes to the debtor/member, if any and doesn't give the creditor any of the other rights that an LLC member has, i.e. voting rights.

New York case law provides that a charging order may not be a creditor's sole remedy against a LLC. In 3 West 16th Street, LLC v. Ancona, the plaintiff/creditor claimed that that codefendant Ancona acted with fraudulent intent when he transferred real property to the codefendant LLCs.

For the Supreme Court of the State of New York, New York County, Justice Singh wrote:

New York's LLC law does not provide that a charging order is a creditor's exclusive remedy against a member. That means that a creditor may be able to foreclose on the member's interest in the limited liability company and become owner of its financial rights in the company, and thus, obtain more authority than a mere assignee. However, that appears to be a rare event. (emphasis added)

The facts and circumstances of each case is important from a debtor/creditor perspective. For more information about LLCs, debtor/creditor law and bankruptcy law, please contact Jim Shenwick.