In Iowa, the remedy of a creditor of a member of a limited liability company with respect to the LLC membership interest is statutorily limited to "charging order." To obtain a charging order, a creditor must first obtain a judgment from a court. This is because a charging order is only available to "judgment creditors."
A charging order is more similar to a garnishment (and is different than a foreclosure); it does not permit the creditor to reach the LLC membership interest itself, but rather permits the creditor only to reach the judgment debtor/LLC member's interest in the distributions that the LLC makes.
However, the charging order remedy may avail an Iowa judgment creditor of one important advantage in the case of a limited liability company organized in another state.
In Rockstone Capital, LLC v. Marketing Horizons, Ltd., 2013 WL 4046597 (Conn.Super., Unpublished, July 17, 2013), a judgment creditor of a Connecticut individual debtor sought the imposition of a charging order against a purportedly foreign limited liability company in Connecticut state court. The defendant resisted the charging order claiming that the LLC at issue, "Nonprofit Solutions, LLC", was a foreign corporation over which the court lacked jurisdiction.
The court noted there was no evidence that "Nonprofit Solutions, LLC" was a corporation as opposed to a limited liability company and concluded the LLC was not a party of record in the action and that the court was not exerting jurisdiction over the LLC. More importantly, the court cited a lack of authority for the proposition that a court must have jurisdiction over a limited liability company in order to enforce a judgment against an individual who is a member of that entity. Ultimately the court concluded that the court has jurisdiction over the judgment debtor's interest in the LLC, if not the LLC itself.
This conclusion raises the possibility that an Iowa judgment creditor of an Iowa judgment debtor could obtain a charging order over the membership interest of a foreign limited liability company without needing to initiate a court action in the jurisdiction of organization of the LLC.
If you have any questions regarding charging orders or other business matters, please contact Jeremy Hagan.
Categories: Business Law