A limited liability company provides asset protection because a creditor’s remedy is limited to a charging lien against the debtors share of profit distributions from the LLC. An interesting issue arises when the debtor owns a membership interest in an LLC that was organized in a state that is different from the debtor’s residence. Does the creditor have to domesticate the judgment in the organization state to obtain a charging lien, and which state’s laws apply to the enforcement of the lien.
The question was first addressed in a federal court in Florida. The decision held that because a debtor’s LLC is intangible personal property the enforcement action is properly in the state where the debtor resides. In that case, the debtor owned an LLC interest organized in a foreign country. The court said the creditor could enforce a charging lien in Florida and did not have to try to transfer the U.S. judgment to an offshore jurisdiction. This ruling made the use of foreign LLCs less effective in asset protection.
More recently, the Colorado Supreme Court reached the opposite conclusion in the same issue. This court held that charging liens must be enforced in the state where the LLC filed articles or organization so that the creditor had to domesticate the judgment in the jurisdiction where LLC articles were filed. The Colorado court discussed the prior Florida ruling and found it unsupported by sufficient analysis. The court said, in short, that permitting collection actions in multiple states where LLC owners may reside, or may move to, would sow “substantial uncertainty and confusion.” The Colorado court interpreted an LLC statute provision on charging liens almost identical to Florida’ LLC statute.
Because different courts have reached opposite conclusions on this important issues planners cannot predict with certainty the benefits of organizing LLCs outside of Florida for the protection of Florida debtors.