Debtors set up LLCs in foreign countries to protect against creditor charging liens against their membership interest and distributions. During legal research this past week I came across a Connecticut case where the creditor found a way to effectively attach a debtor’s distributions from LLCs formed outside the U.S.
The creditor sought a charging liens against the debtor’s interest in several foreign situs LLCs. The debtor argued that the court must have jurisdiction of a foreign entity in order to charge a membership interest with payment of a U.S. judgment. The court found that the proposed order submitted with the creditor’s motion for charging order did not order a foreign LLC to do, or not to do, anything. Rather the order directed the debtor to pay the creditor any and all distributions the creditor all future distributions, creditors or payments receivable from the LLC, and the order direted the defendants to take no loans, directly or indirectly from the foreign LLCs.
The order did not direct the foreign LLC to pay the creditor nor did the order compel the foreign LLC to make any distributions. The order is effectively a charging lien because the debtors may be held in contempt if they receive any LLC money. The LLC money is effectively frozen inside the LLC unless and until the creditors take action against the LLC managers.
The opinion is unpublished. (2014 WL 660624) It shows that courts will try to write orders in a way that minimizes debtors use of sophisticated offshore asset protection to avoid paying judgments. Offshore LLCs may make collection process more difficult and expensive for the creditor, but they do not cure a U.S. money judgment.