Often, clients ask me whether there is an advantage to their forming an LLC or limited partnership in a state other than Florida, commonly, Nevada, Wyoming or Delaware. The clients have heard from friends, attorneys, or internet research that states other than Florida (“foreign states”) have more protective LLC laws. I have almost always advised my clients that there is no advantage for Florida residents to form foreign LLC. Here’s another case that supports my opinion.
I have read an unpublished opinion in a Connecticut state court case (2014 WL 660624) where a creditor sought to impose a charging lien on a debtor’s interests in 12 LLCs formed and operating outside of Connecticut. The debtor objected that the creditor did not have standing to obtain a charging lien against the debtor’s interest in an LLC formed in any state other than Connecticut.
The court held that as long as it had personal jurisdiction over the debtors it could issue a charging order directing the debtors to pay all distributions to the creditor until the judgment is satisfied, and that the debtors could take no loans from the LLC. The debtor would be in contempt of court for receiving LLC money. The court found that issuance of the charging lien is not an order directed against the foreign LLC, but is an order against the resident debtors.
The point is that forming a foreign state LLC will not prevent a Florida court from imposing a charging lien. A creditor does not have to domesticate the judgment in Nevada, Wyoming, Delaware or any state other than Florida in order to lien the debtor’s interest. The decision seems to diminish too the protection of an LLC formed outside the U.S. enforcement of the charging lien may be more difficult if there is no U.S. manager. Maybe, the debtor would have a stronger defense if the subject LLC owned only real estate in the foreign formation state because legal activity related to real property generally is conducted where the property is located.