So many people believe that the most important decision in forming a limited liability company for asset protection purposes is deciding in which state to register the LLC. Find the state, they say, that has the best LLC statute including protection of a debtor’s interest in a single member LLC. Florida law does not protect a debtor’s membership interest in a single member LLC.
The common belief is not correct as illustrated by this recent Delaware court decision. The debtor, a Utah resident, owned interests in one or more single member LLCs formed in Delaware. A Utah court permitted the judgment creditors to levy upon and foreclose the debtor’s membership interest in his single member LLCs. The debtor filed a lawsuit in Delaware asking a Delaware court to declare that the Utah foreclosures on the LLC interest were invalid under Delaware law. Delaware law states that creditors cannot foreclose an LLC interest regardless of the number of members.
The Delaware court refused to override the Utah court decision permitting the foreclosure over the LLC interest under the principal of Res Judicata. The Delaware court said the foreclosure issue had already been resolved in favor of the creditors in the Utah court based upon the theory that Utah law applied to the creditor’s remedy against the debtor’s LLC interest.
Forming an LLC in Delaware, Nevada, or any other state will not guarantee that that state’s law will protect your LLC interest. Most states apply the laws of the debtor’s residence over legal issues of judgment collection. State court judges will usually not abstain from imposing creditor remedies to collect judgments issued or domesticated in their states.
I have written before that Florida asset protection planning should involve LLC’s formed in Florida unless the LLC is actually doing business in or owns property in a foreign state. Thanks to New Jersey attorney Jeff Vandrew for writing about this important court case in his own asset protection blog.
