ILNews

DTCI: He's No Creditor of Mine

Back to TopCommentsE-mailPrint
massaro-august-mug Massaro

The scenario is this: Your client is one of several members in a Multi-Member Indiana Limited Liability Company. Although business is good, your client learns that one of his co-members has creditors with a judgment against him and the judgment creditor now looks to the debtor-member’s LLC interest for collection. This article is designed to briefly examine the rights of the respective parties.

The Corporate Veil

As we all know, one of the largest benefits of incorporation (in this case an LLC) is the personal asset protection provided to its members. Regardless of corporate form, this protection is widely known as the “corporate veil.” However, this corporate veil protection is not absolute. Indiana law is well established that a creditor can “pierce the corporate veil” if it can prove that, among other things, the corporation was used to promote fraud, injustice, or illegal activities and/or the corporation was merely a “shell” to avoid personal liability.

While certainly not the situation all the time, I would submit that these aspects are less likely to be found in an MMLLC than in a Single Member LLC. In the latter, there is no one to look over an owner-member’s shoulder should he improperly commingle funds, pay for personal purchases through the business, attempt to hide assets, or otherwise fail to comply with corporate formalities. Irrespective of these possible differences, a piercing count and its concomitant analysis apply where a creditor has a judgment against the LLC itself. There is a different analysis as well as statutory and case law where an individual or entity is the personal creditor of a member of an LLC.

Outsider-Reverse Veil Piercing

Even where compliance with corporate formalities is met, members of an LLC may still face threats from the creditors of its individual members. An attempt to thwart the LLC’s touted protections and collect on a creditor’s personal judgment is known by various names including “outsider-reverse veil piercing.” Under the concept of ORVP, a personal creditor of a member may disregard the corporation’s separate legal existence and attempt to reach the debtor-member’s rights in the LLC. As will be discussed immediately below, this can be accomplished – depending upon particular state law – in various ways.

I.C. 23-18-6-7 and Charging Orders

The statute under analysis herein is I.C. 23-18-6-7. That statute sets out the rights of judgment creditors vis-a-vis members of an LLC. Under I.C. 23-18-6-7, a creditor may petition a court to allow it to charge a member’s interest in the LLC for the payment of the unsatisfied amount of the judgment. The relevant section reads: “[o]n application to a court with jurisdiction by a judgment creditor of a member, the court may charge the interest of the member in the limited liability company with the payment of the unsatisfied amount of the judgment with interest.” I.C. 23-18-6-7(a). This is known as a request for a charging order.

In its simplest form, a charging order is tantamount to a garnishment order except that, given the discretionary nature of distributions, payments are not so surely guaranteed. It is the vehicle by which a lien is placed upon a member’s economic interests in an LLC. Stated differently, the judgment-creditor obtains a charging order against the debtor-member which, in turn, places a lien upon the economic interest in the LLC to collect the judgment.

An economic interest is generally described as the right to share in the income, gains and losses of the LLC as well as to receive distributions. On the other hand, a noneconomic interest of a member generally means a member’s right to vote, manage and otherwise direct the operations of the LLC. Generally, the lien of a charging order does not intrude upon the noneconomic interests of the member. The question, ultimately, is whether a charging order is the exclusive remedy for a creditor regarding an LLC. That is, under current Indiana law can a creditor seek to obtain greater leverage by levying upon the noneconomic nature of a member’s interest? The answer as Indiana law currently stands is: it depends. And what this determination usually depends upon is whether one is dealing with an MMLLC or an SMLLC.

This determination is, obviously, of extreme importance to other members of an MMLLC in that, if a charging order is not the exclusive remedy, other remedies available to a creditor of a member can wreak utter havoc upon the viability of the LLC. That is, if a charging order is not the exclusive remedy, other options available to a judgment-creditor include (1) the right to foreclose upon a debtor-member’s interest as well as (2) an order of dissolution.

Foreclosure on a Member’s LLC Interest

In short, with an order of foreclosure, a judgment-creditor can foreclose on the debtor-member’s interests of the LLC, taking the interest in full or partial satisfaction of the debt. This, of course, turns a charging order into a much more powerful remedy. The creditor would not be limited to waiting for distributions that the LLC may never make. In foreclosure, the creditor could seize a member’s interests and possibly take control of a portion of ownership and/or management. This control could cause, for example, a forced distribution to the creditor in full or partial satisfaction of the debt. What is worse is the judgment-creditor gets the money while the member is left to pay the taxes on the distribution. Foreclosure could also result in the creditor selling the member’s interest in a public or private sale. One can easily see the turmoil this would cause in the LLC, especially with regard to its ownership and management.

Order of Dissolution

A third option for a judgment creditor is an order of dissolution. This would allow the creditor to force the LLC itself to be dissolved and its assets sold and/or otherwise applied to the satisfaction of the creditor’s judgment. This is the most draconian of remedies, resulting in an extreme hardship upon other members in an MMLLC who have absolutely no personal obligation for the debt. In the event of dissolution, the business would most likely be terminated and everyone tossed out, left to pick up the pieces the best that they can. Clearly, limiting creditors to a charging order is of extreme importance to members in an MMLLC.

What I.C. 23-18-6-7 Does Not Say and Interpretive Case Law

While I.C. 23-18-6-7 states that a judgment creditor may obtain a charging order, it does not state that a charging order is the exclusive remedy. The seminal case on this topic is Brant v. Krilich, 835 N.E.2d 582 (Ind. App. 2005). In Brant, the Court of Appeals definitively stated that a charging order is the exclusive remedy. However, the Brant decision does not provide all the answers, and there are several issues to still consider. As such, Brant should be applied with caution and after a thorough analysis.

One glaring issue is that, despite the ruling in Brant, I.C. 23-18-6-7 itself simply does not state that a charging order is the exclusive remedy. Moreover, while the Brant decision does so state, the facts under Brant dealt with an MMLLC. This disparity leaves open the question as to whether a charging order is truly the exclusive remedy as far as the Legislature is concerned and, in addition, whether it is the exclusive remedy with regard to SMLLCs.

House Bill 1394

Earlier this year in the 2013 legislative session, House Bill 1394 was introduced seeking to amend I.C. 23-18-6-7 to expressly provide that a charging order be the exclusive remedy. The bill sought to add language that “[a] creditor of a member or creditor of a member’s assignee does not have a right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.” Proposed (13) IN 1394.1.11(d). The proposed bill sought to further limit creditor’s rights by stating that a charging order under I.C. 23-18-6-7 would provide “the exclusive remedy by which a judgment creditor of a member may satisfy a judgment from a judgment debtor’s member interest in a limited liability company. A judgment creditor has no right to foreclose upon the charging order or the judgment debtor’s member interest.” Proposed (13) IN 1394.1.11(e).

This change would have leveled the playing field between SMLLCs and MMLLCs, expressly adopted the Brant decision, and extended Brant’s reach to SMLLCs. However, under pressure from the creditor’s bar, the Legislature failed to adopt the proposed amendment and the statute remains unchanged. Thus, at the end of the day, it appears that Brant provides members in an MMLLC with some protection … for now. However, the courts are always free to revisit or distinguish Brant and reliance upon it in the formation of an MMLLC would seem somewhat speculative. Brant notwithstanding, it is open for interpretation as to what rights a creditor has against a member of an SMLLC. I would suggest that, under the totality of the circumstances, and the practicalities of the differences between an SMLLC and an MMLLC, SMLLCs are not going to be limited to a charging order and Brant has little, if any, applicability toward SMLLCs.

The Practicalities and Document Drafting

Given the gravity of the issue and the risk of a change in the law, the question is really what can an MMLLC do to more fully protect its members. As mentioned, in an SMLLC, perhaps nothing. The reasoning is that with regard to an SMLLC, there are no “innocent” members to protect. That notwithstanding, an operating agreement similar to that used for an MMLLC wherein creditor’s rights are delineated and limited, may carry the day to protect a member in an SMLLC. The practical effects of such drafting in an SMLLC remain to be seen. Another possibility – and one that makes Indiana a less desirable place to incorporate – is to form the LLC under the laws of a state that does recognize a charging order as the exclusive remedy.

However, with regard to MMLLCs, a well-drafted operating agreement clearly is of crucial importance. The operating agreement of an MMLLC can and should address this reality, despite the Brant decision. The operating agreement should delineate exactly what happens to a member’s interests in the MMLLC if a creditor seeks the remedy of a charging order or, worse, a remedy beyond a charging order. It should also address the situation where a member is forced to file for bankruptcy protection.

The means to accomplish this end are innumerable. There can be forced disassociation of the member, first rights of refusal to the other members to purchase the member’s interest, and so forth. In the end, the operating agreement must set forth a clear understanding between the parties upon formation of the LLC and close the gap between the current Indiana statute, the Brant decision, and the risk of a change in the law either by the Legislature or the courts. Furthermore, litigators need to be aware of the rights and remedies of both creditors and members when these situations arise and the arguments and tactics to best assert our client’s position, regardless of which side of the “v” we represent.•

Jason M. Massaro is the owner of The Massaro Legal Group, LLC located in Fishers, Indiana, where he focuses his practice primarily in complex civil, business, and real estate law and litigation. Mr. Massaro is a member of the DTCI Business Law Section. The opinions expressed in this article are those of the author.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Indiana State Bar Association

Indianapolis Bar Association

Evansville Bar Association

Allen County Bar Association

Indiana Lawyer on Facebook

facebook
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  2. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  3. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

  4. As a lawyer who grew up in Fort Wayne (but went to a real law school), it is not that hard to find a mentor in the legal community without your school's assistance. One does not need to pay tens of thousands of dollars to go to an unaccredited legal diploma mill to get a mentor. Having a mentor means precisely nothing if you cannot get a job upon graduation, and considering that the legal job market is utterly terrible, these students from Indiana Tech are going to be adrift after graduation.

  5. 700,000 to 800,000 Americans are arrested for marijuana possession each year in the US. Do we need a new justice center if we decriminalize marijuana by having the City Council enact a $100 fine for marijuana possession and have the money go towards road repair?

ADVERTISEMENT