Can A Judgment Creditor Seize Real Property Inside A Washington LLC With A Judgment Personally Against The Member
Can a judgment creditor execute against the State of Washington LLC personal property interest of the “membership”? Thus, taking ownership of the LLC and the real property it contains?
Client has a personal judgment against a debtor and wants to acquire real property in a single member LLC. The judgment does not attach directly to the real property. Normally, a creditor can obtain a charging order against the LLC and any distributions to the member would go to the judgment creditor.
The key here is the term “transferable interest.” As defined in RCW 25.15.006(19), a ‘transferable interest” means a member’s or transferee’s right to receive distributions of the limited liability company’s assets.” The holder of a mere transferable interest does not have the right, without more, to be admitted as a member or to vote or otherwise exercise management rights with respect to the company.
That said, yes, some courts have disregarded this distinction and allowed the creditor to exercise the ownership and management rights of the debtor member. Subsection (5) is supposed to prevent that, but it does not always work out. Contrast some other versions of RULLCA, in which a specific carve-out from (5) is provided as to SMLLCs. To your point, the creditor’s judgment might attach to liquidating distributions under RCW 25.15.305, but how would the creditor be able to bring about the dissolution of the LLC? The creditor is not a member or manager and has no standing to commence a judicial dissolution under RCW 25.15.274 and maybe not even RCW 25.15.265.
This may be among the reasons that charging order lien foreclosures are extremely rare in the real world.
It is possible to foreclose on the member’s transferable interest in the LLC, per RCW 25.15.256(2). Subsection 1 allows a charging order akin to a garnishment on the member’s interest, and subsection 2 allows foreclosure and sale/seizure of the interest itself.
Admittedly the foreclosure only takes the debtor’s “transferable interest,” but if it’s a single member LLC, if I represented a creditor I would foreclose on the 100% transferable interest. Then the creditor would be a 100% transferee, there would be no existing “members” with voting rights, and therefore the creditor has the right to vote to be admitted as a member within 90 days after the transfer, per RCW 25.15.265(4). The judgment creditor would thus effectively seize ownership and control of the LLC and its assets. See RCW Sec. 25.15.256, especially subsection (5). Known as “charging order exclusivity,” this subsection was added in the amendments effective January 1, 2016.
In re Huber, is a bankruptcy case, which is a whole different ballgame. It is safe to assume that a single member LLC is worthless in the event of the member’s bankruptcy.
All LLC clients should be informed that single member LLCs “make lousy asset protection vehicles”, to quote a prominent national creditor rights/asset protection expert. He was addressing the typical veil-piercing and alter ego flavor of asset protection, rather than the so-called “reverse veil-piercing” variety addressed by the section cited above.
With a multiple member LLC the transferee of a transferable interest can’t get in as a member (with voting and management and control rights) without more, because the other members still vote and do all the management.
But for a single member LLC, a foreclosure and transfer of the member’s transferable interest means the LLC no longer has any members. The last (only) member is deemed to have dissociated because of the transfer, under RCW 25.15.131(1)(b). And if the LLC has no remaining members, then the transferee(s) can vote on membership, per RCW 25.15.265(4).
Also, per RCW 25.15.265(4), if 90 days pass post-foreclosure and the transferee(s) don’t vote in at least one new member, then the LLC automatically dissolves because it no longer has any members. Then it’s a fight on who is control of the winding up, based on interpretation of RCW 25.15.297 Subsections (3) versus (4). But I think the creditor should just vote itself in as a member within the first 90 days, and take control that way.