I am not an attorney, I am a judgment matchmaking specialist (Judgment Broker). This article is based on my experience in California. Laws are different in every state, and nothing in any of my articles can ever be considered legal advice. This article is my opinion on recovering judgments on debtors who are members of partnerships and LLCs in California.
In this article, when LLC is used, it means LLCs or partnerships. What if you have a judgment debtor that makes their living, or receives assets from an LLC? How do you recover from a member of a LLC, or a LLC member's distributions of assets?
In California, a charging order is the exclusive way to reach a judgment debtor's benefits from an LLC. The laws about California charging orders are around CCP: 708.310 et seq. (et seq. means that law, and any following it).
LLCs can pay people as employees. Wages and salary are subject to garnishments. A wage garnishment is the exclusive method of recovery against earnings. (CCP 706.020.)
LLCs may also pay non-wage income, that is called K1 income. When non-wage income comes from from LLCs, corporations, estates and trusts, the IRS tax code defines it as K1 income. One example of K1 income is stock dividends. A charging order is needed to intercept K1 distributions.
If a LLC member receives non-K1 funds, for example earnings, an Earnings Withholding Order (EWO) is required as such earnings are not the kind of "economic interests" that get attached with a charging order.
Potential problems for judgment owners, are that the LLC may stop paying salaries, and instead internally accrue dividends, without really distributing them to members. Or, the LLC may choose to make loans to the judgment debtor, which circumvents both charging orders and garnishments.
One thing that can be done to help stop LLC games, is to serve both an assignment (charging) order and an EWO served on the LLC at the same time. It costs about forty dollars additional to serve both, and have both hearings heard on the same date.
Many debtors with an ownership interest in the entity will purposely ignore an EWO. This is an opportunity to relax, and let the execution lien accumulate against the employer, and then sue the employer directly for the amount that should have been levied over time.
If a debtor controls the company, they could just stop paying wages to themselves. They could accrue distribution money without disbursing it. They could pay themselves in other ways - for example as a consultant, or some other kind of other non-employment income.
A creditor may be able to get around such shenanigans, with an assignment (charging) order. The order could be broadly worded to get to whatever funds the debtor is getting from the LLC. It should not be limited to employment wages. The assignment (charging) order can also capture distributions, and whatever other K-1 income there may be. Charging orders include civil liability, for failure to follow the court's order to pay, similar to wage garnishments.
A charging order can be worded to charge the judgment debtor's interests, and garnish the debtor's wages. It could include wording to request the court to prohibit the LLC from making any loans, or paying or guaranteeing any obligations of the judgment debtor, etc.
One complication of a broadly worded charging order, is the "exclusive remedy" benefit (detriment) of the charging order. See Corporations Code 17302 (e). However this applies only to the debtor member's "transferable interest".
A charging order is the exclusive way to recover against debtor's actual interest in the LLC, however it's not the exclusive remedy for going after income flowing to debtor from the LLC. Assignment (charging) orders can be broadly written to catch everything - but only if the judge signs it.
Convincing a court judge to agree to a wide list of remedies in an assignment (charging) order is not easy. In your papers, it may be a good idea to prove to the judge that you tried conventional levy, garnishment, and examination procedures already, with little or no results.
Another complication is that the owners of a LLC, who manage it are usually not considered employees by the IRS. Usually, only those with no ownership of a LLC are considered employees. Also, there are asset protection strategies that can force the creditor pay taxes on LLC income without ever receiving a dollar of actual income, if they force a charging order.
One idea I have heard several times from lawyers at judgment conferences, is to form a new corporation designed to own the assets and liabilities of the LLC judgment debtor member's interest. The new corporation would have an attorney as an officer, and would be disposable, if things went south.
The theory is if the new corporation accomplishes a charging order, and it turns out that the assets are toxic, one could close it down and have no personal liability.
The big boys might be able to pull this off, however I doubt the average person could pull this off and also avoid big problems and liabilities. In my opinion, forming a corporation only to avoid a liability raises red flags.
Be careful to not grab a liability when you perform a charging order. A good site to learn more about this is http://www.chargingorder.com.
Mark Shapiro - Judgment Broker - Free leads for Judgment Enforcers and contingency collection attorneys.n n http://www.JudgmentBuy.com - is the best judgment solution, where Judgments quickly get Purchased or Enforced by the best! We do the shopping for you.
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Source: http://zaykar.com/2011/legal/collecting-from-a-llc/
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