PA 16-97 provided below limits a creditor’s right to collect against an LLC member, by way of a “charging order.” The law is effective July 1, 2017. The statute is codified at Connecticut General Statutes 34-259b.
Charging Order (a) On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. Subject to subsection (e) of this section, a charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor. To the extent that the transferable interest of the judgment debtor is so charged, the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of such transferable interest.
(b) To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subsection (a) of this section, the court may: (1) Appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made; and (2) make all other orders necessary to give effect to the charging order.
(c) The member or transferee whose transferable interest is subject to a charging order under subsection (a) of this section may extinguish the charging order by satisfying the judgment and filing a certified copy of the satisfaction with the court that issued the charging order.
(d) A limited liability company or one or more members whose transferable interests are not subject to the charging order may pay to the judgment creditor the full amount due under the judgment and thereby succeed to the rights of the judgment creditor, including the charging order.
(e) The entry of a charging order is the exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest. With respect to the judgment debtor’s transferable interest, attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has one member or more than one member.
(f) Sections 1 to 102, inclusive, of this act do not deprive any member or transferee of the benefit of any exemption laws applicable to the transferable interest of the member or transferee.
Most new businesses are incorporated as L.L.C.s. Therefore, assuming there is a judgment against an L.L.C. member, the membership interest cannot be sold to satisfy an outstanding judgment. The “exclusive remedy” is a charging order.
The statute applies to a debt of a member individually, not to a debt of the LLC as a separate legal entity.
The charging order rules apply even if there is a single member LLC.
Assuming the LLC fails to pay over any distributions, a creditor can ask for a further order of the court. This may take the form of a receiver, or a “Turnover Order.” Creditors need to be allowed to examine an officer, and records, of the LLC, to ensure proper compliance with a charging order.
With the changes in Connecticut law, business owners will have further motivation to establish an LLC as an asset protection tool.
If you have any questions, please feel free to contact Attorney Robert Singer
2572 Whitney Avenue
Hamden, Connecticut, 06518