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If I die owing crditors, what happens to my interest in a multi-member…

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If I die owing crditors...
If I die owing crditors, what happens to my interest in a multi-member LLC?
Submitted: 6 years ago.Category: Business Law
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Answered in 12 minutes by:
3/6/2012
Business Lawyer: lwpat, Attorney replied 6 years ago
lwpat
lwpat, Attorney
Category: Business Law
Satisfied Customers: 25,387
Experience: Attorney with over 35 years of business experience.
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Your interest in the LLC will have to be liquidated in order to pay the creditors, just like any of your other assets.
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Customer reply replied 6 years ago
I've read that a new member can't be forced on the existing/surviving members- so, assuming the surviving members aren't co-operative would there be any value in my interest? Does the concept of a charging order apply to a decedent?
Business Lawyer: lwpat, Attorney replied 6 years ago
would there be any value in my interest?

That is something that I cannot answer, it would depend on the value of the LLC. While a new member cannot be forced, the court can order the LLC dissolved and the assets sold and distributed.

I am not sure what you mean by charging order.
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Customer reply replied 6 years ago
Relist: Inaccurate answer.
My question can't be answered by someone without knowledge of charging orders, about which this Answerer admits lack of knowledge.

I'm also very sure that a court can't dissolve an LLC for the personal debts of a member.
Business Lawyer: lwpat, Attorney replied 6 years ago
Here is the Florida statute.

1608.433 Right of assignee to become member.—(1) Unless otherwise provided in the articles of organization or operating agreement, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.(2) An assignee who has become a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of the assigning member under the articles of organization, the operating agreement, and this chapter. An assignee who becomes a member also is liable for the obligations of the assignee’s assignor to make and return contributions as provided in s. 608.4211 and wrongful distributions as provided in s. 608.428. However, the assignee is not obligated for liabilities which are unknown to the assignee at the time the assignee became a member and which could not be ascertained from the articles of organization or the operating agreement.(3) If an assignee of a limited liability company interest becomes a member, the assignor is not released from liability to the limited liability company under s. 608.4211, s. 608.4228, or s. 608.426.(4)(a) On application to a court of competent jurisdiction by any judgment creditor of a member or a member’s assignee, the court may enter a charging order against the limited liability company interest of the judgment debtor or assignee rights for the unsatisfied amount of the judgment plus interest.(b) A charging order constitutes a lien on the judgment debtor’s limited liability company interest or assignee rights. Under a charging order, the judgment creditor has only the rights of an assignee of a limited liability company interest to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled from the limited liability company, to the extent of the judgment, including interest.(c) This chapter does not deprive any member or member’s assignee of the benefit of any exemption law applicable to the member’s limited liability company interest or the assignee’s rights to distributions from the limited liability company.(5) Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.(6) In the case of a limited liability company having only one member, if a judgment creditor of a member or member’s assignee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company or the assignee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale. A judgment creditor may make a showing to the court that distributions under a charging order will not satisfy the judgment within a reasonable time at any time after the entry of the judgment and may do so at the same time that the judgment creditor applies for the entry of a charging order.(7) In the case of a limited liability company having only one member, if the court orders foreclosure sale of a judgment debtor’s interest in the limited liability company or of a charging order lien against the sole member of the limited liability company pursuant to subsection (6):(a) The purchaser at the court-ordered foreclosure sale obtains the member’s entire limited liability company interest, not merely the rights of an assignee;(b) The purchaser at the sale becomes the member of the limited liability company; and(c) The person whose limited liability company interest is sold pursuant to the foreclosure sale or is the subject of the foreclosed charging order ceases to be a member of the limited liability company.(8) In the case of a limited liability company having more than one member, the remedy of foreclosure on a judgment debtor’s interest in such limited liability company or against rights to distribution from such limited liability company is not available to a judgment creditor attempting to satisfy the judgment and may not be ordered by a court.(9) Nothing in this section shall limit:(a) The rights of a creditor that has been granted a consensual security interest in a limited liability company interest to pursue the remedies available to such secured creditor under other law applicable to secured creditors;(b) The principles of law and equity which affect fraudulent transfers;(c) The availability of the equitable principles of alter ego, equitable lien, or constructive trust, or other equitable principles not inconsistent with this section; or(d) The continuing jurisdiction of the court to enforce its charging order in a manner consistent with this section.

The problem is that a charging order is when the creditor obtains a judgment against the owner of the LLC share. Unless otherwise, provided the actual interest in the LLC can be transferred to the creditor just like a transfer to an heir.

608.434 Power of estate of deceased or incompetent member; dissolved or terminated member.—(1) If a member who is an individual dies or if a court of competent jurisdiction adjudges a member who is an individual to be incompetent to manage the member’s person or property, the member’s executor, administrator, guardian, conservator, or other legal representative may exercise all the member’s rights for the purpose of settling the member’s estate or administering the member’s property, including any power the member had to give an assignee the right to become a member.

That means that the PR would have the power to settle a creditor's claim by transferring the interest to a creditor including the right to become a member.
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Customer reply replied 6 years ago

I appreciate the fact that you did some research. Do you now agree with my thought that upon my death a creditor cannot force anyone to liquidate the LLC and that the remaining members need only co-operate with the creditor to the extent they pay distributions that the LLC might elect to make to me or my creditor with a charging order.

What is still unclear to me is what this part of the statute means: (just before 608.434):

"The problem is that a charging order is when the creditor obtains a judgment against the owner of the LLC share. Unless otherwise, provided the actual interest in the LLC can be transferred to the creditor just like a transfer to an heir."

 

The 2 sentences seems to be contradicting each other. On the one hand the statute seems to be saying the only creditor remedy is a charging order but the 2nd sentence seems to be saying the opposite. And what does "unless otherwise provided" mean?

 

Business Lawyer: lwpat, Attorney replied 6 years ago
I appreciate the fact that you did some research. Do you now agree with my thought that upon my death a creditor cannot force anyone to liquidate the LLC and that the remaining members need only co-operate with the creditor to the extent they pay distributions that the LLC might elect to make to me or my creditor with a charging order.

No I do not. A charging order is from a judgment obtained against a party that is alive. There is a difference. In the estate action the share of the LLC can actually be transferred rather than there being a lien against it. The statute was just passed in May of last year and there have been no court cases. What happens to your share of the LLC needs to be handled in the operating agreement of the LLC.

I also do not agree that a court cannot force the LLC to be dissolved. For example, you own 90% of an LLC and your 90% ownership is then transferred to a creditor. The court is not going to allow the 10% owner to not pay the 90% owner. Now if your share is only 5%, that would be a different matter.

What happens to the share of a member that dies or becomes incapacitated needs to be handled in the operating agreement.
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