Foreclosure and Dissolution Rights of a Member's Creditors: No Cause for Alarm
9 Pages Posted: 4 Dec 2006 Last revised: 1 Feb 2010
A recent article in this journal raised the spectre that a judgment creditor of a member of a limited liability company (LLC) might apply for and obtain a charging order; then or later persuade the court to order foreclosure on the membership interest subject to the charging order before the charging order is redeemed; be the successful bidder at the foreclosure sale; thereby become a transferee; thereafter petition for involuntary judicial dissolution of the LLC; and finally persuade the court that involuntary dissolution (with its attendant consequences to a potentially successful business, its other members, employees, and creditors) is warranted. If successful, the judicial dissolution threat would either force a sale of the entity's assets or require the other members to purchase the interest from the foreclosure and purchasing creditor at an inflated price elevated by the dissolution threat. Either event would be highly disruptive to the successful continuation of the LLC's business and, if realistic, represent a serious impediment to the use of the LLC entity form. Moreover, the eventuality of judicial dissolution would represent a serious threat to "asset protection" goals of using an entity's separate existence to insulate personal assets from the reach of that member's creditors.
Keywords: limited liability company, LLC, dissolution, foreclosure, charging order
JEL Classification: M10, K12, K19, K20, K29
Suggested Citation: Suggested Citation