Title: Kentucky Jurisdiction in Charging Orders for Out-of-State LLC Interests in Big Sandy
Title: Obtaining Charging Orders Against Out-of-State LLCs: A Legal Perspective
Introduction:When it comes to obtaining charging orders against debtor/member's interests in Limited Liability Companies (LLCs), a common question arises: what happens if the LLC is not formed in the same state where the judgment has been entered, but in another state? Can the creditor still pursue a charging order against interests in an out-of-state LLC? In the following article, we delve into a court case where this issue was addressed.
Background:Big Sandy Company obtained a judgment against American Carbon Corporation for failure to diligently mine under a mineral lease. To collect on the judgment, Big Sandy sought charging orders against American Carbon's interests in its subsidiaries, which were organized as LLCs in various states. American Carbon raised two defenses: first, the LLCs were not formed in the state where the judgment was entered, and second, the charging orders should not be granted without notice to other creditors.
Case Analysis:The court examined the applicable judgment procedures, which in this case were those of the state where the federal court sat, meaning Kentucky. The Kentucky LLC statute (KRS 275.260) provided that the exclusive remedy to enforce a judgment against a debtor/member's interest in an LLC was by way of a charging order. American Carbon argued that the LLCs were not Kentucky entities, therefore the court was not the proper jurisdiction for entry of the charging orders. However, the court disagreed, stating that as long as it had personal jurisdiction over the member, it had the authority to enter a charging order against the member's interest in the non-party LLC, regardless of the LLC's formation state.
American Carbon also argued that the charging order would prejudice the rights of other creditors, citing that Big Sandy's charging order lien would take priority over their own liens without notice and an opportunity to be heard. The court easily dismissed this argument, stating that a charging order merely creates a lien against the debtor/member's right to distributions and does not alter lien priority in any way.
Conclusion:The case highlighted that a court rendering judgment can enter a charging order against the debtor/member's interest in out-of-state LLCs, even if the court does not have jurisdiction over those other LLCs. The case also demonstrated that people who believe that forming an LLC in another state provides better charging order protection are likely mistaken, as the charging order will be enforced according to the law of the state where enforcement against the debtor is made.
Important Considerations:When it comes to charging orders against out-of-state LLCs, there are several factors to consider, such as jurisdictional considerations, cross-state enforcement, the enforcement process, and asset protection strategies. Understanding these factors can help creditors and debtors navigate the complexities involved in obtaining and defending against charging orders in out-of-state LLCs.
In this context, two additional sentences could be:
The creditor, in this case, Big Sandy Company, was able to obtain a charging order against American Carbon's interests in its out-of-state LLCs, despite the LLCs being formed in Kentucky, as the case was heard in a federal court in a different state with appropriate personal jurisdiction over the member.
Moreover, foreign LLCs should be aware that a charging order entered against a debtor/member in an out-of-state court may be recognized and enforced in their state of formation, potentially affecting their assets, in accordance with the charging order and applicable foreign jurisdiction's laws.
