The plaintiff successfully sued the defendant in Arizona. The judgment required the defendant to pay restitution to the plaintiff by way of $300 minimum monthly payments. This amount later increased to $750 and lo the defendant could no longer afford it. The plaintiff then sought a charging order against the defendant’s limited liability company (LLC) which the court granted.
Arizona Law: Charging Order and Garnishment
Under Arizona law, “[A] court of competent jurisdiction may charge the member’s interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest.” A.R.S § 29-655(A). (internal quotations omitted.) In other words, a charging order acts as a lien against the judgment debtor’s economic interest in the LLC. It gives the judgment creditor the right to receive any distributions that would otherwise go to the LLC owner/member.
And this is exactly what the plaintiff sought. In rebuttal, the defendant argued that the plaintiff’s lien on profits, i.e. the charging order, should be limited to no more than 25% of his disposable earnings as Arizona’s garnishment statutes preclude the charging of 100% of his economic interest. The court agreed: “The fact that a charging order is entered, however, does not derive any member of the benefit of any exemption laws applicable to his interest in the limited liability company. A.R.S. § 29-655(B). Arizona law limits garnishment to 25 percent of a garnishee’s disposable earnings.” A.R.S. § 33-1131(B).
Because the distributions made from the LLC to the defendant constituted disposable earnings, or compensation for personal services, the court held that the 25% limitation applied to the charging order. To put this into perspective, charging orders are usually for the entire amount of the distribution, less they be subject to an exemption against collection.
Charging Order Subject to Garnishment Limit in Florida?
Florida law provides for the charging order remedy as follows:
On application to a court of competent jurisdiction by a judgment creditor of a member or a transferee, the court may enter a charging order against the transferable interest of the member or transferee for payment of the unsatisfied amount of the judgment with interest. Except as provided in subsection (5), a charging order constitutes a lien upon a judgment debtor’s transferable interest and requires the limited liability company to pay over to the judgment creditor a distribution that would otherwise be paid to the judgment debtor.
Fla. Stat. § 605.0503(1).
This is near identical to Arizona’s charging order statute (and pretty much most other statutes in the country). Florida’s limited liability company act also states that “[the] chapter does not deprive a member or transferee of the benefit of any exemption law applicable to the transferable interest of the member or transferee.” Fla. Stat. § 605.0503(2).
Regarding garnishment, then, exemptions may apply. Generally, the disposable earnings of the head of a family which exceed $750 a week cannot be garnished unless the garnishee agrees to it in writing. Fla. Stat. § 222.11(b). In addition, the disposable earnings of someone other than the head of a family cannot be attached or garnished in an amount to exceed 25% of the garnishee’s disposable earnings, as per the Consumer Credit Protection Act. Fla. Stat. § 222.11(c).
Thus, in Florida, it may be that if the judgment debtor of the LLC can prove that his income or distributions from the LLC are in fact disposable earnings, or compensation for personal services, the defendant may be successful in limiting the effect of the charging order to 25% of the earnings. Either way, though, and as an aside, garnishment cannot be used as a collection method to satisfy a judgment from a member’s interest in or distributions of a limited liability company. The charging order, as per Fla. Stat. § 605.0503(3), is the sole and exclusive remedy by which a judgment creditor may satisfy the judgment, except in the case of the single-member LLC (SMLLC).
Nonetheless, if the facts are in the defendant’s favor, it is likely that a judge would allow the use of the garnishment limit of 25% to weaken the effect of the charging order. After all, the debtor/member cannot be deprived of his right to claim the benefit of any exemptions, and garnishment is most certainly subject to exemptions.
A Note About Single Member LLCs in Florida
In Florida, only multi-member LLCs enjoy the charging order exclusive remedy. Single-member LLCs are not so fortunate
If a judgment creditor of a member or member’s transferee 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 the limited liability company or the transferee 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.
Fla. Stat. § 605.0503(4).
In English, this means that a creditor of a single member LLC can skip the charging order and foreclose on the debtor’s LLC membership interest, gaining both economic and management rights in the company. In essence, the creditor becomes a member with full management rights and, for example, can choose to dissolve the LLC, empty its bank accounts and sell any of its assets to satisfy the judgment.
On the contrary, the Arizona LLC statute simply states that a charging order is the sole and exclusive remedy of an LLC without differentiating between multi-member and single-member LLCs. Note, though, that this ambiguity in the Arizona statute makes it uncertain as to whether or not a judge would uphold the charging order exclusive remedy for a single-member LLC in Arizona; this ambiguity is absent in Florida’s LLC act.
Thus, if you own a single-member LLC in Florida, a creditor is likely to foreclose your entire LLC interest, irrespective of whether or not your earnings from the company constitute disposable earnings, and exercise its newly acquired management rights in ways that prejudice your best interest.