Businessman Standing

How Charging Orders Might Protect You From Your Co-Owner’s Personal Debts

Asset protection can be a major challenge when personal and business worlds collide. What if, for instance, your business partner is found liable to pay a judgment arising from personal debt?

If your business entity is an LLC, it will be protected by legislatively prescribed limits to a creditor’s ability to collect from the member. The Michigan Limited Liability Company Act (MLLCA) states that a charging order is the “exclusive remedy” by which a judgment creditor of an LLC member may satisfy a personal judgment out of the membership interest.

Debtors rights

Through the charging order provisions, the MLLCA prevents a judgment creditor from entering into the debtor’s shoes. A creditor that obtains a charging order may not foreclose on its lien on the debtor-member’s economic interest, nor can the creditor become a member of the limited liability company. The member who is the subject of the charging order remains a member of the limited liability company and retains all rights and powers of membership except the right to receive distributions to the extent charged.

If a charging order goes into effect against a debtor-member’s interest, his distribution must be paid directly to the creditor. Future distributions due to that member will likewise be paid directly to the creditor until the judgment is paid in full. This is the creditor’s sole remedy under the Act.

Limits on Collections

The MLLCA further states that all applicable exemption laws are applied to LLC distributions. The issue of whether exemptions apply to LLC distributions was examined by the court in United States v. Alexander, a 2016 Arizona Federal District Court case. In Alexander, the court acknowledged that a court-approved charging order does not deprive an LLC member of any exemptions to which he would otherwise be entitled under applicable law. In Michigan, garnishments are limited to 25 percent of the debtor’s disposable earnings—an amount substantially less than what a creditor would obtain if allowed to step into the debtor’s shoes. This is a major win for debtors.

An Important Tool for Asset Protection

In sum, the MLLCA is an important tool for protecting assets. It limits the creditor to distributions from the LLC. If there are no distributions, then the creditor gets nothing from the LLC. Furthermore, the creditor is not allowed to control the LLC’s actions. Rather, the debtor-member is left in control of his stake in the company. This goes a long way in protecting business owners from their co-owner’s personal debts. Setting up and maintaining a business is a complicated endeavor, especially when more than one proprietor is involved.

Are you interested in learning more about protecting your business interests? Experienced lawyers at Drew Cooper & Anding may be able to help. Please feel free to contact us at (616) 454-8300.

Amanda Narvaes

Amanda P. Narvaes, a Partner, joined Drew Cooper & Anding in 2011. Ms. Narvaes is a civil litigator in the areas of complex commercial litigation, lender liability, copyright litigation, and consumer protection. She graduated cum laude from Carleton College with a bachelor’s degree in history. She earned her law degree at WMU-Thomas M. Cooley Law School, graduating magna cum laude, and received Cooley’s Distinguished Student Award. Ms. Narvaes represents clients before Michigan trial courts across the state and in the Michigan Court of Appeals, and before the United States District Courts for the Western and Eastern District of Michigan. Ms. Narvaes has been a guest speaker in Ron Foster’s “Litigation for Paralegals” class. Ms. Narvaes discusses differences between Federal civil discovery rules and Michigan civil discovery rules.