Unhappy Debtor…Creditor with Charging Lien against Debtor’s LLC Interest entitled to Debtor’s LLC Distributions…

A recent case, John A. Kostoglou v. John Fortuna illustrates the effect of a charging order on a member’s interest in a limited liability company (“LLC”).

John Kostoglou (“Creditor”) obtained a judgment against John Fortuna (“Debtor”) in Ohio. The judgment was domesticated in Florida and Creditor obtained a charging order against Debtor’s 5% interest and Debtor’s rights to a 5% distribution of earnings (subject to working capital requirements) in a multi-member LLC.

The lower court determined that the Creditor was entitled to a charging order against Debtor’s 5% interest  in the LLC but not the right to distribution of earnings.

The appellate court had no trouble ruling for the Creditor as Florida law clearly grants a Creditor with a charging order a lien upon the judgment debtor’s interest and a distribution that would otherwise be paid to the judgment debtor.

The court also quoted our friend and Clearwater attorney, Alan Gassman, from his article in the Florida Bar Journal… “[a] charging order is ‘a remedy that a creditor of a member in an LLC… can receive from a court that instructs the entity to give the creditor any distributions that would otherwise be paid to the… member from the entity’.”

ADVICE:  While the result of this case is not surprising, it is important to remember that a charging order is not the panacea that debtors hope for if there are distributions required to be made to that debtor. Be careful in operating agreements as to what is required to be distributed to the members and anticipate what may happen if a creditor gets a judgment against one of the members.

WORD OF THE WEEK: Domesticated judgment is a judgment that has been obtained in another state but will be recognized in another state (in this case, Florida), usually the state in which the debtor resides.

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