Vision Marketing Resources, Inc. v. McMillin Group, LLC.
In Vision Marketing, the court first addressed whether it could issue a charging order against a non-Kansas LLC over which it did not have jurisdiction. There was no Kansas case law on this issue, so the court looked at several cases in which other state’s appellate courts held that the court need not have jurisdiction over the foreign LLC (i.e., those formed elsewhere) in order to issue a charging order against the interests of its members: for example, the Illinois Appellate Court found that a court only needs to have jurisdiction over the judgment debtor to enter charging orders against the judgment debtor’s interest, because charging orders on distributional interests do not affect the rights or interests of the LLC; and in Georgia, the Court of Appeals has likewise held that it is only necessary for a court to have jurisdiction over the judgment debtor to have the authority to enter charging orders against the judgment debtor’s interest because the LLC has no right or direct interest that is affected by the charging order.[1] The Kansas court agreed with the rationale expressed by the other state courts. Noting that, from the LLC’s standpoint, “it is business as usual except that any distributions to the member subject to the charging order are diverted to the judgment creditor,” the court held that it need not have jurisdiction over the LLC itself in order to issue a charging order, because the LLC had no right or direct interest affected by the charging order, but rather it was the judgment debtor’s interest in and right to future distributions of the LLC that was being charged.[2]
Next, the court considered whether the Kansas charging order statute applied to non-Kansas LLC. This warranted the court’s analysis because the term “limited liability company” in the Kansas charging order statute is defined as a Kansas LLC, while the term “member” is defined to include members of both Kansas and non-Kansas LLCs.[3] Again, there was no Kansas case on point, so the court looked at two cases from other states reaching opposite conclusions: in Rockstone Capital, the Connecticut Superior Court found no constraints in the charging order statute that limited its application solely to domestic LLCs; in Fannie Mae, the Minnesota Court of Appeals held that, under the applicable Minnesota charging order statute, the definition of limited liability company specifically excluded foreign LLCs and, thus, the provisions for obtaining a charging order only applied to Minnesota LLCs.[4] The plaintiff (the party trying to collect the money) argued that the court should look to Rockstone Capital, rather than Fannie Mae, because the Connecticut statute bore a closer resemblance to the Kansas statute.[5] The court agreed. Based upon the inconsistencies in the definitions and absence of any language in the Kansas statute specifically excepting its provisions from applying to a non-Kansas LLC, the court held that application of the Kansas charging order statute is not limited to Kansas LLCs.[6] Accordingly, the court authorized the issuance of a charging order against the interests of the judgment debtors in the foreign LLC.[7]
The case is instructive in that, even if you form your LLC in some faraway, more favorable jurisdiction, the LLC is still potentially on the hook for a charging order under the laws of the jurisdiction(s) where you reside, do business, or get brought to court for some other reasons. Of course, this is not to say that the LLC will be subject to the laws of such jurisdiction(s) for all purposes; under the internal affairs doctrine, the law of an LLC’s state of formation is always a choice of law and governs the LLC’s internal affairs (e.g., interpretation of the operating agreement, relations among the members, etc.). Nevertheless, there seems to be growing tensions between the internal affairs doctrine and the evolution of LLC charging order law, and business owners will be well advised to consult experienced business lawyers before and after forming an LLC.
This post was a part of a two-part blog series on LLC charging orders. You can find the other post by searching our blogs at www.mcbrideattorneys.com. If you have any questions about the content of this blog series or other issues not discussed here, please contact us.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. R. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] Vision Mktg. Res., Inc. v. McMillin Group, LLC, No. 10-2252-KHV-TJJ (D. Kan. May 8, 2015), at 7–8 (internal citations omitted).
[2] Id. at 8–9.
[3] Id. at 12 (internal citations omitted) (“[o]n application by a judgment creditor of a member . . . a court having jurisdiction may charge the limited liability company interest of the judgment debtor to satisfy the judgment.”).
[4] Id. at 10–11 (internal citations omitted).
[5] Id. at 11.
[6] Id. at 13.
[7] Id. at 14.