Ohio has amended the charging order provisions of its Limited Liability Company Act to clarify that a charging order is the exclusive remedy of a judgment creditor against an LLC member. Governor Kasich signed Substitute House Bill 48 on February 2, 2012, and the bill becomes law on May 4, 2012.
The Ohio statute gives a judgment creditor of an LLC member the right to obtain a charging order against the member’s LLC interest. A charging order means that any LLC distributions that would otherwise go to the member must instead be paid to the judgment creditor. The creditor is treated like an assignee until the debt is satisfied, has no management rights, and cannot force the LLC to make any distributions. Most states have a charging order provision in their LLC Acts.
Ohio’s current statute is unclear whether a judgment creditor of an LLC member can also use other creditors’ remedies, such as foreclosing on the member’s interest. This lack of clarity is not uncommon. A number of states use language in their Acts such as “the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment.” E.g., Wash. Rev. Code § 25.15.255; N.Y. Ltd. Liab. Co. Law § 607. This sort of language clearly authorizes the charging-order remedy, but does not address the potential applicability of other remedies.
Ohio’s amendment makes clear that a judgment creditor’s charging order remedy is its exclusive remedy against the member-judgment debtor. The new language is italicized and bolded:
1705.19 [Effective 5/4/2012] Rights of judgment creditor
(A) If any judgment creditor of a member of a limited liability company applies to a court of common pleas to charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest, the court may so charge the membership interest. To the extent the membership interest is so charged, the judgment creditor has only the rights of an assignee of the membership interest as set forth in section 1705.18 of the Revised Code. Nothing in this chapter deprives a member of the member’s statutory exemption.
(B) An order charging the membership interest of a member of a limited liability company is the sole and exclusive remedy that a judgment creditor may seek to satisfy a judgment against the membership interest of a member or a member’s assignee.
(C) No creditor of a member of a limited liability company or a member’s assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.
(D) A limited liability company or one or more members of a limited liability company who are not subject to a charging order entered in favor of a judgment creditor may at any time pay to the judgment creditor the full amount then still due under the judgment and by that payment succeed to the rights of that judgment creditor.
The amendment also clarifies that judgment creditors of an LLC member have no right to reach the assets of the LLC itself, although that should already have been clear from the entity nature of an Ohio LLC. See Ohio Rev. Code § 1705.03.
Presumably the amendment will be interpreted to apply to single-member LLCs, although some state court decisions have reflected a negative view of the asset-protection feature of single-member LLCs. E.g., Meyer v. Christie, No. 07-2230-CM, 2011 WL 4857905 (D. Kan. 2011); Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010). I have discussed those cases, here (Meyer) and here (Olmstead). The amendment’s language appears to be applicable to all Ohio LLCs, however, regardless of the number of members.
Substitute House Bill 48 also makes several other changes to Ohio’s LLC Act. The most significant are that it (a) clarifies which default provisions of the LLC Act may be overridden by the operating agreement, and (b) adds fiduciary duties of loyalty and care for LLC members, apparently even if the LLC is manager-managed.