A GOOD WALK SPOILED (LLC Charging Order Protection Affirmed by 4th Circuit)

The Starter

Paul Garfunkel, a Louisiana resident, has been a life-long friend and golf partner of Art Simon.  Mr. Simon is known by many to be a decent golfer, but not a very good politician or diplomat. Mr. Simon owns Simon International Golf Links, which has substantial, but highly leveraged, investments in golf courses around the world.

When Mr. Simon invited Mr. Garfunkel to invest in Bayou Links, a golf course and resort to be located along the environmentally sensitive coastline of Louisiana, he jumped at the opportunity.  Mr. Garfunkel and Mr. Simon formed PGAS Enterprises, LLC, a Louisiana limited liability company (“PGAS”). Mr. Garfunkel contributed most of his life savings for a fifty (50%) percent interest in PGAS and Mr. Simon contributed his name, which is worth billions.

Bayou Links was an immediate success and PGAS was quite profitable under the management of Mr. Garfunkel.

Duff Into The Bunker

Meanwhile, Mr. Simon continued to develop and operate other golf courses, including most recently a world class course along the environmentally sensitive coastline of Scotland. Unfortunately for Mr. Simon, his investment in the Scotish golf course quickly went south after protesters repeatedly stormed the course waiving flags from various countries. Faced with rapidly declining revenue under misguided leadership, the venture eventually went defunct.

After Mr. Simon defaulted on his loans, the lender, Channelside Services, LLC, obtained a judgment against Mr. Simon in the State of New York. When the lender discovered that Mr. Simon owned a fifty (50%) percent interest in PGAS, a Louisiana LLC, it obtained a “charging order” in the State of New York against PGAS, which entitled the lender to Mr. Simon’s distributions from PGAS (if any were to be made).  The lender then filed suit in Civil District Court in Orleans Parish to make the charging order effective in Louisiana.  In order to assess the financial ability of PGAS to make distributions to Mr. Simon, the lender demanded production of all financial documents of PGAS, including bank statements and tax returns.

Mr. Garfunkel, who was at significant personal risk, objected arguing that Mr. Simon’s creditors should not be provided access to financial information of PGAS, which was not a party to Mr. Simon’s Scotish fiasco.

The Turn

If you made it this far, yes — this is a true story — except the facts and names have been changed slightly for the sake of illustration.  On May 13, 2016, a Louisiana court — for the first time — directly addressed whether a creditor of a member of a Louisiana limited liability company can access financial information about the company, thus, exposing the financial interests of the other members.  Channelside Services, LLC v. Chrysochos Group, Inc., (La. App. 4 Cir., 2016).  The response and holding is not only excellent news for any owner of a multi-member LLC, but also confirms that a Louisiana LLC is an attractive vehicle for asset protection purposes.

Fore

The Fourth Circuit made the following observations and holdings:

1. “A creditor of a member cannot seize any of the LLC’s property in satisfaction of a member’s debt.”
2. A member has no direct interest in the LLC’s property and cannot make the LLC’s property available to a member’s creditors.
3. A judgment creditor is taxed on the member’s share of income from the LLC — even if no distributions are made to the creditor.
4. A judgment creditor has no right to obtain or inspect the books and records of the LLC.

This case of Channelside is bad news for judgment creditors, but a significant victory for non-debtor members of an LLC.  The holding establishes that a charging order levied against one member’s interest should pose no impediment to the assets or business of the LLC, or the financial interests of the other members under Louisiana law because the assets, books and records of the LLC are shielded from discovery and attachment. The Court even went so far as to state that a Louisiana limited liability company is a superior vehicle for asset protection purposes because it has “different and greater protections” than a corporation or a partnership.

Double Bogey

In the Court’s own words:

Corporate Bogey:  “In Louisiana Business Corporation law, a creditor of a shareholder can seize a shareholder’s stock, thereby acquiring all of the rights associated with holding that stock, including financial rights, voting rights, if any, and the right to sell the stock.”

Partnership Bogey:  Under the Louisiana Partnership law, “a creditor of a partner may seize the partner’s interest in the partnership, terminate the partner’s interest, and be paid an amount equal to the value of the interest as of the time of seizure.”

Best Ball:  Conversely, “the Louisiana LLC Act expressly restricts judgment creditors of members of LLCs to obtaining a charging order….”