Kevin Mattingly leased some property in Louisville, Kentucky, to Kevin Stich. When Stich didn’t pay Mattingly all he was owned under the contract, Mattingly sued Stich in Kentucky state court and won a default judgment against Stich for a little less than $75,000. Now it came time for Mattingly to enforce his judgment and to do so Mattingly obtained a charging order against Stich’s interest in several different limited liability companies (LLCs). The charging order was entered on August 24, 2020.
Stich owned an interest in Haunt Brothers, LLC, which was one of the companies whose interest was subject to Mattingly’s charging order. Almost two years after the charging order had been granted, Mattingly still had not been paid on his judgment nor had he received any distributions from any of Stich’s charged interests. Thus, on June 15, 2022, Mattingly moved the circuit court to order the foreclosure of Stich’s interest in Haunt Brothers, LLC. The circuit court granted Mattingly’s motion, and Stich appealed, leading to the opinion that we will next review in Stich v. Mattingly, 2024 WL 2788210 (Ky.App., May 31, 2024).
The Kentucky Court of Appeals looked at the Kentucky Limited Liability Company Act to resolve this appeal, and more specifically the charging order rules contained at K.R.S. § 275.260. The relevant provisions of § 276.260 are:
“(2) On application to a court of competent jurisdiction by a judgment creditor of a member or a member’s assignee, a court may charge the judgment debtor’s interest in the limited liability company with payment of the unsatisfied amount of the judgment. To the extent so charged, the judgment creditor has only the rights of an assignee and shall have no right to participate in the management or to cause the dissolution of the limited liability company. * * *
“(3) A charging order constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s limited liability company interest. A charging order does not of itself constitute an assignment of the limited liability company interest.
“(4) The court may order a foreclosure upon the limited liability company interest subject to the charging order at any time. The purchaser of the limited liability company interest at the foreclosure sale has the rights of an assignee.”
The court first noted that when Mattingly obtained a charging order against Haunt Brothers, LLC, all he got was a lien on Stich’s interest plus a right to receive any distributions that Stich was entitled to receive. Nothing more, nothing less. Mattingly could not take managerial action, cause dissolution, or do anything else in regard to Haunt Brothers, LLC, other than if distributions were sent to Stich, Mattingly was entitled to receive them until the judgment was satisfied.
Stich did not argue with any of this. Instead, Stich’s argument was that when the circuit court ordered foreclosure, that foreclosure was not on Stich’s entire interest, including such things as management rights, but only and exclusively on Stich’s right to receive distributions. Even then, Stich further argued, the distributions could only be foreclosed upon up to the amount of the judgment.
The Court of Appeals disagreed. If Stich’s argument were to be adopted, then Mattingly’s position would not improve through foreclosure, thus rendering the foreclosure part of the statute “essentially meaningless and hollow, a result which we cannot countenance.” Essentially, statutory interpretations that render a part of a statute a nullity are to be avoided, and the Court of Appeals would avoid it in this case.
Moving on, Stich’s argument that the foreclosure was to be limited to the amount of the judgment ran opposite to the text of the statute and so that was easily overruled.
But now we come to another fly-in-the-ointment for Stich’s argument, which was that Stich owned 100% of the interest in Haunt Brothers, LLC, or, in other words, Haunt Brothers was a single-member LLC. Under Kentucky law, where the foreclosure is for 100% of an interest, the debtor ceases to be any member at all and the dissolution of the LLC is triggered.
The upshot of all this is that the Court of Appeals affirmed the foreclosure of Stich’s interest in Haunt Brothers, LLC. Presumably, the interest will not be sold at the judicial sale, that will cause Haunt Brothers to dissolve, and the purchaser at the judicial sale will take all the assets of Haunt Brothers.
ANALYSIS
The Court of Appeals got this right even though the wording of § 260 probably could be cleaned up a little, such as by providing that the foreclosure is of the charging order lien and not the interest itself.
Otherwise, this case illustrates once again that single-member LLCs are very poor devices to protect assets from the judgments of the sole member. Single-member LLCs can be cut through by creditors this way, charging order then foreclosure, or through reverse-veil piercing in most jurisdictions. They provide a speed bump to creditors to slow them down slightly, but not much more. Yet, lots of folks will tell me that they “have an LLC” and think that this is their big asset protection plan, not knowing just how poor of a device it is.
A little knowledge is a dangerous thing. Just ask Stich.
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