Call for Papers

The MSBA Business Law Section Newsletter is soliciting articles for Spring 2017.

Articles will be published on a rolling basis, and we will post announcements on the MSBA Business Law Section Listserv when new articles are available.


 

While most of our authors are members of the Business Law Section, we welcome articles from any MSBA member.  Articles can be of any length and should focus on a topic of interest to the Business Law Section.

The section will maintain a searchable, indexed archive of all published articles, and each article will be accompanied by a link to the author’s personal bio/webpage and/or a thumbnail photo of the author at the author’s request.

If interested, please send a Word or PDF version of your article along with title, byline, photo (if desired), and mailing address to the newsletter staff at submissions@msbabusinesslawnewsletter.com.

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Securities and Exchange Commission Adopts Final Rules for Crowdfunding
by Stuart E. Smith, Esq.[1]

 

Four years after its enactment on April 5, 2012, the JOBS Act will take effect with the Securities and Exchange Commission’s (“SEC”) adoption of final rules governing crowdfunding.[2] Crowdfunding” refers to the raising of funding necessary for a project or venture through soliciting small amounts of money from a large number of people, most typically through promotions over the Internet.[3] In this regard, unlike capital campaigns focused on traditional investors, crowdfunded projects rely on contributions from the general public.[4] Prior to the enactment of Title III of the Jumpstart Our Business Startups Act (“JOBS Act” or the “Act”), crowdfunding did not allow for the sale of equity in the company.[5] Individuals who funded the projects received various rewards, often the very product they were backing, but at a reduced price.[6] Although companies could choose to sell equity shares, such sales would be subject to the registration requirements of the Securities Act of 1933.

Congress passed the JOBS Act for the purpose of improving job creation and spurring economic growth.[7] A cornerstone provision of the Act was Title III, Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (“CROWDFUND Act”).[8] The CROWDFUND Act created an exemption to the registration requirements for issuing equity securities under the Securities Act of 1933.[9] The reasoning behind the exemption was to relieve small businesses and startup companies from the costly and burdensome requirements associated with the issuance of security interests under the existing Securities Act.[10] However, companies wishing to use the exemption to raise capital through the Internet via the CROWDFUND Act still must comply with the requirements of the exemption, which includes the disclosure of information about the company to potential investors.[11] The concept of crowdfunding security interests as a form of capital financing for businesses arose out of the already ubiquitous practice of crowdsourcing.[12] Crowdsourcing utilizes the power of the Internet to reach out to the public at large and solicit small amounts of funding from many investors in order to raise enough capital to commence a project.[13] These projects have included activities such as creating t-shirts, new designs for a smartphone case, or a new musical album, mostly within the creative arts realm.[14] Crowdfunding extends this solicitation of small amounts of funding to the raising of equity.

On October 23, 2013, the SEC released a set of proposed rules for the CROWDFUND Act and requested that the public submit comments.[15] This release offered the first opportunity to examine the SEC’s thoughts on regulating disclosure under the exemption and the additional requirements to be imposed on businesses intending to raise capital through the sale of equity via the Internet.[16] After a nearly two year period, the SEC issued a public release on October 30, 2015 indicating adoption of a set of final rules for the CROWDFUND Act.[17] These rules, and accompanying forms, go into effect on May 16, 2016.[18] The rules apply primarily to three groups affected by the offering of securities under the Act; investors, small businesses and startups selling equity, and intermediaries.[19]

 

Regulating Individual Investors

A main concern with offering investors an opportunity to purchase small amounts of equity in companies through the Internet was the sophistication, or lack thereof, of the investors and their potential exposure to risk and fraud. The final rules adopted by the SEC mitigate this risk by limiting the amount of investment any one individual can make as well as the total amount of funding a company may seek. An individual investor’s total investment over a 12-month period is limited to the greater of $2,000 or 5 percent of the lesser of their annual income or net worth, if either their annual income or net worth is less than $100,000.[20] However, if both the investor’s annual income and net worth are greater than $100,000, the investor is limited to a total investment over the 12-month period of 10 percent of the lesser of their annual income or net worth.[21] Regardless of their income and net worth, the total investment in securities offered under the CROWDFUND exemption by an individual during the entire 12-month period may not exceed $100,000.[22] The company seeking equity funding under the Act is also limited during each 12-month period to raising a maximum of $1 million in capital through their crowdfunded offerings.[23] Generally, securities purchased under the crowdfunding exemption may not be resold for one year.[24]

 

Regulating Companies Under the Exemption

Companies choosing to take advantage of the exemption under the Act are still subject to certain disclosure requirements, though not as rigorous or extensive as those for registered offerings under the Securities Act. Examples of the information a company is required to disclose under the SEC rules include:[25]

  • The public price of the securities or the method to be used to determine the price, the target amount of investment sought, and whether the company will accept a greater investment than the target offering;
  • The company’s financial position;
  • A financial statement accompanied by the appropriate level of review;
  • A description of the business and the intended use of the proceeds of the equity offering; and
  • Information about the officers and directors and any owners possessing twenty percent or more of the company.

The independent review required of the financial statements issued by the company is tiered, and corresponds with the amount of capital to be raised.[26] Companies with an offering of $100,000 or less simply need to be certified an executive officer, unless statements are available that have been audited or reviewed by a public accountant.[27] If the amount of capital to be raised through the offering is between $100,000 and $500,000, the company must provide financial statements that have been reviewed by an independent accountant, unless there are statements that have already been audited by an independent accountant.[28] Finally, companies seeking between $500,000 and $1 million in capital must also provide financial statements that have been reviewed by an independent accountant, unless there are statements that have already been audited by an independent accountant or the company has previously sold securities under the crowdfunding regulation, in which case the audited financial statements must be disclosed.[29] Companies relying on the crowdfunding exemption will also need to file an annual report with the commission and provide the report to its investors.[30] Certain companies, however, are not eligible to utilize the exemption provided by the CROWDFUND Act, including those that fail to comply with the annual reporting requirements under the regulation.[31]

 

Regulation of Funding Platforms

In addition to regulating investors and the companies offering securities via the exemption, the CROWDFUND Act also regulates platforms for crowdfunding (intermediaries and funding portals). A crowdfunding transaction must take place through an intermediary, either a broker or the newly created funding portal.[32] A funding portal as defined under the Act and rules refers to a broker, or any person, acting as an intermediary—selling or offering securities on the account of another.[33] An intermediary “means a broker registered under section 15(b) of the Exchange Act (15 U.S.C. 78o(b)) or a funding portal registered under § 227.400 and includes, where relevant, an associated person of the registered broker or registered funding portal.”[34] Intermediaries, including funding portals, must register with the SEC and become members of a national securities association such as the Financial Industry Regulatory Authority Inc. (FINRA).[35] Intermediaries are required to provide educational materials to investors explaining their investment process, identifying the types of securities offered, and the information required to be disclosed by the company seeking capital. Additional requirements of companies facilitating the sale of equity securities through the CROWDFUND Act include:[36]

  • Taking measures to reduce the risk of fraud;
  • Providing the capability for discussions about offerings on the platform;
  • Informing investors of the compensation received by the intermediary; and
  • Having a reasonable basis for believing that an investor complies with the investment limitations.

A funding portal is prohibited from having a financial interest in any company for whom it is selling securities, except as compensation for its services, and from paying for personally identifiable information of an investor or potential investor. Funding portals are also prohibited from offering investment advice, soliciting purchases, and compensating promoters.[37] The rules do include a non-exclusive safe harbor that allows funding portals to take certain limited actions within the confines of the restrictions.[38]

Liability for issuers and intermediaries under the CROWDFUND Act arises through Section 4A(c) of the Securities Act.[39] Issuers of securities through a transaction under the CROWDFUND Act are liable to purchasers for any untrue statement of a material fact or the omission of a material fact in connection with either the offer or sale of the security, provided the purchaser did not know of the untruth or omitted fact. Investors are not precluded under the Act from bringing a private right of action against a funding portal, and issuer liability would be specific to the facts and circumstances of the particular incident.[40]

 

Conclusion

The passage of the CROWDFUND Act and the adoption of rules by the SEC provide a new mechanism allowing small businesses and startups the opportunity to raise capital through offering equity securities to a multitude of investors through the Internet. Whether this exemption allows for cheaper, easier capital funding opportunities for these small companies remains to be seen. More information about the Act and the rules adopted by the SEC can be found online at the SEC’s website, http://www.sec.gov.

 

[1] Mr. Smith is currently a law clerk for the Court of Appeals of Maryland. The opinions, positions, statements, and/or views expressed in this article are solely those of the author, and do not reflect those of the Maryland Judiciary.

[2] 17 C.F.R. § 227.100 et seq. (May, 16, 2016).

[3] Tanya Prive, What Is Crowdfunding And How Does It Benefit The Economy, www.forbes.com, Nov. 27, 2012, http://www.forbes.com/sites/tanyaprive/2012/11/27/ what-is-crowdfunding-and-how-does-it-benefit-the-economy/#13366acc4ed4.

[4] Id.

[5] Ryan Fiet, Equity Crowdfunding by the Numbers, www.inc.com, Nov. 16, 2015, http://www.inc.com/ryan-feit/equity-crowdfunding-by-the-numbers.html.

[6] Id.

[7] Jumpstart Our Business Startups Act, Pub. L. No. 112-106 §§ 301-305 (2012) [hereinafter JOBS Act] (codified at 15 U.S.C.). The JOBS Act, in part, intended to make investment capital available to small businesses and start-up companies unable to obtain financing through existing channels.

[8] Id. § 301 at 315.

[9] Id. § 302 at 315-16; Securities Act of 1933, 15 U.S.C.A. § 77a (West 2012).

[10] 15 U.S.C.A § 77a (West 2012). See also 15 U.S.C.A. § 77f (West 2012) (describing the registration of securities).

[11] 15 U.S.C.A. § 77d(a)(6)(D) (West 2012). Section 77d(a)(6)(D) requires companies issuing securities under the crowdfunding exemption comply with the disclosure requirements contained in section 77d-1(b). Id.

[12] Joan MacLeod Heminway & Sheldon Ryan Hoffman, Proceed at Your Peril: Crowdfunding and the Securities Act of 1933, 78 Tenn. L. Rev. 879, 881 (2011) (quoting Paul Belleflamme et al., Crowdfunding: Tapping the Right Crowd 2 (Feb. 21, 2011) (unpublished manuscript), available at http://ssrn.com/abstract=1578175); Andrew A. Schwartz, Crowdfunding Securities, Notre Dame L. Rev. 1457, 1459 (2013).

[13] Ajay K. Agrawal, Et Al., Some Simple Economics of Crowdfunding 3 (NBER, Working Paper No. 19133, 2013); see also Ethan Mollick, The Dynamics of Crowdfunding: An Exploratory Study, Journal of Business Venturing 3 (2013), http://dx.doi.org/10.1016/j.jbusvent.2013.06.005(discussing the “Pebble” smart watch project).

[14] Schwartz, supra note 7 at 1458.

[15] SEC proposed rules (2013), http://www.sec.gov/rules/proposed/2013/33-9470.pdf; see also Security and Exchange Commission, SEC Issues Proposal on Crowdfunding, U.S. Securities and Exchange Commission, http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.UtA4G2R4aBU.

[16] Until the release of the proposed rules by the SEC, commentary on the likely effects of the CROWDFUND Act was based on speculation and came with the caveat that until the SEC acted no one could be sure of how burdensome the disclosure requirements might be on small businesses and startups. Supra note 7. See also Stuart Evan Smith, The Securities and Exchange Commission’s Proposed Regulations Under the Crowdfund Act Strike A Necessary Balance Between the Burden of Disclosure Placed on Issuers of Securities and Meaningful Protection for Unsophisticated Investors, 44 U. Balt. L. Rev. 127 (2014).

[17] SEC final rules (2015) [hereinafter Final Rules], http://www.sec.gov/rules/final/2015/33-9974.pdf; see also Security and Exchange Commission, SEC Adopts Rules to permit Crowdfunding, U.S. Securities and Exchange Commission, http://www.sec.gov/news/pressrelease/2015-249.html.

[18] One exception to the May 16, 2016 effective date for the rules and forms is that instruction 3, adding part 227 and instruction 14, amending form ID, became effective on January 29, 2016.

[19] One notable addition to the landscape of securities under the CROWDFUND Act is the creation, or designation, of intermediaries, or funding portals, to facilitate the offerings made by companies using the exemption for crowdfunding.

[20] 17 C.F.R. § 227.100(a)(2) (May 16, 2016). See also Final Rules at 547-48.

[21] Id.

[22] Id.

[23] 17 C.F.R. § 227.100(a)(1) (May 16, 2016). See also Final Rules at 547.

[24] 17 C.F.R. § 227.501(a) (May 16, 2016). See also Final Rules at 594-95.

[25] See 17 C.F.R. § 227.201 (May 16, 2016) for a full listing of required disclosures. See also Final Rules at 550-62.

[26] 17 C.F.R. § 227.201(t) (May 16, 2016). See also Final Rules at 557-58.

[27] 17 C.F.R. § 227.201(t)(1) (May 16, 2016). See also Final Rules at 557.

[28] 17 C.F.R. § 227.201(t)(2) (May 16, 2016). See also Final Rules at 557.

[29] 17 C.F.R. § 227.201(t)(3) (May 16, 2016). See also Final Rules at 558.

[30] 17 C.F.R. § 227.202 (May 16, 2016). See also Final Rules at 562-64.

[31] Companies unable to take advantage of raising capital by selling equity through crowdfunding include non-U.S. companies, Exchange Act reporting companies, companies subject to disqualification under Regulation Crowdfunding, and companies with no specific business plan. 17 C.F.R. § 227.100(b) (May 16, 2016). See also Final Rules at 549-50.

[32] Securities Act § 4(a)(6)(C).

[33] 17 C.F.R. § 227.302(c)(2) (May 16, 2016).

[34] 17 C.F.R. § 227.302(c)(3) (May 16, 2016).

[35] 17 C.F.R. § 227.400(a) (May 16, 2016).

[36] 17 C.F.R. § 227.300 et seq. (May 16, 2016). See also Final Rules at 568-81.

[37] A full listing of the prohibited activities is contained in 17 C.F.R. § 227.300(c)(2) (May 16, 2016). See also Final Rules at 570.

[38] 17 C.F.R. § 227.402 (May 16, 2016). See also Final Rules at 586-90. Additional permitted actions include, but are not limited to, the use of objective criteria (e.g. geography) to highlight offerings, creation of search tools to navigate the offerings, providing compensation to third parties for referring persons to the portal, and advertising the existence of the portal.

[39] Securities Act § 4A(c); 15 U.S.C.A § 77d-1(c) (West 2012).

[40] Final Rules at 333-37.

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Limited Liability Company Charging Orders Part II
Charging Order Protections:
Exclusivity, Foreclosure and Single Member LLCs
By
Meredith Cipriano
With input from Clerkship Fellows
Under the auspices of John Orrick, Jr., Carmen Fonda and Marshall Paul

 

Introduction

Charging orders have deep roots in English law and early American partnership laws. Despite the long established presence of charging orders in partnership law, such provisions have recently generated significant discussion in the context of the Limited Liability Company (LLC) framework. With the rise of the LLC in the 1990’s, states passed LLC Acts that incorporated the charging order into these statutes. While state LLC laws are uniform in providing this creditor remedy, this is where much of the similarity ends. The most significant and noteworthy variances between states are provisions regarding the exclusivity of a charging order as the creditor’s sole remedy, the ability of a creditor to foreclose on the charging order, and the application of charging order law to single-member LLCs. This article provides a survey of state LLC laws and the varying treatment of these three provisions of charging order protections.

 

Charging Order Purpose and Statutory Mechanism

Reflective of its roots in partnership law, the charging order is a statutory mechanism for judgment-creditors to reach the judgment-debtor’s membership interest in an LLC. Charging orders allow the judgment-creditor to receive the judgment-debtor’s distributions from the LLC until the judgment is satisfied. However, charging orders only convey the economic interest of the judgment-debtor to the judgment-creditor. The judgment-creditor has no management rights to the LLC and cannot force the LLC to make any distributions. Therefore, charging orders balance the competing interests of the judgment-creditor to collect on a judgment and the non-debtor members to choose with whom they will co-manage the business.

Generally, charging order statutes in most states provide that: 1) a court of competent jurisdiction, on application, may charge the debtor’s transferable interest; 2) the court may appoint a receiver of the distributions due; 3) the creditor retains only the economic rights of the debtor’s interest in the LLC, and not managerial rights;[1] and 4) the charging order does not accelerate any distributions or otherwise interfere with the management of the entity.[2] Although statutory language varies from state-to-state, these elements generally provide for the operation of this creditor remedy. Beyond these commonalities, state statutes vary in the rights of a creditor to foreclose on a charging order and whether the charging order serves as the exclusive remedy for the creditor. Whether or not and if so, the way these two elements are memorialized in the various statutes greatly impacts the judgment-creditor’s ability to access any distributions to satisfy the judgment, and the judgment-debtor’s ability to retain his economic interest in the LLC. Significantly, however, the treatment of these provisions as applied to Single Member LLCs (SMLLCs) are ambiguous as to their impact in light of recent court decisions.

 

Variances in State Statutes

Exclusivity or Sole Remedy

Thirty-six states explicitly declare the charging order to be the exclusive remedy of a judgment-creditor.[3] Fourteen states do not incorporate exclusivity language.[4] As case law has indicated, however, the silence of these fourteen states does not necessarily mean that the charging order is a non-exclusive remedy. This silence may create uncertainty, particularly in light of the relatively sparse case law on charging orders. Furthermore, some courts have determined that a charging order is not the exclusive remedy when applied against a debtor’s interest in a SMLLC, as the policy rationale of charging orders is lost in the SMLLC context.[5] Absent statutory language regarding the exclusivity of the remedy, judgment-creditors may be entitled to foreclosure on the order or utilize other equitable remedies generally available to creditors under other provisions of law, such as fraudulent transfer and reverse veil piercing.

 

Foreclosure

            The ability to foreclose on a charging order provides an enhanced remedy for the judgment-creditor. If the LLC fails to make any distributions, then the charging order attached to the judgment-debtor’s interest in the LLC is essentially worthless. Thus, some states explicitly allow a judgment-creditor to foreclose on a charging order if the judgment is unlikely to be satisfied. For example, California’s LLC Act provides that “[u]pon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time, [the court may] foreclose the lien and order the sale of the transferable interest.[6] Select states permit foreclosure of a charging order, but give members the ability to prohibit foreclosure through the operating agreement (as Maryland does.)[7] In contrast, some states affirmatively preclude the right of a judgment-creditor to foreclose on a charging order. Many of these states (including Delaware) reject the foreclosure remedy because they are attempting to be more “business friendly” or aligned with Delaware law.[8]

State LLC laws are quite varied regarding the foreclosure of a charging order lien. Fifteen states explicitly authorize the foreclosure of a charging order.[9] Alaska, Delaware, Florida, Georgia, Maine, Michigan, New Hampshire, New Jersey, Oklahoma, South Dakota, Texas, and Wyoming explicitly preclude foreclosure.[10] Twenty-one state LLC laws are silent as to the right of foreclosure.[11] However, out of these states the statutory silence in the laws of Virginia, and Nevada are distinguishable as each state recently amended its LLC statutes by deleting the right to foreclosure, whereas the other silent states never addressed the right to foreclosure in their LLC acts.

State legislatures are actively reviewing and reforming charging order protections under their LLC Acts. The status of laws in Minnesota and Alabama are changing over the next few years. Effective in 2018, Minnesota’s LLC act will explicitly permit the right of a judgment-creditor to foreclose on a charging order, whereas in 2018, Alabama’s law will expressly preclude this remedy.[12] In addition, Washington’s legislature recently repealed proposed changes to their statute which would have allowed for foreclosure and made the charging order the exclusive remedy.[13]

 

Single-Member LLC

Charging orders developed in the context of the general partnerships, which require at least two partners.  The policy rationale of charging orders was to protect both the partnership as an entity and the individual partners from interference by another partner’s personal judgment-creditor. The SMLLC, however, creates significant challenges to the underlying rationale for the charging order because there is no potential that the charging order would affect the managing or economic interests of another member. Recently, courts have neglected to support the exclusivity of the charging order provisions in favor of allowing a judgment creditor to reach the partnership assets (including membership interests) of a SMLLC.

For example, the U.S. District Court in Kansas examined the scope of a charging order against a single-member LLC in Meyer v. Christie.[14] While the Kansas LLC Act provides that a charging order against a member’s interest is the creditor’s exclusive remedy,[15] the court found that, in the case of a SMLLC, the creditor could assert management rights and take control of the LLC. The court looked beyond the charging order statute and instead referenced a section of the Kansas LLC Act dealing with the assignments of LLC interests. From this section, the court held that “the assignee/creditor shall have the right to participate in the management of the business and affairs of the LLC as a member.”[16] Consequently, the holder of a charging order against a sole member has managerial rights, enabling the holder to take over the LLC, make distributions to itself, or even liquidate the LLC.

Likewise, in Olmstead v. FTC, the Florida Supreme Court had to decide whether a charging order would be the sole remedy available to the creditor of a member of a Florida LLC.[17] At the time of the case, Florida LLC law governing charging orders was silent as to whether the charging order was the exclusive remedy of a judgment creditor.[18] After comparing Florida’s limited liability company statute with the state’s partnership act and limited partnership act, the Florida Supreme Court decided that the charging order was not the creditor’s sole remedy.[19] That decision opened the door for the creditor to take possession of the member’s LLC interest in his single-member LLC, and the possibility of a similar outcome in the context of multi-member LLCs.[20]

Currently, only Alaska, Delaware, Wyoming, Nevada, and South Dakota LLC laws specifically acknowledge the similar treatment of multiple-member LLCs and SMLLCs under their charging order provisions.[21] Florida and New Hampshire have statutes that enhance the right of creditors solely when holding an order against a SMLLC debtor’s interest. In these states, while foreclosure is not a right available to the judgment-creditor of a debtor’s interest in a multiple-member LLC, foreclosure is an affirmative remedy afforded to the judgment-creditors of debtor’s interest in a SMLLC.[22] The silence of all other jurisdictions may present an ambiguous question as to whether the courts will favor of judgment-creditors attempting to reach a SMLLC, even when the charging order provisions include an exclusivity provision.

 

Maryland Law

The Maryland LLC Act was revised in 2011-2012 adding to the law that charging orders and foreclosure rights constitute the exclusive remedies by which a creditor can satisfy the debt of a debtor-member through the debtor-member’s interest LLC.[23] It is important to note that though the recent amendments to the Maryland LLC Act afford creditors a right to foreclose on a charging order, Maryland law also permits members of an LLC to prohibit foreclosure by explicitly disallowing it in the LLC’s operating agreement.[24] The Maryland statute does not address whether the charging order provisions apply uniformly to multiple-member LLCs and SMLLCs.

 

Conclusion

            Although charging order protections have been a feature of American partnership law since the 1900’s, there remains sparse authority on the application of charging orders in the LLC context. As examined, state statutes vary considerably in the extent of protection a charging order may provide to an LLC, a judgment-debtor, and a judgment-creditor. Moreover, they vary as well in whether the state treats the creditors of debtor member of a SMLLC the same as a debtor member of a multiple member LLCs. The varying statutory language combined with the sparse case law in this area creates many ambiguities of law. Most significantly, the application of charging order protections in the SMLCC context presents an area of uncertainty that state legislators and the judiciaries are just now beginning to interpret.

[1] Some state laws explicitly allow the purchaser of a charging order at a foreclosure sale to obtain the full membership interest rights, not just the economic interest, when the charging order is against a debtor who is the sole member of an LLC. E.g., Fla. Stat. Ann. § 608.426(6)(a)­–(c) (West 2015); Utah Code Ann. § 48-2C-1103(2)(d) (West 2015).

[2] See generally Bishop, Carter G., Fifty State Series: LLC Charging Order Statute Table, Suffolk Univ. Law Sch., Research Paper No. 10-03 (Aug. 2014), available at http://ssrn.com/abstract=1542244.

[3] The thirty-six states that explicitly declare that charging orders are the exclusive remedies are as follows: Ala. Code § 10-A-5-6.05(a) (West 2015); Alaska Stat. § 10.50.380(c) (West 2015); Ariz. Rev. Stat. Ann. § 29-655(c) (West 2015); Cal. Corp. Code § 17705.03(f) (West 2015); Del. Code Ann. tit. 6, § 18-703(d) (West 2015); D.C. Code Ann. § 29-805.03(h) (West 2015); Fla. Stat. Ann. § 608.433(c)(5) (West 2015); Haw. Rev. Stat. Ann. § 428-504(e) (West 2015); Idaho Code Ann. § 30-6-503(7) (West 2015); 805 Ill. Comp. Stat. Ann. § 180/30-20(e) (West 2015); Iowa Code Ann. § 489.503(7) (West 2015); Kan. Stat. Ann. § 17-76, 113 (West 2015); Ky. Rev. Stat. Ann. § 275.260(1) (West 2015); Me. Rev. Stat. Ann. tit. 31 § 1573(7) (West 2015); Md. Code Ann., Corps. & Ass’ns § 4A-607(f) (West 2015); Mich. Comp. Laws § 450.4507(6) (West 2015); Minn. Stat. Ann. § 322B.32 (West 2015); Miss. Code Ann. § 79-29-705(3) (West 2015); Mont. Code Ann. § 35-8-705(5) (West 2015); Neb. Rev. Stat. § 21-142(g) (West 2015); Nev. Rev. Stat Ann. § 86.401(2)(a) (West 2015); N.H. Rev. Stat. § 304-C : 126(IV) (West 2015); N.J.S.A. 42:2B-45 (West 2014); N.C. Gen. Stat. § 57D-5-03(d) (West 2015); N.D. Cent. Code § 10-32-34(3) (West 2015); Ohio Rev. Code Ann. § 1705.19(B) (West 2015); Okla. Stat. tit. 18 § 2034 (West 2015); S.C. Code Ann. § 33-44-504(e) (West 2015); S.D. Codified Laws § 47-34A-504(e) (West 2015); T.C.A. § 48-249-509 (West 2015); Texas Bus. Orgs. Code Ann. § 101.112(d) (West 2015); Utah Code Ann. § 48-2c-1103(2)(5) (West 2015); Vt. Stat. Ann. tit, 11 § 3074(e) (West 2015); Va. Code Ann. § 13.1-1041.1(d) (West 2015); W. Va. Code Ann. § 31-B-5-504(e) (West 2015); Wyo. Stat. Ann. § 17-29-503(g) (West 2015).

[4] Ark. Code Ann. § 4-32-705 (West 2015); Colo. Rev. Stat. § 7-80-703 (West 2015); Conn. Gen. Stat. Ann. § 34-171 (West 2015); Ga. Code Ann. § 14-11-504 (West 2015) ; Ind. Code Ann. § 23-18-6-7 (West 2015); La. Rev. Stat. Ann. § 12:1331 (West 2015); Mass. Gen. Laws Ann. ch. 156C, § 40 (West 2015); Mo. Ann. Stat. § 347.119 (West 2015); N.M. Stat. § 53-19-35 (West 2015); N.Y. Ltd. Liab. Co. Law § 607 (West 2015); Or. Rev. Stat. § 63.259 (West 2015); R.I. Gen. Laws § 7-16-37 (West 2015); Wash. Rev. Code Ann. § 25.15.255 (West 2015); Wis. Stat. Ann. § 183.0705 (West 2015).

[5] In re Albright, 291 B.R. 538, 541 (Bankr. D. Colo. 2003).

 

However, the charging order, as set forth in Section 703 of the Colorado Limited

Liability Company Act, exists to protect other members of an LLC from having

involuntarily to share governance responsibilities with someone they did not choose,

or from having to accept a creditor of another member as a co-manager. A charging

order protects the autonomy of the original members, and their ability to manage their

own enterprise. In a single-member entity, there are no non-debtor members to protect.

The charging order limitation serves no purpose in a single member limited liability

company, because there are no other parties’ interests affected.”

 

[6] Cal. Corp. Code § 17705.03.

[7] See Md. Code Ann., Corps. & Ass’ns § 4A-607(c)(3)(i) (“Unless otherwise agreed, on a showing that the distributions under a charging order will not pay the amount owed to the creditor within a reasonable time, the court may order foreclosure of the economic interest subject to the charging order and order the sale of the economic interest of the debtor.”).

[8] “The intent is to update Nevada’s charging order protection laws that affect corporations, limited liabilities, and limited partnerships to make our laws as good as other states’ laws including South Dakota, Wyoming, and Delaware . . . .” Minutes of the Meeting of the Assembly Committee on the Judiciary May 12, 2011, 76th Session, available at http://www.leg.state.nv.us/Session/76th2011/Minutes/Assembly/JUD/Final/1189.pdf.

[9] Cal. Corp. Code § 17705.03(b)(3); Colo. Rev. Stat. § 7-80-703; D.C. Code Ann. § 29-805.03(b)(c); Haw. Rev. Stat. Ann. § 428-504(b); Idaho Code Ann. § 30-6-503(3); 805 Ill. Comp. Stat. Ann § 180/30-20(b); Iowa Code Ann. § 489.503(3); Ky. Rev. Stat. Ann. § 275.260(4); Md. Code Ann., Corps. & Ass’ns § 4A-607(a)(3)(i)); Mont. Code Ann. § 35-8-705(3) ; Neb. Rev. Stat. § 21-142(c);S.C. Code Ann. § 33-44-504(b); Utah Code Ann. § 48-2c-1103(2)(b); Vt. Stat. Ann. tit, 11 § 3074(b); W. Va. Code Ann. § 31-B-5-504(b).

[10] Alaska Stat. § 10.50.380(c); Del. Code Ann. tit. 6, § 18-703(d); Fla. Stat. Ann. § 608.433(c)(8); Ga. Code Ann. § 14-11-504(b); Me. Rev. Stat. Ann. tit. 31 § 1573(3); Mich. Comp. Laws § 450.4507(5); N.H. Rev. Stat. § 304-C : 126(v)(a); N.J.S.A. 42:2B-45;Okla. Stat. tit. 18 § 2034; S.D. Codified Laws § 47-34A-504(e); Texas Bus. Orgs. Code Ann. § 101.112(c); Wyo. Stat. Ann. § 17-29-503 (2014).

[11] Ala. Code § 10-A-5-6.05; Ariz. Rev. Stat. Ann. § 29-655; Ark. Code Ann. § 4-32-705; Conn. Gen. Stat. Ann. § 34-171; Ind. Code Ann. § 23-18-6-7; Kan. Stat. Ann. § 17-76, 113; La. Rev. Stat. Ann. § 12:1331; Mass. Gen. Laws Ann. ch. 156C, § 40; Minn. Stat. Ann. § 322B.32; Mo. Ann. Stat. § 347.119; N.M. Stat. § 53-19-35; N.Y. Ltd. Liab. Co. Law § 607; N.C. Gen. Stat. § 57D-5-03; Ohio Rev. Code Ann. § 1705.19; R.I. Gen. Laws § 7-16-37;T.C.A. § 48-249-509; Wash. Rev. Code Ann. § 25.15.255; Miss. Code Ann. § 79-29-705; N.D. Cent. Code § 10-32-34; Or. Rev. Stat. § 63.259; Wis. Stat. Ann. § 183.0705.

[12] H.F. 977, 88th Leg., (MN 2014); HB 2, Act No. 2014-144 (Ala. 2014).

[13] 2015 Washington Senate Bill No. 5030.

[14] Meyer v. Christie, No. 07-2230-CM, 2011 WL 4857905 (D. Kan. Oct. 13, 2011).,

[15] “The KRLLCA makes clear that the charging order is the only remedy by which a judgment creditor of a member can reach the member’s interest in the LLC.” Id. at 3.

[16] Id.

[17] Olmstead v. FTC, 44 So. 3d 76 (2010).

[18] Id. at 82.

[19] “The Legislature has shown—in both the partnership statute and the limited partnership statute—that it knows how to make clear that a charging order remedy is an exclusive remedy. The existence of the express exclusive-remedy provisions in the partnership and limited partnership statutes therefore decisively undermines the appellants’ argument that the charging order provision of the LLC Act—which does not contain such an exclusive remedy provision—should be read to displace the remedy available under section 56.061.” Id.

[20] The dissent strongly criticized the majority for unnecessarily re-writing the LLC charging order statute and consequently creating a hostile environment for LLCs in Florida.

 

An adequate remedy is available without the extreme step taken by the majority

in rewriting the plain and unambiguous language of a statute. This is extremely important

and has far-reaching impact because the principles used to ignore the LLC statutory language

under the current factual circumstances apply with equal force to multimember LLC entities

and, in essence, today’s decision crushes a very important element for all LLCs in Florida.

If the remedies available under the LLC Act do not apply here because the phrase “exclusive

remedy” is not present, the same theories apply to multimember LLCs and render the assets

of all LLCs vulnerable.

Id. at 84 (Lewis, J., dissenting).

[21] Alaska Stat. § 10.50.380 (West 2015); Del. Code Ann. tit. 6, § 18-703 (West 2015); Nev. Rev. Stat. § 86.401(2)(a) (West 2015); S.D. Codified Laws § 47-34A-504 (West 2015); Wyo. Stat. Ann. § 17-29-503(g) (West 2015).

[22] Fla. Stat. Ann. § 608.433(5)–(6) (West 2015); N.H. Rev. Stat. Ann § 304-C : 126(IV)–(VI)(a) (West 2015).

[23] Md. Code Ann., Corps. & Ass’ns § 4A-607 (West 2015)

[24] § 4A-607(c)(3).

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By Meredith Cipriano and Ariana DeJan-Lenoir

With input from Laura Gagne and Stuart Smith[1]

Under the auspices of John Orrick, Jr., Carmen Fonda and Marshall Paul[2]

 —–

In 2011 and 2012 the Business Law Section of the Maryland Bar Association drafted legislation which was passed in the Maryland General Assembly to amend the Maryland Limited Liability Company Act (LLC Act).[3]  As twenty years had passed since the original adoption of the LLC Act and the last substantive amendments to the LLC Act occurred in 1997, the Business Law Section’s Committee on Unincorporated Business Associations identified areas of the LLC Act that warranted revisions and further clarity.

 

Charging Orders and Foreclosure Rights

One of the specific sections of the LLC Act addressed by the Committee was Section 4A-607,[4] dealing with the rights of a creditor of an individual who also happens to be a member of an LLC.  Section 4 A-607, as it currently stands, states that the creditor may obtain a “charging order” to attach the LLC member’s economic interest to satisfy a personal debt owed to that creditor.   The Section also specifies a right to foreclose on the charging order, that is, to sell to the creditor the debtor’s LLC member’s rights.  The right to foreclose, however, may be barred by the LLC operating agreement.

Read the rest of this entry »

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Call for Papers!

The MSBA Business Law Section Newsletter is still soliciting articles for our online newsletter for Fall 2014.

Articles will be published on a rolling basis, and we will post announcements on the MSBA Business Law Section Listserv when new articles are available.


 

While most of our authors are members of the Business Law Section, we welcome articles from any MSBA member.  Articles can be of any length and should focus on a topic of interest to the Business Law Section.

The section will maintain a searchable, indexed archive of all published articles, and each article will be accompanied by link to the author’s personal bio/webpage and/or a thumbnail photo of the author at the author’s request.

If interested, please send a Word or PDF version of your article along with title, byline, photo (if desired), and mailing address to the newsletter staff at  submissions@msbabusinesslawnewsletter.com.

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