One of the benefits of a limited liability company is that a member’s interest is subject to statutory transfer restrictions, one of which is that a judgment creditor of a member cannot recover the judgment debtor member’s interest.
Instead, a judgment creditor must seek a charging order, which provides the creditor with the right to receive the judgment debtor’s distributions from the LLC. Tex. Bus. Orgs. Code § 101.112(b). The charging order is the “exclusive remedy by which a judgment creditor of a member or of any other owner of a membership interest may satisfy a judgment out of the judgment debtor’s membership interest.” Tex. Bus. Orgs. Code § 101.112(d) (emphasis added).
But can the court deviate from the express statutory “exclusive remedy” when the judgment creditor is the judgment debtor’s LLC?
Yes, said the 14th Court of Appeals answering a question of first impression in Gillet v. ZUPT, LLC, 14-15-01033-CV, 2017 WL 716633 (Tex. App.—Houston [14th Dist.] Feb. 23, 2017, no. pet. h.).
Gillet obtained an arbitration award of over $500,000 against ZUPT, LLC for oppression and breach of a buy sell agreement. As part of the award, Gillet was supposed to transfer his membership interest to ZUPT upon ZUPT’s payment of the arbitration award. In the same arbitration, however, ZUPT obtained an award of almost $2 million against Gillet for breach of fiduciary duty and misappropriation of trade secrets. The arbitrator did not offset the awards.
The trial court entered judgment on the arbitrator’s award, and later ordered a turnover of Gillet’s non-exempt assets. Among Gillet’s assets to be turned over were the value of his judgment against ZUPT and his membership interest in ZUPT.
The appellate court held that the membership interest should be turned over, and that the exclusive charging order remedy did not apply under the circumstances. First, the Court reasoned that the arbitrator expressly awarded the membership interest to ZUPT. Second, the Court stated, “the reasoning behind requiring a charging order as the exclusive remedy” was not applicable when the judgment creditor is the LLC which originated the membership interest it is seeking.
The Court reasoned that the “charging order was developed to prevent a judgment creditor’s disruption of an entity’s business by forcing an execution sale of the partner’s or member’s entity interest to satisfy a debt of the individual partner or member.” Without it, the entire enterprise could be jeopardized by one member’s creditor, which would be unjust to the other members. The Court thus obliterated the statutory language based on its interpretation of the reasoning behind the exclusive charging order remedy.
With this finding, the 14th Court, relying on no other appellate case, breached the exclusivity of the charging order remedy. The opinion did not state much as to the arbitrator’s award, which required the transfer of Gillet’s interest to the LLC. Reliance on the arbitrator’s award may have been sufficient to reach the same result, but the Court also chose to reject the statutory language.
There are situations between and among members, or possibly spouses, where one or more parties desire to obtain the membership interest of another member. These parties now have a basis to argue that the charging order remedy is not exclusive.
The 14th Court remanded the case to the trial court on other grounds, but if this holding stands, gamesmanship and litigation between and among members may increase, given that such parties may not be limited to the previously exclusive charging order remedy.