Brant v. Krilich: Charging Order Protection

Brant v. Krilich, No. 45A03-0411-CV-514 (Ind. Ct. App. Oct. 14, 2005) is the first appellate decision to address the question of charging order protection for Indiana LLCs.  Ind. Code § 23‑18‑6‑7(a) provides,

On application to a court with jurisdiction by a judgment creditor of a member, the court may charge the interest of the member in the limited liability company with the payment of the unsatisfied amount of the judgment with interest.

In other words, the court may order the LLC to pay to the creditor any distributions that would otherwise go to the member.  Such an order is called a charging order. Ind. Code § 23‑18‑6‑7(b) provides that the right to receive distributions is the only right that a creditor acquires under a charging order. The creditor does not become a member or receive any other membership rights to the LLC. 

The question is whether a charging order is the exclusive remedy a member’s creditor is entitled to receive with respect to the LLC.  Under the laws of some state, it is. Those state laws are said to provide “charging order protection.” Under the laws of other states, a member’s creditor has other rights, such as the right to foreclose on the member’s LLC interest. 

Still other states provide charging order protection for the members of multi-member LLCs but not to the member of a single-member LLC.  The rationale for drawing that distinction is that charging order protection is intended to protect the other LLC members from having a stranger thrust upon them as a co-member, and in a single-member LLC, there are no other members to protect.

In Brant, the Indiana Court of Appeals held,

[A] charging order is the only remedy for a judgment creditor against a member’s interest in an LLC…. To the extent a charging order is granted, the judgment creditor has only the rights of an assignee of the member’s interest in the LLC. Consequently, in any future proceeding, Krilich [the creditor] is not entitled to Brant’s membership in any LLC but may be able to receive a charging order against Brant’s interest.

Slip op. at *17-18.

It is important to note that the facts of Brant involved only multi-member LLCs.  Although the Court’s analysis did not expressly exclude single-member LLCs, the opinion observed,

Indiana Code §§ 23-18-6-3 to 4 explicitly state that unless the operating agreement provides otherwise, an assignee only becomes a member of an LLC if the other members unanimously consent. There is no reason why our courts should disregard the intent of the General Assembly to protect the close-knit structure of a LLC and violate the other members’ interests and rights by declaring that they must accept a judgment creditor of a member into full membership with all the rights appurtenant thereto when the judgment debtor could not transfer those rights himself.

Slip op. at *17 n.20. Given that observation, we believe the Brant decision left open the question of charging order protection for single-member LLCs.