Charging Orders May be Issued Against Member Interest in Non-Party LLCs

March 12, 2015

The Court of Appeals of Georgia recently issued a decision affecting judgment creditors’ rights to collect against the members of an LLC. In acknowledging the issue as one of first impression, the Court ruled that Superior Courts may enter judgment against an individual, thereafter enter charging orders against that individual’s member interests in limited liability companies (“LLCs”), even when those LLCs are not parties to the case and not subject to the Court’s jurisdiction. A charging order allows a creditor to divert LLC distributions payable to a member (the debtor), without conferring upon the creditor an interest in the LLC itself. In that sense, the charging order functions almost as a garnishment.

In Mahalo Investments III, LLC v. First Citizens Bank & Trust Co., Inc., No. A14A1940, 2015 WL 687922 (Ga. Ct. App. Feb. 19, 2015), the Cobb County Superior Court issued judgment against an LLC and two of its members, who were individuals. During post-judgment discovery, the creditor learned that the two individual defendants owned an interest in various other LLCs. The creditor applied for a charging order from the Cobb County Superior Court under O.C.G.A. § 14-11-504(a) against the defendants’ interests in the various LLCs, which were not parties to the proceeding or even subject to the Cobb court’s jurisdiction. The Court of Appeals determined that the Cobb Superior Court was a court of competent jurisdiction to enter the charging orders because it had jurisdiction over the individual defendants, who were members of the LLC. The Court reasoned that since the superior court was not asserting jurisdiction over the LLCs themselves, but only over the individual defendants’ member interests in those LLCs, “from the limited liability company’s standpoint, it is business as usual except that any distributions to the member subject to the charging order are diverted to the judgment creditor.”

This decision provides judgment creditors with an effective tool in post-judgment collections efforts. Plaintiff’s lawyers should always seek to discover – in the underlying case – whether the defendant owns an interest in any other companies as this information may be allow the Plaintiff to quickly obtain charging orders once the judgment is issued.