New NC Court Ruling Affects LLCs

Asset Protection

North Carolina Limited Liability Company (LLC) owners may be interested in a new court ruling that illustrates the protection these asset preservation tools offer. As an asset protection tool, LLCs protect owners’ personal assets from creditors seeking business debts, and LLCs also prevent personal creditors from pursuing assets held in the LLC. In the case below, creditors demanded control of an LLC member’s interest in the LLC in order to receive LLC distributions to re-pay the debts owed.

First Bank v. S&R Grandview, LLC is a case that shows charging orders provide creditors only with limited rights to distributions otherwise payable to member-debtors-in-default.
Initially, a member of S&R Grandview, LLC took out loans from First Bank. The member defaulted on these loans. In an effort to collect on this judgment, First Bank filed a motion in 2012 seeking a charging order against the member’s interest in S&R Grandview, LLC. In 2013, the trial court approved, and implemented a series of highly restrictive conditions that included having the rights of the LLC member until the debts were satisfied. This allowed First Bank to receive distributions from S&R Grandview, LLC to pay off the debts owed.
In March 2014, the North Carolina Court of Appeals reversed this order, citing Chapter 57C: “a charging order does not effectuate an assignment of a debtor’s membership interest in an LLC and does not cause a debtor to cease being a member in an LLC.”
This case highlights that under North Carolina law, a charging order against an LLC to collect debt cannot essentially terminate the member’s ownership. These tools remain important tools for business owners in North Carolina. Interested in other asset protection strategies? Learn about Family Limited Liability Companies and business succession plans.
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