Single Owner LLC, Analytical comparison between Saudi System and US system.

Citation: Herrick K. Jr. Lidstone, Single-Member LLCs and Asset Protection, 41 Colo. Law. 187, 194 (2012) Provided by: <br>SMU Underwood Law Library

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BUSINESS LAW

Single-Member LLCs and Asset Protection by Herrick K. Lidstone, Jr.

Single-member LLCsformed under Colorado law are not an effective toolfor assetprotection. Other states have enacted stronger assetprotection legislation for the protection of members ofsingle-member LLCs to the deroga- tion of the rights of creditors, but these laws have questionable enforceability f addressed by Colorado courts.

ingle-member limited liability companies (LLCs) are a unique creature authorized by the Colorado LLC Act (Colorado Act) and the limited liability acts of many other

states.1 When Colorado enacted the initial version of the Colorado Act, single-member LLCs were not permitted because LLCs were designed for partnership tax treatment, which required two or more members. With the adoption of the check-the-box regula- tions by the Internal Revenue Service in 1996,2 partnership tax treatment for all partnership entities became much easier to ensure, and single-member LLCs became very popular. Under the check- the-box regulations, single-member LLCs are treated either as a disregarded entity (taxed at the single-member level) or as an asso- ciation taxable as a corporation (if the box is checked).

Many persons look to single-member LLCs as an asset protec- tion device-that is, a person can conduct business through a sin- gle-member LLC and avoid personal liability for the single-mem- ber LLC's obligations, while also protecting the assets of the sin- gle-member LLC from the single member's creditors. The purpose of this article is not to discuss insulating the member from the debts of the single-member LLC, which is a question involving (among other things) legal principles related to piercing the veil of the LLC.3 The question addressed by this article is whether the use of a single-member LLC can protect the assets of the single-member LLC from the claims of the member's cred- itors.

This article concludes that, as an asset protection device, single- member LLCs are not an effective tool, especially in Colorado. It is important to note that asset protection strategies are seldom per- fect and are generally intended to create barriers-making access to assets more difficult for creditors, although access is rarely impossible. When the U.S. government or a bankruptcy trustee

becomes involved, asset protection strategies are subject to their most rigorous test and a single-member LLC, standing alone, probably will fail. A single-member LLC, when combined with a domestic or foreign asset protection trust or other entity, will create firther barriers (but they are only barriers-not guarantees). Turn- ing the single-member LLC into a multi-member LLC will have a better chance of succeeding than a single-member LLC standing alone. Structuring a single-member LLC with a "springing mem- ber"4 or independent managers also may create a barrier to the creditor's ultimate goal of recovering the single member's debt from the LLC's assets. As discussed below, using a state law that pro- vides greater asset protection for single-member LLCs than Colo- rado's may have limited impact in Colorado, but is another step to consider.

Single-Member LLCs and Liability Protection When considering single-member LLCs, the risk of liability

must be analyzed from two directions. First, there is the possibility of holding the member (or a manager or other person) liable for the debts incurred by the LLC. This is generally referred to as "piercing the veil," which is authorized by the Colorado Act,5 but is in derogation of the basic rule that a single-member LLC benefits from the liability protection available to LLCs in general.6 Second, a creditor of the single member may seek to enforce the member's debt against the assets of the LLC.This is generally referred to as reverse piercing."

Creditors' Remedies Creditors of a person (debtor) who is a member of a Colorado

LLC have two methods for recourse against the debtor's LLC

Coordinating Editors About the Author Trygve E. Kjellsen of Lathrop & Gage LLP, Denver--(720) Herrick K. Lidstone, Jr. is managing director and a 931-3145, tkjellsen@lathropgage.com; David P. Steigerwald shareholder of the Greenwood Village law firm of of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Bums, Figa & Will, P.C. He practices in transactional Springs-(719) 475-0097, dpsteig@sparkswillson.com; Curt law, including corporations, limited liability compa- Todd, Denver-(303) 955-1184, ctodd@templelaw.comcast nies, financing, mergers and acquisitions, and biz.net (Bankruptcy Law) ethics-(303) 796-2626, hklidstone@bfwlaw.com.

Business Law articles are sponsored by the CBA Business Law Section to apprise members of current substantive law. Articles focus on business law topics for the Colorado practitioner, including antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchis- ing, and securities law.

The Colorado Lawyer I March 2012 I Vol. 41, No. 3 39

BUSINESS LAW

interest. These are charging orders and foreclosure against the membership interest.

7

Charging Orders Charging orders in the LLC context are authorized by the

Colorado Act, as well as by the partnership statutes.8 The Colo- rado Act specifically provides:9

On application to a court of competent jurisdiction by any judg- ment creditor of a member, the court may charge the member- ship interest of the member with payment of the unsatisfied amount of the judgment with interest thereon and may then or later appoint a receiver of the member's share of the profits and of any other money due or to become due to the member in respect of the limited liability company and make all other orders, directions, accounts, and inquiries that the debtor mem- ber might have made, or that the circumstances of the case may require. To the extent so charged, except as provided in this sec- tion, the judgment creditor has only the rights of an assignee or transferee of the membership interest. The membership inter- est charged may be redeemed at any time before foreclosure. If the sale is directed by the court, the membership interest may be purchased without causing a dissolution with separate property by any one or more of the members. With the consent of all members whose membership interests are not being charged or sold, the membership interest may be purchased without caus- ing a dissolution with property of the limited liability company This article shall not deprive any member of the benefit of any exemption laws applicable to the member's membership inter- est. In general, a charging order in a single- or multi-member LLC

is unattractive to creditors. A charging order places the creditor at the risk of being allocated for tax purposes income or losses of the partnership or LLC, but with no right to receive any distributions. Furthermore, a charging order does not ensure that there will be any distributions even if the LLC is operating profitably with sur- plus cash. Whether to make distributions usually is in the discre- tion of the management of the LLC, and the holder of the charg-

ing order, as an assignee or transferee and even following foreclo- sure, has no right to obtain information about the LLC or to require the payment of distributions.

A 2002 case from North Carolina demonstrates the very lim- ited usefulness of a charging order to a creditor.10 A bank had obtained a judgment against a debtor (Keasler) and (through an assignee) attempted to execute on Keasler's LLC interests. The court denied the request for seizure and sale of the LLC interest, but granted the assignee a charging order. The charging order pro- vided that the LLC must deliver to the assignee any distributions and allocations to which Keasler would be entitled to receive on account of his membership interest, but that the creditor-assignee would not obtain any rights in the LLC except as an assignee with- out the ability to require any distributions or satisfaction of the judgment. After the North Carolina Court of Appeals' decision, the assignee's counsel observed:"1

The bad thing about having a charging order is that, at most, you get your principal and your interest-but only if the LLC works out until your judgment is paid. The charging order is worth less than selling the interest because you bear all the risk that the business will go bust before the judgment is paid. So it's worth much less than what you could get by selling it under an order.... If you're a member and manager of an LLC, you never have to give yourself a distribution or you don't have to do it until the judgment runs out. [The defendant] owns at least seven or eight LLCs that were formed years after the judgment with his assets, and I can't get to them. If they were shares in a corporation, we could sell them.

Where the charging order debtor is the sole member of a single- member LLC, the likely results are similarly negative.

Foreclosure as a Remedy It is probable that, under the Colorado Act, foreclosure of the

membership interest is available to creditors and, for single-mem- ber LLCs, this provides a much more attractive remedy to credi- tors. Although foreclosure is not specifically authorized, it is men- tioned in the third sentence of CRS § 7-80-703: "The member- ship interest charged may be redeemed at any time before foreclosure."Where the LLC is a multi-member LLC, foreclosure and a charging order are weak remedies, because the transferee of the foreclosed membership interest will be treated as an assignee and not as a member of the LLC. As a result, the creditor will not have the right to participate in management of the LLC or to inspect the records of the LLC."

2

The Colorado Act provides that where the LLC has no mem- bers (such as in the case where the single member loses his or her membership interest through foreclosure or as a result of a con- veyance to a bankruptcy trustee on filing a petition in bankruptcy), the nonmember assignees "of the last remaining member" may, by the unanimous consent of the assignees, "be admitted as a mem- ber or members."1 3 This would include a bankruptcy trustee, a creditor foreclosing on the single-member membership interest,

14

or an heir on death of the single member. 5

The Colorado Act also clarifies that the voting/management rights of an LLC membership interest may not be separated from the economic rights in a manner to delay creditors. The Colorado Act provides that "a member ceases to be a member upon assign- ment or transfer of all of the member's membership interest."

16

Once appointing itself as member, the creditor that acquired the

40 The Colorado Lawyer I March 2012 I Vol. 41, No. 3

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BUSINESS LAW

single member's interest as assignee could appoint itself the single member, remove the manager, and appoint itself manager.17 There- after, the new member/manager could amend the operating agree- ment and take other actions as a member to obtain value from the membership interest.

It is untested whether a single-member LLC operating agree- ment can include spendthrift provisions, which can be successfully used to delay or hinder creditors. Arguably, an operating agreement also may provide that the "manager cannot be removed by the members." However, ultimately, the operating agreement is the agreement of all of the members,' 8 and the creditor becoming the sole member should be able to make appropriate amendments to the operating agreement.

Rationale for the Colorado Act Generally, the limited rights for a creditor under a charging

order or as an assignee following foreclosure are intended to pro- tect the rights of the other (non-debtor) members and partners.19

Where there is only a single member, or the other members are all under the same obligation, there is no need to protect the other members because there are none.

Single-Member LLC Determination Clearly, a single-member LLC is an LLC that has no more than

one owner. There are, however, many variations on this theme, which result in making the determination more difficult.

As a matter of pure dictum, the U.S. Bankruptcy Court for the District of Colorado discussed the possibility of"peppercom mem- bers" in In reAlbright.20 In that case, the bankruptcy court was con- fronted with a single-member LLC where the member was seek- ing to delay creditors as a result of her single-member status. (This case was decided before the Colorado Legislature amended the statute to provide that the assignee of the last member may appoint a new member, as discussed above.) Even without the current ver- sion of the Colorado Act, the bankruptcy court used its equitable powers to reverse pierce the LLC to place the trustee in control of the LLC and its assets. In its decision, however, the court addressed the possibility that it may have reached a different conclusion had there been other economic members of her LLC. Footnote 9 to the A/lbright decision states:

To the extent a debtor intends to hinder, delay or defraud credi- tors through a multi-member LLC with "peppercorn" co-mem- bers, bankruptcy avoidance provisions and fraudulent transfer law would provide creditors or a bankruptcy trustee with recourse.

21

Thus, where a parent forms an LLC and gives small economic interests to his or her children for little or no consideration, these may be considered by a court following the A/lbright dictum pep- percorn members who do not impact the LLC's status as a single- member LLC.22 The same analysis may apply when the pepper- corn members are not related.

A dual-member LLC, when the members are husband and wife and both members file bankruptcy, may be treated as a single-

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The Colorado Lawyer I March 2012 I Vol. 41, No. 3 41

BUSINESS LAW

member LLC. This occurred in In re Lowe.23 Because both owners filed bankruptcy, the court ruled that "the [bankruptcy] trustee [in a chapter 7 case] does, indeed, have the member's interest. He is operating as a substitute member of [the LLC]."The court went on to say:

Whether the trustee wishes to assert control and operate the entity, the LLC, is within the business discretion of the trustee. If it wishes to take actions in that regard, it's within the business judgment and can take the benefits or detriments of asserting such control.

24

According to the bankruptcy court, as the single member following the bankruptcy assignment by the Lowes, the trustee had absolute control and the ability to determine whether to exercise that con- trol. The bankruptcy court may have reached a different result where only one of the married owners had filed for bankruptcy protection.

Under Colorado law, a person can establish an LLC with non- economic members. 25 However, non-economic members do not hold a "membership interest" in the LLC. "Membership interest" is defined to include a person's share of profits and losses and rights to distributions-characteristic of an economic interest, not a non-economic interest. If, therefore, there is a single economic member and one or more non-economic members, the assignee of the economic member (whether through bankruptcy or fore- closure by the economic member's creditor) may appoint itself member.

26

In Colorado and other states where LLCs can have non-eco- nomic members, peppercorn members, and economic but non- voting members, these variations may confuse the question of whether an LLC is a single-member LLC. J. William Callison has proposed a method to determine whether an LLC should be treated as a one-person LLC or one with other significant parties in interest for which the charging order should be the sole rem- edy. He suggests that the ability of the owner to transfer his or her interest in the LLC to a third party without consent from other members should be the determinative factor.27 This proposal would apply not only to single-member LLCs (however defined), but also to multi-member LLCs where there are no (or limited) transfer restrictions. If there are no material transfer restrictions, there is no basis to require that a charging order be the creditor's sole remedy.

There is likely to be significant discussion in forthcoming cases where an LLC, seeking to avoid the risks associated with a single- member LLC, admits other members. The court's determination whether the members are peppercorn members or non-economic members should turn on the significance of the rights they have; the terms of the operating agreement; and perhaps other law, such as the Colorado Uniform Fraudulent Transfers Act.28 In the end, Colorado courts have held that an individual should be responsible for his or her own torts and liabilities, and likely will use legal or equitable arguments to achieve this result.

29

Asset Protection Legislation The balance between the ability of an owner to protect his or

her assets and the right of a legitimate creditor to be paid has been the subject of a significant amount of litigation. In the case of a sin- gle-member LLC, Colorado has struck a balance favoring the creditor; other states have reversed that balance with the intention of protecting the owner from responsibility for his or her debts.

Wyoming In 2010, the Wyoming Legislature adopted a pure asset protec-

tion amendment to its LLC Act.30 This amendment provides that, even in the case of a single-member LLC, only a charging order is available to creditors of the single member.31 As applicable to this discussion, in § 17-29- 5 0 3 (g), the Wyoming LLC Act now pro- vides:

This section [17-29-503] provides the exclusive remedy by which a person seeking to enforce a judgment against a judg- ment debtor, including any judgment debtor who may be the sole member, dissociated member or transferee, may, in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor's transferable interest 32 or from the assets of the limited liability company. Other remedies, includingforeclosure on the judgment debtor' limited liability interest and a court order for directions, accounts and inquiries that the judgment debtor might have made are not available to the judgment creditor attempting to satisfy a judgment out ofthejudgment debtor' interest in the limited liability company and may not be ordered by the court.

33

Wyoming statutes do not provide a similar limitation for Wyoming partnerships and, in fact, specifically contemplate the right of a creditor to foreclose on a partner's transferable interest in a Wyoming partnership. 34 A "transferable interest" in a Wyoming partnership is defined as "the partner's interest in distributions.

35

Nevada In 2011, the Nevada Legislature took the Wyoming LLC

efforts toward asset protection to the derogation of the rights of creditors even further in Nevada Senate Bill (SB) 405. This bill, entitled "an act relating to business entities," amended Nevada law relating to corporations, partnerships, and LLCs.The summary of SB 405 includes the following description of its purposes: "revis- ing provisions governing the rights of a judgment creditor to satisfy a judgment out of the debtor's ownership interest in certain busi- ness entities."

There are three relevant sections in Nevada SB 405 that imple- ment the stated purpose of the bill:

> Section 52 amended NRS § 78.746 to provide that, on appli- cation to a court of competent jurisdiction by any judgment creditor of a stockholder of a Nevada corporation, the court may charge the stockholders' stock with payment of the unsatisfied amount of the judgment with interest.

> Section 69 amended NRS § 86.401 similarly for the mem- ber's interest in an LLC formed under Nevada law.

> Section 75 amended NRS § 87A.480 similarly for a Nevada partnership interest.

In all cases, Nevada statutes now provide that the creditor so charging has only the rights of an assignee, and goes on to say:

No other remedy, including, without limitation, foreclosure on the stockholder's stock [member's interest or partnership inter- est] or a court order for directions, accounts, and inquiries that the debtor or stockholder [member, or partner] might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor's interest in the cor- poration [LLC or partnership], and no other remedy may be ordered by the court. The phrase "rights of an assignee" is defined in each of the sec-

tions to be:

42 The Colorado Lawyer I March 2012 1 Vol. 41, No. 3

BUSINESS LAW

the rights to receive the share of distributions or dividends paid by the corporation [LLC or partnership] to which the judgment debtor would otherwise be entitled. The term does not include the rights to participate in the management of the business or affairs of the corporation [LLC or partnership] or to become a director of the corporation.

36

The Nevada LLC Act amendment3 7 states specifically that the application of this amendment applies equally to a single-member LLC as to a multi-member LLC.

Kansas In 1999, when adopting its LLC Act,'38 the Kansas Legislature

provided for charging orders and further stated that the rights pro- vided by the charging order section "to the judgment creditor shall be the sole and exclusive remedy of a judgment creditor with respect to the member's limited liability company interest." Based on the language of the statute, it appears to be an asset protection provision, as well, notwithstanding the Meyer v. Christie interpre- tation.

39

The IntemalAffairs Doctrine The laws in effect in Kansas, Nevada, and Wyoming operate to

the detriment of any contract, tort, or other creditor of an owner of a single-member Wyoming LLC or any Nevada corporation, partnership, or LLC (and Kansas LLCs to the extent the Kansas charging order statute survives Meyer v. Christie).4° These efforts raise some interesting and important questions about whether other states will recognize such an extreme approach. Article IV, Section 1 of the U.S. Constitution provides that each state shall give "full faith and credit" to the "public acts, records and judicial proceedings of every other state."41 On the other hand, the "inter- nal affairs doctrine" is a choice of law rule, which, simply stated, provides: "The internal affairs of a corporation will be governed by the corporate statutes and case law of the states in which the cor- poration is incorporated." 42

Colorado and many other states have extended the internal affairs doctrine to LLCs and other entities, as well.43 The question there is what exactly are the internal affairs of a corporation or LLC formed under a state with asset protection provisions. The courts and the commentators generally consider the internal affairs of an entity to be matters involving voting, fiduciary responsibili- ties, and other potential conflicts between the owners and the man- agers-but not including issues surrounding the rights of third parties, except where the third parties are parties to the governing agreements. As explained in the Restatement (Second) of Conflict of Laws, the intemal affairs doctrine favors the needs of interstate and international business systems and promotes certainty, predictabil- ity, and uniformity, as well as protecting the justified expectation of the parties:

Uniform treatment of directors, officers and shareholders is an important objective which can only be attained by having the rights and liabilities of those persons with respect to the corpo- ration governed by a single law. To the extent that they think about the matter, these persons would usually expect that their rights and duties with respect to the corporation would be deter- mined by the local law of the state of incorporation.44

It is arguable that relationships between creditors and an LLC (or a corporation, for that matter) are not within the internal affairs of an entity. That being the case, Colorado courts would be free to

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The Colorado Lawyer I March 2012 I Vol. 41, No. 3 43

BUSINESS LAW

apply substantive Colorado law to the obligations of a Nevada, Wyoming, or Kansas LLC or its single member to creditors. Nev- ertheless, this may be setting up a constitutional challenge by those who may believe that Nevada, Wyoming, or Kansas law protecting the owners rather than the creditors should apply.45 On the other hand and even in Colorado, using the laws of Nevada, Wyoming, or Kansas to form an LLC may create one more barrier for the benefit of the single member.

Conclusion In Colorado and many other states, an LLC operating agree-

ment is the agreement of the members and may include as parties other persons, such as lenders.46 The statutes authorizing LLCs are generally contractarian-meaning that the parties to the operating agreements must "scriven with precision."

47

Based on the Colorado statutes and the case law, single-member LLCs standing alone do not provide significant protection to the member from the claims of the member's creditors. Additional pro- tection can be added where the single member is itself a multi- member LLC or owned by a foreign or domestic trust, but in all cases, the formalities of the arrangement must be honored. Pepper- corn members (in the Albright sense) or non-economic members, or a failure to follow the formalities required by the operating agree- ment or the entity structure will give a court a reason to ignore the separateness of the LLC to the detriment of the economic and non- economic members. The effect that the Wyoming, Kansas, and Nevada legislation may have on this analysis is yet to be determined, but as discussed above, Colorado courts are unlikely to respect the efforts to protect single-member LLCs from the creditors of the single member, regardless of the asset-protection provisions found in the organizational statute for the single-member LLC.

Notes

1. CRS §§ 7-80-101 etseq. 2.Treas. Reg. § 301.7701-3. 3. For a more detailed discussion of this topic, see Lidstone, "Piercing

the Veil of an LLC or a Corporation," 39 The Colorado Lawyer 71 (Aug. 2010).

4. A "springing member" is a person who becomes the holder of an economic interest in an LLC on the occurrence of a specific event, such as the single member's bankruptcy or insolvency.

5. CRS § 7-80-107. 6. CRS § 7-80-705 provides: "Members and managers of limited lia-

bility companies are not liable under a judgment, decree, or order of a court, or in any other manner, for a debt, obligation, or liability of the lim- ited liability company." Piercing the veil also is possible to hold members or managers liable for improper distributions, a subject that is not dis- cussed in this article. CRS § 7-80-606(2).

7. Corporations are different in that under Colorado law and the laws of all of the other states but Nevada (discussed below), charging orders are not a remedy available to a creditor of a corporate shareholder. Corpora- tions can create a similar mandate through a properly drafted shareholders' buy-sell agreement. For a discussion of buy-sell agreements, see Reichert and Rozansky, The Practitioner's Guide to Colorado Business Organizations (CLE in Colorado, Inc., supplemented through 2011) at chapter 18.

8. Colorado has five statutes defining charging orders, and each of the statutes is different:

* The charging order statute under the Colorado Uniform Partner- ship Law (CUPL) is found in CRS § 7-60-128(1).

* The charging order statute under the Colorado Uniform Limited Partnership Law is found in CRS § 7-61-123(1).

44 The Colorado Lawyer I March 2012 I Vol. 41, No. 3

" The charging order statute under the Colorado Uniform Limited Partnership Act is found in CRS § 7-62-703.

" The charging order statute under the Colorado Uniform Partner- ship Act (CUPA) is found in CRS § 7-64-504(1).

" The charging order statute under the Colorado Limited Liability Company Act (Colorado Act) is found in CRS § 7-80-703.

9. CRS § 7-80-703. 10. Herring v. Keasler, 563 S.E.2d 614 (N.C.App. June 4,2002), avail-

able at www.assetprotectionbook.com/NCHerring-Keasler_2002.htm. 11. Quoted in Leimberg' Asset Protection Planning Email Newsletter,

Archive Message #24, available at leimbergservices.com (subscription only). 12. These rights are specifically available to members of a Colorado

limited liability company (LLC)-not assignees-unless the operating agreement provides that assignees will be admitted as members or treated as members for these purposes. See CRS §§ 7-80-706 (voting) and -408 (access to records).

13. CRS § 7-80-701(2). 14. See CRS § 7-80-703 (ajudgment creditor "has only the rights of an

assignee or transferee of the membership interest" and contemplates the possibility of foreclosure). In Olmstead v. FederalTrade Comm'n, So.3d __, 2010 WL 2518106 at *1 (Fla. 2010) the Florida Supreme Court (answering a question from the Eleventh Circuit) held that Florida's LLC Act's "statutory charging order does not preclude" a creditor attaching and foreclosing on a debtor's interest in a single-member LLC.The Colorado Act specifically contemplates foreclosure as a remedy, unlike the Florida LLC Act.

15. Movitz v. Fiesta Investments, LLC (In re Ehmann), 319 B.R. 200 (Bankr. D.Ariz. 2005) (decided on a motion to dismiss). The court held that when a member of an LLC files for bankruptcy protection, the debtor's membership interest becomes an asset of the bankruptcy estate, entitling the estate to the rights of an assignee, including distributions. This decision was so negative for the LLC that it paid $85,000 to settle all creditor claims and all administrative costs in full. This payment was conditioned on the court's withdrawal of its earlier opinion to "eliminat[e] any precedential effect"of the earlier opinion. In re Ebmann, 337 B.R. 228 (Bankr. D.Ariz. 2006) vacating 319 B.R. 200 (Bankr. D.Ariz. 2005). See also In re Modanlo, Civ. Act 2006-1168 (D.Md. Oct. 11, 2006) (holding that because the bankruptcy trustee was the personal representative of the last remaining member, the bankruptcy trustee could, under 6 Del. C. § 18-801(a), admit himself or a nominee as a member and continue the LLC over the objections of the bankrupt debtor).

16. CRS § 7-80-702(2). 17. CRS § 7-80-402, third sentence, which provides: "Managers may

be designated and removed by the consent of a majority of the members." 18. CRS § 7-80-102(11)(a). 19. Union Colony Bank of Greeley, 832 P2d 1112,1114-15 (Colo. 1992).

See also Nash and Bedingfield, "Charging Partnership and LLC Interests to Satisfy Creditors," 23 The Colorado Lawyer 2743 (Dec. 1994); Gose, "The Charging Order Under the Uniform Partnership Act," 28 Wash. L.Rev. 1 (1953).

20. In reAlbrigbt, 291 B.R. 538 (Bankr. D.Colo. 2003). 21. Id., citing 11 U.S.C. §§ 544(b)(1) and 548(a). 22. See Sparkman, "Family Business Entities: Preserving Wealth and

Minimizing Taxes," 32 The Colorado Lawyer 11, note 133 (Nov. 2003). 23. In re Lowe, 07-10904 MER, transcript of oral ruling (Bankr.

D.Colo. Oct. 17,2007). 24. In re Lowe, 07-10904 MER (Bankr. D.Colo.), transcript of oral rul-

ing at 7 (Oct. 17,2007). 25. CRS § 7-80-501. Specifically the statute states that "a person may

be admitted to a limited liability company as a member of the limited lia- bility company without acquiring a membership interest in the limited lia- bility company."

26. CRS § 7-80-701(2). See text at note 13, supra. 27. Callison,"Charging Order Exclusivity," 66 The Business Lawyer 339,

358 (Feb. 2011). Callison's statutory proposal for the conditional exclusiv- ity of charging order is:

BUSINESS LAW

Chaiging orders are the exclusive remedy by which a member's judg- ment creditors can reach the member's interest in the [LLC]; provided, however, that if the judgment creditor can demonstrate that all or any part of the member's interest in the [LLC] can be assigned by the member to a third party without the other members' consent, then the charging order shall not be an exclusive remedy with respect to such freely assignable interest. 28. CRS §§ 38-8-101 etseq. (CUFTA). 29. Valley Dev. Co. v. Weeks, 364 P.2d 730,734 (Colo. 1961). 30. Wyoming L. 2010, ch. 94, § 1. 31. In its entiretyWyo. Stat. § 17-29-503 (entitled "Charging Orders")

now provides: On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charg- ing order requires the limited liability company to pay over to the per- son to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor. Reserved. Reserved. The member or transferee whose transferable interest is subject to a charging order under subsection (a) of this section may extinguish the charging order by satisfying the judgment and filing a certified copy of the satisfaction with the court that issued the charging order. A limited liability company or one (1) or more members whose trans- ferable interests are not subject to the charging order may pay to the judgment creditor the flil amount due under the judgment and thereby succeed to the rights of the judgment creditor, including the charging order. This article does not deprive any member or transferee of the benefit of any exemption laws applicable to the member's or transferee's trans- ferable interest. This section provides the exclusive remedy by which a person seeking to enforce a judgment against a judgment debtor, including any judg- ment debtor who may be the sole member, dissociated member or transferee, may, in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor's transferable interest or from the assets of the limited liability company. Other remedies, including fore- closure on the judgment debtor's limited liability interest and a court order for directions, accounts and inquiries that the judgment debtor might have made are not available to the judgment creditor attempt- ing to satisfy a judgment out of the judgment debtor's interest in the limited liability company and may not be ordered by the court. 32.Wyo. Stat. § 17-29-102(a)(xxii) defines the term "transferable inter-

est" for the purposes of a Wyoming LLC as: the right, as originally associated with the person's capacity as a mem- ber, to receive distributions from a limited liability company in accor- dance with the operating agreement, whether or not the person remains a member or continues to own any part of the right. 33.Wyo. Stat. § 17 -2 9-503 (g) (emphasis supplied). 34.Wyo. Stat. § 17-21-504. 35.Wyo. Stat. § 17-21-502(a). 36.The limitations on the rights of an assignee are set forth elsewhere,

but similarly, in the Nevada LLC Act and the Nevada partnership laws. 37. Section 69 of Senate Bill 405. 38. Kansas L. 1999, ch. 119, § 52, codified at K.S.A. § 17-76-113. 39.This section was interpreted by the federal district court of Kansas

in Meyerv. Christie, 2011 WL 4857905 (D.Kan. Oct. 13,2011), where the defendant argued that the court could not enter the charging order because entry would violate the non-assignment provisions of the operat- ing agreement. In an analysis of the Kansas statute, the court reviewed the charging order statute and concluded that, because the statute provided that the charging order was the creditor's exclusive remedy, an operating

agreement could not limit the statute in this respect. The court then noted that the charging order makes the holder an assignee, and another provi- sion of the Kansas LLC Act provides that the assignee of a single-member LLC membership interest "shall have the right to participate in the man- agement of the business and affairs of the limited liability company." K.S.A. § 17-76,112(f).Thus, rather than providing for a typical charging order remedy, the Kansas federal court went a step further and equated the holder of a charging order with an assignee and granted the holder of the charging order full management rights. This decision was criticized by Thomas E. Rutledge in Pubogram, the Newsletter of the Committee on LLCs, Partnerships and Unincorporated Entities, XXVIII Pubogram 9 (Nov. 2011). Rutledge noted that "[t]he provision that the holder of a charging order has the rights of an assignee is not intended to be an affir- mative grant but rather a limitation."

40. Arguably the remedies of piercing the veil and fraudulent con- veyances are still available for LLCs in Wyoming and Kansas, and corpo- rations and LLCs in Nevada.

41. See CRS § 7-80-106, which provides the general assembly's inten- tion that

the legal existence of [Colorado] limited liability companies... be rec- ognized beyond the limits of this state and that, subject to any reason- able registration requirements, any such limited liability company be granted the protection of fill faith and credit under section 1 of article IV of the constitution of the United States. 42. CTS Corp. v. Dynamics Corp. ofAm., 481 U.S. 69, 89-90 (1987);

Edgarv. Mite Corp., 457 U.S. 624,645 (1982); Shaffer v. Heitner, 433 U.S. 186,215, n.44 (1977); Rogers v. Guaranty Trust Co. ofNew York, 288 U.S. 123, 130 (1933); VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108,1116-18 (Del. 2005); McDermott Inc. v. Lewis, 531 A.2d 206, 215 (Del. 1987). Of course, Delaware has significant encouragement to expand the internal affairs doctrine as far as possible to protect the national and international applicability of the Delaware General Corporation Law to Delaware corporations. See Glynn, "Delaware's VantagePoint: the Empire Strikes Back in the Post-Post-Enron Era," 102 Northwestern Univ. L.Rev. 91 (2008); Note, "Internal Affairs Doctrine: California versus Delaware in a Fight for the Right to Regulate Foreign Corporations," 48 Boston Coll. L.Rev. 1047 (2008); Beveridge, "The Internal Affairs Doc- trine: The Proper Law of a Corporation," 44 The Business Lawyer 692 (1988).

43. CRS § 7-90-805(4) provides that [a]s to any foreign entity transacting business or conducting activities in this state, the law of the jurisdiction under the law of which the for- eign entity is formed shall govern the organization and internal affairs of the foreign entity and the liability of its owners and managers. 44. Restatement (Second) of Conflict of Laws § 302(2), cmt. e and g

(1971). 45. In his paper presented to the Colorado Bar Association 2011 Real

Estate Symposium, Beat U. Steiner raised the question: [I]f you form a single member LLC in a jurisdiction that expressly pro- vides for a charging [order] as an exclusive remedy and does not pro- vide for foreclosure (i.e. not Colorado), will a Colorado court follow the law of the state where the LLC is organized or Colorado law?

Steiner, "Colorado Limited Liability Entities: Qualities, Quirks & Queries" § III.C.4 at 14 (2011).

46. CRS § 7-80-102(11). 47. Willie Gary LLC v. James &Jackson, LLC, 2006 WL 75309 at *2

(Del.Ch.Ct. Jan. 10, 2006), affd sub nom. James &Jackson, LLC v. Willie Gary LLC, No. 59-2006 (Del.Sup.Ct. March 21, 2006). There, the issue was a dispute resolution clause that the court found was "unwieldy" but sufficiently clear to deny a motion to dismiss for arbitration of the claims. See also Kleinberger,"Careful What You Wish For-Freedom of Contract and the Necessity of Carefiil Scrivening,"XXIV Pubogram 19 (Oct. 2006), available at ssm.com/abstract=939 0 09 . U

The Colorado Lawyer I March 2012 I Vol. 41, No. 3 45

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