Texas LLCs Lose Charging Order Exclusivity Protection

Texas used to be considered a strong LLC state. But strength can evaporate with one court decision, which happened in Texas in August, 2016.

In Devoll v. Demonbreun, 2016 WL 4538805 (Tex.App. August, 2016) Rebecca Demonbreun went to court and won $114,000 from Norris Devoll over the sale of a house. Rebecca obtained a charging order over Norris’ other properties.

What is a Charging Order?

A charging order is a court-authorized right granted to a creditor get a lien against the debtor/member’s LLC interest. The lien lasts until the judgment is satisfied. A creditor is prohibited by law from levying on the interests of an LLC, as a creditor is traditionally allowed do to the shares of a corporation.

A creditor gets a lien against what is known as the debtor/member’s “economic interest” in the LLC, or, in English, a lien against whatever distributions that the LLC makes to the debtor/member, if any. If a member of an LLC becomes a debtor, the creditor does not get the assets of the LLC or even the debtor/member’s LLC interest outright. Not all states offer equal protection to LLCs.

Norris’ brother Gene then got involved and engaged in some questionable transactions to remove a real estate holding partnership interest under the charging order from Norris’ control. Rebecca sued Gene for a fraudulent transfer.

What Changed?

The Texas Court of Appeals ruled that an order preventing the sale of the property was appropriate. As many commentators have now reported, the court muddled the difference between the partnership interest and the assets underlying the partnership interest. (For a detailed explanation of the Devoll v. Demonbreun case click here.)

The intent of the charging order is to place a lien against a partnership or LLC membership interest. It does not allow for orders to be brought against the asset itself, in this case a real estate holding. But now the Texas courts allow equitable remedies against the underlying asset – the real estate.

The exclusivity of the charging order in Texas is gone. This decision makes it much easier for creditors to get at the assets themselves, even if they are in an LLC.

Interestingly, Chief Justice Marion dissented in the case. She correctly pointed out that a trial court lacked the power to award equitable relief over the property. The Texas Supreme Court or Texas Legislature may (or may not) correct this very significant ruling.

Wyoming LLCs Necessary After Surprising Texas Verdict

Until then, owners of Texas LLCs may want to add a Wyoming LLC to their structure. By having a Wyoming LLC own one or more Texas LLCs the benefits of Wyoming law may be asserted.