Wisconsin Charging Orders and the Single-Member LLC
Jeff Storch | 10.08.21
In Wisconsin, as in most other states, when a creditor obtains a judgment against a member of an LLC, the court may issue a “charging order,” under which the court charges the member’s LLC interest with payment of the unsatisﬁed amount of the judgment. The judgment creditor has only the rights of an assignee of the member’s LLC interest, which are the rights to receive only the distributions and to share in the allocations of proﬁts and losses to which the member-debtor would otherwise be entitled with respect to the interest. A charging order effectively is a type of lien on distributions, profits, and losses.
The charging order does not give a judgment creditor voting or management rights of the LLC; the creditor’s rights are limited to the economic rights outlined above. The rationale for this limitation is the “pick your partner” principle: it protects the other members from involuntarily having a creditor as their new “partner.” As a result, a judgment creditor that has secured a charging order can receive the member-debtor’s economic benefits from ongoing ownership of the LLC but generally cannot force a sale of the member-debtor’s LLC interest or the LLC assets to satisfy the debt all at once.
However, the “pick your partner” principle does not work where there are no other partners, such as in single-member LLCs. Though Wisconsin courts have yet to address the issue, courts from other jurisdictions have treated single-member LLCs differently in the charging order context, recognizing that the need to protect other members of an LLC does not exist when the LLC only has one member. Several of these courts have held that an assignee of the sole interest in a single-member LLC acquires full management rights in the LLC because there are no other members whose interests need to be protected. In such cases, courts have allowed judgment creditors to foreclose on the member-debtor’s membership interest, assume control of the LLC, and sell the member-debtor’s LLC interest or LLC assets to satisfy the debt.
In addition, unlike some other states, Wisconsin’s charging order statute does not say that a charging order is the exclusive remedy for a creditor against a member’s LLC interest. Therefore, it is foreseeable that a Wisconsin court first addressing the issue would allow a judgment creditor to foreclose on the membership interest of an owner of a single-member LLC.
This issue is further complicated in Wisconsin by the state’s marital property laws. By default, under Wisconsin law, all marital property can be used to satisfy obligations incurred by a spouse in the interest of the marriage. In contrast, individual property of the non-debtor spouse generally cannot be used to satisfy the obligations of the debtor spouse. In Wisconsin, a creditor who has a judgment against one spouse can satisfy the judgment against both spouses’ interests in an LLC if those interests are owned by them as marital property.
Consequently, where an LLC is owned solely by two spouses as marital property, a judgment creditor that obtains a charging order against one of the member’s interests may be able to convince a court to allow the judgment creditor to foreclose on the membership interest, rather than be limited to a charging order against the interest, under the theory that the creditor also has obtained the non-debtor spouse’s LLC interest as marital property, and there are no other members whose interests need to be protected.
To address against this risk, Wisconsin spouses who together own 100% of an LLC may consider executing a statutory individual property classiﬁcation agreement classifying each of their interests in the LLC as individual property. If each spouse owns their LLC interest as individual property, the member-debtor should have a stronger argument that the judgment creditor’s rights should be limited to a charging order against the interest. However, it is possible that a Wisconsin court still could find that the “pick your partner” principle does not apply, treating the married couple as a single “partner” for this purpose. Wisconsin’s non-exclusive charging order statute would give the court additional support to allow foreclosure of the interest in this situation.
Until a Wisconsin court directly addresses the issue, a person considering starting a single-member LLC who wishes to improve the likelihood that a court would limit a creditor’s remedy against the member’s LLC interest to a charging order should consider adding another member, and preferably not the member’s spouse. Of course, adding another member has other business and tax consequences, which will need to be balanced against the charging order issue.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.