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Outside Liability Protection

Property held in an LLC cannot be seized by a creditor of a member. If there is a judgment or claim against John or Mary, the creditor cannot reach the property held in the LLC. However, even though the creditor cannot reach the property directly, he can do so indirectly by seizing the member’s ownership interest in a foreclosure. (California Corporations Code Section 17302 (Foreclosure of LLC interests); In Re: Ashley Albright, U.S. Bankruptcy Court for the District of Colorado (April 4, 2003)). The ability of a creditor to foreclose on a membership interest was recently affirmed by the Florida Supreme Court despite statutory language limiting the creditors remedy to a charging order. (Olmstead, et al., v. The Federal Trade Commission, Supreme Court of Florida. Case No. SC08-1009 (June 24, 2010)). The foreclosure remedy is a powerful weapon in the hands of a creditor since it allows a potential recovery by a creditor equal to the full value of LLC property—which may be considerably greater than the judgment itself.

Getting back to our example, what this means is that if the LLC interests are held personally by John and Mary, meaningful protection from outside liability is not achieved since a creditor with a judgment can seize the membership interests. As with the FLP, proper ownership of the LLC interests within a Family Savings Trust or other vehicle is a key component of any asset protection strategy for protecting the membership interests. This fact must be addressed at the planning stage.

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