Limited Liability Companies are wholly creatures of statute. Corps & Ass’ns § 4A-301 provides blanket protection to members:
“Except as otherwise provided by this title, no member shall be personally liable for the obligations of the limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company.”
Creditors of a member may charge an interest and “to the extent so charged, the judgment creditor shall have only the rights of an assignee…” Corps & Ass’ns § 4A-607. An assignee is generally entitled to distributions but not to participate in management. Corps & Ass’ns § 4A-603.
In the securities fraud arena, the Maryland Court of Special Appeals has held that LLC’s are similar to corporations, not general partnerships, in large part because members are not personally liable for company debts. The narrow question in AK’s Daks Commc’n, Inc. v. Maryland Securities Div., 138 Md. App. 314, 771 A.2d 487 (2001), was whether a presumption that partnership agreements are not generally “investment contracts” and therefore not regulated securities should be applied to LLCs. The rationale for this rule (the so-called “Williamson presumption”) is that partners remain liable for partnership debts by virtue of the form of their ownership interest:
“Other courts have addressed whether the Williamson presumption for general partnerships applies to interests in limited liability companies. In Great Lakes Chemical Corporation v. Monsanto Company, supra, 96 F. Supp. 2d 376, the court was asked to decide whether interests in a limited liability company were securities and, thus, whether the sale of those interest was governed by federal securities law. The court compared the general partnership form of business entity and the limited liability company form of business entity. It notes that the two forms do share some of the same characteristics. Id. at 391. Like general partners, members in a limited liability company may participate actively in the management and control of the business. Id. The court concluded, however, that the factors distinguishing limited liability companies from general partnerships are significant. Id. at 383. Unlike general partners, members in a limited liability company are not personally liable for the obligations of the company solely by virtue of their membership in the company. Rather, their liability is limited, like the liability of shareholders. Id. See also CA § 4A-301. Further, depending on the nature of the particular limited liability company’s operating agreement, the members also may be less involved in the management of the business than general partners are. Great Lakes Chem. Corp. 96 F. Supp. 2d at 391. See also CA § 4A-401. Based on these distinctions, the court declined to extend the Williamson presumption, that interests in general partnerships are not securities, to interests in limited liability companies.”
[Presumably, limited liability partnership status would also lift a general partnership out of the Williamson presumption for securities fraud purposes. See Corps & Ass’ns § 9A-306(c).] The statutory direction that a charging order is the method available to judgment creditors may not apply to single member LLC’s. In re Albright, 291 B.R. 538 (D. Colo. 2003) the Colorado bankruptcy court permitted the Trustee to take possession and control of a single member LLC:“[T]he charging order, as set forth in Section 703 of the Colorado Limited Liability Company Act, exists to protect other members of an LLC from having involuntarily to share governance responsibilities with someone they did not choose, or from having to accept a creditor of another member as a co-manager. A charging order protects the autonomy of the original members, and their ability to manage their own enterprise. In a single-member entity, there are no non-debtor members to protect. The charging order limitation serves no purpose in a single member limited liability company, because there are no other parties’ interests affected.”
In re Albright, 291 B.R. 538, 541 (D. Colo. 2003)
Bankruptcy courts have found non-managing members of LLC’s not to hold significant management obligations thus permitting full control by the bankruptcy trustee. These cases turn on whether the non-managing member has to do anything of substance on behalf of the LLC. In re Ehmann, 319 B.R. 200 (D. Ariz. 2005); In re IT Group, Inc., 302 B.R. 483 (D. Del. 2003). In effect, these cases hold that the member’s interest should be seen as stock in a corporate entity and not as a team of individuals sharing partner-like obligations to each other.
The Delaware Series LLC is a relatively new, and largely untested, variation on the standard LLC. By statute, the Delaware Series LLC permits separate properties to be held in separate compartments in a single LLC. Each compartment purportedly is treated as separate from the other compartments for liability purposes. Although the separateness of the compartments has not yet been tested in the courts, a Delaware Series LLC offers the potential of adding liability protection yet qualifying as a single LLC for Maryland state recordation tax purposes under the “real estate enterprise” exception. Real Prop. § 12-108(bb).
