In 2017, Greg Gengs decided that it was time to split the sheets with his then wife, Lisa Gengs, and so filed for divorce. After a couple of years of litigation, the couple reached a settlement on July 10, 2019, the terms of which were placed on the record during a telephone hearing and soon thereafter the settlement was reduced to judgment. As part of the terms settlement, now incorporated into a judgment, Greg was required to make a lump sum payment to Lisa within 120 days, and also Greg was to provide Lisa with a security interest and mortgage in real estate that was owned GLG Farms, LLC, which LLC was solely owned by Greg.
But when the 120 days had come and gone, Greg had not made the lump sum payment to Lisa nor had Greg given Lisa the security interest in GLG Farms, LLC. The court was not pleased, and held Greg in contempt — but allowed Greg to stay the contempt if he filed a bond in the amount of $115,000 and executed the mortgage for the real estate owned by GLG Farms, LLC. Otherwise, Greg would get to serve up to 60 days in the pokey. The court later modified that order to provide that if Greg would make a payment of $150,000 to Lisa then he could purge the contempt, and Greg finally made that payment.
Greg appealed the judgment and made a variety of arguments, none of which were even modestly successful and only one which is of interest to us here: Whether the court could force Greg to give a security interest and mortgage on the real estate of GLG Farms, LLC.
Reduced to its essence, Greg argued that the exclusive remedy that a judgment creditor, such as Lisa, has against a debtor/member’s interest in an LLC is a charging order, and so instead of Greg being forced to give a security interest and mortgage on the real that was owned by GLG Farms, LLC (and not Greg individually), Lisa should instead be stuck with a charging order that would limit her rights to merely getting whatever distributions came out of GLG Farms, LLC, if any. Indeed, the LLC statute uses the precise term “exclusive remedy” in defining a creditor’s rights against a debtor/member’s interest in an LLC, and the result urged by Greg is the correct result in most cases, i.e., the general rule.
But once again, we have to recall the General Rule of Anglo-American jurisprudence, which is that general rules are generally inapplicable. Here, Greg voluntarily and consensually bartered away a security interest and mortgage in the real estate of GLG Farms, LLC, as part of the settlement, which is very different than a creditor seeking distributions in an ordinary case. Thus:
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Lisa Grengs is not seeking to obtain distributions from GLG Farms, LLC that would otherwise be payable to Greg Grengs. A charging order has no application to whether or not Greg Grengs can be held in contempt. The question present in this case is not whether Lisa Grengs can pursue collection of Greg Grengs’ liability from assets of the limited liability, the question is whether Greg Grengs has the ability to execute a security interest and mortgage on assets owned by the limited liability company.
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Greg next argued that he couldn’t be held in contempt because he personally had no ability to give a security interest and mortgage in the property of GLG Farms, LLC — only GLG Farms, LLC could do that. This quite disingenuously overlooked that as the sole owner of GLG Farms, LLC, Greg had total control of the entity and could make it do whatever he wanted:
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Greg Grengs is the sole owner of GLG Farms, LLC and has exclusive control of GLG Farms, LLC. Greg Grengs offered no evidence to support a finding he does not have the ability to secure the execution of the mortgage from GLG Farms, LLC. He has not argued that he lacks control of GLG Farms, LLC; he has not argued he is prohibited by an operating agreement from encumbering the assets of GLG Farms, LLC; and he has not argued he is otherwise prevented from complying with the terms of the judgment. While it is true the title is held by GLG Farms, LLC, Greg Grengs has failed to demonstrate he does not have the ability to comply with the judgment by executing a security interest and mortgage on behalf of GLG Farms, LLC.
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The bottom line was that Greg could indeed comply with the judgment but simply chose not to do so, and it was not error for the court to hold him in contempt.
This opinion demonstrates that as vehicle to protect one’s assets from creditors, a single-member LLC (“SMLLC”) isn’t worth much. The reason is that a court can simply order the debtor to do just about whatever in relation to the entity, such as make it give a security interest and mortgage on the real estate that it holds as here. Which is to say that a court might not be able to technically force the LLC as a non-party to the litigation to do anything, but the court certainly has the contempt power to force the debtor as the single member to do whatever the court wants, including take action on as the manager of the LLC.
However, in the creditor-debtor context is critical to distinguish between consensual liens where the debtor has agreed (as Greg did in this case) to place the lien, as opposed to non-consensual liens where a creditor is forcing the placement of a lien onto the interest of the debtor against her wishes. In the first event, where the debtor voluntarily consents to the lien, the charging order procedure is not implicated at all. It is only in the second event, where the debtor does not consent to the lien, and thus the court is forced to place the lien against the debtor’s wishes, that the charging order procedure is used.
But even where the charging order procedure is implicated, it is important to realize that “exclusive remedy” is a perhaps poorly-chosen term of art which does mean that the charging order procedure must be used to the exclusion of other remedies, such as a levy or garnishment, but it not the equivalent of “exclusive outcome” since there may be other theories — most notably alter ego and reverse veil-piercing theories — that creditors may employ to essentially by-pass the separate legal existence of the LLC and get at the assets within.
Grengs v. Grengs, 2020 ND 242, 2020 WL 6793355 (N.D., Nov. 19, 2020). Full Opinion at https://chargingorder.com/opinion-2020-north-dakota-gengs-charging-order-exclusive-remedy.html
Source: Forbes – Money