Downtown Louisville
Kevin Mattingly leased a property in Louisville, Kentucky to Kevin Stich. When Stich did not pay Mattingly all that he was owed under the contract, Mattingly sued Stich in Kentucky state court and obtained a default judgment against Stich for a bit of lower than $75,000. Now it was time for Mattingly to implement his judgment, and to accomplish that, Mattingly obtained a garnishment order against Stich’s interests in several different limited liability firms (LLCs). The garnishment order was entered on August 24, 2020.
Stich owned an interest in Haunt Brothers, LLC, considered one of the businesses whose interest was the topic of Mattingly’s garnishment order. Nearly two years after the garnishment order was entered, Mattingly had still not received any payments from his judgment, nor had he received any distributions from Stich’s encumbered interests. Therefore, on June 15, 2022, Mattingly filed a motion within the district court to foreclose on Stich’s interest in Haunt Brothers, LLC. The district court granted Mattingly’s motion and Stich appealed, resulting in the opinion that we should always next hear the case in Stab against Mattingly2024 WL 2788210 (Ky.App., May 31, 2024).
To resolve this challenge, the Kentucky Court of Appeals looked to Kentucky limited liability company law, specifically the garnishment rules in KRS § 275.260. The relevant provisions in § 276.260 are as follows:
“(2) Upon application to a reliable court by a member’s enforcement creditor or a member’s assignee, a court may encumber the judgment debtor’s share within the limited liability company with the payment of the unpaid amount of the enforcement title. To the extent that such encumbrance is made, the judgment creditor shall have only the rights of an assignee and shall not be entitled to take part in the management of the limited liability company or to cause its dissolution. * * *
‘(3) An attachment order creates a lien on and a right to payments in respect of the debtor’s participation within the limited liability company. An attachment order doesn’t routinely constitute an project of the participation within the limited liability company.
“(4) The court may at any time order compulsory enforcement against the GmbH share affected by the attachment order. The purchaser of the GmbH share at the compulsory auction has the rights of an assignee.”
The court first found that when Mattingly obtained a lien against Haunt Brothers, LLC, he merely obtained a lien on Stich’s shares and a right to receive any distributions due Stich. Nothing more, nothing less. Mattingly couldn’t take any executive motion, cause dissolution, or do the rest with respect to Haunt Brothers, LLC, except that if distributions were sent to Stich, Mattingly was entitled to receive them until the judgment was enforced.
Stich didn’t contest any of this. Rather, Stich argued that when the court ordered the foreclosure, that foreclosure didn’t affect all of Stich’s property, including things like management rights, but only and exclusively Stich’s right to receive distributions. Even then, Stich further argued, the distributions could only be foreclosed as much as the quantity of the judgment.
The Court of Appeals disagreed. If Stich’s argument were accepted, Mattingly’s position wouldn’t be improved by the foreclosure, rendering the a part of the law coping with foreclosure “essentially meaningless and hollow, a result we cannot endorse.” As a general rule, statutory interpretations that invalidate a part of a law are to be avoided, and the Court of Appeals would avoid doing so on this case.
As the case progressed, Stich’s argument that enforcement ought to be limited to the quantity of the judgment contradicted the wording of the law and will due to this fact easily be rejected.
But now we come to a different flaw in Stich’s argument, namely that Stich owned 100% of the interest in Haunt Brothers, LLC, or in other words, Haunt Brothers was a single-member LLC. Under Kentucky law, if the foreclosure affects 100% of an interest, the debtor loses membership and the LLC is dissolved.
The upshot of all that is that the Court of Appeals has affirmed the foreclosure of Stich’s interest in Haunt Brothers, LLC. Presumably, the interest won’t be sold on the foreclosure sale, which might end in the dissolution of Haunt Brothers, and the purchaser on the foreclosure sale would receive all of Haunt Brothers’ assets.
ANALYSIS
The Court of Appeal made this decision accurately, even when the wording of Section 260 could probably be made more precise, for instance by stipulating that the enforcement pertains to the lien arising from the attachment and never to the interest itself.
Otherwise, this case shows once more that one-person LLCs are very poor vehicles for shielding assets from the judgments of the only member. One-person LLCs might be breached by creditors in this manner, by garnishment order and subsequent foreclosure, or in most jurisdictions by reverse veils. They provide a brake on creditors to slow them down a bit, but not far more. Yet many individuals tell me they “have an LLC” and think it’s their great asset protection plan, not realizing how poor this vehicle is.
Slightly knowledge is a dangerous thing. Just ask Stich.
