Opinion ID: 6500405
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Text: A limited liability company (LLC) member sold his LLC interest to another LLC member as part of a settlement agreement, under which funds were to be paid to the selling member and his attorneys. A judgment creditor of the selling member sought a charging order against the settlement funds; meanwhile, the selling member’s attorneys filed an attorney’s lien against the same funds. The superior court granted the charging order and enforced the attorney’s lien, resulting in partial recoveries for the judgment creditor and the attorneys. The judgment creditor appeals, arguing that the attorney’s lien was invalid, or, if valid, should have been prioritized beneath his charging order. The selling member cross-appeals, arguing that the charging order was invalid and, if valid, should have been prioritized beneath the attorney’s lien. Because evidentiary issues prevent us from determining the validity or extent of the charging order and lien, we remand for the superior court to conduct the appropriate evidentiary inquiries. II. LEGAL BACKGROUND OF LIMITED LIABILITY COMPANIES The LLC is a relatively new form of business organization combining limited liability features of corporations with tax treatment of general partnerships.1 LLC members enjoy a measure of immunity from personal liability for the LLC’s actions and liabilities while also benefitting from pass-through taxation, meaning that the LLC’s income generally is not taxed separately before “passing through” to its members.2 Alaskans have been able to use this hybrid form of business organization since 1995.3 1 Joseph P. Briggett, The Rights of a Judgment Creditor Against an LLC, Under Various States’ Charging Order Statutes, 39 REV. BANKING & FIN. L. 277, 284, 292-93 (2019); John Dwight Ingram, Limited Liability Companies, 6 FLA. STATE UNIV. BUS. L. REV. 1, 6-7 (2007); Katherine Quigley, Converting to a Limited Liability Company: Considerations for Alaska Business Organizations, 13 ALASKA L. REV. 289, 297-98 (1996). 2 Briggett, supra note 1, at 287-89; Ingram, supra note 1, at 2. 3 Ch. 99, §1, SLA 1994 (enacting Alaska LLC law); see Alaska Revised Limited Liability Company Act, AS 10.50.010-.995; Minutes, House Judiciary Comm., Hearing on H.B. 420, 18th Leg., 2d Sess. No. 353 (March 23, 1994) (testimony of Rep. Gene Therriault, House District 33, bill sponsor) (describing LLC as “new hybrid form of business structure . . . that combines the tax advantages of a partnership and the (continued...) -2- 7602 Just as LLC members enjoy limited liability for LLC actions and liabilities, LLCs enjoy protection from members’ non-business activities.4 Because a person can become an LLC member only “in compliance with the operating agreement of the company” or with the consent of all LLC members,5 many jurisdictions, including Alaska, allow a judgment creditor to reach a member’s LLC interest exclusively through an instrument called a charging order.6 The judgment creditor may not acquire the LLC member’s interest; the charging order requires “only that the LLC pay to the creditor any distributions that otherwise would be due to the member.”7 Distributions are payments LLCs make to their members, either during the life of the LLC (interim distributions)8 3 (...continued) liability safeguards of a corporation”). 4 Briggett, supra note 1, at 287-91 (discussing reverse veil piercing). 5 AS 10.50.155(a) (outlining LLC membership requirements). 6 Briggett, supra note 1, at 297; AS 10.50.380 (“This section provides the exclusive remedy that a judgment creditor of a member or a member’s assignee may use to satisfy a judgment out of the judgment debtor’s interest in the limited liability company.”). The legislature has clarified that a charging order is a creditor’s exclusive remedy in law or equity. AS 10.50.380(c); ch. 45, §4, SLA 2013 (enacting amendments to AS 10.50.380(c) to address equitable remedies). Commentary on AS 10.50.380(c) and similar exclusive remedy provisions suggests that “legislatures perceive the charging order as so broad and potentially useful a tool that no other remedy is needed and that, in fact, it needs explicit limitation.” Chad J. Pomeroy, Think Twice: Charging Orders and Creditor Property Rights, 102 KY. L.J. 705, 721 n.102, 722 (2014). 7 Briggett, supra note 1, at 297; see AS 10.50.380(b) (stating that holder of charging order has same rights as would assignee of LLC member’s interest); AS 10.50.375(b) (stating that assignee of member’s interest has right only to LLC distributions due to member). 8 AS 10.50.990(8) (defining “interim distribution” as “a distribution of the (continued...) -3- 7602 or at the dissolution and winding up stage (final distributions).9 An LLC typically is governed by an operating agreement.10 In Alaska, state law fills gaps if operating agreements are silent. For example, if an LLC’s operating agreement does not specify how distributions are to be allocated to members, Alaska law requires equal distributions to all members by default.11 But Alaska law also affords LLC members the flexibility to choose different distribution arrangements.12