By , February 26, 2015 4:29 pm

When you help your clients form LLCs to purchase and sell real estate, you should advise them about how to maximize the likelihood that they’ll receive capital gains treatment rather than ordinary income treat on their income from these sales.  The following brief summary of a recent Tax Court case in the CCH Intelliconnect Tracker will provide your clients with solid guidelines:

LLCs’ Real Property Sales Resulted in Ordinary Income; Subject to Self Employment Tax

Sales of real property by three related LLCs produced ordinary income rather than capital gain, could not be reported on the installment method, and were subject to self-employment tax. Two of the three LLCs participated as bidders in tax lien auctions throughout Illinois, obtaining certificates of purchase of tax lien after paying taxes and other costs on tax-delinquent properties. Some certificates were assigned to the non-bidding LLC. If the lien was not redeemed by the property owner, the certificate owner would obtain a tax deed and try to sell the property as quickly as possible. Some properties were sold within one year of acquisition, some within two years, and a few after that. The LLCs reported the sales proceeds under the installment method as capital gain, either long- or short term. The IRS determined that the LLCs held the properties primarily for sale to customers in the ordinary course of a trade or business, so the proceeds were ordinary income.

The Tax Court considered various factors and determined that (1) the sales were made frequently and regularly; (2) the sales were substantial; (3) most of the properties were held for a short time; and (4) numerous people were employed to operate the LLCs’ business, all of which weighed against a finding of the properties being capital assets. The nature of the LLCs’ businesses, the relationship of the real property to those businesses, and the sales of the properties being in furtherance of those businesses also weighed against a finding of capital gain. The court concluded that the properties were not capital assets under Code Sec. 1221(a)(1) and the sales proceeds were ordinary income.

Sales of real property held in the ordinary course of a trade or business are considered “dealer dispositions” under Code Sec. 453(l) and, as such, were not reportable using the installment method. Because the sales proceeds were not capital gains, they were not excluded from the computation of net earnings and were subject to self-employment tax under Code Sec. 1402(a).

SI Boo, LLC, Dec. 60,224(M), TC Memo. 2015-19


By , February 25, 2015 3:58 pm

Of possible interest to Texas readers of this post (and perhaps to other readers as well):  Two very recent articles in the Texas Law Journal address Texas LLC issues:

  • Ehlert, Jerel, “Texas Limited Liability Company :  Rescission of Management Agreement; Fair Market Value of a Withdrawing Member’s Interest; Joint and Several Liability of Members with the LLC, “46-FALL Texas. J. Business. Law § 18-111 (2014); and
  • Ricks, Val, “The Twisted Veil of Texas LLCs,” 46-FALL Texas. J. Business. L, 67 (2014)


By , February 25, 2015 2:30 pm

The blog post under the link below deals with the tax consequences of sales of closely held corporate stock, but many of the general points in the post also apply to sales of LLC interests, and all of the points about sales of Subchapter S stock apply to LLCs taxable as S corporations.

Here is the link:



By , February 24, 2015 2:20 pm

Lawyers shouldn’t form LLCs unless they have a solid knowledge of veil-piercing law as applicable to LLCs.  The above decision on that subject in a case called Schlossberg v Bell Builders Remodeling [MD Ct Appeals 2/20/15]  is very well reasoned and is likely to be useful not only to Maryland LLC lawyers but to LLC lawyers nationwide.


By , February 23, 2015 2:33 pm

As many of you probably know, Jay Adkisson is the world’s expert on charging order theory and charging order litigation (except, possibly, for his partner Chris Riser).  Below, Jay provides (i) a brief but very useful summary of an important new Georgia charging order decision called Mahalo Investments and (ii) the text of the decision.  In my view, the decision is likely to have an impact well beyond Georgia.

Best, John


This is actually a very read on (1) why a creditor doesn’t have to bring a separate action against the charged entity, and (2) why the creditor can get the charging order proceeding in the court that issued the judgment, even if the LLC is not domiciled there. Enjoy!


Mahalo Investments III, LLC v. First Citizens Bank andTrust Co., Inc., 2015 WL 687922, ___ S.E.2d _____ (Ga.App., Feb. 19, 2015).

2015 WL 687922

Court of Appeals of Georgia.


No. A14A1940. | Feb. 19, 2015.



*1 This appeal presents an issue of first impression—whether under OCGA sec. 14–11–504(a), an order charging a member’s interest in a limited liability company with payment of an unsatisfied judgment must be initiated as a separate action against the limited liability company. As more fully set forth below, we discern no error in the issuance of the charging order by the trial court that also entered judgment on the underlying debt and therefore affirm.

Pertinent to the issues presented here, the record shows that on August 18, 2011, appellee First Citizens Bank and Trust Company, Inc. (“FCB”) obtained a judgment in excess of three million dollars (hereinafter referred to as the “original judgment”) against Mahalo Investments III, LLC (“Mahalo”), Mark B. Epstein, and Andrew Kelly (hereinafter collectively referred to as “appellants”) in the State Court of Cobb County. Appellants appealed to this Court, and we affirmed the original judgment without opinion pursuant to our Rule 36. See Mahalo Investments III v. First Citizens Bank and Trust Company, Inc., 319 Ga.App. XXVII (January 24, 2013) (unpublished opinion).1

Following remittitur, FCB engaged in discovery in an effort to collect its judgment. During their post-judgment depositions, both Epstein and Kelly revealed they owned interests in several limited liability companies (the “LLCs”), and FCB filed an application under OCGA sec. 14–11–504(a) seeking an order charging their interests in the LLCs with payment of the unsatisfied judgment. FCB filed its application in the same court under the same file number assigned to the original civil action in which the original judgment was rendered, and appellants opposed FCB’s request for a charging order on the basis that, inter alia, OCGA sec. 14–11–504(a) requires the judgment debtor seeking a charging order to initiate a separate proceeding, apart from the proceeding in which the judgment establishing the debt was rendered. Following a hearing, the trial court issued a charging order against appellants’ interests in the LLCs, without specifically addressing whether the application had been properly filed in that court.

On appeal, appellants contend the trial court erred by entering the charging order against their interest in the LLCs as part of the same action in which the original judgment was entered, and without first establishing that venue and jurisdiction over the LLCs was proper.2 Appellants argue that their position is supported by both the “statutory text and structure of the charging order remedy” as it relates to limited liability companies, limited partnerships, and partnerships, and our Supreme Court’s decision in Prodigy Centers/Atlanta No. 1 v. T–C Assoc., 269 Ga. 522 (501 S.E.2d 209) (1998).

We begin with the premise that in construing a statute, we look at its terms, giving words their plain and ordinary meaning, and “[w]here the plain language of a statute is clear and susceptible of only one reasonable construction, we must construe the statute according to its terms.” Atlanta Independent School System v. Atlanta Neighborhood Charter School, Inc., 293 Ga. 629, 631 (748 S.E.2d 884) (2013).

*2 Under OCGA sec. 14–11–504, a judgment creditor of a member of a limited liability company has a statutory right to collect a judgment debt from the member’s distributional interests in a limited liability company by obtaining a charging order and diverting payments to the creditor which would otherwise have been made to the member. Subsection (a) of that section sets out the procedure for obtaining a charging order:

On application to a court of competent jurisdiction by any judgment creditor of a member or of any assignee of a member, the court may charge the limited liability company interest of the member or such assignee with payment of the unsatisfied amount of the judgment with interest….

The court that can issue a charging order is mentioned twice in this provision. First, subsection (a) makes it clear that the application must be filed with a court of competent jurisdiction. Appellants do not assert on appeal that the state court does not have subject matter jurisdiction over an application for a charging order.3 The second reference to court simply refers to “the court,” and grammatically refers back to the “court of competent jurisdiction,” which received the application. Thus, under the plain language and unambiguous language of OCGA sec. 14–11–504(a), we can discern no basis for disallowing the court that entered the underlying judgment to also enter the charging order so long as that court is a “court of competent jurisdiction.” See Couch v. Red Roof Inns, Inc., 291 Ga. 359, 363 (729 S.E.2d 378) (2012) ( “Instead, what a legislature normally does, if it wants to make sure that readers understand that a word with a broad ordinary meaning does not include something within that meaning, is to expressly define that thing out of the category.”).

Appellants point to slightly different language in the Georgia Uniform Partnership Act’s charging order provision to support their argument that the judgment creditor must initiate an action in a separate court to obtain a charging order. OCGA sec. 14–8–28(a) provides:

On due application to a competent court by any judgment creditor of a partner …, the court which entered the judgment, order, or decree, or any other court, may charge the interest of the debtor partner … with payment of the unsatisfied amount of such judgment debt with interest thereon….

Relying on the language “the court which entered the judgment, order, or decree,” appellants assert that these charging order provisions must be read in pari materia and the absence of this language in OCGA sec. 14–11–504(a) means that the court that entered the judgment is not permitted to also enter the charging order.

Pretermitting the question of whether the charging order provisions are related statutes for purposes of applying the in pari materia rule, we disagree that the Georgia Uniform Partnership Act’s charging order provision has any bearing on construing the plain and unambiguous language in OCGA sec. 14–11–504(a). It has long been held that “[e]ven statutes in pari materia may not be resorted to where the language of the statute under consideration is clear.” Corey Outdoor Advertising, Inc. v. Board of Zoning Adjustments of the City of Atlanta, 254 Ga. 221, 222(1) (327 S.E.2d 178) (1985) (citing Ryan v. Commrs. of Chatham County, 203 Ga. 730, 732 (48 S.E.2d 86) (1948)).

*3 The reason for this rule is obvious—construing statutes together that separately are plain and unambiguous may create ambiguities where none exist. In this case, the Georgia Uniform Partnership Act’s charging provision specifies that the charging order may be issued by “the court which entered the judgment, order, or decree, or any other court.” If, as appellants argue, the absence of the language “which entered the judgment, order, or decree” in OCGA sec. 14–11–504(a) means that such courts are prohibited from issuing charging orders, then the same rule ought to apply to the term “or any other court,” which is also absent from subsection (a). But construing the statutes together to prohibit in one what is expressly mentioned in the other would mean that under OCGA sec. 14–11–504(a), no court could issue a charging order, an absurd result that has no basis in the text.

In addition to the statutory textual argument, appellants also assert that their interpretation of the statute is supported by our Supreme Court’s decision in Prodigy Centers/Atlanta v. T–C Assoc. Ltd., 269 Ga. 522 (501 S.E.2d 209) (1998). In Prodigy, the issue was whether an interest in a limited liability partnership constitutes a chose in action under Georgia law. The underlying facts were that T–C Associates (“TCA”) first obtained a monetary judgment against Prodigy Child Development Centers (“PCDC”) in the Superior Court of Fulton County. TCA then filed a judgment lien and an application for a charging order against PCDC’s interests in several limited partnerships in the Superior Court of DeKalb County. Id. at 522–523. However, before TCA’s judgment lien was recorded or a charging order was issued, the Internal Revenue Service filed a federal tax lien against PCDC in the Superior Court of Fulton County. The case was subsequently removed to federal court, where the federal government argued that its federal tax lien should have priority over TCA’s lien because its lien was recorded prior to TCA’s lien. On the other hand, TCA contended it should have priority because it obtained its judgment before the federal tax lien was filed. The government responded to this contention by asserting that the debtor’s partnership interest is a chose in action, which requires a charging order, garnishment, or some other collateral proceeding in order for the judgment to attach, which had not taken place at the time the federal government filed its tax lien. The district court granted summary judgment to TCA, and this ruling was appealed to the United States Court of Appeals for the Eleventh Circuit, which certified the question to our Supreme Court. Id. at 522, (citing Prodigy Centers/Atlanta v. T–C Assoc., 127 F3d 1021, 1022 (11th Cir.1997)). Our Supreme Court answered that question in the affirmative, supporting its conclusion in part by reference to the charging order statutes under the limited liability partnership acts and the Georgia Uniform Partnership Act:

*4 [e]ach statute provides a means by which a judgment creditor or a partner may cause the diversion of monetary payments the partner expects to receive from the partnership to the partner’s judgment creditor. Under both statutory schemes, the judgment creditor must initiate a collateral proceeding in which the creditor seeks a court order charging the debtor partner’s partnership interest with payment of the unsatisfied amount of the judgment, or serves process of garnishment on the partnership. (OCGA secs. 14–9–703(a); 14–9A–52 (a); 14–8–28(a)). A judgment creditor must initiate the identical collateral proceedings in order to attach a lien to a chose in action. [Cit.] Id. at 526(4).

Appellants argue that the Court’s use of the phrase “initiate a collateral proceeding” means that the application for a charging order must be filed in a wholly separate action. However, we are not persuaded that Prodigy stands for the proposition urged by appellants. First, the question of whether an entirely new proceeding, meaning, according to appellants, a separate proceeding under a different case number and possibly in a different court, must be initiated by a judgment creditor to obtain a charging order against a member’s interests in a limited liability entity was not at issue in Prodigy. Our appellate courts have “repeatedly cautioned that our decisions stand only for the points raised by the parties and decided by the court. Questions which merely lurk in the record, neither brought to the attention of the court nor ruled upon, are not to be considered as having been so decided as to constitute precedents.” (Citations and punctuation omitted.) Holton v. Physician Oncology Svcs., L.P., 292 Ga. 864, 869–870(2) (742 S.E.2d 702) (2013).

Moreover, appellants’ own statutory textual argument is antithetical to its interpretation of Prodigy. In referencing “collateral proceedings” to obtain a charging order, Prodigy cited to the charging order statutes under the limited liability partnership acts and the Georgia Uniform Partnership Act. But both Georgia’s Uniform Limited Partnership Act, OCGA sec. 14–9A–52 (a), (“ULPA”) and Georgia’s Revised Uniform Limited Partnership Act, OCGA sec. 14–9–703(a), (“RULPA”)4 contain language similar to the language used in OCGA sec. 14–11–504(a), authorizing a judgment creditor to bring an application for a charging order in “a court of competent jurisdiction,” or a “competent court,” respectively, and each of these statutes refers generally to “the court” that may issue the charging order.5 In addition, Prodigy cited the Georgia Uniform Partnership Act’s charging order provision, OCGA sec. 14–8–28, which appellants rely on, without distinguishing it from the limited partnership charging order statutes, implying that the language should be read consistently.

Thus, the language cited by appellants in Prodigy merely confirms that, beyond obtaining a judgment establishing a debt, a creditor must initiate an additional proceeding, collateral to the one establishing the debt, and request a separate order from the court to charge a debtor’s interests in a limited liability company, limited liability partnership, or partnership. See generally Brown v. King, 266 Ga. 890, 891(1) (472 S.E.2d 65) (1996) (“a contempt action to enforce court-ordered child support payments is an independent proceeding that is ancillary to the divorce action and not a new civil action”). And the charging order statutes further direct that the additional proceeding be initiated by a written application filed in a court of competent jurisdiction.

*5 However, that conclusion merely brings us to the ultimate issue in this case—what is meant by a “court of competent jurisdiction” as that term is used in OCGA sec. 14–11–504(a). And more specifically, whether jurisdiction and venue over the judgment debtor and member of the limited liability company is sufficient or whether, as appellants contend, a court is competent to issue a charging order only if jurisdiction and venue over the limited liability company is proper.

As to this issue, we begin again with the charging order statute and the remedy that it provides to a judgment creditor vis-à-vis the limited liability company. As an initial matter, we note that OCGA sec. 14–11–504(a) is silent as to whether the limited liability company is to be made a party to the proceeding initiated by the application for a charging order.

Instead, subsection (a) focuses on the judgment debtor/member’s interest in the limited liability company, limits the rights of the judgment creditor under the charging order: “[t]o the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest,” and makes it clear that “[t]his chapter does not deprive any member of the benefit of any exemption laws applicable to his or her limited liability company interest.” OCGA sec. 14–11–504(a). See also OCGA sec. 14–11–502 (concerning assignment of a limited liability company interest). Moreover, under OCGA sec. 14–11–504(b), unless provided in the articles of organization or in a written operating agreement, “a judgment creditor shall have no right under this chapter or any other state law to interfere with the management or force dissolution of a limited liability company or to seek an order of the court requiring a foreclosure sale of the limited liability company interest.” See generally L. Andrew Immerman and Bryan N. Baird, The Georgia LLC Act: Recent Developments and Future Possibilities, 6 John Marshall L.J. 565, 597 (2013) (“The amendment to section 14–11–504(b) of the Georgia LLC Act clarifies that when a creditor receives a judgment against a member or an assignee of an LLC interest, the creditor is not thereby granted leave to interfere in the management of the LLC or to take certain other actions that would be disruptive to the company’s business.”).

We glean from these provisions that the charging order is a mechanism by which a judgment creditor can attach a member’s limited liability company interest to satisfy an unpaid judgment, but that the charging order does not permit the judgment creditor to replace the member or otherwise interfere in the governance of the limited liability company. Moreover, it is the judgment debtor’s right to possession of distributions in the future that is essentially being levied or charged. Thus, from the limited liability company’s standpoint, it is business as usual except that any distributions to the member subject to the charging order are diverted to the judgment creditor. Because the limited liability company has no right or direct interest that is affected by the charging order, we see no reason why it must be added as a party to the proceeding to obtain the charging order. See Bank of America, N.A. v. Freed, 983 N.E.2d 509, 520–521 (Ill.App.Ct.2012) (rejecting contention that a court must obtain jurisdiction over a limited liability company or partnership in order to charge a judgment debtor’s distributional interest in those entities under similar charging order statutes). Thus, we hold that under Georgia’s limited liability company act, it is only necessary for a court to have jurisdiction over the judgment debtor to have the authority to enter charging orders against the judgment debtor’s interest.

*6 In the present case, there is no contention that the court that entered the charging order did not have jurisdiction over Epstein and Kelly. Accordingly, and because appellants assert no other error warranting reversal, we hereby affirm the order of the trial court charging Epstein and Kelly’s interests in the named LLCs.

Judgment affirmed.

PHIPPS, C.J., and ELLINGTON, P.J., concur.


1 Although our opinion may be found in the section listing unpublished written opinions issued under our Rule 33(b), we decided this case under Court of Appeals Rule 36, which governs judgments which are affirmed without an opinion.

2 Appellants do not appear to contest FCB’s general entitlement to a charging order against their interests in the LLCs.

3 Although in the proceedings below appellants argued that a charging order is an equitable remedy that can only be imposed by a superior court, they have not pressed this argument on appeal.

4 Georgia’s ULPA applies to limited partnerships existing before 1988, unless the pre-existing limited partnership elects to adopt the provisions of Georgia’s RULPA in writing. OCGA sec. 14–9A–2.1; Prodigy, 269 Ga. at 524, n. 1.

OCGA sec. 14–9A–52 (a) provides: “On due application to a court of competent jurisdiction by any judgment creditor of a limited partner, the court may charge the interest of the indebted limited partner with payment of the unsatisfied amount of the judgment debt….” OCGA sec. 14–9–703(a) provides: “On application to a competent court by a judgment creditor of a partner or of any assignee of a partner, the court may charge the partnership interest of the partner or such assignee with payment of the unsatisfied amount of the judgment, with interest….”



By , February 20, 2015 9:45 pm
Note: This was first posted on 11/26/14 but was accidentally deleted.
The Delaware Chamber of commerce published on November 17, 2015 the case under Delaware law on the implied contractual covenant of good faith and fair dealing referred to, summarized and cited in the attached blog post.
The implied contractual covenant of good faith and fair dealing lies at the very heart of LLC contract law in every U.S. jurisdiction.  Every competent LLC lawyer needs a comprehensive understanding of the Implied Covenant, because it is often central to the negotiation of tricky issues in LLC operating agreements. 
Obviously, you need to understand the Implied Covenant under the common law of your own state.  But the opinion is likely to be persuasive in your state.


By , February 19, 2015 3:33 pm

The blog post under the link below discusses a January 28, 2015 decision by the Delaware Court of Chancery in a case called Orckit Communications Ltd. v. Networks Inc., and you can get a copy of the decision through that link.  The case is complex, but, in essence, under the relevant facts, it upholds a waiver of the implied contractual covenant of good faith and fair dealing (the “Implied Covenant”).  The Implied Covenant provides that on issues not addressed in contracts, the parties must meet one another’s reasonable expectations as in effect at the time of execution.  The Implied Covenant haunts LLC drafting, and a constitutional argument can be made that it is non-waivable.  But if your LLC formation client wants it to be waived in the governing operating agreement, read Orckit and look for common law waiver guidelines.

Here’s the link:


By , February 18, 2015 2:45 pm

Below is a link to the above terrific post by Peter Mahler.


By , February 17, 2015 8:50 pm

If you have a reasonably active practice in forming LLCs, sooner or later you’ll be advising your LLC clients about issues, including tax issues, in selling interests in their LLCs.  For a good discussion of the relevant tax issues, click on the link below.  The blog post under the link deals with the tax issues of state-law business corporations, but much of its content applies equally to LLCs.


By , February 17, 2015 5:03 pm

Whenever you draft an LLC operating agreement, you should, whether you represent the majority members or the minority members, address the issue of minority member oppression by the majority members.  The article under the link below, by Professor Elizabeth Miller of Baylor Law School, is very instructive about this issue.  The focus of the article is Texas law, but the article also contains many lessons for LLC lawyers in other states.  Professor Miller is one of the leader LLC scholars in the U.S.

Here’s the link: