Kevin Mattingly sued Kevin Stich in a Kentucky state court for not fulfilling his contractual obligations after leasing property to him. Mattingly won a default judgment of almost $75,000 against Stich. In an attempt to enforce the judgment, Mattingly obtained a charging order against Stich’s interest in several limited liability companies (LLCs). Despite this, Mattingly had not received any payment or distributions from Stich’s charged interests almost two years later. On June 15, 2022, Mattingly moved the circuit court to foreclose Stich’s interest in Haunt Brothers, LLC, one of the companies subject to the charging order.
The Kentucky Court of Appeals examined the Kentucky Limited Liability Company Act, particularly the charging order rules outlined in K.R.S. § 275.260, to address the appeal. The relevant provisions of § 276.260 state that a charging order allows a judgment creditor to receive distributions from the judgment debtor’s limited liability company interest. Mattingly, as a judgment creditor, was entitled to receive any distributions that Stich was supposed to receive until the judgment was satisfied. Stich argued that the foreclosure should only apply to his right to receive distributions up to the amount of the judgment, but the Court of Appeals rejected this argument.
Stich also claimed that the foreclosure should be limited to the amount of the judgment and that he owned 100% of the interest in Haunt Brothers, LLC, a single-member LLC. Under Kentucky law, when the foreclosure is for 100% of an interest in a single-member LLC, the debtor loses their membership and triggers the dissolution of the LLC. Therefore, the Court of Appeals affirmed the foreclosure of Stich’s interest in Haunt Brothers, LLC, which will likely lead to the dissolution of the company and the transfer of assets to the purchaser at the judicial sale.
The Court of Appeals upheld the foreclosure of Stich’s interest in Haunt Brothers, LLC, stating that if Stich’s argument was accepted, it would render the foreclosure provision of the statute meaningless. The court also explained that the foreclosure was not limited to the amount of the judgment, as Stich claimed. Additionally, the case highlighted the limitations of single-member LLCs as asset protection vehicles, as they can be easily accessed by creditors through mechanisms like charging orders and foreclosures. While some individuals may believe that having an LLC provides significant asset protection, this case demonstrates the potential pitfalls of relying solely on an LLC for protection against judgments.
In conclusion, the Court of Appeals decision affirmed the foreclosure of Kevin Stich’s interest in Haunt Brothers, LLC, under a charging order obtained by Kevin Mattingly. The court clarified that the foreclosure extends beyond the right to receive distributions and does not have a cap based on the judgment amount. The case also serves as a cautionary tale about the limitations of single-member LLCs as asset protection tools and highlights the importance of understanding the legal implications of such structures. Ultimately, this ruling demonstrates the importance of thorough legal analysis and strategic planning when it comes to asset protection and enforcement of judgments in the context of limited liability companies.
