Kevin Mattingly won a default judgment of almost $75,000 against Kevin Stich in a dispute over leased property in Louisville, Kentucky. Mattingly sought to enforce the judgment by obtaining a charging order against Stich’s interest in several limited liability companies (LLCs). After almost two years of no payment, Mattingly filed a motion to foreclose on Stich’s interest in Haunt Brothers, LLC. The circuit court granted the motion, leading to an appeal by Stich and a subsequent ruling by the Kentucky Court of Appeals in Stich v. Mattingly.
The Court of Appeals reviewed the Kentucky Limited Liability Company Act, specifically focusing on the charging order rules outlined in K.R.S. § 275.260. The statute allows for a judgment creditor to obtain a charging order against a member’s interest in an LLC, granting the creditor a lien on the interest and the right to receive distributions. Mattingly was entitled to receive any distributions from Stich’s charged interests until the judgment was fulfilled.
Stich argued that the foreclosure should only apply to his right to receive distributions and be limited to the amount of the judgment. However, the Court of Appeals disagreed, stating that such an interpretation would render the foreclosure part of the statute meaningless. Furthermore, Stich’s ownership of 100% interest in Haunt Brothers, LLC meant that foreclosure on the entire interest would trigger the dissolution of the LLC under Kentucky law.
Ultimately, the Court of Appeals affirmed the foreclosure of Stich’s interest in Haunt Brothers, LLC. This decision will likely result in the dissolution of the LLC, with the purchaser at the judicial sale acquiring all the assets of Haunt Brothers. The case highlights the risks of using single-member LLCs as a method of asset protection, as they can be easily targeted by creditors through charging orders and foreclosures.
While the wording of the statute regarding foreclosures could potentially be clarified, the Court of Appeals’ decision in this case underscores the limited protection single-member LLCs offer against creditor judgments. Despite common misconceptions about LLCs being a strong asset protection strategy, individuals like Stich can find themselves vulnerable to legal actions that can lead to the dissolution of their businesses. This case serves as a cautionary tale about the importance of fully understanding asset protection strategies before relying on them.
