Connecticut has adopted a new LLC act that will be effective July 1, 2017. Many of the changes from current law are technical and/or minor. However, there are two changes that have major implications for creditor protection planning in Connecticut. There are also significant changes in the duties that managers and members owe to the LLC and each other.
First, the new act makes clear that a creditor of a member who obtains a charging order against the member’s LLC interest may not foreclose upon the member’s interest in the LLC. A creditor with a charging order may only receive any distribution that otherwise would be paid to the debtor-member. The current LLC act is silent as to whether a creditor may foreclose upon a debtor-member’s LLC interest, and at least one court case permitted a creditor to foreclose upon a debtor-member’s LLC interest. It is now clear that a creditor of a member may only receive the distributions that are made to the member as and when the distributions are made.
Second, the new act makes clear that if a creditor obtains a charging order against a debtor-member, the charging order does not permit the creditor to receive reasonable compensation paid to the debtor-member by the LLC. Again, this was unclear under the current LLC act.
The new LLC act also makes clear that an LLC manager owes the LLC and LLC members a duty of loyalty and a duty of care. If the LLC is member managed, the duties are owed by the members. In any event, the members (and managers, if any) owe each other a duty of good faith and fair dealing.
The duty of loyalty means that the member (or manager in a manager managed LLC) must not (1) personally profit from the LLC’s activities, other than as a member of the LLC, (2) deal with the LLC on behalf of someone with a conflict of interest with the LLC, and (3) compete with the LLC while the LLC is in existence.
The duty of care means that the member (or manager in a manager managed LLC) must discharge his duties (1) in good faith, (2) with the care an ordinarily prudent person would exercise, and (3) in a manner reasonably believed to be in the best interests of the LLC.
The LLC’s operating agreement may alter the duties of loyalty and care if the alteration is not ”manifestly unreasonable.” Whether an alteration is manifestly unreasonable will be decided by a court. The duty of good faith and fair dealing may not be altered in the LLC operating agreement.
Mr. Hendel has been practicing wealth preservation planning for over thirty years.