Vaughn obtained a judgment for $6.35 million against Farhat. At the time, Farhat owned 100% interests in four limited liability companies, so Vaughn applied for charging orders against Farhat’s interests. A charging order places a lien on the interests and requires that any distributions that Farhat would have received by re-directed to Vaughn.
But more than that, Vaughn also requested he be allowed to foreclose on Farhat’s LLC interests. This would mean that Farhat’s interests would be sold at an auction with Vaughn receiving the sale proceeds. The Virginia trial court refused to allow Vaughn to foreclose on the charged interests and he appealed. This resulted in the opinion of the Virginia Court of Appeals in Vaughn v. Farhat, 2026 WL 1073680 (Vir.App., April 21, 2026).
Virginia’s charging order provides:
“VA Code § 13.1-1041.1. Member’s transferable interest subject to charging order
“A. On application by a judgment creditor of a member or of a member’s assignee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. To the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of the interest.
“B. A charging order constitutes a lien on the judgment debtor’s transferable interest in the limited liability company.
“C. This chapter does not deprive a member or a member’s assignee of a right under exemption laws with respect to the judgment debtor’s interest in the limited liability company.
“D. The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member’s assignee may satisfy a judgment out of the judgment debtor’s transferable interest in the limited liability company.
“E. No creditor of a member or of a member’s assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.”
Pop Quiz! What is missing that might be relevant to this case?
That’s right, the Virginia charging order statute does not have a foreclosure provision.
Vaughn argued that the absence of a foreclosure provision meant that the court could exercise its discretion whether to allow foreclosure of the charging order lien. This should be particularly true, Vaughn argued, where the LLC was a single-member LLC that was solely owned by the debtor. Otherwise, he continued, a debtor could hold a single-member LLC as an “asset protection device” to hold assets without ever making a distribution to creditors. Further, an LLC interest is really just another intangible asset of a debtor that should be subject to being sold to satisfy creditors.
The appellate court rejected this interpretation:
” The plain language of the statute refutes Vaughn’s interpretation. Contrary to his claim that no provision of Virginia law explicitly prohibits foreclosure of an interest subject to a charging order, Code § 13.1-1041.1(A) itself provides that a judgment creditor who obtains a charging order on a judgment debtor’s interest in an LLC only has the right to distributions the judgment debtor otherwise would have been entitled to from that interest. Subsection (D) of the statute further states that the entry of the charging order “is the exclusive remedy” by which a creditor may satisfy a judgment out of the debtor’s transferable interest in an LLC. To hold that a court may foreclose on the interest would defy the plain meaning of the words in the statute by allowing judgment creditors another means of pursuing the judgment debtor’s interest in an LLC.”
The appellate court then elaborated that Virginia’s charging order statute previously allowed for the foreclosure of a charging order lien, but in the 2006 revisions that provision had been dumped. The implication of eliminating the foreclosure provision indicated that the Virginia General Assembly was expressing its desire that charging order liens not be subject to foreclosure.
The bottom line was that Vaughn could not foreclose on the charging order but would have to look to “other means to satisfy the judgment under other provisions of Virginia law . . ..” Thus, his appeal was denied.
ANALYSIS
The reason that so-called charging order exclusivity exists — meaning that the charging order is the exclusive remedy for a creditor reaching a debtor’s interest in an LLC or partnership — is to protect the non-debtor members. Charging order exclusivity does not exist to protect the debtor’s interest, although in a sense that is the effect.
Recognizing this, the Florida Supreme Court in Olmstead v. FTC (2010), held that charging order exclusivity should not exist where there are no non-debtor members to protect. In other words, for a single-member LLC. Florida subsequently modified its charging order statute to reflect this with something known as the Olmstead Patch. When the Uniform Laws Commission subsequently updated the uniform LLC law, the Revised Uniform Limited Liability Act (“RULLCA”), the Olmstead Patch was included and there is a special rule that allows a creditor to get at the assets of a single-member LLC.
But Virginia has its own organic LLC act which does not include anything like the Olmstead Patch. And, as the appellate court related, the Virginia LLC act does not allow for the foreclosure of a charging order lien. This means that a creditor like Vaughn is stuck, at least under the Virginia LLC Act. What Vaughn could next try is an effort to reverse-pierce Farhat’s single-member LLCs, but that is for another day. Virginia apparently recognized reverse-piercing in CF Trust Inc v. First Flight LP (2001), which possibly makes this result less painful for Vaughn.
Where reverse-piercing is allowed, it is usually an easier remedy for a creditor than attempting to foreclose on a charging order. The creditor doesn’t have to get an appraisal, go through the notice of sale, go through the sale, and then go through the court’s confirmation of the sale. Where the charging order comes into play in these cases is to essentially “freeze” the debtor’s interest in the LLC (so that the debtor cannot fraudulently transfer it away) and also block any distributions until the creditor can assert the reverse-piercing motion.
This is the way that it has always worked for me: Get the charging order to freeze the LLC interest and distributions, and then reverse-pierce a single-member LLC. I have never had to foreclose on the interest of a single-member LLC.
There are times that the foreclosure of an LLC interest would make sense. Assume that the LLC interest is not closely held, but rather is one out of 100 such interests in a hedge fund that is spinning off dividends. If the dividends are not going to pay off the judgment, then a creditor might foreclose on the interest and have it sold at auction. In that case, there would presumably be buyers willing to acquire the hedge fund interest and the creditor would get the cash from the sale.
But single-member LLCs are a different animal altogether an are easily susceptible to reverse-piercing. To make a case for piercing, the creditor in most jurisdictions must show that the so-called unities exist, which are unity of ownership and unity of control, and that it would not be equitable for the court to recognize the legal separateness of the entity under the circumstances.
With a single-member LLC, the unities are inherently present since the debtor both owns and controls the LLC. Thus, with a single-member LLC, one foot begins in the alter ego grave. This is also why single-member LLCs are of dubious value for asset protection purposes, unless they are owned by something like a trust that is unlikely to ever have a judgment creditor. Yet, there seem to be no shortage of promoters out there selling single-member LLs as asset protection devices when they might be characterized as little more than a speedbump for creditors.
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