Some states recognize a form of marital property known as tenancy by the entireties. In these states, assets held in tenancy by the entireties are not available to the creditors of only one spouse ― but they are available to creditors if both spouses are debtors. Among other assets, interests in LLCs can be held in tenancy by the entireties. This can give LLC interests an extra layer of asset protection in addition to so-called charging order protection. But what a debtor is resident in a state that recognizes tenancy by the entireties, but the LLC itself is not formed in a state that does not recognize tenancy by the entireties?
A company called SMS Financial P, LLC (“SMS”) bought a Georgia judgment against Harry Burkhalter. As part of their efforts to enforce the judgment, SMS sought a charging order against Burkhalter’s interest in Burkhalter Rentals LLC (the “LLC”), which was registered in Georgia.
To oppose SMS’s charging order, Burkhalter testified that when he and his wife formed the LLC back in 2007, there were residents of Pensacola, Florida. As Florida residents, Burkhalter further argued, that he and his wife held the LLC interests as tenants by the entirety (commonly known in planning circles as “TBE”).
As mentioned at the start of this article, property held in TBE is not available to the creditors of only one spouse ― it is available to creditors only if both spouses own the property and both spouses are judgment debtors. Here, only Burkhalter himself was a judgment debtor and so, he argued, SMS was not entitled to a charging order against his interest in the LLC. Indeed, the Articles of Organization for the LLC filed back in 2007 stated that Burkhalter and his wife as the member were “a married couple who are Florida residents and own their interests in the company as tenants by the entirety.” The LLC’s 2007 operating agreement likewise indicated that the LLC interests were owned in TBE by the Burkhalters.
Nonetheless, the Georgia Superior Court found that the Burkhalters had listed their address in the 2007 Articles of Organization as being in Griffen, Georgia, Further, the Superior Court found that the LLC’s operating agreement said that it was to be governed by Georgia law. Thus, the Superior Court concluded that Georgia law, not Florida law, applied. While Florida law recognizes TBE, Georgia law does not. The effect was that Burkhalter and his wife each owned 50% of the LLC as tenants in common. Thus, SMS was allowed to place a charging order against Burkhalter’s 50% interest in the LLC.
Burkhalter appealed. This resulted in the opinion in Burkhalter v. SMS Financial P, LLC, 2026 WL 1870939 (Ga.App., June 29, 2026), by the Georgia Court of Appeals that we will not examine.
Burkhalter’s first argument was that Florida law should apply. To get there, Burkhalter first noted that an LLC interest is in the nature of personal property (it is), and where such property is intangible (as with an LLC interest) such property is said to exist in the debtor’s state of residence. Since Burkhalter and his wife were Florida residents at the time the LLC was formed and its ownership interests determined, then Florida law should apply.
By contrast, the Superior Court had determined that the nature of an LLC’s membership interest was a so-called “internal affair” ― a relationship between the LLC and its members ― and such internal affairs are typically resolved by the state of the LLC registration, being Georgia.
The Court of Appeals noted that Georgia typically follows the rule that interests in property are to be determined by the of the owner’s domicile when the property was acquired. This would point to Florida. But in the specific context of corporate law (and thus presumably LLC law), Georgia applies the internal affairs rule to determine the choice of law to be utilized by the court.
Here, because the LLC itself has to determine the nature of the distributions to be made to its members, the Court of Appeals determined that the internal affairs doctrine should apply, and that meant Georgia law should apply. But even beyond that, the Court of Appeals noted that the LLC’s operating agreement specified that on the death of a member that Georgia law would apply thus contradicting Burkhalter’s argument that Florida law should determine the nature of the LLC interests.
The bottom line was that the Superior Court did not err in determining that Georgia law applied, that the Burkhalter’s interests were owned as tenants in common and not TBE, and that it was proper to allow SMS to place a charging order on Burkhalter’s 50% interest in the LLC.
ANALYSIS
Here we have an obvious conflict of law between Georgia and Florida. At the outset, let’s be clear that conflict of laws issues when studied in law school are so complicated and often counter-intuitive that they will typically fry the minds of the involved law students as well as frequently those of their professors. Conflict of laws issues then will go on to occasionally fry the minds of even the most brilliant litigators and jurists.
These issues are anything but easy. But even worse, the laws governing how to resolve conflict of laws issues are all over the map as well. Different states have different schemes for dealing with conflict of laws. Even to the extent that a particular state starts out with the Restatement (Second) of Conflict of Laws, differing (and sometimes wildly differing) application of those rules can vary as one hops across state borders.
Thus, conflict of laws is one of the things which makes planning, which requires a more-or-less accurate prediction of results, so difficult. You can kind of guess how things should probably turn out between two states’ competing laws, but you are never really going to know for certain until you’ve been all the way through an appeal like this one.
The Georgia Court of Appeals in this case gives us a pretty shallow application of the conflict of laws rules. I’m not saying that the Court of Appeals was wrong or that it should have gone deeper, but their opinion is what it is, i.e., limited to deciding whether the rule relating to intangible personal property is greater or lesser than the internal affairs doctrine. The Court of Appeals could have, for instance, gone deeper and applied the most common conflict of laws rule in the United States, known as the Most Significant Relationship Test, but it did not do so. And maybe it didn’t need to either.
If I had to defend the Court of Appeals’ opinion in this case, it would not be on the basis of anything like the merits of the interchange between the rule relating to intangible personal property and the internal affairs doctrine. It would instead ignore the law altogether and focus upon the facts of this case, which was that the LLC’s operating agreement was sloppy. Yes, the operating agreement did state (as did the Article of Organization) that the interests were held in TBE. But other parts of the operating agreement indicated that the interests were something other than TBE. Just barely sloppy enough for the Court of Appeals to conclude that the mere recital that the interests were held in TBE was not enough.
The vast majority of LLCs go through their existence without anybody consulting the operating agreement about anything. You have a deal with the other members and so long as that deal is carried out, there is rarely a need to look at the document. In fact, the only time that one needs the operating agreement is that if something unusual happens; a member dies, a manager goes off the rails ….. or a creditor of a member appears. To state the matter otherwise, the operating agreement is not needed for good times, only bad times. Most folks presume when an LLC is formed that there will only be good times (otherwise why do the deal in the first place?), and so too little thinking is done about possible contingencies ― but you only need the operating agreement if those contingencies arise.
For what it is worth, contracts are exactly the same: Contracts are drafted only in case of the deal going bad. In fact, the true purpose of a contract is to tell everybody what happens if something goes wrong. And an LLC operating agreement is really nothing but a contract after all.
This case illustrates one thing more than any other: If a creditor of a member appears, the LLC operating agreement must be crystal clear throughout as to how the membership interest will be treated. Merely reciting that the interest is held in a certain way is not enough; the entire agreement has to reflect that treat and not be internally contradictory as the operating agreement here was found to be.
With this case, we also find a point that cannot be overemphasized: Courts like to see creditors paid on their judgments. After all, if judgments are not enforced, then there is little point in the courts going through all that work to get to a judgment, and that means that there is little need for the civil courts. Thus, if the balance of justice comes up even ― the parties’ positions are exactly 50/50 in merit ― the courts will ever so slightly put their finger on the creditor’s side so that the balance swings in the creditor’s favor.
Within the confusing nuances of conflict of laws, it is rarely difficult for courts to go through their conflict analysis so that it comes out in favor of creditors. So, you’d better presume that creditors will more often than not win these conflict battles. And, anecdotally from the case law, it seems like creditors do indeed win the lion’s share of such disputes.
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