The Delaware Court of Chancery recently explained that a charging lien is the exclusive remedy of a judgment creditor against a member’s interest in an LLC, in XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL (Del. Ch. July 24, 2024). See Slip op. at 7-8 and footnote 6 (citing Section 18-703(d) and other sources).

A Delaware Supreme Court opinion and a Chancery decision in this matter were previously highlighted on these pages.

Short Factual Overview

The abbreviated factual background of this case involved the parties structuring several special purpose vehicles in an effort to circumvent an existing lien on LLC membership units by designing the right of a subordinate creditor to receive proceeds from the sale of the membership units already encumbered—as opposed to a security interest in the membership units themselves. See Slip op. 9-14.

Highlights

• The decision found that the above-described structure that attempted to circumvent the prior encumbrance on a member’s LLC units as security for a loan violated a no-transfer clause in the LLC Agreement.
• The court focused on several issues that arose in connection with the debtor not fully disclosing to an existing creditor, who had an existing encumbrance on the units, that there would be an attempt to obtain a lien on the proceeds from the sale of the units, in an effort to provide new collateral for a new loan. Slip op. at 14-16.
• Acquiescence and other equitable defenses were addressed in an analysis of which of those defenses might be used against legal claims, but the seminal CompoSecure II decision barred the defense of acquiescence in this matter. See Slip op. at 23-24. See also blog post on these pages with highlights of a recent Delaware Supreme Court decision reversing in part a Chancery decision on this issue.