Court Reaffirms that LLC Members Are Separate From the LLC and DO NOT Have An Ownership Interest In The LLC’s Property. Therefore Member Can File Lien.
Just a brief post regarding LLC Property:
On September 3, 2013, the Illinois Appellate Court for the Fifth District filed an opinion in the case of Peabody-Waterside Development, LLC v. Islands of Waterside, LLC, Regions Bank N.A., and Prairie Construction Management, LLC 2013 IL App (5th) 120490.
The Court’s Opinion is consistent with Illinois law related to limited liability companies (LLC). The fact that the trial court got it wrong and had to be reversed, however, is not entirely surprising. Experience demonstrates that many lawyers, and courts, either don’t understand the law related to the separateness of an LLC from its members, or refuse to believe it.
The law in Illinois is quite clear. Members of an LLC have no ownership interest in the property or business of the LLC. Members own an economic interest in the distributable cash flow (if any) from the LLC, but no interest in the property or business that generates that cash flow. The LLC Act is clear. The case-law is clear. Like it or not, this is the law in Illinois (and in virtually all USA jurisdictions).
The issue arises when creditors try to collect judgments or other debts owed by members against assets of an LLC; when creditors try to pierce the entity veil without proving fraud; and in a variety of other circumstances.
In the Peabody-Waterside case, Peabody-Waterside was a 50% member of Islands of Waterside, LLC, and entered into an arm’s-length contract to provide construction services on land owned by Islands of Waterside, LLC. When Peabody-Waterside was not paid, it filed a mechanics lien against the property which, if enforceable, may result in a priority lien over the mortgage lien of Regions Bank.
Regions Bank defended by asserting that the mechanics lien was void because Peabody-Waterside was “jointly interested” in the property against which the mechanics lien was filed. [Under Illinois law, a co-owner of property cannot file a valid mechanics lien against the property because it is “jointly interested” in the property.] The trial court agreed, and found the mechanics lien to be void. Peabody-Waterside appealed.
On appeal, the Appellate Court correctly pointed out that “a limited liability company is a legal entity distinct from its members.” It also pointed out that “Illinois law clearly states . . . that membership in a limited liability company does not confer any ownership interest in the property, real or personal, of the LLC. 805 ILCS 180/30-1(a) (West 2008) (member of an LLC is not a co-owner of, and has no transferable interest in, property of a limited liability company). A member of an LLC owns only its membership interest in the LLC. . . . This is the reason why a creditor of an LLC member cannot seize LLC property to satisfy a member’s debt. The creditor can only attach the member’s distributional interest in the LLC because that is all the member owns. 805 ILCS 180/30-20(a)(West 2008).”
If you are a creditor, you need to understand this.If you are a debtor, this clear legal distinction provides some remarkable asset protection opportunities through use of LLCs.
Something to think about . . .
Thanks for listening.
Kymn
