November 28, 2018

Garnishment Limits and Charging Orders

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Most if not all charging order statutes provide that exemption laws appli­cable to the member’s interest in the LLC remain available notwithstand­ing the charging order. There has been essentially no consideration of the effort of this language. It has been suggested that one effort of this language has been to apply federal and state garnishment limits on charging orders, a view recently adopted by one federal district court. As discussed below, this application is typically not appropriate.

In Alexander, the court held that a charging order against the distributions from a single member LLC to its sole member should be limited by the state law garnishment limit. Generally speaking, Arizona law limits a “garnishment” to 25% of the garnishee’s “disposable earnings.” “Earnings” are defined in Arizona as including “compensation paid or payable for personal services, whether those payments are called wages, salary, commission, bonus or otherwise.” “Disposable earnings” are earnings less required Federal and state deductions. The Alexander court reasoned that the LLC’s sole member “receives distributions equivalent to the LLC’s annual income. These are provided as compensation for his personal services to [the SMLLC]. These distributions qualify as earnings and are protected by the personal property exemption.” From there, the Alexander court limited the charging order to “25 percent of [the Defendant’s] disposable earnings.”