Unincorporated Business Entities Law

Hotel 71 Mezz Lender LLC v. Falor, 2008 NY Slip Op 09848 (NY AD [1st], December 16, 2008), involved a couple of interesting questions about a judgment creditor of a member of an LLC in that member’s rights and interests in an LLC:

1. For purposes of determining jurisdiction in an in rem proceeding, what is the situs of an interest in an LLC?
2. Internal affairs doctrine.  Does local law or the law of the jurisdiction under which the LLC was organized determine the rights of creditors in interests in an LLC?
3. Forum non conveniens.  Even if a court has jurisdiction over an interest in an LLC organized under the law of another state, if the internal affairs doctrine will determine the rights of the parties, should the court decline to determine the rights of the parties and direct them to the courts of the other state?

Situs.  The Court noted that, under New York law, the situs of shares of a corporation of interests in a limited partnership is where the business is formed and operates.  Given that LLCs are a "hybrid" of both, the same rule should apply.  Id. at 3.  Given that there was no evidence that any of the out-of-state LLCs had any business operations in New York, the court held that the ex parte order of attachment should not have been confirmed by the trial court.  Id. at 4.

Internal Affairs and Forum Non Conveniens.  Invoking the internal affairs doctrine, the Court reasoned that it should decline jurisdiction in favor of the situs of the LLCs.  I specifically noted that whether the judgment creditor of the member could get at real property owned by an LLC should be determined by the the courts of the state in which the property was located.  Id. at 4.  Here, the opinion suffers from a lack of clarity.  Perhaps as a result of the failure of the parties to use the statutory remedy–the charging order, the court is conflating situs of the property of an LLC and the internal affairs doctrine. 

A strong argument can be made that the nature of an interest in an LLC, and of the rights of a member, should be governed by the internal affairs doctrine, and determined by the laws of the state under which the LLC was organized.  To have the courts of each state in which the LLC might own property determine the right of the creditor of a member to proceed against the property of the LLC in that state could result in chaos.

posted by Gary Rosin

This entry was posted on Wednesday, February 4th, 2009 at 7:04 pm and is filed under LLCs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.