Article: 8
  Volume 18, April 17, 2000.
David G. Shaftel, 2000 © All Rights Reserved.

Limited partnerships and limited liability companies are often used for closely-held businesses or investment activities. These entities have also become popular estate planning vehicles. Interests in such entities are often significantly discounted for Federal Gift and Estate Tax purposes. Many families are attracted to the creditor protection provided to the limited partnership or LLC interests held by their family members.

If a creditor obtains a judgment against a partner or member, most state statutes provide that the creditor can obtain a "charging order" against the debtor's partnership or limited liability company interest. This allows the creditor to receive the distributions to which the partner or member would be entitled.

On its face, these statutes do not expressly allow for any other creditor remedies. This is consistent with the concept that the other partners of a partnership or members of a limited liability company should not have their business or investment activity disrupted, nor should they be forced to take in a substitute partner or member (e.g., the judgment creditor). This was the generally understood position taken by the Uniform Limited Partnership Act and many limited liability acts.

However, a Connecticut court has held that a judgment creditor of a limited partnership could foreclose on the partnership interest. [Madison Hills Ltd. v. Madison Hills, Inc., 644 A.2d 363 (Conn. App. 1994).] This holding was in conflict with a prior Florida court decision which held that foreclosure was not an available remedy for a judgment creditor of a limited partner. The Connecticut court's holding opened the door for courts to provide a variety of remedies to creditors of partners in limited partnerships and members in LLC's. These additional remedies could result in forced dissolutions of the entities and the sale of their assets. The Alaska Legislature concluded that such results could be very harmful to the other partners or members, their families and their business interests.

The proposed amendments make it clear that a judgment creditor of an Alaska limited partnership or limited liability company has only the remedy of a charging order. Thus, the creditor will receive all distributions made to the debtor partner or member. However, the right to receive such distributions is the judgment creditor's sole remedy. No other remedies are available to the judgment creditor or to a court implementing a creditor's collection request.

The strengthened creditor protection provided to these entities should make them even more popular for estate planning purposes. While many families are attracted to these entities for Federal Gift and Estate Tax reduction, creditor protection may prove to be an equally advantageous reason for their use.

The Alaska Revised Limited Partnership Act is amended by changes to AS 32.11.170 and .340. The Alaska Revised Limited Liability Act is amended by changes to AS 10.50.380. These amendments will be effective immediately, and will apply to remedies pursued after the effective date.

Alaska House Bill 222 passed on February 22, 2000. Its effective date is March 8, 2000.