In Zokaites v. Pittsburgh Irish Pubs, LLC a case decided in December, 2008, the Superior Court of Pennsylvania held that a judgment creditor may not receive a debtor’s membership interest in a limited liability company, unless the operating agreement of the company allows it. A judgment creditor is a person who has successfully won a judgment for a sum of money to be paid by a debtor. In Zokaites the Court held that §8924(a) of Pennsylvania’s Limited Liability Company Law makes clear that a membership interest in a limited liability company in the Commonwealth of Pennsylvania includes both an economic right and also a right to participate in the management of the business. Further, the Court held that unless the operating agreement of the company provides to the contrary, a member of the limited liability company could only transfer his or her economic rights in the company, and not his or her right to manage the company. The Court went on to state that a judgment creditor is only entitled to money to satisfy his or her judgment against a debtor, if courts allowed the transfer of the membership interests of the debtor to the judgment creditor, the judgment creditor would be receiving a right to manage and govern the company. Ultimately, the Court held that a judgment creditor is only entitled to collect future profits the debtor may earn from the company, but not entitled to a full transfer of the membership interests of the limited liability company, wherein the judgment creditor would be receiving a right to manage and govern the company.
If you or your company is a judgment creditor, it is important to understand what this case means for your collection efforts. It is important for you to obtain a copy of the company’s operating agreement, which should state what happens in the event a member’s membership interests in the company are subject to involuntary transfer. Unless the operating agreement provides otherwise, if all of the members of a company, other than the debtor, do not approve of the proposed transfer or assignment of the membership interests, the judgment creditor will have no right to participate in the management of the company or become a member of the company. All is not lost, however, as Zokaites makes clear, a judgment creditor can still attach the profits a debtor receives from the limited liability company of which he or she is a member.