In a criminal case opinion called U.S. vs. Wilhite issued by a Colorado federal District Court on November 17, 2017, the court ruled that a federal law called the Fair Debt Collection Practice Act (FDCPA) preempted Colorado’s limited liability company charging order statute

Michael David Wilhite owed the U.S. money.  He owned a membership interest in a Colorado LLC that transferred $200,000 that could have been distributed to Wilhite to Yahab Foundation.  Wilhite argued that there was a six year statute of limitations on collection of the debt and the Colorado LLC charging order statute prohibited the federal government from garnishing the $200,000 paid to the Yahab Foundation.

The court ruled that: (i) the twenty year federal statute of limitations on collecting a criminal restitution obligation overruled the six year state statute of limitations of the FDCPA and (ii) the FDCPA overruled Colorado’s LLC charging order statute Colorado Revised Statutes Title 7 Corporations and Associations § 7-80-703.

The Court said:

“the Court likewise rejects Mr. Wilhite’s argument that Colorado law requiring the issuance of a charging order before levying interest in an LLC limits the Government’s ability to collect Mr. Wilhite’s restitution here.”

The Court ruled that the federal government could levy on the $200,000 distribution made to Yahab Foundation by an LLC in which the debtor owned a membership interest.

Bottom Line

You want your LLC to be formed in a state like Arizona that has the charging order as the sole remedy of a creditor who gets a judgment against a member of the LLC, but if the creditor is the federal government collecting taxes, the state’s LLC charging order law will probably be overruled to allow the U.S. to collect money or property.

Arizona’s charging order statute is ARS Section 29-655.