Garnishment is a tool used by judgment creditors to collect on a judgment owed by the debtor-defendant. Property subject to garnishment includes monetary obligations owed by a third party to the debtor-defendant. In a recent decision by the Oregon Court of Appeals, a limited liability company’s (“LLC”) unlawful distributions and rent payments to its members may be garnishable. Twigg v. Opsahl, 316 Or App 775 (Jan. 5, 2022). This means that members of an LLC may not unlawfully strip the LLC of its assets, leaving the LLC “judgment proof,” and expect personal liability not to follow when the LLC is hit with a judgment.
Many contractors, large and small, use the LLC form to do business. LLCs are easy to establish. LLCs are easy to run. An LLC has the benefit of shielding its members from its liabilities. Under Twigg, however, that shield just got smaller. For contractors using the LLC form, the contractor should take great care when making disbursements and insider transfers in the shadow of a construction defect claim.
In Twigg, Carrie and Weston Twigg hired Rainier Pacific Development, LLC (“RPD”) to build their house. The members of RPD were Hana and Gregg Opsahl, and their son, Erik Opsahl. A dispute arose out of RPD’s construction of the Twiggs’ home that resulted in a $604,594.80 arbitration award to the Twiggs. Shortly after the award, RPD dissolved, leaving no assets to satisfy the award.
The Twiggs then served the Opsahls with writs of garnishment. Through the writs, the Twiggs asserted that the Opsahls personally owed obligations to RPD for unlawful distributions, which are garnishable. Garnishable property includes “monetary obligations owing to the debtor that are then in existence” at the time of garnishment. Oregon law makes members of an LLC personally liable for approving distributions that would leave the LLC insolvent. Thus, when the Opsahls approved a $106,000 distribution to Erik Opsahl when RPD was already insolvent, each Opsahl became jointly and severally liable to RPD, and the Twiggs could garnish. The trial court agreed, which was affirmed on appeal.
In a separate part of the opinion, the Court held that the Twiggs could also garnish RPD’s potential claim of fraudulent transfer arising out of RPD’s rent payments to the Opsahls at a time when RPD was insolvent. The Twiggs asserted that RPD’s lease of a building owned by the Opsahls was not for “reasonably equivalent value” because the rent was paid with whatever money happened to be left after RPD paid its other bills and the Opsahls would never have evicted RPD. The Court of Appeals held that a fraudulent transfer theory may be raised in a garnishment setting, overruling the trial court.
The take-away is that contractors using the LLC form must recognize and treat the LLC as a separate entity. Contractors must be aware that periodically scraping out all of the LLC’s cash assets and keeping it in a judgment-proof state potentially exposes the members to personal liability through a garnishment action on the LLC’s judgments.