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A Magistrate's Report in the Delaware Court of Chancery recently held that a judgment creditor of an individual could not reach the assets the individual had contributed to an LLC that was intentionally formed for the purposes of asset protection. In the matter of the CES 2007 Trust, C.A. No. 2023-0925-SEM (May 2, 2025). The case was later dismissed by the trial court on the grounds that the judgment creditor did not have standing due to suing the wrong party, but the trial court stated that the Report "appears correct."
The case dealt with an LLC owned though a trust with an "independent" trustee that was formed in 2007, when ownership through a trust was the best alternative, but Delaware Code §18-703(d) was subsequently amended to provide equivalent protection for an LLC owned directly, even if it is wholly owned by one member, which eliminates the complexity of interposing a trust.
This case is important because litigation judgements have become astronomical in the U.S. recently, with many reaching tens of millions of dollars for accidental injuries, such as one judgment this year for $50 million against Starbucks for coffee spilled in a man's lap and another for $32.5 million awarded to a woman injured in a car crash.
The good news is that several states have stepped up to the plate and provided asset protection for individuals as an extension of the limited liability they provide to corporations and LLCs, but in reverse, by providing that creditors of an individual owner cannot get hold of the assets of an entity owned by that induvial. These states include Alaska, Delaware, Nevada, South Dakota, and Wyoming.
Delaware provides the strongest protection, since a judgment creditor of an individual that owns a Delaware LLC can only get a "charging order" as a lien on any distributions the LLC actually makes, and they can't foreclose on the membership interest in the LLC itself or on the LLC's assets. If a creditor does obtain such a charging order, the LLC can simply decide not to make distributions, which discourages creditors from waiting around. This structure works in Delaware even if the individual is the sole owner of the LLC.
More importantly, with careful drafting, the governing LLC agreement can provide for management discretion as to which of several potential members is entitled to distributions, so a charging order as to one member's distributions would not prevent distributions to other members, such as family members. For example, there can be different classes of membership interests, and in Delaware there can be classes of membership interests that only participate in management, not distributions, and a particular class of members can have the sole right to appoint the managers. Delaware law thus provides great flexibility to obtain the desired result if the governing LLC agreement is properly drafted.
Significantly in this case the transfers to the LLC occurred well before the liability had been incurred or the lawsuit filed. It is therefore essential to plan early. If you only do so after the liability has arisen, or worse after you have been sued, it is too late, as any transfer of assets at that stage will likely be treated as a "fraudulent conveyance" that can be pulled back in court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
