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Georgia Court Allows Judgment Creditor to Pursue an Llc’s Managing Member for Preferential Payment

Poole Huffman, LLC

As a creditor, your objective is to pursue any legal means allowable to obtain payment on the debt owed to you. Sometimes, those involved in the entity that owes you a debt may engage in improper activities to try to hide money or avoid paying you. As a judgment creditor, you need skilled and determined Georgia debt collection counsel on your side fighting for what’s duly owed to you.

A recent example of a judgment creditor that had to take multiple steps came from a dispute over an insolvent company’s large transfer of LLC funds. The insolvent LLC was an Atlanta area-based real estate business. The LLC’s managing member was also the individual who handled the LLC’s daily operations. In 2012, the insolvent LLC faced foreclosure on all of its assets. According to the judgment creditor, despite the LLC’s problematic financial condition, the managing member nevertheless authorized the company to make a $239,000 preferential payment…to the managing member. That transfer was a repayment of an unsecured loan that the managing member had previously made to the LLC.

In 2013, the LLC stopped making lease payments to the plaintiff, although the lease was not yet complete. This led the plaintiff to obtain a judgment against the LLC. Unable to collect from the insolvent LLC, the plaintiff took this additional step and went after the managing member for the payment he made to himself in 2012. The plaintiff’s argument was that, by making the preferential payment to himself while the LLC was insolvent, the managing member breached its fiduciary duty to it.

Although the trial court threw out that claim, the Court of Appeals reversed that decision on appeal. Georgia law is clear that, when a corporation becomes insolvent, that entity’s insolvency triggers a duty, owed by the entity’s directors and officers toward the entity’s creditors, to manage the remaining assets for the benefit of the creditors. Just as a director or an officer of an insolvent corporation has a fiduciary duty to manage assets for the benefit of the entity’s creditors, the managing member of an insolvent LLC has a similar duty to the company’s creditors to manage faithfully the LLC’s assets on behalf of those creditors.

If a corporation’s officers or directors, or an LLC’s managing members, make an improper preferential payment to themselves, they have violated that fiduciary duty. If a violation occurs, the entity’s creditors have the right to pursue a legal action for breach. If successful, the creditor can potentially obtain a court order that will set aside the preferential transfer and recover the money that was paid.

In other words, if the LLC’s judgment creditor was able to prove that the managing member’s $239,000 payment to himself to satisfy the loan he’d earlier made to the LLC was an improper preferential payment, it would have a viable case for a breach of fiduciary duty and an opportunity to recover the money paid to the managing member. The judgment creditor should have been allowed to take this claim to trial, according to the court’s opinion.

When you are a creditor dealing with a debtor taking extra-legal steps to try to move assets and avoid paying, you need experienced litigators on your side. The knowledgeable Atlanta debt collection attorneys at Poole Huffman, LLC have spent many years helping their clients protect their business interests. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation.

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