corporate-law community-property
What might be the chances of piercing the corporate veil for owning an LLC in a community property state with my spouse?
<p>It seems that the courts in more States in the U.S. might start to grant judicial foreclosure on single-member LLCs. So, my question is, is husband and wife owned LLC in community property States regarded as Single-Member LLC? If so, what is the cure besides adding at least one new member?</p>

<p><strong>EDIT</strong>: revised the tone of <em>likeliness</em> of more States granting judicial foreclosures.</p>

<p><a href="http://chapter11cases.com/2012/07/01/in-re-albright-291-br-538-bankr-court-d-colorado-2003/" rel="nofollow noreferrer"><em>In re Albright</em></a>, 291 BR 538 (Bk. Colo. 2003) is a "reverse piercing" case which involves different considerations than ordinary veil piercing. The Court in that case reasoned that if the debtors in bankruptcy were the only people with any ownership interest in the LLC that the debtors' control passed to the bankruptcy trustee notwithstanding the general rule under Colorado law that a transferee of a member of an LLC loses all control rights in the company. </p>

<p>In part, this decision flows from the particular feature of Colorado LLC law at the time that the default rule otherwise would have been that no one at all would ever have any right to control the operations or management of the LLC because there was no statute providing for who could control an LLC in Colorado which had no members because all members of the LLC were transferees of members without voting or control rights.</p>

<p>The fact that the LLC was a single member LLC is really less relevant than the fact that all owners of the LLC were bankrupts and that no one else had any control rights with regard to the company.</p>

<p>Also, importantly, <em>Albright</em> is not, as the question claims, a "judicial foreclosure". It is an exercise of the rights of a bankruptcy trustee whose is carrying out right to ownership of the debtor's property in accordance with federal bankruptcy law that overrides conflicting state law. Essentially, the Court ruled that notwithstanding the plain language of state law that a bankruptcy trustee is a substitute member of an LLC with the same control rights as the debtor, rather than an economic interest owner with no control rights as would be the case normally in a voluntary transfer of a membership interest without the permission of the other members to admit the new member.</p>

<p>So, under the reasoning of <em>Albright</em> any bankrupt debtor whose membership interest was transferred to the bankruptcy trustee who had the power to dissolve the company would give the bankruptcy trustee the same power, even if the LLC was not a single member LLC.</p>

<p><a href="http://www.floridasupremecourt.org/decisions/2010/sc08-1009.pdf" rel="nofollow noreferrer"><em>Olmstead v. FTC</em></a>, Case No . SC08-1009 (Fla. June 24, 2010) is also a reverse piercing case. It involves a debtor of an owner of an LLC trying to seize the ownership interest, just as a creditor of an owner of a corporation could seize the shares of the corporation that the debtor owns including all voting rights in the corporation. The seizure of the assets of the LLC is only indirect as a result of the control rights obtained by seizing ownership of the ownership interest of the debtor. </p>

<p>But, unlike <em>Albright</em>, <em>Olmstead</em> does not involve a bankruptcy court and in instead an attempt to enforce a judgment against the owner of an entity.</p>

<p>In answer to that question, the Court in <em>Olmstead</em> holds that:</p>

<blockquote>
  <p>For the reasons we explain, we conclude that the statutory charging
  order provision does not preclude application of the creditor‘s remedy
  of execution on an interest in a single-member LLC.</p>
</blockquote>

<p>As a matter of policy, the concerns associated with veil piercing are very different from the concerns associated with "reverse piercing" by allowing a creditor to seize by execution the membership interests of a debtor, so I would expect the trend to continue. There is no good policy reason to deny a creditor the right to an ownership interest in an entity of a debtor when the exemption law of a state do not so provide, as they generally do not.</p>

<p>Similar laws have disregarded self-settled trusts as a defense against the settlor's creditors.</p>
