Heckert v. Heckert Defeated Asset Protection of Many Texas FLPs and LLCs1

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Much of what you have can be taken from you via legal process. Over forty million lawsuits are filed each year. Business owners and professionals often have high exposure and high assets. The greater your assets, the more attractive you become to legal predators. Your assets can be protected, but this must be done before a liability-causing event occurs.

If you use a Texas FLP or LLC to protect your assets from seizure and deter lawsuits, you should know the legal landscape has changed, and cases have emerged that may allow any asset protection you have to be breached. Here’s a Cliffs Notes summary of what has happened:

Limited Liability Corporations (LLCs) and Family Limited Partnerships (FLPs) have been the primary means by which Texans protected their assets for decades. That protection was based mainly on laws that prevented someone who

successfully sued you ( judgment creditor) from taking your interest in an LLC or FLP. Over the years, Texas courts made exceptions to that rule, and those exceptions were becoming more numerous. In November 2017, the Second Court of Appeals in Fort Worth cleared a path that provided lawyers a means to seize the assets of many LLCs and FLPs.

Broadly, the ruling stated that a judgment creditor may seize assets of LLCs and FLPs that are either (1) controlled by a single person or (2) are not “operational businesses.” LLCs and FLPs that hold passive investments (such as stocks, bonds, broker accounts) could be described as non-operational businesses. If you have an LLC or FLP that meets these criteria, it may not be functional for asset protection.

Future cases will determine under what circumstances Texas FLP/LLC assets are subject to seizure. In the interim, entities controlled by a single person and non-operational entities are at greater risk. The uncertainty regarding the legal landscape for asset protection was furthered when the Texas Legislature modified the Texas Business Organizations Code to re-state its belief that a charging order should be the sole remedy against LLCs. This is discussed further in Much Ado About Nothing? – Texas Legislature Efforts to Shore Up Eroding Asset Protection.

Feel free to contact us if you have questions regarding the dangerous waters of Texas asset protection strategies.

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i This paper does not constitute legal advice and should not be acted upon without the advice of counsel.

ii In Heckert vs. Heckert, No. 02-16-00213-CV, the Second District Court of Appeals (Fort Worth) issued a Memorandum Opinion. In deciding this case, the Court pushed aside the clear reading of §101.112 and §153.256 of the Texas Business Organizations Code (pre-2023), which provides that a charging order is the exclusive remedy by which to satisfy a judgment out of the judgment debtor’s interest in an LLC/LP(FLP).

Specifically, the Court reviewed whether a Court could force a debtor to turn over interests in an FLP and LLC. The appellant argued that §101.112 and §153.256 of the Texas Business Organizations Code provide that a charging order is the "exclusive remedy" to collect on a debtor's partnership or LLC interests.

The Court stated that as the purpose of charging order exclusivity is to protect the non-debtor members from having their business interfered with, there should be no exclusivity where there are no non-debtor members/partners.

They further stated that as neither the FLP nor LLC were operational businesses, no other party’s interest would be disrupted by the turnover of assets. This created a pathway whereby creditors may secure the assets of non-operational businesses even though they have multiple members or partners. Many FLPs were specifically designed to hold passive investments and are thus non-operational.