Statutory Definition of LLC Distributions Cannot Be Contracted Away by Operating Agreements

Introduction

Lee E. Baker, Jr. v. Kenneth M. Duffus is a decision from the Supreme Court of the State of Alaska, handed down on May 16, 2025. At its core, the dispute turns on competing claims to $300,000 in settlement funds held in the court registry. The creditor, Kenneth Duffus, had obtained a charging order against limited liability company (LLC) distributions due to Baker. Baker’s former law firm, Jones Law Group (JLG), had filed an attorney’s lien on the same funds for legal services rendered in related litigation. On remand from an earlier appeal, the superior court held that (1) the funds constituted interim distributions by Aurora Park, LLC, subject to Duffus’s charging order, and (2) Baker and JLG failed to prove the value of the attorney’s lien. It then released the funds to Duffus. A procedural mishap led to an award of attorney’s fees against Duffus when he briefly held the funds. The parties cross-appeal various rulings.

Summary of the Judgment

On remand, the Superior Court of the State of Alaska found that:

• The $300,000 paid under the Aurora Park settlement agreement was an “interim distribution” of LLC assets under AS 10.50.990(8) and AS 10.50.380, regardless of how the operating agreement described distributions.
• All of those settlement funds were traceable to Aurora Park, LLC, not to Patricia Baker personally, and thus fell squarely within the scope of the charging order issued in December 2019.
• Baker and JLG failed to produce any fee agreement, billing records, or other credible evidence establishing that Baker owed JLG any amount for services in the Aurora Park litigation. As a result, JLG’s attorney’s lien had no proven value.
• A second “final judgment” in the amount of $300,000 was mistakenly entered, although the funds simply satisfied the existing 2013 judgment under Rule 58.
• An order awarding $2,820 in attorney’s fees against Duffus for briefly holding the funds was issued without identifying any rule violation.

The Supreme Court of Alaska affirmed the merits (charging order priority and lien valuation), vacated the second final judgment as unnecessary and potentially duplicative, and reversed the attorney’s fee award as an unexplained sanction.

Analysis

Precedents Cited

1. Duffus v. Baker, 513 P.3d 264 (Alaska 2022) – The earlier appeal laid out the framework for charging orders under AS 10.50.380 and noted that an LLC and its operating agreement have flexibility in distribution procedure but “may not necessarily” redefine what constitutes a “distribution.” The Court remanded for factual findings on the nature of the settlement funds and the value of JLG’s lien.

2. AS 10.50.380 & AS 10.50.990 – Alaska’s Charging Order statute provides that a judgment creditor may obtain “only the rights of an assignee” and receive “only distributions to which the assignor is entitled.” The definitions of “interim distribution” and “distribution” are statutory and exclusive.

3. L. Offices of Steven D. Smith, P.C. v. Ceccarelli, 385 P.3d 841 (Alaska 2016) – An attorney’s lien attaches only to fees for services actually rendered in the suit and requires evidentiary proof of the amount due.

4. Alaska R. Civ. P. 58 – Governs entry of final judgments, requiring a single final judgment once a party recovers a sum certain or costs.

Legal Reasoning

The Supreme Court’s reasoning unfolds along three main axes:

1. Statutory Definition of Distributions Over Operating Agreement. The Court held that while an LLC may prescribe the manner of distributions (who, when and how much), it cannot contractually redefine what a “distribution” is for purposes of AS 10.50.380. Allowing LLC members to recast transfers as something other than distributions would eviscerate the charging order statute, their exclusivity and priority rules.
2. Factual Findings—Traceability and Vesting. The record showed Aurora Park, LLC deposited $178,000 from its operating account and $122,000 from escrow into the registry. The superior court credited testimony that Baker quitclaimed his membership interest in exchange for $300,000. Those rights vested no later than the April 2019 quitclaim. Neither Patricia Baker nor Aurora Park contributed personal funds. These findings were not clearly erroneous under the “definite and firm conviction” test.
3. Attorney’s Lien Valuation Requires Proof. An attorney’s lien under AS 34.35.430 attaches only to fees due for services in that suit, and summary evidence or bare assertions is insufficient. Neither a fee agreement nor itemized bills were produced, and hearsay billing spreadsheets without corroboration failed to prove a debt. The Court affirmed that absence of proof justified denying any lien share in the settlement funds.

Impact

On LLC Charging Orders: This decision cements that Alaska’s charging order regime cannot be sidestepped by operating agreement definitions. Creditors of LLC members will reliably penetrate distributions whenever statutory prerequisites are met.

On Contract Drafting: LLC members should ensure operating agreements focus on distribution mechanics—timing, consent, classes—rather than labeling transfers as non-distributions. Attempts to insulate assets by semantic tweaks will fail.

On Attorney’s Liens: Law firms must meticulously preserve fee agreements, billing records, and contemporaneous invoices to enforce liens. Without clear documentary evidence, courts will decline to honor liens—even for settlement-designated amounts.

On Court Procedure: Practitioners should watch for redundant final judgments; civil rule 58 allows only one per case and a simple order directing registry funds is preferable to a new judgment. Sanctions under Rule 95 require explicit findings and must identify the breached rule to be sustainable on appeal.

Complex Concepts Simplified

• Charging Order: A statutory lien that lets a creditor step into the shoes of an LLC member to collect distributions to which that member is entitled. It does not give control of the LLC or management rights.
• Interim vs. Final Distribution: – Interim: Any non-winding-up payment of company assets to members (e.g., dividends). – Final: Payments made in dissolution, following strict statutory priority among creditors, members and capital contributors.
• Attorney’s Lien: A right to keep or claim money in a lawsuit’s outcome to secure unpaid fees. It only attaches to fees for services in that specific case and must be proven with fee agreements or billing records.
• Rule 58 Final Judgment: Alaska courts permit only one “final judgment” per lawsuit—once you decide who recovers a set sum or costs, you enter judgment. Subsequent orders distributing registry funds are implementation, not new judgments.

Conclusion

Lee E. Baker, Jr. v. Kenneth M. Duffus clarifies and reinforces key tenets of Alaska law: LLC operating agreements cannot redefine or evade statutory distribution rules; settlement or buy-out payments to a departing member (and assignees) are “interim distributions” if traceable to the LLC; attorney’s liens demand documentary proof of fees owed; and civil procedure demands precision in final judgments and sanctions. The Supreme Court affirmed the superior court’s substantive rulings on charging order priority and lien valuation, vacated an unnecessary second final judgment, and struck an ungrounded attorney’s fee sanction. Going forward, creditors, counsel, and LLC members will look to this decision when navigating charging orders, lien enforcement, and operating agreement drafting.