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Preemption By Federal Law

Preemption




PAGE SUMMARY

Federal preemption of state charging order statutes is increasingly recognized under the Federal Debt Collection Procedures Act (FDCPA) when federal agencies collect judgments, as highlighted by the landmark decision in Consumer Financial Protection Bureau v. Integrity Advance, LLC (2024). This ruling establishes that the FDCPA preempts state statutes—such as those in Kansas—that characterize charging orders as the exclusive remedy for reaching a member’s interest in a limited liability company. Under the Supremacy Clause, conflict preemption arises because the FDCPA’s expansive definition of property under 28 U.S.C. § 3002 includes intangible membership interests, which are thus subject to federal garnishment procedures. While debtors argue that creditor-debtor relations fall under traditional state authority and that the Consumer Financial Protection Act (CFPA) preserves state laws offering greater consumer protection, federal courts have prioritized the FDCPA's mandate for nationwide procedural uniformity in debt recovery. The Seventh Circuit’s decision in U.S. v. Rogan and subsequent district court rulings support the conclusion that LLC interests constitute personal property reachable through federal writs of garnishment, effectively bypassing state-level protections. This trend signifies that traditional asset protection strategies relying on the exclusivity of charging orders are insufficient against federal creditors. Consequently, for federal debt collection, the comprehensive garnishment provisions of 28 U.S.C. §§ 3001-3308 override state procedural limitations, allowing for the direct seizure of membership interests. This development forces practitioners to reassess the efficacy of state-specific LLC governance in the face of federal enforcement actions, ensuring that legal counsel accounts for the risk of federal preemption in multi-jurisdictional enforcement scenarios.

♦ Charging Orders And Federal Preemption

Introduction

Federal Preemption Doctrine Framework

The FDCPA and State Charging Order Preemption

Circuit Court Treatment of LLC Interests Under Federal Law

Consumer Financial Protection Act Preemption Framework

Limited Preemption Under the Fair Debt Collection Practices Act

Arguments and Rebuttals

Arguments Favoring Federal Preemption

Express Congressional Intent for Exclusive Federal Procedures

• The FDCPA explicitly provides "the exclusive civil procedures for the U.S." to recover judgment debts 28 USCA § 3001 and contains express preemption language providing that the FDCPA preempts state law where inconsistencies exist 28 USCA § 3003 Consumer Financial Protection Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (2024).
• Congress designed the FDCPA to provide "nationwide procedural uniformity in the collection of sums owed the U.S.," evidencing clear intent to displace inconsistent state procedures Consumer Financial Protection Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (2024).
• Anticipated Rebuttals: Courts should presume against preemption when federal law intrudes into areas of traditional state authority like creditor-debtor relations unless Congress's intent is "clear and manifest". Myrick v. Freuhauf Corp., 13 F.3d 1516 (1994); Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947).

LLC Interests Constitute Federal "Property" Subject to Garnishment

• The FDCPA's broad definition of "property" as "any present or future interest, whether legal or equitable, in real, personal (including choses in action), or mixed property, tangible or intangible, vested or contingent, wherever located and however held" encompasses LLC membership interests Consumer Financial Protection Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (2024) 28 USCA § 3002.
• Multiple federal courts have recognized LLC interests as "property" subject to federal garnishment, creating a consistent line of federal authority Consumer Financial Protection Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (2024); U.S. v. Rogan, 639 F.3d 1106 (2011); U.S. v. Belfort, 340 F.Supp.3d 265 (2018); U.S. v. Wilhite, Not Reported in Fed. Supp. (2017).
• Anticipated Rebuttals: State charging order statutes provide specialized procedures for LLC interests that don't directly conflict with federal garnishment procedures but rather provide an alternative state law remedy.

Conflict Between Exclusive State Remedies and Federal Procedures

• State statutes declaring charging orders as the "exclusive remedy" for reaching LLC interests directly conflict with federal garnishment procedures that treat such interests as reachable property Consumer Financial Protection Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (2024).
• Allowing state law to limit federal collection procedures would stand as an obstacle to accomplishing federal objectives under the Supremacy Clause.
• Anticipated Rebuttals: State charging order statutes and federal garnishment procedures can coexist without direct conflict, as they serve different purposes and may apply to different categories of creditors.

Arguments Against Federal Preemption

Traditional State Authority Over Creditor-Debtor Relations

• Creditor-debtor relations and entity governance have historically been areas of traditional state authority, requiring clear congressional intent to displace state law Myrick v. Freuhauf Corp., 13 F.3d 1516 (1994) Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947).
• The Supreme Court has emphasized that courts should be reluctant to find preemption when federal statutes pertain to subjects traditionally governed by state law Myrick v. Freuhauf Corp., 13 F.3d 1516 (1994).
• Anticipated Rebuttals: The FDCPA contains explicit preemption language and represents a clear congressional choice to establish uniform federal debt collection procedures that override conflicting state laws.

Limited Federal Preemption Scope Under Consumer Protection Laws

• The CFPA expressly preserves state laws that afford greater protection to consumers and establishes a cooperative federal-state regulatory framework 12 USCA § 5551.
• Federal debt collection laws like the FDCPA have limited preemption provisions that preserve state law remedies except where directly inconsistent Cliff v. Payco General American Credits, Inc., 363 F.3d 1113 (2004) Desmond v. Phillips & Cohen Associates, Ltd., 724 F.Supp.2d 562 (2010).
• Anticipated Rebuttals: The federal debt collection procedures act (28 U.S.C. §§ 3001-3308) is distinct from consumer protection statutes and provides exclusive procedures for federal debt collection with express preemption of inconsistent state law.

Absence of Direct Conflict Between State and Federal Procedures

• State charging order procedures may provide additional remedies rather than conflicting with federal garnishment procedures, allowing both to coexist Cliff v. Payco General American Credits, Inc., 363 F.3d 1113 (2004).
• Courts have found no preemption where federal and state laws can be harmonized without creating impossible compliance requirements Sears, Roebuck and Co. v. O'Brien, 178 F.3d 962 (1999) Sturm v. Providian National Bank, 242 B.R. 599 (1999).
• Anticipated Rebuttals: State statutes that declare charging orders as the "exclusive" remedy for LLC interests create a direct conflict with federal garnishment procedures and cannot be harmonized with federal law.

Cases on Both Sides

Federal Preemption of State Charging Order Laws

• Consumer Financial Protection Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (2024) — The court held that the Federal Debt Collection Procedures Act preempts Kansas state charging order statutes when federal agencies collect judgments against LLC interests. The court reasoned that LLC interests constitute "property" under the FDCPA's broad definition and that state statutes declaring charging orders as the "exclusive remedy" conflict with federal garnishment procedures.
• U.S. v. Rogan, 639 F.3d 1106 (2011) — The Seventh Circuit recognized that judgment debtor's LLC interests were "property" subject to FDCPA writs of garnishment. The court explained that equity investors own tradable interests distinct from company assets and emphasized the separation between investment interests and operating assets as a fundamental premise of business law.
• U.S. v. Belfort, 340 F.Supp.3d 265 (2018) — The Eastern District of New York concluded that LLC membership interests are subject to "full garnishment" under the FDCPA because they do not qualify as earnings subject to exemption. The court applied the FDCPA's comprehensive definition of property to encompass membership interests in limited liability companies.

Limited Federal Preemption of State Creditor Remedies

• Cliff v. Payco General American Credits, Inc., 363 F.3d 1113 (2004) — The Eleventh Circuit held that the Fair Debt Collection Practices Act does not preempt state law remedies and "affirmatively acknowledges that state law remedies may be pursued concurrent with FDCPA remedies." The court noted that the FDCPA only preempts state laws "to the extent of the inconsistency."
• Pennsylvania v. Navient Corporation, 354 F.Supp.3d 529 (2018) — The Middle District of Pennsylvania held that the Consumer Financial Protection Act does not preclude concurrent state enforcement actions even when the CFPB pursues materially similar claims. The court found that the CFPA's plain language authorizes state enforcement and contains no bar on concurrent state action.
• Consumer Financial Protection Bureau v. CashCall, Inc., 35 F.4th 734 (2022) — The Ninth Circuit held that CFPA deceptive practice findings are not precluded when deception involves state law, noting that the CFPA "directs the Bureau to cooperate with state regulators, and vice-versa" and "does not modify or limit state law, except to that extent that state law is inconsistent with the CFPA."

Practical Implications

Recent Developments

PREEMPTION OPINIONS