Charging Orders

The Creditors' Primary Remedy Against A Debtor's

Interest In A Limited Liability Company Or Partnership

Caution state law variances!

A Charging Order is a statutory remedy available to some degree or another in all states which allow a creditor of a member (in the case of an limited liability company) or a partner (in the case of a general or limited partnership) to place a lien on that member's or partner's rights to distributions, so as to intercept any payments that would otherwise be made to the member or partner by the entity.

 

[Charging Orders are also occasionally found in a few states as, essentially, a method of garnishment in (it seems) predominantly family law cases, but this website does not consider that varietal and no more will be said about them.]

 

The Charging Order did not exist at common law, and was not imported into the American common law. Instead, Charging Orders are authorized by the state laws relating to partnerships and LLCs, and almost always meaning some version of the Uniform Partnership Act ("UPA", phonetic "Ooh-pah"), the Uniform Limited Partnership Act ("ULPA", phonetic "Uhl-pah"), and the Uniform Limited Liability Company Act ("ULLCA", phonetic "Uhl-kah"). All of these uniform acts were drafted and approved by the Uniform Law Commission, which is comprised of state commissioners appointed by the governor of each state, and then promulgated to the states via legislative liasons for enactment.

 

Together, the UPA, ULPA, and ULLCA are known as the "Harmonized Acts" due to a harmonization project by the Uniform Law Commission ("ULC), completed in 2013, that was intended to (and did in substantial part) make these acts nearly alike in the language used for their key aspects.

 

The process of harmonization and the inherent desire for uniform acts to be, well, uniform, has generally been respected by the states; however, some states have substantially tinkered with both the language and substantive effect of the Harmonized Acts as they related to charging orders. For example, some states have eliminated the ability of a creditor to foreclose on a charging order, which creates the potential for certain benefits and problems (mostly problems) in those states.

 

The point here is that this website considers Charging Orders under the Uniform Law Commission version of the Harmonized Acts, but the charging order provisions of the Harmonized Acts may have been modified or changed by particular states. Thus, practitioners should caution variances in their state's acts, or in the acts of other states that might apply in a conflict of law situation. This is a principle reason why nothing in this website should be taken as legal advice or opinion, nor should be presumed to apply as state in a given state. Practitioners must understand the Harmonized Acts, their acts of the states that they are dealing with, and note the differences (if any) and their effect.

 

A further caution is that only one state, being California, has taken the time to coordinate their post-judgment procedural regime with the Harmonized Acts. The result of this wholesale failure of the state legislatures (due largely to the strange lack of guidance provided on the subject by the Uniform Law Commission) is that in all states but California the courts must come up with ad hoc procedures to implement the Charging Order provisions of the Uniform Acts. To say that this is an unfortunate state of affairs and has caused considerable confusion among the courts and litigants would be a vast understatement.

 

It Doesn't Have To Be This Difficult

 

The Charging Order remedy is an anachronism that exists because of (1) a divergence of English remedy law, which requires that a "charging order" effect an attachment of the debtor's property, and American remedy law, which normally allows a creditor to simply place a lien on that property, and (2) the Charging Order provision of the English Partnership Act was (apparently) thoughtlessly copied into the original Uniform Partnership Act of 1914 -- and been just as thoughtlessly carried over into the revisions of that act, as well as the ULPA and ULLCA, ever since.

 

There really is no good reason why a creditor should not just be able to provide a copy of the judgment to the entity, or file a copy of the judgment with the Secretary of State's office in the entity's jurisdiction of formation, and thereby automatically create a lien on the debtor's interest. Unfortunately, the Charging Order has taken on a life of its own, mostly spurred as a misuse for asset protection purposes, and so persists as an anomaly, a "peculiar mechanism" as one court put it, or what I would call a statutory bastard of American law.

 

But it is what it is, and we have to deal with the law as it is instead of (for the time being at least) what we desire it to be.

 

Enjoy.

 

 

 

2018.02.22 ... Ancillary Provisions In Charging Orders Illuminated In Law

2017.11.23 ... Charging Order Not Exclusive Remedy For SMLLC Interest In Heckert

2017.6.29 ... Colorado Supreme Court Affirms McClure Charging Order Decision And Causes Split With Other States

2017.5.22 ... A Charging Order A Day Keeps The Receiver Away In Pajooh

2017.3.11 ... Yet Another Intra-Member Dispute In ZUPT

 

 

For more on the historical background of Charging Orders and contemporary issues involving the same, see Jay Adkisson's article, Charging Orders: The Peculiar Mechanism, 61 South Dakota Law Review 440 (2016). Available at SSRN: https://ssrn.com/abstract=2928487

© 2017, Jay D. Adkisson. All Rights Reserved. No claim to government works or the works of the Uniform Law Commission. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction.  This site is https://chargingorder.com Contact: jay [at] jayadkisson.com or by phone to 702-953-9617 or by fax to 877-698-0678.x