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.

 

 

C O M M O N      P A G E      F O O T E R

 

2019.02.18 ... Florida Order Awarding LLC Interest To Creditor Reversed In Pansky

2019.03.19 ... Million Dollar Quartet Leads To Lien Priority Dispute Involving Charging Order

2019.04.27 ... Iowa Supreme Court Serves Up A Shoddy Charging Order Opinion In Retterath

 

More Articles On Charging Orders click here

 

 

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

 

General Information

• About Jay Adkisson
• Articles About Charging Orders

 

Analysis of Uniform Limited Liability Company Act Sections re Charging Orders

• Charging Orders (Section 503)

• Foreclosure of Charging Order Liens (502(c-e))
• Foreclosure re Single-Member LLC (502(f))

• Transfers of Transferable Interests (Section 502) includes definitions of "transfer" (102(23)), "transferable interests" (102(24)), and "transferees" (102(25))
• Definition of Distribution (Section 102(4))

 

The Uniform Acts re Charging Orders and Transferable Interests (without Jay's comments):

• Uniform Limited Liability Company Act, Article V

• Uniform Partnership Act, Article V
• For the Uniform Limited Partnership Act, Article VII

 

Effect of Bankruptcy On The Debtor-Member's LLC Interest here

 

More Interesting Charging Order Opinions (unsorted) here

 

 

Appeal - Issues relating to the appeal of a charging order

 

Bankruptcy - Treatment of the debtor/member's interest in bankruptcy

 

Compliance - Issues for the LLC and non-debtor members in complying with a charging order

 

Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute

 

Creditor Rights Restrictions - Limitations on creditors' management and informational rights

 

Economic Rights - Limitation of charging order and foreclosure to debtor's economic rights

 

Exclusivity - The charging order as the sole remedy available to creditors and exceptions

 

Exemptions - Available state and federal protections that may apply to charging orders

 

Foreclosure - Liquidation by judicial sale of the debtor's right to distributions

 

Information Rights - Creditors' ability to access information about the LLC

 

Intra-Member Disputes - Where one member obtains a charging order against another

 

Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs

 

Lien - The lien effect of a charging order and priority issues

 

Procedure - The procedure for obtaining a charging order and ancillary provisions

 

Receiver - The role of the receiver in charging order proceedings

 

Single-Member LLCs - Enforcing the judgment against an LLC with a sole member

 

Taxes - Tax issues relating to charging orders for all involved parties

 

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Additional Court Opinions About Charging Orders - Unsorted

 

 

• About Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances - https://jayadkisson.com/

 

• Captive Insurance Companies - Licensed insurance companies formed by the parent organization to handle the insurance and risk management needs of the business - https://captiveinsurancecompanies.com/

 

• Asset Protection Book - The all-time best-selling book on asset protection planning by Jay Adkisson and Chris Riser - https://assetprotectionbook.com/

 

• Collecting On A Judgment - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies - https://collectingonajudgment.com/

 

• Voidable Transactions - Discussion of the Uniform Voidable Transactions Act (a/k/a 2014 Revision of the Uniform Fraudulent Transfers Act) and fraudulent transfer law in general - https://voidabletransactions.com/

 

• Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused - https://privateretirementplans.com/

 

• Protected Series LLCs - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017 - https://protectedseriesact.com/

 

• California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues - https://calejl.com/

 

• Anti-SLAPP Laws - A collection of and commentary about Anti-SLAPP laws and significant court decisions on the subject within the United States - https://antislapplaws.com/ and focus on the California Anti-SLAPP law at https://antislappcalifornia.com/

 

© 2018 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] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678.