Compliance With Charging Orders

Topic Compliance TopicsCompliance

The Harmonized Acts make no provisions for a court to enforce a charging order, thus leaving the presumption that the appropriate remedy sounds in contempt.

Acts of non-compliance with a charging order typically fit into the following categories:

1. Non-compliance by the entity, by decision of the debtor/member ("D/M");

2. Non-compliance by the entity, by decision another member;

3. Non-compliance by the D/M; and

4. Collusive non-compliance by the D/M, the entity, and/or other members.

There is also a distinction to be drawn between willful non-compliance (what contempt requires) and non-willful non-compliance (i.e., negligence) for which contempt is not available and the creditor's remedy would sound in damages.

The contempt remedy requires the creditor to obtain an Order to Show Cause (OSC) re Contempt (still known in some states as a Writ of Fieri Facias), and go through a lengthy evidentiary hearing process. Conversely, damages for a negligent distribution are usually remedied through a creditor's suit or similar device, similar to where a bank allows a debtor to withdraw money pending a levy. It is probably satisfactory for an expanded Comment to explain this difference.

The non-compliance may also be divided between the making of a distribution to the D/M in violation of the charging order, and the making of so-called "imputed income" to the D/M by paying the D/M's expenses, such as credit cards, car leases, etc. This issue probably requires a change to § 503 to make it clear that all consideration of any kind passing to a D/M is subject to the charging order, and that the entity is directly liable to the creditor for a like amount of the consideration given by the entity but not distributed to the creditor.