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Exclusivity Of Charging Order Remedy

Topic Exclusive_Remedy TopicsExclusivity



♦ SUMMARY OF CHARGING ORDER EXCLUSIVITY

Introduction

Charging orders are generally the exclusive remedy by which judgment creditors may satisfy judgments from a debtor's interest in limited liability companies and partnerships, but this exclusivity varies significantly by jurisdiction and circumstance. Most states have adopted statutes establishing charging order exclusivity for both LLCs and partnerships, following the Uniform Limited Liability Company Act and Revised Uniform Partnership Act models. However, important exceptions exist, including: (1) single-member LLC carve-outs in some jurisdictions like Florida; (2) states like Colorado that reject exclusivity entirely; (3) equitable exceptions for alter ego and reverse veil-piercing theories; and (4) preservation of fraudulent transfer remedies. The exclusivity doctrine serves to protect non-debtor members and partners from business disruption while providing creditors a limited remedy to capture distributions.

Statutory Framework for LLC Charging Order Exclusivity

The foundation for charging order exclusivity stems from widespread state adoption of provisions modeled on the Uniform Limited Liability Company Act. Florida's LLC statute exemplifies the exclusivity approach, stating that "a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member's transferee may satisfy a judgment from the judgment debtor's interest in a limited liability company or rights to distributions from the limited liability company." FL ST § 605.0503. Texas similarly provides that "the entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of any other owner of a membership interest may satisfy a judgment out of the judgment debtor's membership interest." TX BUS ORG § 101.112.

Multiple states have adopted comparable exclusivity language. Arkansas law declares that "the entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of another owner of a membership interest may satisfy a judgment out of the judgment debtor's membership interest." AR ST § 4-38-503. Michigan's statute provides that charging orders constitute "the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the member's membership interest." MI ST 450.4507. Pennsylvania similarly establishes charging order exclusivity for LLC interests. PA ST 15 Pa.C.S.A. § 8853. Oklahoma's statute explicitly states that charging orders "shall be the sole and exclusive remedy of a judgment creditor with respect to the judgment debtor's membership and capital interest, whether the limited liability company has one member or more than one member." OK ST T. 18 § 2034.

Partnership Charging Order Exclusivity

Partnership statutes similarly establish charging order exclusivity across multiple jurisdictions. Maine law provides that charging orders constitute "the exclusive remedy by which a judgment creditor of a partner or partner's transferee may satisfy a judgment out of the judgment debtor's transferable interest in the partnership." ME ST T. 31 § 1054 Pennsylvania's partnership statute declares that charging orders provide "the exclusive remedy by which a person seeking, in the capacity of a judgment creditor, to enforce a judgment against a partner or transferee may satisfy the judgment from the judgment debtor's transferable interest." PA ST 15 Pa.C.S.A. § 8454. Oregon, Tennessee, Arkansas, and Maryland have adopted similar exclusivity provisions for partnership interests. OR ST § 67.205; TN ST § 61-1-504; AR ST § 4-46-504; MD CORP & ASSNS § 9A-504.

The historical development of partnership charging orders demonstrates their intended exclusivity. The Wyoming Supreme Court in Christensen v. Oedekoven, citing legal scholarship, noted that "the statutory charging order was virtually the exclusive remedy available to a partner's separate creditor who wanted to reach the partnership interest." Christensen v. Oedekoven, 95 Wy. 3 (Wyo.App., 1995).. The court agreed with the Colorado Court of Appeals that charging orders are "a post-judgment remedy specifically tailored for partnerships" that "protects the interests of the nondebtor partners by giving the judge wide latitude to control the creditor's actions against the partnership." Christensen v. Oedekoven, 95 Wy. 3 (Wyo.App., 1995)..

Jurisdictions Rejecting Charging Order Exclusivity

Several jurisdictions have explicitly rejected charging order exclusivity or adopted statutes that make charging orders non-exclusive. Colorado represents the clearest example of a state that has not adopted charging order exclusivity for LLCs. In Bartch v. Barch, the Tenth Circuit held that "we conclude that the Colorado Supreme Court would hold that a § 7-80-703 charging order is not an exclusive remedy for an LLC judgment creditor member seeking to enforce a judgment against a judgment debtor's interest in the LLC." Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024).. The court noted that "other states and the model Uniform Limited Liability Company Act make charging orders an exclusive remedy to protect non-judgment-debtor members in a multi-member LLC," but emphasized that "Colorado has not adopted the ULLCA." Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024).

Georgia's LLC statute, OCGA § 14-11-504(b), explicitly rejects exclusivity, providing that charging order remedies "shall not be deemed exclusive of others which may exist." The Georgia Court of Appeals acknowledged this non-exclusivity provision in Gaslowitz v. Stabilis Fund I, LP, 2015 WL 1059575 (Ga.App., 2015)..

Single-Member LLC Exception

Several jurisdictions have created specific exceptions to charging order exclusivity for single-member LLCs, recognizing that the policy rationale for protecting non-debtor members does not apply when only one member exists. Florida's statute contains the most detailed single-member LLC exception, providing that for LLCs with only one member, "if a judgment creditor establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy," and courts may "order the sale of that interest in the limited liability company pursuant to a foreclosure sale." FL ST § 605.0503.

The Florida Supreme Court's decision in Olmstead v. F.T.C. interpreted Florida's LLC charging statute as non-exclusive for all LLCs, holding that "the charging order provision establishes a nonexclusive remedial mechanism" because "there is no express provision in the statutory text providing that the charging order remedy is the only remedy that can be utilized with respect to a judgment debtor's membership interest in an LLC." Olmstead v. FTC, 44 So.3d 76 (Fla., 2010).. The court applied this interpretation to hold that judgment creditors could pursue remedies beyond charging orders against single-member LLCs. However, the Florida legislature subsequently amended the statute to clarify that charging orders are generally exclusive, with specific exceptions for single-member LLCs when charging orders prove inadequate. FL ST § 605.0503.

In contrast, Texas explicitly rejected the single-member LLC exception, with its statute stating that charging order exclusivity "applies to both single-member limited liability companies and multiple-member limited liability companies." TX BUS ORG § 101.112. This clarification was added in 2023 to resolve any ambiguity about whether exclusivity applied to single-member entities.

Alter Ego and Reverse Veil-Piercing Exceptions

Courts across multiple jurisdictions have recognized that charging order exclusivity does not prevent application of alter ego theories and reverse veil-piercing doctrines when appropriate factual circumstances exist. The Fourth Circuit's decision in Sky Cable, LLC v. DIRECTV, Inc., predicting how Delaware law would apply, concluded that "Delaware's LLC charging statute does not prevent a court from reverse piercing the veil of an LLC that serves only as alter ego of its sole member." Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (2018). The court reasoned that piercing the veil of an alter ego is not the type of remedy that the provision was designed to prohibit, because piercing the veil of an LLC effectively eliminates the legal status of the LLC in very narrow circumstances in which fraud or other injustice has been established. Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (2018).

California courts have similarly permitted reverse veil-piercing despite charging order exclusivity statutes. In Curci Investments, LLC v. Baldwin, the court held that California's charging order statute "does not preclude reverse piercing" to add the LLC as a judgment debtor. Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214 (2017). The court emphasized that "the key is whether the ends of justice require disregarding the separate nature of the LLC under the circumstances," requiring evaluation of traditional veil-piercing factors and whether the creditor has "any plain, speedy, and adequate remedy at law." Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214 (2017). This approach was reaffirmed in Blizzard Energy, Inc. v. Schaefers, where the court concluded that "charging order against distributions made to judgment debtor as LLC member was not judgment creditor's exclusive remedy" when reverse veil-piercing was appropriate. Blizzard Energy, Inc. v. Schaefers, 2021 WL 5366815 (Cal.App., Distr. 6, Nov. 18, 2021)..

Connecticut's Supreme Court in McKay v. Longman addressed this issue, noting that other jurisdictions have held that "piercing the veil of an alter ego is not the type of remedy that the [exclusivity] provision was designed to prohibit." McKay v. Longman, 332 Conn. 394 (2019).

Delaware's Court of Chancery has provided additional clarity on this issue. In Manichaean Capital, LLC v. Exela Technologies, Inc., the court held that charging orders do not prohibit reverse veil-piercing claims because such claims "does not rest on or invoke a remedy other than the charging order" but instead seek "a judicially sanctioned expansion of the entities against whom the Charging Order may be enforced." Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021).. The court distinguished between attempts to pursue "separate legal or equitable claims" against entities (which would be barred) and efforts to expand the scope of entities subject to existing charging orders (which are permitted). Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021).. However, the court held that other equitable claims like unjust enrichment are barred by the charging order statute because they seek separate judgments rather than enforcement of existing charging orders.

Preserved Remedies and Fraudulent Transfer Claims

Charging order exclusivity statutes typically preserve certain categories of remedies, most notably fraudulent transfer claims. Florida's statute explicitly provides that charging order exclusivity does not limit "the principles of law and equity which affect fraudulent transfers" or "the availability of the equitable principles of alter ego, equitable lien, or constructive trust or other equitable principles not inconsistent with this section." FL ST § 605.0503.

Texas courts have addressed the interaction between charging order exclusivity and fraudulent transfer remedies. In Pajooh v. Royal West Investments LLC, the court rejected arguments that charging order exclusivity would "vitiate Texas fraudulent transfer law," explaining that "to the extent a debtor is shown to have fraudulently transferred an asset to a partnership in which the debtor has a partnership interest, the creditor's remedies are not limited to the debtor's partnership interest" but instead include avoidance remedies under the Uniform Fraudulent Transfer Act. Pajooh v. Royal West Investments LLC, Series E, 2017 WL 1173892 (Tex.App., March 30, 2017)..

The Oregon Supreme Court in Law on behalf of Robert M. L. Profit Sharing Plan v. Zemp addressed the scope of charging order exclusivity, holding that "even if the charging order remedy provided in ORS 70.295 is in some respect exclusive, that exclusivity would not affect a court's authority under "ordinary rules", including ORS 67.205, to issue ancillary orders that are not themselves traditional creditor's remedies." Law v. Zemp, 362 Or. 302 (Jan. 11, 2018).. However, the court held that ancillary orders are only authorized when necessary to effectuate the charging order without unduly interfering with the entity's management, and found that the ancillary orders at issue did not meet this standard. The court emphasized that exclusivity prevents "traditional creditors' remedies like attachment, garnishment and levy—not ancillary orders that are designed only to assist or enforce the charging order remedy." Law v. Zemp, 362 Or. 302 (Jan. 11, 2018)..

Federal Bankruptcy Court Treatment

Federal bankruptcy courts generally respect state law determinations regarding charging order exclusivity, but the intersection with federal bankruptcy law creates additional complexity. In In re Pettine, the Tenth Circuit Bankruptcy Appellate Panel addressed whether a Chapter 7 trustee could obtain a charging order under Wyoming law, ultimately concluding that state charging order provisions apply in bankruptcy proceedings. Pettine v. Direct Biologics, LLC (In re Pettine), 2023 WL 7648619 (BAP 10th Cir., Nov. 15, 2023)..

However, the survival of charging order liens through bankruptcy proceedings varies by jurisdiction. In Monroe v. Berger, a federal district court applying Ohio law held that "under Ohio law, a charging order is not a lien and, thus, does not pass through bankruptcy unscathed." Monroe v. Berger, 297 B.R. 97 (2003). The court found that charging orders do not create property interests that survive bankruptcy discharge, distinguishing them from secured claims that may pass through bankruptcy proceedings.

In contrast, In re Keeler addressed Maryland law and found that charging order liens could survive bankruptcy proceedings under certain circumstances. In re Keeler, 257 B.R. 442 (2001). The court held that "while action to collect on prepetition charging lien entered against debtor's partnership interests was stayed during bankruptcy case, lien itself rode through bankruptcy case and remained viable on property captured before case commenced." In re Keeler, 257 B.R. 442 (2001).

Practical Limitations of Charging Orders

Even in jurisdictions that enforce charging order exclusivity, these remedies have significant practical limitations that reduce their effectiveness for creditors. Charging orders typically provide creditors only with rights to receive distributions that would otherwise be paid to the judgment debtor, without granting any management rights or ability to compel distributions. Courts have recognized from case law interpreting Texas statutes that a judgment creditor cannot use a charging order to compel a distribution of profits by a partnership and does not obtain a right to participate in the partnership, and similarly cannot use a charging order to compel a distribution of proceeds by an LLC.

The Georgia Court of Appeals in Gaslowitz v. Stabilis Fund I, LP emphasized these limitations, holding that "Stabilis was not entitled to an accounting of G & A, LLC's assets" because "A charging order, however, gives no direct remedy against company property" and "company assets shown in an accounting would not be subject to satisfaction of Gaslowitz's debt." Gaslowitz v. Stabilis Fund I, LP, 2015 WL 1059575 (Ga.App., 2015).. The court noted that "a judgment creditor does not become a member of a limited liability company by reason of a charging order, but only accedes to the 'rights of an assignee' of a limited liability company interest." Gaslowitz v. Stabilis Fund I, LP, 2015 WL 1059575 (Ga.App., 2015)..

Courts have also recognized that charging orders may be ineffective when entities are structured to avoid making distributions. The practical reality is that many LLCs and partnerships can operate indefinitely without making distributions to members, rendering charging orders largely meaningless for creditor collection purposes. This limitation has led some courts to permit additional remedies in appropriate circumstances, particularly when entities appear to be structured primarily for asset protection purposes.

Arguments and Rebuttals

Supporting Charging Order Exclusivity

Entity Protection and Business Continuity
  • Charging order exclusivity prevents judgment creditors from disrupting ongoing business operations by prohibiting direct seizure of entity assets or forced liquidation.
  • Non-debtor members and partners are protected from having unwanted third parties imposed upon them through creditor collection actions.
  • The policy preserves the essential nature of business entities as separate legal persons distinct from their owners.
  • Anticipated Rebuttals: Critics argue this protection is unnecessary for single-member entities where no non-debtor members exist, and that absolute protection enables fraudulent asset protection schemes.
Legislative Intent and Uniform Law Adoption
  • State legislatures have explicitly adopted statutes declaring charging orders as "exclusive" or "sole" remedies, demonstrating clear legislative intent to limit creditor remedies.
  • The widespread adoption of uniform act provisions across jurisdictions shows consensus that charging order exclusivity serves important policy goals.
  • Courts should respect clear statutory language rather than creating judicial exceptions that undermine legislative choices.
  • Anticipated Rebuttals: Opponents contend that uniform acts are models that states can modify, and that some states have explicitly rejected exclusivity provisions or created exceptions.
Adequate Creditor Remedies
  • Charging orders provide creditors with meaningful collection mechanisms by capturing all distributions that would otherwise flow to debtor-members.
  • Creditors retain access to other remedies including fraudulent transfer claims, secured transaction rights, and direct collection from other debtor assets.
  • The charging order framework provides a balanced approach that protects both creditor rights and entity integrity.
  • Anticipated Rebuttals: Creditors argue that charging orders are often illusory remedies when entities make no distributions, and that asset protection abuse requires stronger collection mechanisms.

Opposing Charging Order Exclusivity

Single-Member Entity Exception
  • The policy rationale for protecting non-debtor members disappears when dealing with single-member LLCs where no other stakeholders exist.
  • Allowing absolute protection for single-member entities creates opportunities for abusive asset protection strategies that harm legitimate creditors.
  • Courts should permit foreclosure and direct collection when charging orders prove inadequate for single-member entities.
  • Anticipated Rebuttals: Supporters argue that entity protection serves broader purposes beyond member protection, including encouraging business formation and maintaining consistent legal frameworks.
Equitable Exceptions for Abuse
  • Traditional equity doctrines like alter ego and reverse veil-piercing should override statutory exclusivity when entities are mere shams or instrumentalities.
  • Charging order exclusivity should not protect debtors who abuse the corporate form or use entities primarily for asset protection rather than legitimate business purposes.
  • Courts possess inherent equitable power to prevent injustice that transcends statutory limitations.
  • Anticipated Rebuttals: Exclusivity advocates contend that statutory schemes should be respected, and that existing exceptions for fraudulent transfers provide adequate protection against abuse.
Ineffective Remedies Requiring Alternatives
  • Charging orders become meaningless when entities are structured to make no distributions, requiring courts to permit alternative collection methods.
  • Absolute exclusivity enables sophisticated asset protection schemes that effectively place debtor assets beyond creditor reach.
  • Courts should have flexibility to order direct collection when charging orders prove practically inadequate.
  • Anticipated Rebuttals: Proponents argue that creditors should consider these limitations before extending credit, and that undermining exclusivity would damage business entity law's predictability.

Cases on Both Sides

Supporting Charging Order Exclusivity

  • Pansky v. Barry S. Franklin & Assoc., 2019 WL 581620 (Fla.App., Feb. 13, 2019). — The Florida Fourth District Court of Appeal held that charging orders are the exclusive statutory remedy available to judgment creditors against interests in multi-member LLCs under § 605.0503(3). However, for single-member LLCs, § 605.0503(4) permits courts to order foreclosure sales of the LLC interest if distributions under a charging order will not satisfy the judgment within a reasonable time. The court emphasized that trial courts exceeded their authority when ordering direct transfer of LLC interests where factual disputes existed about whether the LLC was single-member or multi-member, as this determination controls which statutory provision applies.
  • Wells Fargo Equip. Fin. v. Retterath, 2019 WL 1574686 (Iowa, April 12, 2019). — The Iowa Supreme Court held that charging orders constitute "the sole and exclusive remedy by which a judgment creditor may satisfy a judgment from the judgment debtor's interest in a limited liability company." The court applied this exclusivity principle to determine that LLC membership interests were located where the entity was formed for purposes of charging order enforcement.
  • Pajooh v. Royal West Investments LLC, Series E, 2017 WL 1173892 (Tex.App., March 30, 2017). — The Texas First District Court of Appeals held that charging orders were the exclusive remedy for satisfying judgments from partnership and LLC interests themselves, rejecting policy arguments about conflicts with fraudulent transfer law. However, the court affirmed the receivership over the judgment debtors personally, holding that receiverships can be used to monitor distributions and effectuate charging orders. The court reversed only to the extent the receivership improperly extended to the partnership entity (County Investment LP) and the debtor's membership interest in U.S. Capital Investments LLC.

Rejecting or Limiting Charging Order Exclusivity

  • Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024). — The Tenth Circuit held that under Colorado law, charging orders are not exclusive remedies for judgment creditors seeking to enforce judgments against LLC membership interests. The court noted that Colorado had not adopted the Uniform Limited Liability Company Act provisions establishing exclusivity, making alternative collection methods available.
  • Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (2018) — The Fourth Circuit predicted that Delaware law would permit outsider reverse piercing of LLC veils when entities serve as alter egos of sole members. The court concluded that Delaware's charging statute did not prevent reverse veil-piercing because such remedies address different concerns than traditional seizure remedies.
  • Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214 (2017) — The California Fourth District Court of Appeal held that charging order statutes do not preclude reverse veil-piercing to add LLCs as judgment debtors under alter ego theories. The court found that charging provisions were not as all-encompassing as defendants suggested and that legislative comments supported allowing reverse piercing where appropriate.
  • Olmstead v. FTC, 44 So.3d 76 (Fla., 2010). — The Florida Supreme Court interpreted Florida's LLC charging order provision as establishing a non-exclusive remedial mechanism for all LLCs because the statute contained no express exclusivity language. Applying this interpretation, the court concluded that courts could order judgment debtors to surrender their interests in single-member LLCs to satisfy outstanding judgments. This holding was later superseded by legislative amendments.

Practical Implications

Charging orders present significant practical challenges for judgment creditors seeking to collect on debts owed by LLC members or partners. Creditors cannot compel entity distributions and must wait passively for voluntary distributions, which may never occur if entities are structured to retain earnings or make distributions only when convenient for debtor-members. This limitation makes charging orders particularly ineffective against entities designed primarily for asset protection purposes rather than active business operations.

The effectiveness of charging orders varies dramatically based on entity structure and jurisdiction. Single-member LLC exceptions in states like Florida provide additional collection avenues when charging orders prove inadequate, but require creditors to demonstrate through litigation that traditional charging orders will not satisfy judgments within reasonable timeframes. Conversely, absolute exclusivity jurisdictions like Texas provide debtors with substantial asset protection benefits that may be difficult for creditors to overcome absent evidence of fraudulent transfers or alter ego relationships.

Creditor attorneys must carefully assess both entity structure and governing jurisdiction before pursuing collection actions against LLC or partnership interests. The choice between filing in exclusivity versus non-exclusivity jurisdictions can determine whether creditors have access to meaningful collection remedies or face potentially years of waiting for distributions that may never materialize. Asset protection benefits for debtors are correspondingly substantial in strict exclusivity jurisdictions, making LLC and partnership structures attractive vehicles for protecting assets from potential future creditors.

Recent Developments

Recent legislative and judicial developments demonstrate increasing jurisdictional divergence on charging order exclusivity issues. Texas clarified its position in 2023 by explicitly stating that charging order exclusivity applies equally to single-member and multi-member LLCs, rejecting the trend toward single-member exceptions adopted in other states. TX BUS ORG § 101.112. This amendment resolved previous ambiguity about whether exclusivity applied when no non-debtor members existed to protect.

Delaware's Court of Chancery's 2021 decision in Manichaean Capital, LLC v. Exela Technologies, Inc., 2021 WL 2104857 (Del.Chanc., May 25, 2021)., was the first Delaware decision to recognize reverse veil-piercing as an available remedy in exceptional circumstances. The court refined the analysis for when charging orders do not prevent reverse veil-piercing specifically, distinguishing between prohibited alternative collection methods and permitted expansions of charging order scope. This landmark decision provides creditors with additional tools for reaching entity assets when traditional charging orders prove inadequate.

The Tenth Circuit's 2024 decision in Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024)., represents the clearest federal appellate rejection of charging order exclusivity, holding that Colorado law does not establish charging orders as exclusive remedies for LLC interests. This decision highlights the continuing divergence between states that have adopted uniform act provisions and those that maintain more traditional creditor collection frameworks.

California courts have recognized the availability of reverse veil-piercing as an exception to charging order exclusivity through decisions including Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214 (2017), and Blizzard Energy, Inc. v. Schaefers, 2021 WL 5366815 (Cal.App., Distr. 6, Nov. 18, 2021)., establishing that alter ego theories can override statutory exclusivity provisions when equitable factors support disregarding entity separateness. These decisions reflect a judicial trend toward recognizing equitable exceptions to statutory exclusivity provisions when entities are used primarily for asset protection purposes. ♦

LIKE SWISS CHEESE: 14 EXCEPTIONS TO CHARGING ORDER EXCLUSIVITY

A charging order is the American remedy by which a creditor may enforce a judgment against the interest held by a debtor in a limited liability company or partnership. A charging order has two components: First, a judicial lien is created in favor of the creditor against the debtor's interest; and, second, economic distributions to the interest are ordered to be paid to the creditor. The charging order ― which is to say the lien and order to pay ― continues to exist until the debtor has fully satisfied the judgment to the creditor. Most U.S. jurisdictions have adopted language in their LLC and partnership statutes which say that the charging order remedy is a creditor's exclusive remedy to satisfy a judgment against the debtor's interest. This is known as charging order exclusivity. But what does exclusive in this context mean really?

There is a widely-held myth in LLC and partnership law that exclusive means something like outcome determinative, i.e., the creditor is stuck with a charging order and can get no further relief against the debtor's interest. This is false for, as will be shown below, there are at least fourteen (14) identifiable exceptions to charging order exclusivity. Moreover, it has long been held that the office of the charging order is not to protect the debtor's interest from creditors, but rather to protect the non-debtor members from being forced into what amounts to an involuntary business marriage with the debtor-member's creditors. With these exceptions, we will see that so long as the interests of the non-debtor members can be protected from the forced business marriage scenario, the debtor's interest is actually quite susceptible to being lost to creditors.

For ease of analysis, this article will focus upon limited liability companies although the same analysis will usually apply to the various forms of partnerships. Also, because most U.S. jurisdictions have adopted some form of the Uniform Limited Liability Company Act ("ULLCA"), or at least a functionally-similar various of the ULLCA, we will focus upon the language of the ULLCA where applicable.

And now, on to the exceptions!

The 503 Organic Exceptions

The first four exceptions are those found within the text of ULLCA 503 itself. They are thus known as the organic exceptions to charging order exclusivity.

1. 503(c) Foreclosure

ULLCA 503(c) provides that if the creditor can show that distributions to the debtor-member's interest will not satisfy the judgment within a "reasonable" time, the court may order a judicial sale of the interest. What the purchaser at the judicial sale gets is determined by ULLCA 502, which means that the purchaser acquires the debtor's economic interest only. See, e.g., Hellman v. Anderson, 233 Cal. App. 3d 840, 284 Cal. Rptr. 830 (Cal.App.Dist.3 1991). However, this leaves the debtor without an economic interest in the LLC and normally causes the debtor to be disassociated from the LLC.

Outcome: Debtor loses LLC interest, and the purchaser at the judicial sale becomes a mere assignee of the debtor's economic interest unless also admitted to the LLC.

2. 503(e) Redemption

ULLCA 503(e) provides that prior to the foreclosure, either the LLC or the non-debtor members may purchase the interest by paying to the creditor the the full outstanding amount of the debtor-member's judgment. Practically, however, a creditor should almost be willing to accept the fair market value of the interest (and often much less). See, e.g., Eights & Jackson Investment Group v. Kaw Valley Bank, 2013 WL 183753 (D.Kan., 2013).

Outcome: Debtor loses the LLC interest, which is acquired by the non-debtor members.

3. 503(f) Single-Member LLC

ULLCA 503(f) provides that the foreclosure of the charging order lien against the debtor-member's interest in a single-member LLC results in the purchaser at the judicial sale (usually the creditor via credit-bidding) becomes the new and only member of the LLC. The Comment to 503(f) states: "The charging order remedy—and, more particularly, the exclusiveness of the remedy—protect the 'pick your partner' principle. That principle is inapposite when a limited liability company has only one member. The exclusivity of the charging order remedy was never intended to protect a judgment debtor, but rather only to protect the interests of the judgment debtor's co-owners. Put another way, the charging order remedy was never intended as an 'asset protection' device for judgment debtors. See Olmstead v. F.T.C., 44 So. 3d 76, 83 (Fla. 2010) (recognizing 'the full scope of a judgment creditor's rights with respect to a judgment debtor's freely alienable membership interest in a single-member LLC'); In re Albright, 291 B.R. 538, 540 (Bankr. D. Colo. 2003) (holding that, '[b]ecause there are no other members in the LLC, . . . the Debtor's bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights, including the right to control the management of the LLC'). Accordingly, when a charging order against an LLC's sole member is foreclosed, the member's entire ownership interest is sold and the buyer replaces the judgment debtor as the LLC's sole member."

Outcome: Debtor loses the LLC interest and the purchaser at the judicial sale will take in full the debtor's former interest and also take control of the LLC's assets.

4. 503(h) "Other Orders"

ULLCA 503(h) states that "[t]his section provides the exclusive remedy" by which a creditor can satisfy a judgment against the debtor-member's interest in an LLC. However, "this section" includes 503(b)(2) which allows a court to "make all other orders necessary to give effect to the charging order" and to "effectuate the collection of distributions". Thus, where distributions are not being made, the court may make "other orders" that force the making of that distribution. See, e.g., Earthgrains Baking Co., v. Sycamore, 2022 WL 433486 (10th Cir., Feb. 14, 2022) ("It is wrong to use [the exclusive remedy language] to read out of the statute broad language permitting a court to 'make all other orders necessary to give effect to the charging order.' [Citation omitted]. That language is crucial to the statute's procedural design and effectiveness, as this case illustrates."). This is perhaps the biggest hole in the charging order Swiss Cheese, albeit it is typically employed only in cases where the debtor, the LLC, or the non-debtor members have acted egregiously in derogation of the creditor's rights.

Outcome: Distributions are forced to the debtor's interest subject to the charging order, including liquidation of LLC assets to accomplish this if necessary.

The 503 Inapplicable Exceptions

The next five exceptions to charging order exclusivity occur because ULLCA 503 is determined for various reasons to not apply at all. Since charging order exclusivity is a creature of ULLCA 503, it simply disappears with these exceptions. These exceptions are thus known as the inapplicability exceptions.

5. Foreign LLC

Comment to ULLCA 503: By its terms, this section does not apply to foreign limited liability companies. See Section 102(8) (defining "[l]imited liability company" to mean "an entity formed under this [act] or which becomes subject to this [act]") (emphasis added); see also Fannie Mae v. Heather Apartments Ltd. P'ship, A13-0562, 2013 WL 6223564, at *6 (Minn. Ct. App. Dec. 2, 2013) (considering the remedies available to a judgment creditor with respect to the judgment debtor's interest in a Cook Islands LLC; rejecting the debtor's argument that the creditor's "only remedy is to obtain a charging order under" [the Minnesota LLC statute]; explaining that "this argument fails because that statute only applies to Minnesota limited liability companies" which that statute "defines . . . as 'a limited liability company, other than a foreign limited liability company, organized or governed by this chapter'") (emphasis added) (statutory citations omitted). The operating agreement has no power to alter the provisions of this section to the prejudice of third parties. Section 105(c)(15). Note that recent changes to ULLCA, now being adopted by the states, will patch this loophole and make clear that foreign LLCs (including out-of-state LLCs) are subject to ULLCA 503.

Outcome: A creditor may choose another remedy besides the charging order to enforce the judgment against the debtor's interest.

6. Forum State Has No Charging Order Exclusivity

Some states do not make the charging order the creditor's exclusive remedy. Even if the LLC is the formation state having charging order exclusivity, local judgment enforcement law may apply the law of the forum state without charging order exclusivity, thus allowing the creditor to employ another remedy. See, e.g., Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024).

Outcome: A creditor may choose another remedy besides the charging order to enforce the judgment against the debtor's interest.

7. Federal Preemption

The Federal Debt Collection Practices Act (FDCPA), which controls judgment enforcement actions of the U.S. government, has been held to have supremacy as federal law over the contrary state charging order limitations. See, e.g., U.S. v. Wilhite, 2017 WL 5517410 (D.Colo., Nov. 17, 2017); Consumer Fin. Prot. Bureau v. Integrity Advance, LLC, 2024 WL 5262916 (D.Kan. Dec. 31, 2024). A similar result occurs with IRS collections. See, e.g., U.S. v. Driscoll, Case No. 18-11762 (D.N.J., Unpublished Opinion of Jan. 6, 2025).

Outcome: A creditor may choose another remedy besides the charging order to enforce the judgment against the debtor's interest.

8. UCC Article 9

Charging order exclusivity does not apply to a secured lender which is enforcing its security interest. The Comment to 503(h) states: "This subsection does not override Uniform Commercial Code, Article 9, which may provide different remedies for a secured creditor acting in that capacity. A secured creditor with a judgment might decide to proceed under Article 9 alone, under this section alone, or under both Article 9 and this section. In the last-mentioned circumstance, the constraints of this section would apply to the charging order but not to the Article 9 remedies." Note that charging order exclusivity should still exist where the creditor has exhausted its security interest and is only pursuing the deficiency.

Outcome: The debtor loses the interest through foreclosure, and the purchaser at the judicial sale becomes a mere assignee of the debtor's economic interest unless admitted to the LLC.

9. Intra-Member Disputes

In a two-member LLC, members A & B get into a dispute and A gets a judgment against B. Since the purpose of charging order exclusivity is to protect the non-debtor member (and not the debtor member) should A's be limited to a charging order? Compare Voll v. Dunn, 2014 WL 7461644 (Conn.Super., Nov. 10, 2014) (unpublished) (no charging order exclusivity in intramember dispute), with Young v. Levy, 2014 WL 2741060 (Fla.App., June 18, 2014) (Creditor-member's remedy still limited to charging order based on wording of statute even if it doesn't make much sense). Note that this issue can likely be resolved in the drafting of the Operating Agreement, although hardly anybody does that.

Outcome: Depending upon state law, the non-debtor member/creditor may not be restricted to a charging order against the debtor/member's interest.

The General Judgment Enforcement Exceptions

The final five exceptions to charging order exclusivity arise from general judgment enforcement law. While these judgment enforcement vehicles would facially seem to be subject to charging order exclusivity, the courts through decisional law have carved out these exceptions. Note that at least two of these exceptions (voidable transaction and reverse veil-piercing) are also recognized by the Comments to ULLCA 503, so these exceptions should not be particularly surprising.

10. General Receiver

This is different than the limited-purpose "informational" receiver found in 503(b)(1). Instead, the idea here is that the court may appoint a general receiver for the debtor-member which is all of (1) an officer and appendage of the court, (2) a trustee for the benefit of creditors, and, most importantly, the agent with power of attorney for the debtor. Thus, if a general receiver for the debtor-member then the receiver may exercise all rights possessed by the debtor-member, including voting to make distributions, dissolve the LLC or bring a derivative lawsuit to force distributions to be made. See, e.g., Gaggero v. Knapp, Petersen & Clarke, 2014 WL 5786609 (Cal.App., Nov. 7, 2014) (Unreported). This is another large hole in the charging order Swiss Cheese, but general receivers are typically not appointed except where a debtor has acted egregiously to defeat the creditor's rights.

Outcome: The general receiver may vote all the debtor's rights in the LLC, including to make distributions, to liquidate assets, to elect managers and new members to the LLC, and even to dissolve the LLC entirely (which would create a liquidating distribution to be paid to the debtor which would then be available to the creditor.

11. Voidable Transaction

If money has been fraudulently transferred by the debtor to an LLC (ostensibly in exchange for LLC membership interests), the creditor can maintain a case to avoid the transfer which, if successful, would render the LLC itself a debtor on the fraudulent transfer judgment. The creditor can then enforce the judgment directly against the LLC's assets in spite of charging order exclusivity. See, e.g., Comment to 503(h): "Likewise, this subsection does not supplant fraudulent transfer law."

Outcome: LLC must pay the amount of the contribution that is avoided to the creditor which may require liquidation of some or all of the LLC's assets.

12. Constructive Trust/Disgorgement

Similar to a voidable transaction theory, a constructive trust is a creditor's remedy that is used when the creditor can trace money that was procured by wrongful means. In this scenario, a constructive trust is imposed over the recipient of the money, which would be the LLC. The LLC thus becomes liable for the money that it received, even if it was received in exchange for the membership interest. The same will be true for disgorgement orders and criminal restitution orders. See, e.g., Liberation Mgt. Satellite LLC v. Green, Appeal No. D083092 (Cal.App., April 23, 2025) (criminal restitution order).

Outcome: LLC must pay the amount of the contribution that is avoided to the creditor which may require liquidation of some or all of the LLC's assets.

13. Reverse Veil-Piercing

For creditors, the easiest and most expedient method of circumventing charging order exclusivity is by the employment of an alter ego theory, known in this context as "reverse veil piercing". Comment 503(h) states: "This subsection is not intended to prevent a court from effecting a 'reverse pierce' where appropriate. In a reverse pierce, the court conflates the entity and its owner to hold the entity liable for a debt of the owner. Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298, 312 (Conn. App. Ct. 2002) (approving a reverse pierce where a judgment debtor had established a limited liability company in a patent attempt to frustrate the judgment creditor), overruled on other grounds by, Robinson v. Coughlin, 830 A.2d 1114 (Conn. 2003). Likewise, this subsection does not supplant fraudulent transfer law."

Outcome: The LLC is added to the creditor's judgment and its assets become liable for execution to satisfy the judgment.

14. Bankruptcy

While this requires a very long explanation, suffice it here to say that there may be situations where the Bankruptcy Trustee may acquire, exercise management rights and liquidate the interests of an LLC in bankruptcy. That this is a very complex area of bankruptcy law is indicated by the fact that there have been approximately 20 court opinions relating to the issue of a debtor's LLC or partnership interest in bankruptcy ― and those opinions are all over the board. The root cause of this problem is that the current Bankruptcy Code was adopted prior to LLCs becoming popular entity planning tools and thus are required to be treated by provisions of the Bankruptcy Code (and most particularly BC § 365 relating to executory interests) which very poorly fit LLCs and partnerships.

Outcome: In the worst case, the bankruptcy trustee may vote all the debtor's rights in the LLC, including to make distributions, to liquidate assets, to elect managers and new members to the LLC, and even to dissolve the LLC entirely (which would create a liquidating distribution to be paid to the debtor which would then be available to the creditor.

Conclusion

The next time you hear somebody say that, "the creditor's only remedy is a charging order", you'll know that isn't true. Notwithstanding these exceptions, however, in most cases a creditor will be quite content to simply take a charging order and not seek to go further. The reason is that the charging order ties up the debtor's interest and deprives the debtor of the income stream thus helping to financially strangle the debtor. In connection with other remedies which similarly cut the debtor off from income streams, this alone can often be enough to bring the debtor to the table. Or, to alleviate the financial pain, the debtor will file for bankruptcy and the special powers of the bankruptcy court will end up cleaning the debtor out.

But if a creditor needs to go further in attacking a debtor's LLC or partnership interest, there are a lot of arrows to be found in the creditor's quiver.

EXCLUSIVE REMEDY ARTICLES

EXCLUSIVE REMEDY OPINIONS