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Foreclosure Of Charging Order Lien

Topic Foreclosure TopicsExemption



♦ FORECLOSURE OF THE CHARGING ORDER LIEN

A charging order is the primary judicial remedy by which a judgment creditor can reach a debtor’s transferable interest in a partnership or limited liability company (LLC) to satisfy a judgment. The charging order constitutes a lien on the debtor’s transferable interest, directing the partnership or LLC to pay distributions that would otherwise be made to the debtor to the creditor. The debtor retains management rights during the pendency of the charging order, and the creditor’s rights are limited to receiving distributions without control or participation in management. Courts may appoint receivers and issue additional orders necessary to effectuate the charging order’s purpose.

Foreclosure of a charging order lien is generally available if distributions will not satisfy the judgment within a reasonable time. Foreclosure allows the creditor or a purchaser at sale to obtain the debtor’s transferable interest, with varying rights depending on entity and jurisdiction. In partnerships and LLCs, purchasers usually obtain only the economic rights, not management rights, except in single-member LLCs where foreclosure transfers full ownership and membership status. Prior to foreclosure, the judgment debtor, other members, or the entity may redeem the charged interest by paying the creditor the judgment amount. The charging order is often the exclusive remedy available to creditors, but some states and courts allow foreclosure even when statutes provide exclusivity to the charging order remedy. These procedures vary by jurisdiction but generally follow principles of equitable lien enforcement and judicial sale.

Application for charging orders is a post-judgment equitable proceeding requiring court issuance. Upon foreclosure, purchasers typically receive limited rights as transferees or assignees, without participatory or management rights, preserving the entity’s structure. Courts may consider whether foreclosure disrupts business operations or the consent of other members or partners. The charging order lien continues until the judgment is satisfied or extinguished by payment. Conflicts of law may arise if a charging order is obtained under different state laws with differing foreclosure rights.

The procedural steps for foreclosing a charging order lien vary significantly by jurisdiction, with some states explicitly authorizing foreclosure while others prohibit it entirely. In jurisdictions that permit foreclosure, the general process involves: (1) obtaining an initial charging order, (2) demonstrating that distributions under the charging order will not satisfy the judgment within a reasonable time, (3) filing a motion for foreclosure with notice to the debtor and other entity members/partners, (4) obtaining court authorization for judicial sale, (5) conducting a public sale under court supervision (typically by sheriff), and (6) transferring only economic rights to the purchaser. However, Texas explicitly prohibits foreclosure of charging order liens, while other states like California, Pennsylvania, Connecticut, and South Carolina permit foreclosure under specific statutory frameworks derived from the Uniform Partnership Act and Revised Uniform Limited Liability Company Act.

Statutory Framework for Charging Order Foreclosure

The Uniform Partnership Act and Revised Uniform Limited Liability Company Act provide the foundational framework for charging order foreclosure in most jurisdictions. Under UPA (1997) § 504(b), a charging order constitutes a lien on the judgment debtor's transferable interest in the partnership, and "the court may order a foreclosure of the interest subject to the charging order at any time" upon conditions the court considers appropriate. Similarly, Pennsylvania's statute authorizes foreclosure "upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time" PA ST 15 Pa.C.S.A. § 8853.

Pennsylvania's implementation exemplifies the standard approach under 15 Pa. Cons. Stat. § 8853, which permits foreclosure when distributions will not satisfy the judgment within a reasonable time and includes special procedures for sole member LLCs PA ST 15 Pa.C.S.A. § 8853. The statute provides that upon foreclosure, "the purchaser at the foreclosure sale only obtains the transferable interest, does not thereby become a member," except in sole member situations where the purchaser obtains the entire interest and becomes a member PA ST 15 Pa.C.S.A. § 8853.

Initial Charging Order Requirements

Before foreclosure can be pursued, creditors must first obtain a charging order. Under California Code of Civil Procedure section 708.320, service of a notice of motion for a charging order on the judgment debtor and other partners or the partnership creates an automatic lien on the debtor's partnership interest. The statute provides that "if a charging order is issued, the lien created pursuant to subdivision (a) continues under the terms of the order." See Hellman v. Anderson, 233 Cal. App. 3d 840, 847 n.8 (1991).

The charging order itself directs the entity to pay any distributions that would otherwise go to the debtor partner or member directly to the judgment creditor. As the Nevada Supreme Court explained in Tupper v. Kroc , the charging order procedure allows creditors to reach a debtor's "share of the profits and surplus and no more" Tupper v. Kroc , 88 Nev. 146 (1972).

Prerequisites for Foreclosure

Courts require specific conditions before authorizing foreclosure of a charging order lien. Following Crocker Nat. Bank v. Perroton, courts recognize that foreclosure requires (1) the creditor previously obtained a charging order, and (2) the judgment nevertheless remained unsatisfied. See Hellman v. Anderson, 233 Cal. App. 3d 840, 851 n.11 (1991) (citing Crocker, 208 Cal. App. 3d at 9). However, Hellman rejected Crocker's third requirement of nondebtor partner consent, holding instead that "the trial court should consider whether foreclosure of a charged partnership interest will unduly interfere with partnership business before the court exercises its equitable powers to order foreclosure" Hellman v. Anderson, 233 Cal.App.3d 840 (1991).

The standard for demonstrating inadequacy of the charging order typically requires showing that distributions will not pay the judgment debt within a reasonable time. The Pennsylvania statute exemplifies this approach, permitting foreclosure "upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time" PA ST 15 Pa.C.S.A. § 8853.

Notice and Motion Requirements

Proper notice to interested parties is essential for charging order foreclosure proceedings. Code of Civil Procedure section 708.320 requires that notice of the motion for a charging order be served on the judgment debtor and on the other partners or the partnership. See Hellman v. Anderson, 233 Cal. App. 3d 840, 847 fn. 8 (1991). The Tupper v. Kroc case demonstrates that debtors must be given adequate opportunity to respond, with the Nevada court noting that "The application and notice afforded Tupper an opportunity to take whatever steps he deemed necessary to either limit the charging order or prevent the sale." Tupper v. Kroc , 88 Nev. 146 (1972)

In the motion for foreclosure, creditors must typically demonstrate that the charging order has proven ineffective. The Hellman court noted that "the second condition—that the charging order be unsuccessful—is, we believe, implied in the statute" Hellman v. Anderson, 233 Cal.App.3d 840 (1991). The motion should include evidence showing the likelihood that distributions under the charging order will not satisfy the judgment within a reasonable timeframe.

Court Authorization and Judicial Supervision

Once proper grounds are established, courts have broad discretionary authority to order foreclosure. The Connecticut Appellate Court in , held that Connecticut's Uniform Partnership Act (General Statutes § 34-66) authorizes foreclosure and that strict foreclosure was available to enforce a charging order. The court based this conclusion on the common law definition of "foreclosure," statutory interpretation, and analogy to the UCC. The court noted that the Uniform Partnership Act (1992) model act also explicitly authorizes foreclosure in Section 504(b) Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994).

Courts retain significant supervisory authority throughout the foreclosure process. In Hellman, the California court noted that "a court-ordered sale to foreclose the lien created by a charging order on a partnership interest involves judicial supervision," distinguishing it from ordinary execution sales Hellman v. Anderson, 233 Cal.App.3d 840 (1991). The trial court in that case "retained jurisdiction over all phases of the sale" Hellman v. Anderson, 233 Cal.App.3d 840 (1991).

Conduct of Judicial Sale

The actual sale is typically conducted by the sheriff or other court-appointed officer as a public sale. In Tupper v. Kroc , the Nevada Supreme Court described how "a charging order was entered directing the sheriff to sell all of Tupper's 'right, title and interest' in the three partnerships and to apply the proceeds against the unsatisfied amount of the judgment" Tupper v. Kroc , 88 Nev. 146 (1972). The court emphasized that the sale must be conducted publicly, with "the mode for determining the value of Tupper's interest in the partnerships was by a public sale" Tupper v. Kroc , 88 Nev. 146 (1972).

Courts have flexibility in setting notice requirements for the sale. The Tupper court held that "Because this was a judicial sale authorized by NRS Ch. 87, and not an execution sale, the district court was not bound to have Tupper's partnership interest sold in strict compliance with NRS 21.130(2) but the court was free, pursuant to NRS 87.280(1), to order any notice procedure that it deemed reasonable" Tupper v. Kroc , 88 Nev. 146 (1972).

Rights of Purchaser and Transfer of Interest

Purchasers at charging order foreclosure sales obtain limited rights compared to traditional asset sales. Under most statutory schemes, including the UPA and RULLCA, the purchaser obtains only the economic rights of the debtor—specifically, the right to receive distributions. The Pennsylvania statute makes this clear: "the purchaser at the foreclosure sale only obtains the transferable interest, does not thereby become a member" PA ST 15 Pa.C.S.A. § 8853.

The Tupper court explained that "anyone reading or relying on the notice of sale was, as a matter of law, deemed to understand that by statute the sale of Tupper's interest in the partnerships consisted of a sale of his share of the profits and surplus and no more" Tupper v. Kroc , 88 Nev. 146 (1972). The court distinguished this from an assignment, noting that "A sale made pursuant to a charging order (NRS 87.180) of a partner's interest in a partnership is not an assignment of an interest in a partnership." Tupper v. Kroc , 88 Nev. 146 (1972).

Redemption Rights and Protective Measures

Most statutes provide redemption rights that allow debtors to extinguish the charging order before foreclosure. The Pennsylvania statute is typical, providing that "at any time before foreclosure under subsection (c), the member or transferee whose transferable interest is subject to a charging order under subsection (a) may extinguish the charging order by satisfying the judgment and filing a certified copy of the satisfaction with the court that issued the charging order" PA ST 15 Pa.C.S.A. § 8853.

Additionally, many statutes allow the entity or non-debtor members to purchase the creditor's rights. Pennsylvania's provision states that "at any time before foreclosure under subsection (c), a limited liability company or one or more members whose transferable interests are not subject to the charging order may pay to the judgment creditor the full amount due under the judgment and thereby succeed to the rights of the judgment creditor, including the charging order" PA ST 15 Pa.C.S.A. § 8853.

Jurisdictional Variations and Prohibitions

A critical consideration is that several jurisdictions explicitly prohibit foreclosure of charging order liens. Texas law provides that "a charging order constitutes a lien on the judgment debtor's membership interest" but "the charging order lien may not be foreclosed on under this code or any other law" TX BUS ORG § 101.112. This prohibition applies to both partnerships and LLCs, with Texas courts consistently holding that "the entry of a charging order is the exclusive remedy by which a judgment creditor of a partner or of any other owner of a partnership interest may satisfy a judgment out of a judgment debtor's partnership interest" Goodman v. Compass Bank, Not Reported in S.W. Rptr. (2016).

The Court of Appeals of Texas in Pajooh v. Royal West Investments LLC, reinforced this limitation, holding that "charging order was exclusive remedy by which creditor could satisfy judgment from debtors' limited partnership interests" Pajooh v. Royal West Investments LLC, Series E, 518 S.W.3d 557 (2017).

Arguments and Rebuttals

Arguments Favoring Foreclosure Authorization

Creditor Rights Protection
  • Courts should authorize foreclosure when charging orders prove ineffective because creditors have legitimate expectations of judgment satisfaction and should not be limited to potentially inadequate distribution streams.
  • The UPA and RULLCA expressly authorize foreclosure "at any time" with appropriate court supervision, indicating legislative intent to provide meaningful collection remedies beyond passive distribution collection.
  • Anticipated Rebuttals: Entity protection statutes are designed to limit creditor remedies to prevent disruption of business operations and protect non-debtor members' investment-backed expectations.
Judicial Efficiency
  • Foreclosure sales provide market-based valuation of debtor interests and create immediate resolution rather than prolonged monitoring of distribution payments that may never satisfy judgments.
  • Court supervision ensures fair market value determination while avoiding extended proceedings that burden judicial resources.
  • Anticipated Rebuttals: Foreclosure sales of partnership/LLC interests often yield below-market prices due to limited marketability and buyer reluctance to acquire minority economic interests without management rights.
Equitable Considerations
  • Courts have broad equitable powers to fashion appropriate remedies, and categorical prohibition of foreclosure may deny creditors meaningful relief in cases where entities deliberately minimize distributions.
  • Business entity laws should not provide asset protection for fraudulent debtors who use entity structures to avoid legitimate creditor claims.
  • Anticipated Rebuttals: Existing charging order remedies combined with other collection tools (fraudulent transfer actions, alter ego claims) provide adequate creditor protection without undermining entity structures.

Arguments Against Foreclosure Authorization

Entity Protection Rationale
  • Charging orders as exclusive remedies protect legitimate business operations from disruption and preserve the contractual expectations of non-debtor partners or members who invested based on limited liability protections.
  • Foreclosure threatens to introduce unknown third parties into closely-held business relationships, potentially destroying ongoing business operations and harming innocent investors.
  • Anticipated Rebuttals: Modern statutes limit purchaser rights to economic interests only, preventing management disruption while still providing meaningful creditor remedies.
Legislative Intent
  • Jurisdictions like Texas have explicitly prohibited foreclosure after careful consideration, demonstrating clear legislative policy that charging orders should be the exclusive and sole remedy for creditor collection.
  • The absence of foreclosure provisions in many LLC acts indicates legislative intent to provide stronger asset protection than traditional partnership law.
  • Anticipated Rebuttals: Most states have adopted UPA and RULLCA provisions that explicitly authorize foreclosure, suggesting broader legislative consensus favoring creditor remedies.
Practical Ineffectiveness
  • Foreclosure sales of minority economic interests typically yield minimal proceeds due to lack of marketability and absence of control rights, making foreclosure an illusory remedy that primarily serves to harass debtors.
  • The administrative costs and complexities of foreclosure proceedings often exceed any potential recovery, making charging orders the more practical and cost-effective remedy.
  • Anticipated Rebuttals: Market forces will determine fair value at foreclosure sales, and creditors should have the option to pursue foreclosure rather than being limited to potentially non-existent distribution streams.

Cases on Both Sides

Cases Authorizing Foreclosure

  • Hellman v. Anderson, 233 Cal.App.3d 840 (1991) — The California Court of Appeal held that a judgment debtor's interest in a partnership may be foreclosed upon and sold even without non-debtor partner consent, provided foreclosure does not unduly interfere with partnership business. The court reasoned that statutory authority under Corporations Code section 15028 implicitly authorized foreclosure sales as indicated by redemption provisions referencing "foreclosure" and "sale being directed by the court."
  • Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994) — The Connecticut Appellate Court held that Connecticut's Uniform Partnership Act (General Statutes § 34-66) authorizes foreclosure and that strict foreclosure was available to enforce a charging order. The court based this conclusion on the common law definition of "foreclosure," statutory interpretation, and analogy to the UCC. The court noted that the Uniform Partnership Act (1992) model act also explicitly authorizes foreclosure in Section 504(b).
  • Kriti Ripley, LLC v. Emerald Investments, LLC, 404 S.C. 367 (2013) — The South Carolina Supreme Court held that courts have equitable discretion to order foreclosure of charging order liens, treating foreclosure as an available remedy when appropriate. The court characterized the decision as equitable, allowing appellate courts to review foreclosure denials de novo under preponderance of evidence standard. ♦

Cases Prohibiting or Restricting Foreclosure

  • Pajooh v. Royal West Investments LLC, Series E, 518 S.W.3d 557 (2017) — The Texas Court of Appeals ruled that charging orders provide the exclusive remedy for satisfying judgments from LLC membership interests and that trial courts lacked authority to order receivership over debtor's membership interest. The court found that "charging order was exclusive remedy by which creditor could satisfy judgment from debtors' limited partnership interests."
  • Goodman v. Compass Bank, Not Reported in S.W. Rptr. (2016) — The Texas Court of Appeals reaffirmed that "the entry of a charging order is the exclusive remedy by which a judgment creditor of a partner or of any other owner of a partnership interest may satisfy a judgment out of a judgment debtor's partnership interest" and that foreclosure is categorically prohibited. The court noted that partnership interests represent only rights to distributions, not interests in specific partnership property.

Practical Implications

Creditors must carefully consider jurisdiction when pursuing charging order remedies, as states like Texas completely prohibit foreclosure while others like California, Pennsylvania, and Connecticut explicitly permit it under appropriate circumstances. This jurisdictional variation creates strategic considerations for both creditors and debtors in choosing where to conduct business or file collection actions. Courts will consider whether foreclosure unduly interferes with partnership business operations, requiring creditors to demonstrate minimal impact on non-debtor partners while showing that charging order distributions alone will not satisfy judgments within reasonable timeframes.

The timeline for foreclosure proceedings often involves uncertainty, as creditors must first demonstrate that charging order distributions will not satisfy the judgment within a reasonable time, potentially requiring extended monitoring periods before foreclosure becomes available. Purchasers at foreclosure sales obtain only economic rights to profit and surplus distributions rather than management rights or direct interests in partnership property, which may limit the practical value and marketability of foreclosed interests. Given judicial supervision requirements, notice obligations to multiple parties, potential redemption rights, and the limited scope of assets obtained, foreclosure may not prove cost-effective for smaller judgments when compared to alternative collection mechanisms.

The availability of redemption rights "at any time before foreclosure" creates ongoing settlement opportunities that may benefit both creditors and debtors by providing pressure for negotiated resolution while preserving the debtor's opportunity to retain their business interest through payment of the underlying judgment. Additionally, many statutes allow non-debtor members or the entity itself to purchase the creditor's rights, creating additional layers of protection for business continuity while still providing creditors with potential recovery avenues.

Recent Developments

Delaware courts have continued to authorize charging order foreclosures despite jurisdictional challenges, with the Superior Court in Bridev One, L.L.C. v. Regency Centers, L.P. (2018), confirming that Delaware's longstanding practice of issuing charging orders with foreclosure authority remains valid. Bridev One, L.L.C. v. Regency Centers, L.P., Not Reported in Atl. Rptr. (2018). The court noted that "charging orders issued by several Superior Court judges since 2005" have consistently included foreclosure provisions, reflecting established judicial practice under Delaware law.

Recent Florida cases like Ramos v. Mississippi Real Estate Dispositions, LLC, (2021) have applied statutory amendments to restrict courts from providing remedies beyond the authorized charging order and foreclosure framework, rejecting broader collection mechanisms that exceed statutory boundaries Ramos v. Mississippi Real Estate Dispositions, LLC, 314 So.3d 643 (2021).

Federal bankruptcy courts have increasingly addressed charging orders in the context of Chapter 7 proceedings, with decisions like In re Pettine (2023) recognizing charging orders as judicial liens under Bankruptcy Code § 101(36) while analyzing trustees' authority to obtain and sell such orders In re Pettine, 655 B.R. 196 (2023).

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