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Charging Order Lien And Priority

Topic Lien_Priority TopicsLien




PAGE SUMMARY

Charging orders are statutory, court-supervised remedies that create judicial liens on a judgment debtor’s transferable interest in a partnership or LLC, allowing a creditor to receive any distributions otherwise payable to the debtor while generally not granting management, voting, or inspection rights and not forcing the entity to make distributions; in many states, charging orders are the exclusive collection remedy against these interests to protect non-debtor owners from disruptive transfers, though notable exceptions—especially for single-member LLCs—may permit foreclosure if distributions will not satisfy the judgment within a reasonable time. The document explains that lien priority commonly follows the “first in time, first in right” principle, with charging-order priority often turning on when an order becomes effective/enforceable (frequently tied to entry and/or service, and sometimes domestication for out-of-state orders), but also notes important statutory departures, including super-priority regimes for certain liens (e.g., tax and mechanic’s liens) and special treatment for attorney charging liens, which may be designated “first liens” or benefit from relation-back doctrines. It further highlights bankruptcy implications: LLC interests and charging-order rights typically become property of the estate under 11 U.S.C. § 541, prepetition charging orders often survive as liens subject to the automatic stay, and outcomes may differ between single-member and multi-member LLCs (including cases where trustees may obtain broader control in single-member contexts). Finally, it identifies practical and recent developments, emphasizing prompt creditor action to preserve priority, increased litigation and statutory amendments reducing single-member protections (e.g., foreclosure authorization), and growing judicial attention to interstate enforcement and bankruptcy limits on state-law asset protection.

Charging Orders, Liens and Priority

Introduction

Charging orders function as judicial liens against a partner’s or member’s transferable interest in a partnership or limited liability company (LLC), providing creditors with a mechanism to satisfy judgments without granting them management or control rights. This remedy permits the creditor to receive distributions that would otherwise belong to the judgment debtor, but it does not compel the entity to make distributions or alter the debtor’s management status. Charging orders create liens on transferable interests, which may be foreclosed by the court, granting the purchaser at foreclosure only the rights of a transferee, not full membership or partnership rights unless the entity has a single member or partner. Courts uniformly hold that charging orders are typically exclusive remedies against a judgment debtor’s interest, limiting creditors to economic rights without access to management or inspection of business records.
Priority among competing creditor liens generally depends on the order of lien attachment, service, or court order filing. In California, the priority of charging orders aligns with the timing of lien creation, typically initiated by service of motion or filing, and may be preempted by previously perfected security interests. Judicial discretion allows appointment of receivers to collect distributions, and courts may enter ancillary orders necessary to give effect to charging orders without unduly interfering in entity management. Foreclosure procedures and redemption rights are also codified, with purchasers acquiring economic interests but seldom management rights, maintaining operational control within the entity’s non-debtor members or partners.
Charging orders are statutory creditor remedies that constitute liens on debtor's partnership interests or LLC membership interests, allowing judgment creditors to reach distributions that would otherwise be paid to the debtor member or partner. Most states treat charging orders as the exclusive remedy for collecting judgments from these interests, though exceptions exist for single-member entities and certain circumstances. Creditor lien priority generally follows the first-in-time, first-in-right principle, with charging orders competing alongside judgment liens, tax liens, and mechanic's liens based on their perfection dates. However, statutory liens often have super-priority, and attorney charging liens may relate back to the commencement of legal services. In bankruptcy proceedings, LLC membership interests and charging orders become property of the estate, with pre-petition charging orders surviving as liens subject to the automatic stay.

Nature and Legal Framework of Charging Orders

Charging orders represent a specialized statutory remedy designed to balance creditor collection rights with entity protection principles. Under state LLC and partnership statutes, a charging order "constitutes a lien on the judgment debtor's transferable interest and requires the limited liability company to pay over to the judgment creditor any distribution that would otherwise be paid to the judgment debtor." FL ST § 605.0503 The Florida Fourth District Court of Appeal has characterized the charging order as "a flexible court-supervised substitute for the more disruptive process of execution by the sheriff." Krauth v. First Continental Dev-Con, Inc., 351 So.2d 1106 (1977).
The statutory framework varies significantly across jurisdictions, but most states follow similar procedural requirements. In Pennsylvania, "on application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment." PA ST 15 Pa.C.S.A. § 8853. Colorado provides additional enforcement mechanisms, allowing courts to "appoint a receiver of the member's share of the profits and of any other money due or to become due to the member in respect of the limited liability company and make all other orders, directions, accounts, and inquiries that the debtor member might have made." CO ST § 7-80-703.
Many states explicitly designate charging orders as the exclusive creditor remedy. Texas law 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. Similarly, Texas partnership law states 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 the judgment debtor's partnership interest." TX BUS ORG § 153.256 This exclusivity serves to protect non-debtor members and partners from forced sales or transfers that could disrupt business operations.
However, significant exceptions to charging order exclusivity exist, particularly for single-member entities. Florida law provides that for single-member LLCs, "if a judgment creditor of a member or member's transferee 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 This distinction recognizes that single-member entities lack the protective rationale underlying charging order exclusivity since there are no non-debtor members to protect.

Types and Priority of Creditor Liens

The creditor lien landscape encompasses multiple categories of liens, each with distinct creation, perfection, and priority rules. Judgment liens typically arise when abstracts of judgment are "recorded and indexed in accordance with this chapter, if the judgment is not then dormant," creating liens that attach "to any real property of the defendant" located in the recording county. TX PROPERTY § 52.001. Federal tax liens arise automatically when "any person liable to pay any tax neglects or refuses to pay the same after demand," creating liens "in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 USCA § 6321.
Mechanic's liens represent another important category, with priority rules that often supersede general first-in-time principles. Under Iowa law, "Mechanics' liens posted by a general contractor or subcontractor within ninety days after the date on which the last of the material was furnished or the last of the claimant's labor was performed and for which notices were properly posted to the mechanics' notice and lien registry internet site pursuant to sections 572.13A and 572.13B shall be superior to all other liens which may attach to or upon a building or improvement," except for liens of record prior to commencement of work. IA ST § 572.18. Similarly, Arkansas provides that mechanic's liens "shall have priority over all other encumbrances that attach to the real estate or improvements thereon subsequent to commencement of construction or repair." AR ST § 18-44-110.
The fundamental principle governing lien priority is well-established across jurisdictions. South Dakota codifies this rule: "Other things being equal, different liens upon the same property have priority according to the time of their creation." SD ST § 44-2-1 Federal courts have consistently applied this principle, with one bankruptcy court noting that "under federal law, priority of lien is governed by well-known principle that first in time is first in right." In re South Independence, Inc., 256 B.R. 861 (2000).
However, numerous statutory exceptions create super-priority for specific lien types. Federal tax liens are subject to significant statutory limitations under 26 U.S.C. § 6323, which provides that such liens "shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary," and even after notice is filed, the liens remain invalid against numerous protected interests enumerated in subsection (b). 26 USCA § 6323 New York's mechanic's lien statute exemplifies the complex priority schemes that can override temporal rules, providing detailed frameworks for competing claims between mechanics' liens, building loan mortgages, and other encumbrances. NY LIEN § 13

Charging Orders as Liens and Their Priority Interactions

Courts universally recognize charging orders as creating liens on debtor interests in partnerships and LLCs. The Colorado Court of Appeals held that "each charging order creates a lien upon a debtor partner's interest in the partnership, to wit, his distributive share of partnership's profits and surplus. We further hold that the lien attaches at the time the order is served upon the partnership. And, upon attachment, the charging order has priority, for full satisfaction of the creditor's judgment, over any other charging order subsequently served upon the partnership." Union Colony Bank v. United Bank of Greeley Nat. Ass'n, 832 P.2d 1112 (1992) This principle establishes that charging orders compete with other liens under standard first-in-time priority rules.
The timing of lien attachment proves crucial for priority determinations. In JPMorgan Chase Bank, N.A. v. McClure, the Colorado Supreme Court emphasized that "determining the relative priorities of the competing charging orders requires us to ascertain when each order became effective or enforceable" because "any assessment of the relative priorities of competing charging orders mandates comparing only effective and enforceable orders to one another." JPMorgan Chase Bank, N.A. v. McClure, 393 P.3d 955 (2017) The court concluded that the McClures' charging orders had priority over Chase's later-effective charging orders because Chase's Arizona charging orders did not become effective in Colorado until after the McClures had obtained and served their Colorado charging orders.
Multiple jurisdictions have addressed the perfection requirements for charging order liens. Under Florida law, as explained by the bankruptcy court in In re Jaffe, "Krauth holds that the application date determines the priority of competing liens where each lien was perfected by a charging order. It does not hold that perfection is accomplished simply by filing the application... Like service of a writ of garnishment, an application for a charging order starts the judicial process for perfecting a lien against a partnership interest. Perfection of the lien, however, does not occur until a court actually enters a charging order." In re Jaffe, 235 B.R. 490 (1999). This requirement ensures that only actually entered charging orders, not mere applications, create enforceable liens with priority rights.
Attorney charging liens present a significant exception to standard priority rules. In North Valley Bank v. McGloin, the Colorado Court of Appeals held that an attorney's statutory charging lien against a judgment obtained for the client was superior to a bank's prior perfected security interest in the client's accounts receivable and proceeds, reasoning that "by using the phrase 'first lien,' the legislature made clear its intent that an attorney's lien is to take priority over security interests that were perfected when the attorney's lien came into existence." North Valley Bank v. McGloin, Davenport, Severson and Snow, Professional Corp., 251 P.3d 1250 (2010) Some jurisdictions allow attorney charging liens to relate back to the commencement of legal services, as demonstrated in Intercity Development, LLC v. Rose, where the court held that "the effectiveness of the lien 'relates back' to when services were commenced by the attorney... Any preexisting claims against the client as of this point in time will prevail over the charging lien but any claims arising after such time, even if the lien was still inchoate, will be subordinate to it." Intercity Development, LLC v. Rose, 2010 WL 1006098 (Conn., Unpublished, 2010)

Federal Bankruptcy Law Implications

Federal bankruptcy law significantly impacts both charging orders and LLC membership interests through the broad property definition in 11 U.S.C. § 541. The statute provides that bankruptcy estates include "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 USCA § 541 which encompasses both direct ownership of LLC membership interests and rights under charging orders against LLC distributions. Importantly, Section 541(c)(1) specifies that "an interest of the debtor in property becomes property of the estate notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law that restricts or conditions transfer of such interest by the debtor." 11 USCA § 541 This provision can override LLC operating agreement restrictions on transfer of membership interests.
The distinction between single-member and multi-member LLCs becomes particularly significant in bankruptcy contexts. In In re Albright, the bankruptcy court held that "where debtor, on date her Chapter 7 petition was filed, was only member of Colorado limited liability company (LLC), debtor's bankruptcy filing effectively assigned her entire membership interest in the LLC to Chapter 7 estate, and trustee obtained all of her rights, including right to control management of the LLC." In re Albright, 291 B.R. 538 (2003) The court reasoned that "Because there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate, and the Trustee has become a 'substituted member.'" In re Albright, 291 B.R. 538 (2003)
For multi-member LLCs, the analysis differs significantly. As explained in In re A-Z Electronics, LLC, "where a single member files bankruptcy while the other members of a multi-member LLC do not, the bankruptcy estate is only entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled." In re A-Z Electronics, LLC, 350 B.R. 886 (2006) This distinction preserves the rights of non-debtor members while still bringing the debtor's economic interests into the estate.
Charging orders in bankruptcy present complex issues regarding their characterization and survival. The Tenth Circuit Bankruptcy Appellate Panel held that "A charging order granted under Wyoming law is a type of a judicial lien, as that term is defined by the Bankruptcy Code. The Bankruptcy Code defines 'judicial lien' as a 'lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.' The Bankruptcy Code defines 'lien' as a 'charge against or interest in property to secure payment of a debt or a performance of an obligation.' A charging order is a charge against property to secure payment of a debt and is obtained by judgment or a legal or equitable process or proceeding." In re Pettine, 655 B.R. 196 (2023) However, some jurisdictions reach different conclusions. In Monroe v. Berger, the Southern District of Ohio determined 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)
Generally, pre-petition charging orders survive bankruptcy as liens on estate property, subject to the automatic stay provisions. In In re Keeler, the bankruptcy 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) The court emphasized that Maryland law establishes that "a lien is established upon the debtor's interest in the partnership at the time a levy is effectuated by the obtaining of the charging order." In re Keeler, 257 B.R. 442 (2001)

Arguments and Rebuttals

Arguments Supporting Charging Order Priority

Statutory Exclusivity Protection
  • Charging orders are designed as the exclusive remedy to protect non-debtor LLC members and partners from disruptive forced sales or transfers.
  • State statutes explicitly designate charging orders as the "exclusive remedy" for reaching debtor interests in LLCs and partnerships.
  • Courts recognize charging orders as "a flexible court-supervised substitute for the more disruptive process of execution by the sheriff."
  • Anticipated Rebuttals: Single-member entities lack the protective rationale since there are no non-debtor members to protect, and some states explicitly allow foreclosure in these circumstances.
First-in-Time Priority Principles
  • Charging orders constitute liens that attach when entered or served, establishing clear temporal priority under the universal "first in time, first in right" principle.
  • Colorado courts have held that priority between competing charging orders is determined by service dates regardless of underlying judgment dates.
  • This approach promotes certainty and protects earlier creditors who act promptly to perfect their liens.
  • Anticipated Rebuttals: Statutory liens often have super-priority regardless of timing, and attorney charging liens may relate back to the commencement of services rather than lien filing dates.

Arguments Supporting Other Creditor Priority

Statutory Super-Priority Liens
  • Federal tax liens, mechanic's liens, and attorney charging liens often have statutory priority that supersedes temporal rules.
  • These liens serve important policy objectives such as ensuring tax collection, protecting construction industry participants, and securing attorney compensation.
  • Legislative designation of "first lien" status for attorney charging liens demonstrates intent to override general priority rules.
  • Anticipated Rebuttals: Charging order exclusivity provisions may preclude other collection methods entirely, making priority questions moot in many circumstances.
Relation-Back Doctrines
  • Attorney charging liens can relate back to the commencement of legal services, predating subsequent creditor actions.
  • Mechanic's liens typically relate back to the commencement of construction or first delivery of materials.
  • These doctrines protect parties who create value before competing creditors perfect their interests.
  • Anticipated Rebuttals: Relation-back doctrines may conflict with notice and perfection requirements that protect subsequent creditors who reasonably rely on public records.

Cases on Both Sides

Cases Supporting Charging Order Priority

  • Union Colony Bank v. United Bank of Greeley Nat. Ass'n, 832 P.2d 1112 (1992) — The court held that charging orders create liens with priority based on service dates, finding that the first creditor to serve a charging order had priority over a later-served charging order regardless of judgment dates. The court emphasized that each charging order creates a lien upon the debtor partner's interest that attaches when served and has priority for full satisfaction over subsequent charging orders.
  • JPMorgan Chase Bank, N.A. v. McClure, 393 P.3d 955 (2017) — The Colorado Supreme Court held that the McClures' Colorado charging orders had priority over Chase's Arizona charging orders because Chase's orders did not become effective in Colorado until after the McClures had obtained and served their charging orders. The court reasoned that priority determinations require comparing only effective and enforceable orders, and Chase's Arizona orders were not enforceable against the Colorado LLCs until domesticated.

Cases Supporting Other Creditor Priority

  • North Valley Bank v. McGloin, Davenport, Severson and Snow, Professional Corp., 251 P.3d 1250 (2010) — The court held that an attorney's statutory charging lien against a judgment obtained for the client was superior to a bank's prior perfected security interest in the client's accounts receivable and proceeds. The court found that the charging lien was statutorily designated as a "first lien," indicating legislative intent for such liens to take priority over previously perfected security interests.
  • Intercity Development, LLC v. Rose, 2010 WL 1006098 (Conn., Unpublished, 2010) — The court determined that an attorney's charging lien had priority over other creditors' claims to judgment proceeds, relating back to when the attorney first performed services. The court reasoned that the lien attached prior to creditors' execution attempts, giving the attorney superior rights to the settlement funds.

Practical Implications

For creditors seeking to collect judgments from LLC members or partners, understanding charging order procedures and priority rules is crucial for effective collection strategies. Creditors should promptly seek charging orders after obtaining judgment to maximize their priority position under first-in-time rules, as delays may result in subordination to competing creditors. The exclusive remedy nature of charging orders in many states means traditional execution methods may be unavailable, requiring creditors to adapt their collection approaches to focus on distribution rights rather than asset seizure.
Single-member LLC situations present different strategic considerations, as some states allow foreclosure when charging orders prove inadequate for collection. Creditors facing single-member entities should investigate whether their jurisdiction permits foreclosure sales and what standards courts apply in determining charging order inadequacy. The timing and procedural requirements for transitioning from charging orders to foreclosure vary significantly between jurisdictions.
In bankruptcy contexts, creditors must navigate the intersection of state charging order law with federal bankruptcy procedures. Pre-petition charging orders survive as liens on estate property, but creditors must comply with automatic stay provisions and may need to seek relief from stay to continue enforcement actions. The distinction between single-member and multi-member LLCs becomes particularly important in bankruptcy, as trustees gain different levels of control based on entity structure.
Foreign charging orders typically require domestication procedures to gain enforceable priority, creating additional procedural hurdles for out-of-state creditors. The Colorado Supreme Court's decision in McClure demonstrates that foreign charging orders may lack priority until properly domesticated, potentially disadvantaging creditors who fail to understand jurisdictional requirements. Attorney charging liens may have superior priority over other creditors, creating potential conflicts in fee collection scenarios where multiple creditors compete for limited assets.

Recent Developments

Recent case law shows increasing litigation over single-member LLC charging order protection, with courts generally allowing foreclosure remedies in these scenarios despite traditional charging order exclusivity. Florida's 2014 amendment explicitly authorizing foreclosure for single-member LLCs when charging orders prove inadequate reflects this trend toward reduced protection for sole-member entities. Several other states have adopted similar provisions, recognizing that the policy rationale for charging order protection diminishes when no non-debtor members require protection from disruptive transfers.
Bankruptcy courts are increasingly addressing the interaction between charging orders and federal bankruptcy law, with recent decisions like In re Pettine, 655 B.R. 196 (2023) clarifying that charging orders constitute judicial liens subject to bankruptcy trustee avoidance powers. The Tenth Circuit Bankruptcy Appellate Panel's 2023 decision represents growing judicial recognition that state charging order protections cannot completely insulate LLC interests from federal bankruptcy procedures. This trend suggests that charging orders provide less asset protection in bankruptcy contexts than some practitioners previously believed.
Courts are also grappling with cross-jurisdictional charging order enforcement issues, requiring domestication procedures for priority determination and creating uncertainty for creditors operating across state lines. The Colorado Supreme Court's decision in JPMorgan Chase Bank, N.A. v. McClure, 393 P.3d 955 (2017) regarding foreign charging order enforcement reflects the complexity of interstate litigation over LLC and partnership interests, with courts developing approaches to jurisdictional and choice-of-law issues. Several states have updated their LLC statutes to clarify charging order procedures and exclusivity provisions, though significant variations remain between jurisdictions.

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