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Form Of Charging Order

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INTRODUCTION

Many of the judgment enforcement remedies have statutory forms, e.g., garnishment summons. Again, the charging order procedure is ad hoc, and there is nothing like a standard form to be utilized by creditors, i.e., a creditor must draft its own form for submission to the court like any other motion that does not have an authorized form. A basic sample form is provided below as an exemplar.

Three important practice tips:

1. Presume that the judge knows utterly nothing about charging orders, because they usually do not.
2. It is often helpful to the court to submit an Addendum containing several other charging orders entered in that jurisdiction, since judges of course feel much more comfortably entering an order that is similar to those of other judges.
3. Motions for charging orders are often filed concurrently with other creditor remedies such as a garnishment on the LLC, so that if a debtor argues "I don't get a distribution, I get a salary", then at least the salary will be garnished if the court agrees.

It would certainly be helpful for the Comment to § 503 to include an exemplar form charging order. There is likewise considerable confusion about the extent of the application of § 503(b)(2) ("make all other orders necessary to give effect to the charging order"). See, e.g., Law v. Zemp, 362 Or. 302 (Jan. 11, 2018). (creditor must make evidentiary showing to obtain ancillary supporting terms in a charging order). It is suggested that § 503 should be amended such that all consideration of any kind passing to a debtor/member ("D/M") should be considered to be in the nature of of a distribution and thus subject to the charging order, without regard to how it is characterized by either the D/M or the entity, i.e., loans, salary, payment of the D/M's credit cards and other expenses, use of vehicle, etc.


CHARGING ORDER EXAMPLE SAMPLE FORM

The following is a typical example of a Charging Order. Of course, the procedure and practices of particular jurisdictions may require appropriate modification. The order itself is relatively simple; the drafting of the application and supporting opening brief may be considerably more difficult. In my experience, when applications for charging orders fail, it is usually for one of three reasons:

(A) The judgment creditor did not conduct an adequate investigation and pre-application discovery to be able to prove with admissible evidence that the debtor does in fact have an interest in the entity, i.e., the creditor didn't have all her ducks in a row before asking for a charging order;
(B) The application, or more usually the supporting brief, was not well-drafted, usually because the creditor didn't spend the time to figure out exactly what a charging order is or what it does before starting to draft; or
(C) Most commonly, the trial judge didn't have the foggiest idea what a charging order was and the application and brief did not explain in the most basic terms what a charging order is, the statutory basis for the charging order, or how any of that relates to the facts before the court.

Also, the creditor must be able to explain to the court the legal and evidentiary support for each and every commandment that the creditor desires the charging order to contain, and avoid asking for "too much, too early". Creditors frequently ask the court to both grant the charging order and order the foreclosure of the debtor's interest at the same time and in the same documents. While, personally, I firmly believe the law allows this where the judgment is much larger than the debtor's assets and there is no reason to suspect that the distributions alone from the charging order will get anywhere close to paying the judgment, the vast majority of trial judges will reject such attempt at foreclosure and instead require the judgment creditor to make a subsequent application for foreclosure of the debtor's interest. Particularly where the trial judge may be unfamiliar with the vehicle of the charging order, it is usually best to take this "one base at a time" as opposed to swinging for the home run all at once. Whether it is wise for a creditor to even want to foreclose in a particular case is, of course, another matter altogether -- I almost never do.

My final word is that the charging order is a very poor remedy standing alone, but can be very powerful when used in the right way as merely one component of an overall creditor strategy. That is the real trick. Any marginally-competent third-year law student can probably draft a decent charging order after an hour of research; that is easy. What is difficult is developing a judgment enforcement strategy which is effective -- and that often takes many years to learn.

At any rate, for those who want to see what a charging order typically looks like, here you go:


ORDER CHARGING JUDGMENT DEBTOR'S INTEREST IN ABC LLC

The judgment creditor has applied to this Court for a charging order against the judgment debtor's interest in ABC LLC. Good cause having been shown in support of the application, it will be GRANTED.

Based upon the admissible evidentiary submissions of the judgment creditor, the Court finds as follows:

(1) The judgment creditor holds an enforceable judgment which has not been satisfied in full against the judgment debtor;

(2) The judgment debtor holds an interest in ABC LLC; and

(3) Notice of the application has been served upon the judgment debtor and given to ABC LLC through its registered agent.

Based upon the foregoing findings, the Court hereby orders as follows:

(1) The judgment debtor's interest in ABC LLC is hereby charged with a lien until the judgment held by the judgment creditor has been satisfied in full;

(2) Distributions made by ABC LLC to the judgment debtor's interest in ABC LLC shall instead be paid immediately to the judgment creditor c/o the judgment creditor's attorney at [address];

(3) The judgment debtor is hereby prohibited from receiving from ABC LLC any other money or assets other than distributions, whether by way of loans, fees, wages, salary,[FN 1] or payment of the obligations of the judgment debtor such as the judgment debtor's credit cards, or otherwise;

(4) Should the judgment debtor receive or otherwise come into possession, by whatever means, of any moneys or assets from ABC LLC, the judgment debtor shall immediately advise the judgment creditor of the same, and immediately remit those moneys or assets to the judgment creditor c/o the judgment the creditor's attorney at [address]; [FN 2]

(5) Upon the judgment debtor's receipt of any financial information from ABC LLC, including, but not limited to, financial statements, annual statements, notifications of distributions made or to be made, U.S. Internal Revenue Service Form K-1, any other state or federal tax forms or statements, the judgment debtor shall immediately provide a copy thereof to the judgment creditor. [FN 3]

Any violation of this order, whether by the judgment debtor or any other person receiving notice of this order, may be punishable by contempt.

SO ORDERED this ____ day of _________, 20__.

__________________________________
Hon. [Judge Name]
Judge of the District Court

- - - - -

FN 1. If the debtor was receiving wages or salary prior to the entry of the charging order, there is an issue as to whether the Federal Wage Garnishment Law (FWGL) should be applicable. The FWGL limits a creditor to 25% of net disposable income, which is roughly 25% after ordinary withholdings. If the LLC makes a distribution, that should not be subject to the FWGL and the creditor should pick up 100% of that. However, if what the LLC is paying is compensation for the debtor's services, then the FWGL might apply. It is a very difficult area of the law which the courts are just beginning to explore.

FN 2. Note that a charging order is also binding upon the judgment debtor and not just upon the LLC or partnership from which the judgment debtor's interest derives. Thus, if an LLC ignores (negligently or intentionally) the charging order and makes a distribution to the debtor anyway, the debtor must under penalty of contempt turn the distribution over to the levying officer or creditor. This may also have ramifications as to so-called "imputed distributions", such as where the LLC does not give the debtor cash, but instead pays off the debtor's credit cards, etc.

FN 3. The judgment creditor has no rights under UPA, ULPA or ULLCA to information from the partnership or LLC. However, to the extent that the judgment debtor receives such information it is fair game for the judgment creditor to obtain that information.

As to whether the judgment creditor can seek additional provisions to include in the charging order, see Law v. Zemp, 362 Or. 302 (Jan. 11, 2018)..


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