Site /
ULLCA 503(a) Entry, Lien and Effect of Charging Order
Site.ULLCASection503as1Entry History
Hide minor edits - Show changes to output
Deleted lines 14-41:
->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).
----
!!!JayNote
->Section 503 is the only section of the ULLCA that deals with charging orders. Section 503 does not, however, exist in the abstract, but must instead be carefully interpreted in accordance with its preceding § 502 which relates to transfers of [[CodeTransferTransferableInterest | transferable interests]], and the definition of "[[CodeDistribution | distribution]]" found in § 102(4). Frankly, reading § 503 will make a whole lot more sense if you substantially understand those other sections first.
->The effect of a charging order is to combine two traditional remedies (why we just don't use those remedies instead, I am not particularly sure), being (1) attachment of the interest, meaning that an involuntary lien in favor of the creditor is placed on the debtor's interest, and (2) a non-wage garnishment, or "assignment order" in some states, of any [[CodeDistribution | distributions]] made to the debtor.
->And now, a quibble with the Reporter's Comments. The Reporter writes: "By its terms, this section does not apply to foreign limited liability companies." What the Reporter doesn't say is that this is the result of a significant drafting flaw in the ULLCA (and also in the UPA and the ULPA), since there is utterly no reason -- and certainly no good one -- why the provisions of Article V and sections 502 and 503 in particular should not apply to foreign (out-of-state) or even alien (out-of-country) LLCs just as they would to any in-state LLCs. It is a mistake, an error, a FUBAR.
----
!!!Reporter's Comment to Section 503 generally
Under this section, the judgment creditor of a member or transferee is entitled to a charging order against the relevant [[CodeTransferTransferableInterest | transferable interest]].
While in effect, that order entitles the judgment creditor to whatever [[CodeDistribution | distributions]] would otherwise be due to the member or transferee whose interest is subject to the order.
However, the judgment creditor has no say in the timing or amount of those [[CodeDistribution | distributions]].
The charging order does not entitle the judgment creditor to accelerate any [[CodeDistribution | distributions]] or to otherwise interfere with the management and activities of the limited liability company.
Changed lines 17-22 from:
The phrase "judgment debtor" encompasses both members and transferees.
The lien pertains only to a [[CodeDistribution | distribution]], which excludes "amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program." Section 102(4)(B).
A judgment creditor that wishes to levy on such amounts should use the appropriate creditor's remedy, such as garnishment (which may be subject to exemptions or exclusions not relevant to a charging order). Cf. PB Real Estate, Inc. v. Dem II Props., 719 A.2d 73, 76 (Conn. 1998) (rejecting the contention of an LLC's two members that "payments of $28,000 to each of them" should be treated "as expenses for wages" rather than as [[CodeDistribution | distributions]]).
The lien pertains only to a [[CodeDistribution | distribution]], which excludes "amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program." Section 102(4)(B).
A judgment creditor that wishes to levy on such amounts should use the appropriate creditor's remedy, such as garnishment (which may be subject to exemptions or exclusions not relevant to a charging order). Cf. PB Real Estate, Inc. v. Dem II Props., 719 A.2d 73, 76 (Conn. 1998) (rejecting the contention of an LLC's two members that "payments of $28,000 to each of them" should be treated "as expenses for wages" rather than as [[CodeDistribution | distributions]]).
to:
->The phrase "judgment debtor" encompasses both members and transferees.
->The lien pertains only to a [[CodeDistribution | distribution]], which excludes "amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program." Section 102(4)(B).
->A judgment creditor that wishes to levy on such amounts should use the appropriate creditor's remedy, such as garnishment (which may be subject to exemptions or exclusions not relevant to a charging order). Cf. PB Real Estate, Inc. v. Dem II Props., 719 A.2d 73, 76 (Conn. 1998) (rejecting the contention of an LLC's two members that "payments of $28,000 to each of them" should be treated "as expenses for wages" rather than as [[CodeDistribution | distributions]]).
->The lien pertains only to a [[CodeDistribution | distribution]], which excludes "amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program." Section 102(4)(B).
->A judgment creditor that wishes to levy on such amounts should use the appropriate creditor's remedy, such as garnishment (which may be subject to exemptions or exclusions not relevant to a charging order). Cf. PB Real Estate, Inc. v. Dem II Props., 719 A.2d 73, 76 (Conn. 1998) (rejecting the contention of an LLC's two members that "payments of $28,000 to each of them" should be treated "as expenses for wages" rather than as [[CodeDistribution | distributions]]).
Changed lines 25-28 from:
Whether an application for a charging order must be served on the limited liability company, the judgment debtor, or both is a matter for other law, principally the law of remedies and civil procedure.
The order itself must be served on the limited liability company. Whether the order must also be served on the judgment debtor is a matter for other law.
The order itself must be served on the limited liability company. Whether the order must also be served on the judgment debtor is a matter for other law.
to:
->Whether an application for a charging order must be served on the limited liability company, the judgment debtor, or both is a matter for other law, principally the law of remedies and civil procedure.
->The order itself must be served on the limited liability company. Whether the order must also be served on the judgment debtor is a matter for other law.
->The order itself must be served on the limited liability company. Whether the order must also be served on the judgment debtor is a matter for other law.
Changed line 31 from:
If a [[CodeDistribution | distribution]] consists of rights to acquire interests in a limited liability company, the charging order applies only to those rights within the definition of [[CodeTransferTransferableInterest | transferable interest]]. See Section 102(24) (defining [[CodeTransferTransferableInterest | transferable interest]]).
to:
->If a [[CodeDistribution | distribution]] consists of rights to acquire interests in a limited liability company, the charging order applies only to those rights within the definition of [[CodeTransferTransferableInterest | transferable interest]]. See Section 102(24) (defining [[CodeTransferTransferableInterest | transferable interest]]).
Changed lines 1-4 from:
(:title TEXT:)
(:Summary: TEXT:)
(:description TEXT:)
(:keywords charging order, TEXT:)
(:description TEXT:)
(:keywords charging order, TEXT
to:
(:title ULLCA 503(a) Entry, Lien and Effect of Charging Order:)
(:Summary: Entry, Lien and Effect of Charging Order:)
(:description Entry, Lien and Effect of Charging Order:)
(:keywords charging order, procedure, entry, lien, effect:)
(:Summary: Entry, Lien and Effect of Charging Order:)
(:description Entry, Lien and Effect of Charging Order:)
(:keywords charging order, procedure, entry, lien, effect:)
Changed lines 6-7 from:
[[!Topic]] [[!TEXT]]
to:
(:linebreaks:)
Procedure Lien [[!Code]] [--ULLCASection503as1Entry--]
Procedure Lien [[!Code]] [--ULLCASection503as1Entry--]
Changed lines 10-16 from:
(:title Statute ~ Main Charging Order Section 503:)
(:Summary: Section 503 re Charging Order.:)
(:description Section 503 re Charging Order.:)
(:keywordscharging order:)
(:linebreaks:)
[[!Code]] [-CodeULLCASection503-]
!!SECTION 503. CHARGING ORDER.
(:Summary: Section 503 re Charging Order.:)
(:description Section 503 re Charging Order.:)
(:keywords
(:linebreaks:)
to:
!!(a) On application by a judgment creditor of a member or transferee, a court may enter a charging order against the [[CodeTransferTransferableInterest | transferable interest]] of the judgment debtor for the unsatisfied amount of the judgment. Except as otherwise provided in subsection (f), a charging order constitutes a lien on a judgment debtor's [[CodeTransferTransferableInterest | transferable interest]] and requires the limited liability company to pay over to the person to which the charging order was issued any [[CodeDistribution | distribution]] that otherwise would be paid to the judgment debtor.
Changed lines 14-18 from:
Reporter's Comment to Section 503 generally.
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).
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).
to:
!!!Reporter's Comment to Section 503 generally.
->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).
Changed lines 22-26 from:
JayNote: Section 503 is the only section of the ULLCA that deals with charging orders. Section 503 does not, however, exist in the abstract, but must instead be carefully interpreted in accordance with its preceding § 502 which relates to transfers of [[CodeTransferTransferableInterest | transferable interests]], and the definition of "[[CodeDistribution | distribution]]" found in § 102(4). Frankly, reading § 503 will make a whole lot more sense if you substantially understand those other sections first.
The effect of a charging order is to combine two traditional remedies (why we just don't use those remedies instead, I am not particularly sure), being (1) attachment of the interest, meaning that an involuntary lien in favor of the creditor is placed on the debtor's interest, and (2) a non-wage garnishment, or "assignment order" in some states, of any [[CodeDistribution | distributions]] made to the debtor.
And now, a quibble with the Reporter's Comments. The Reporter writes: "By its terms, this section does not apply to foreign limited liability companies." What the Reporter doesn't say is that this is the result of a significant drafting flaw in the ULLCA (and also in the UPA and the ULPA), since there is utterly no reason -- and certainly no good one -- why the provisions of Article V and sections 502 and 503 in particular should not apply to foreign (out-of-state) or even alien (out-of-country) LLCs just as they would to any in-state LLCs. It is a mistake, an error, a FUBAR.
The effect of a charging order is to combine two traditional remedies (why we just don't use those remedies instead, I am not particularly sure), being (1) attachment of the interest, meaning that an involuntary lien in favor of the creditor is placed on the debtor's interest, and (2) a non-wage garnishment, or "assignment order" in some states, of any [[CodeDistribution | distributions]] made to the debtor.
And now, a quibble with the Reporter's Comments. The Reporter writes: "By its terms, this section does not apply to foreign limited liability companies." What the Reporter doesn't say is that this is the result of a significant drafting flaw in the ULLCA (and also in the UPA and the ULPA), since there is utterly no reason -- and certainly no good one -- why the provisions of Article V and sections 502 and 503 in particular should not apply to foreign (out-of-state) or even alien (out-of-country) LLCs just as they would to any in-state LLCs. It is a mistake, an error, a FUBAR.
to:
!!!JayNote
->Section 503 is the only section of the ULLCA that deals with charging orders. Section 503 does not, however, exist in the abstract, but must instead be carefully interpreted in accordance with its preceding § 502 which relates to transfers of [[CodeTransferTransferableInterest | transferable interests]], and the definition of "[[CodeDistribution | distribution]]" found in § 102(4). Frankly, reading § 503 will make a whole lot more sense if you substantially understand those other sections first.
->The effect of a charging order is to combine two traditional remedies (why we just don't use those remedies instead, I am not particularly sure), being (1) attachment of the interest, meaning that an involuntary lien in favor of the creditor is placed on the debtor's interest, and (2) a non-wage garnishment, or "assignment order" in some states, of any [[CodeDistribution | distributions]] made to the debtor.
->And now, a quibble with the Reporter's Comments. The Reporter writes: "By its terms, this section does not apply to foreign limited liability companies." What the Reporter doesn't say is that this is the result of a significant drafting flaw in the ULLCA (and also in the UPA and the ULPA), since there is utterly no reason -- and certainly no good one -- why the provisions of Article V and sections 502 and 503 in particular should not apply to foreign (out-of-state) or even alien (out-of-country) LLCs just as they would to any in-state LLCs. It is a mistake, an error, a FUBAR.
Changed lines 32-39 from:
[[<<]]
[[<<]]
[[<<]]
----
Reporter's Comment to Section 503 generally
to:
!!!Reporter's Comment to Section 503 generally
Changed lines 42-44 from:
Reporter's Comment to Subsection (a) ¶ 1.
to:
!!!Reporter's Comment to Subsection (a) ¶ 1.
Changed lines 50-52 from:
Reporter's Comment to Subsection (a) ¶ 2.
to:
!!!Reporter's Comment to Subsection (a) ¶ 2.
Added lines 56-60:
!!!Reporter's Comment to Subsection (a) ¶ 3.
If a [[CodeDistribution | distribution]] consists of rights to acquire interests in a limited liability company, the charging order applies only to those rights within the definition of [[CodeTransferTransferableInterest | transferable interest]]. See Section 102(24) (defining [[CodeTransferTransferableInterest | transferable interest]]).
Changed lines 62-64 from:
If a [[CodeDistribution | distribution]] consists of rights to acquire interests in a limited liability company, the charging order applies only to those rights within the definition of [[CodeTransferTransferableInterest | transferable interest]]. See Section 102(24) (defining [[CodeTransferTransferableInterest | transferable interest]]).
to:
!!!JayNote
->Paragraph (a) is the meat of the charging order procedure. As mentioned, the charging order accomplishes two things, both of them through ¶ (a):
-->First, the charging order places an involuntary lien (forces the creation of a security interest) in favor of the creditor on the LLC interest of the debtor. This would normally be accomplished by the remedy of attachment.
-->Second, the charging order diverts [[CodeDistribution | distributions]] from the debtor to the creditor. This would normally be accomplished in most states by a non-wage garnishment or an assignment order.
->Well, a reader might ask, if those existing remedies will already accomplish those things, then why do we need this charging order thingy? The short answer is: We don't. The longer answer is that the charging order remedy is the result of an error in the drafting of the original Uniform Partnership Act of 1914, where the drafters of that Act lazily copied the United Kingdom's Partnership Act on this point, without realizing that the charging order was unnecessary because of existing U.S. remedies. This error then persisted to modern times, and eventually took on a life of its own to where it may be practically impossible to get rid of the charging order and just use these other remedies instead.
->Now, some explanations of the phraseology used in ¶ (a):
->'''"On application"'''
-->The creditor must file an "Application for Charging Order" or similar and have a hearing before the court on the application, which is probably required to satisfy procedural due process for the attachment aspect of the charging order.
->'''"by a judgment creditor"'''
-->A charging order is exclusively a post-judgment enforcement remedy, meaning that there is no such thing as a "preliminary charging order". If a creditor desires to tie up the debtor's interest prior to trial, the relief there would be in the nature of an ordinary pre-judgment attachment.
->'''"of a member of transferee"'''
-->The debtor is not necessarily a member of the LLC, but may be a transferee of the member. Example: Ted is a member of Alpha LLC, and voluntarily transfers his interest to Barbara. Later, Barbara incurs a liability and suffers a judgment. Creditor can obtain a charging order against Barbara's interest.
->'''"court may enter"'''
-->A court is not required to enter a charging order upon application, but may in its discretion decline to do so. Suffice it to say that the situations where the court chooses to exercise its discretion not to grant the charging order should be very rare. Example: State X has a statute that provides for a $10,000 "wildcard" exemption from collection. Barbara has an LLC interest worth $2,000 and which pays a dividend of only $50 per year. Barbara asserts her wildcard exemption as to her LLC interest. The court should exercise its discretion to refuse the charging order.
->'''"against the [[CodeTransferTransferableInterest | transferable interest]]"'''
-->The creditor can take through a charging order only what the debtor has under § 502 and no more.
->'''"of the judgment debtor"'''
-->This is shorthand for the "member of transferee" against whom the creditor holds the judgment.
->'''"for the unsatisfied amount of the judgment"'''
-->The lien created by the charging order is for the amount of the unsatisfied value of the judgment, and the redirection of [[CodeDistribution | distributions]] is likewise limited to that amount. Can the court issue the charging order for a lesser amount? Negative, according to the plain reading on the statute (which doesn't seem to think the matter through), but there may be occasions where the creditor agrees to a lesser amount, such as where the parties have partially settled, where the court should treat this more in the nature of guidance than a firm prohibition.
->Paragraph (a) is the meat of the charging order procedure. As mentioned, the charging order accomplishes two things, both of them through ¶ (a):
-->First, the charging order places an involuntary lien (forces the creation of a security interest) in favor of the creditor on the LLC interest of the debtor. This would normally be accomplished by the remedy of attachment.
-->Second, the charging order diverts [[CodeDistribution | distributions]] from the debtor to the creditor. This would normally be accomplished in most states by a non-wage garnishment or an assignment order.
->Well, a reader might ask, if those existing remedies will already accomplish those things, then why do we need this charging order thingy? The short answer is: We don't. The longer answer is that the charging order remedy is the result of an error in the drafting of the original Uniform Partnership Act of 1914, where the drafters of that Act lazily copied the United Kingdom's Partnership Act on this point, without realizing that the charging order was unnecessary because of existing U.S. remedies. This error then persisted to modern times, and eventually took on a life of its own to where it may be practically impossible to get rid of the charging order and just use these other remedies instead.
->Now, some explanations of the phraseology used in ¶ (a):
->'''"On application"'''
-->The creditor must file an "Application for Charging Order" or similar and have a hearing before the court on the application, which is probably required to satisfy procedural due process for the attachment aspect of the charging order.
->'''"by a judgment creditor"'''
-->A charging order is exclusively a post-judgment enforcement remedy, meaning that there is no such thing as a "preliminary charging order". If a creditor desires to tie up the debtor's interest prior to trial, the relief there would be in the nature of an ordinary pre-judgment attachment.
->'''"of a member of transferee"'''
-->The debtor is not necessarily a member of the LLC, but may be a transferee of the member. Example: Ted is a member of Alpha LLC, and voluntarily transfers his interest to Barbara. Later, Barbara incurs a liability and suffers a judgment. Creditor can obtain a charging order against Barbara's interest.
->'''"court may enter"'''
-->A court is not required to enter a charging order upon application, but may in its discretion decline to do so. Suffice it to say that the situations where the court chooses to exercise its discretion not to grant the charging order should be very rare. Example: State X has a statute that provides for a $10,000 "wildcard" exemption from collection. Barbara has an LLC interest worth $2,000 and which pays a dividend of only $50 per year. Barbara asserts her wildcard exemption as to her LLC interest. The court should exercise its discretion to refuse the charging order.
->'''"against the [[CodeTransferTransferableInterest | transferable interest]]"'''
-->The creditor can take through a charging order only what the debtor has under § 502 and no more.
->'''"of the judgment debtor"'''
-->This is shorthand for the "member of transferee" against whom the creditor holds the judgment.
->'''"for the unsatisfied amount of the judgment"'''
-->The lien created by the charging order is for the amount of the unsatisfied value of the judgment, and the redirection of [[CodeDistribution | distributions]] is likewise limited to that amount. Can the court issue the charging order for a lesser amount? Negative, according to the plain reading on the statute (which doesn't seem to think the matter through), but there may be occasions where the creditor agrees to a lesser amount, such as where the parties have partially settled, where the court should treat this more in the nature of guidance than a firm prohibition.
Changed lines 103-126 from:
First, the charging order places an involuntary lien (forces the creation of a security interest) in favor of the creditor on the LLC interest of the debtor. This would normally be accomplished by the remedy of attachment.
Second, the charging order diverts [[CodeDistribution | distributions]] from the debtor to the creditor. This would normally be accomplished in most states by a non-wage garnishment or an assignment order.
Well, a reader might ask, if those existing remedies will already accomplish those things, then why do we need this charging order thingy? The short answer is: We don't. The longer answer is that the charging order remedy is the result of an error in the drafting of the original Uniform Partnership Act of 1914, where the drafters of that Act lazily copied the United Kingdom's Partnership Act on this point, without realizing that the charging order was unnecessary because of existing U.S. remedies. This error then persisted to modern times, and eventually took on a life of its own to where it may be practically impossible to get rid of the charging order and just use these other remedies instead.
Now, some explanations of the phraseology used in ¶ (a):
"On application" -- The creditor must file an "Application for Charging Order" or similar and have a hearing before the court on the application, which is probably required to satisfy procedural due process for the attachment aspect of the charging order.
"by a judgment creditor" -- A charging order is exclusively a post-judgment enforcement remedy, meaning that there is no such thing as a "preliminary charging order". If a creditor desires to tie up the debtor's interest prior to trial, the relief there would be in the nature of an ordinary pre-judgment attachment.
"of a member of transferee" -- The debtor is not necessarily a member of the LLC, but may be a transferee of the member. Example: Ted is a member of Alpha LLC, and voluntarily transfers his interest to Barbara. Later, Barbara incurs a liability and suffers a judgment. Creditor can obtain a charging order against Barbara's interest.
"court may enter" -- A court is not required to enter a charging order upon application, but may in its discretion decline to do so. Suffice it to say that the situations where the court chooses to exercise its discretion not to grant the charging order should be very rare. Example: State X has a statute that provides for a $10,000 "wildcard" exemption from collection. Barbara has an LLC interest worth $2,000 and which pays a dividend of only $50 per year. Barbara asserts her wildcard exemption as to her LLC interest. The court should exercise its discretion to refuse the charging order.
"against the [[CodeTransferTransferableInterest | transferable interest]]" -- The creditor can take through a charging order only what the debtor has under § 502 and no more.
"of the judgment debtor" -- This is shorthand for the "member of transferee" against whom the creditor holds the judgment.
"for the unsatisfied amount of the judgment" -- The lien created by the charging order is for the amount of the unsatisfied value of the judgment, and the redirection of [[CodeDistribution | distributions]] is likewise limited to that amount. Can the court issue the charging order for a lesser amount? Negative, according to the plain reading on the statute (which doesn't seem to think the matter through), but there may be occasions where the creditor agrees to a lesser amount, such as where the parties have partially settled, where the court should treat this more in the nature of guidance than a firm prohibition.
----
to:
Added line 105:
Added line 107:
Changed lines 111-114 from:
!!TEXT OPINIONS
(:pagelist link=Category.TEXT list=normal fmt=title:)
(:pagelist link=Category.
to:
!!!PROCEDURE OPINIONS
(:pagelist link=Category.Procedure list=normal fmt=title:)
Added lines 117-122:
!!!LIEN OPINIONS
(:pagelist link=Category.Lien list=normal fmt=title:)
----
Changed lines 9-92 from:
to:
(:title Statute ~ Main Charging Order Section 503:)
(:Summary: Section 503 re Charging Order.:)
(:description Section 503 re Charging Order.:)
(:keywords charging order:)
(:linebreaks:)
[[!Code]] [-CodeULLCASection503-]
!!SECTION 503. CHARGING ORDER.
[[<<]]
[[<<]]
----
Reporter's Comment to Section 503 generally.
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).
----
JayNote: Section 503 is the only section of the ULLCA that deals with charging orders. Section 503 does not, however, exist in the abstract, but must instead be carefully interpreted in accordance with its preceding § 502 which relates to transfers of [[CodeTransferTransferableInterest | transferable interests]], and the definition of "[[CodeDistribution | distribution]]" found in § 102(4). Frankly, reading § 503 will make a whole lot more sense if you substantially understand those other sections first.
The effect of a charging order is to combine two traditional remedies (why we just don't use those remedies instead, I am not particularly sure), being (1) attachment of the interest, meaning that an involuntary lien in favor of the creditor is placed on the debtor's interest, and (2) a non-wage garnishment, or "assignment order" in some states, of any [[CodeDistribution | distributions]] made to the debtor.
And now, a quibble with the Reporter's Comments. The Reporter writes: "By its terms, this section does not apply to foreign limited liability companies." What the Reporter doesn't say is that this is the result of a significant drafting flaw in the ULLCA (and also in the UPA and the ULPA), since there is utterly no reason -- and certainly no good one -- why the provisions of Article V and sections 502 and 503 in particular should not apply to foreign (out-of-state) or even alien (out-of-country) LLCs just as they would to any in-state LLCs. It is a mistake, an error, a FUBAR.
----
[[<<]]
[[<<]]
!!(a) On application by a judgment creditor of a member or transferee, a court may enter a charging order against the [[CodeTransferTransferableInterest | transferable interest]] of the judgment debtor for the unsatisfied amount of the judgment. Except as otherwise provided in subsection (f), a charging order constitutes a lien on a judgment debtor's [[CodeTransferTransferableInterest | transferable interest]] and requires the limited liability company to pay over to the person to which the charging order was issued any [[CodeDistribution | distribution]] that otherwise would be paid to the judgment debtor.
[[<<]]
[[<<]]
----
Reporter's Comment to Section 503 generally
Under this section, the judgment creditor of a member or transferee is entitled to a charging order against the relevant [[CodeTransferTransferableInterest | transferable interest]].
While in effect, that order entitles the judgment creditor to whatever [[CodeDistribution | distributions]] would otherwise be due to the member or transferee whose interest is subject to the order.
However, the judgment creditor has no say in the timing or amount of those [[CodeDistribution | distributions]].
The charging order does not entitle the judgment creditor to accelerate any [[CodeDistribution | distributions]] or to otherwise interfere with the management and activities of the limited liability company.
----
Reporter's Comment to Subsection (a) ¶ 1.
The phrase "judgment debtor" encompasses both members and transferees.
The lien pertains only to a [[CodeDistribution | distribution]], which excludes "amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program." Section 102(4)(B).
A judgment creditor that wishes to levy on such amounts should use the appropriate creditor's remedy, such as garnishment (which may be subject to exemptions or exclusions not relevant to a charging order). Cf. PB Real Estate, Inc. v. Dem II Props., 719 A.2d 73, 76 (Conn. 1998) (rejecting the contention of an LLC's two members that "payments of $28,000 to each of them" should be treated "as expenses for wages" rather than as [[CodeDistribution | distributions]]).
----
Reporter's Comment to Subsection (a) ¶ 2.
Whether an application for a charging order must be served on the limited liability company, the judgment debtor, or both is a matter for other law, principally the law of remedies and civil procedure.
The order itself must be served on the limited liability company. Whether the order must also be served on the judgment debtor is a matter for other law.
----
Reporter's Comment to Subsection (a) ¶ 3.
If a [[CodeDistribution | distribution]] consists of rights to acquire interests in a limited liability company, the charging order applies only to those rights within the definition of [[CodeTransferTransferableInterest | transferable interest]]. See Section 102(24) (defining [[CodeTransferTransferableInterest | transferable interest]]).
----
JayNote: Paragraph (a) is the meat of the charging order procedure. As mentioned, the charging order accomplishes two things, both of them through ¶ (a):
First, the charging order places an involuntary lien (forces the creation of a security interest) in favor of the creditor on the LLC interest of the debtor. This would normally be accomplished by the remedy of attachment.
Second, the charging order diverts [[CodeDistribution | distributions]] from the debtor to the creditor. This would normally be accomplished in most states by a non-wage garnishment or an assignment order.
Well, a reader might ask, if those existing remedies will already accomplish those things, then why do we need this charging order thingy? The short answer is: We don't. The longer answer is that the charging order remedy is the result of an error in the drafting of the original Uniform Partnership Act of 1914, where the drafters of that Act lazily copied the United Kingdom's Partnership Act on this point, without realizing that the charging order was unnecessary because of existing U.S. remedies. This error then persisted to modern times, and eventually took on a life of its own to where it may be practically impossible to get rid of the charging order and just use these other remedies instead.
Now, some explanations of the phraseology used in ¶ (a):
"On application" -- The creditor must file an "Application for Charging Order" or similar and have a hearing before the court on the application, which is probably required to satisfy procedural due process for the attachment aspect of the charging order.
"by a judgment creditor" -- A charging order is exclusively a post-judgment enforcement remedy, meaning that there is no such thing as a "preliminary charging order". If a creditor desires to tie up the debtor's interest prior to trial, the relief there would be in the nature of an ordinary pre-judgment attachment.
"of a member of transferee" -- The debtor is not necessarily a member of the LLC, but may be a transferee of the member. Example: Ted is a member of Alpha LLC, and voluntarily transfers his interest to Barbara. Later, Barbara incurs a liability and suffers a judgment. Creditor can obtain a charging order against Barbara's interest.
"court may enter" -- A court is not required to enter a charging order upon application, but may in its discretion decline to do so. Suffice it to say that the situations where the court chooses to exercise its discretion not to grant the charging order should be very rare. Example: State X has a statute that provides for a $10,000 "wildcard" exemption from collection. Barbara has an LLC interest worth $2,000 and which pays a dividend of only $50 per year. Barbara asserts her wildcard exemption as to her LLC interest. The court should exercise its discretion to refuse the charging order.
"against the [[CodeTransferTransferableInterest | transferable interest]]" -- The creditor can take through a charging order only what the debtor has under § 502 and no more.
"of the judgment debtor" -- This is shorthand for the "member of transferee" against whom the creditor holds the judgment.
"for the unsatisfied amount of the judgment" -- The lien created by the charging order is for the amount of the unsatisfied value of the judgment, and the redirection of [[CodeDistribution | distributions]] is likewise limited to that amount. Can the court issue the charging order for a lesser amount? Negative, according to the plain reading on the statute (which doesn't seem to think the matter through), but there may be occasions where the creditor agrees to a lesser amount, such as where the parties have partially settled, where the court should treat this more in the nature of guidance than a firm prohibition.
----
For court opinions dealing with compliance with a charging order [[TopicsCompliance | click here]].
----
For court opinions dealing with the charging order procedure generally [[TopicsProcedureRules | click here]].
(:Summary: Section 503 re Charging Order.:)
(:description Section 503 re Charging Order.:)
(:keywords charging order:)
(:linebreaks:)
[[!Code]] [-CodeULLCASection503-]
!!SECTION 503. CHARGING ORDER.
[[<<]]
[[<<]]
----
Reporter's Comment to Section 503 generally.
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).
----
JayNote: Section 503 is the only section of the ULLCA that deals with charging orders. Section 503 does not, however, exist in the abstract, but must instead be carefully interpreted in accordance with its preceding § 502 which relates to transfers of [[CodeTransferTransferableInterest | transferable interests]], and the definition of "[[CodeDistribution | distribution]]" found in § 102(4). Frankly, reading § 503 will make a whole lot more sense if you substantially understand those other sections first.
The effect of a charging order is to combine two traditional remedies (why we just don't use those remedies instead, I am not particularly sure), being (1) attachment of the interest, meaning that an involuntary lien in favor of the creditor is placed on the debtor's interest, and (2) a non-wage garnishment, or "assignment order" in some states, of any [[CodeDistribution | distributions]] made to the debtor.
And now, a quibble with the Reporter's Comments. The Reporter writes: "By its terms, this section does not apply to foreign limited liability companies." What the Reporter doesn't say is that this is the result of a significant drafting flaw in the ULLCA (and also in the UPA and the ULPA), since there is utterly no reason -- and certainly no good one -- why the provisions of Article V and sections 502 and 503 in particular should not apply to foreign (out-of-state) or even alien (out-of-country) LLCs just as they would to any in-state LLCs. It is a mistake, an error, a FUBAR.
----
[[<<]]
[[<<]]
!!(a) On application by a judgment creditor of a member or transferee, a court may enter a charging order against the [[CodeTransferTransferableInterest | transferable interest]] of the judgment debtor for the unsatisfied amount of the judgment. Except as otherwise provided in subsection (f), a charging order constitutes a lien on a judgment debtor's [[CodeTransferTransferableInterest | transferable interest]] and requires the limited liability company to pay over to the person to which the charging order was issued any [[CodeDistribution | distribution]] that otherwise would be paid to the judgment debtor.
[[<<]]
[[<<]]
----
Reporter's Comment to Section 503 generally
Under this section, the judgment creditor of a member or transferee is entitled to a charging order against the relevant [[CodeTransferTransferableInterest | transferable interest]].
While in effect, that order entitles the judgment creditor to whatever [[CodeDistribution | distributions]] would otherwise be due to the member or transferee whose interest is subject to the order.
However, the judgment creditor has no say in the timing or amount of those [[CodeDistribution | distributions]].
The charging order does not entitle the judgment creditor to accelerate any [[CodeDistribution | distributions]] or to otherwise interfere with the management and activities of the limited liability company.
----
Reporter's Comment to Subsection (a) ¶ 1.
The phrase "judgment debtor" encompasses both members and transferees.
The lien pertains only to a [[CodeDistribution | distribution]], which excludes "amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program." Section 102(4)(B).
A judgment creditor that wishes to levy on such amounts should use the appropriate creditor's remedy, such as garnishment (which may be subject to exemptions or exclusions not relevant to a charging order). Cf. PB Real Estate, Inc. v. Dem II Props., 719 A.2d 73, 76 (Conn. 1998) (rejecting the contention of an LLC's two members that "payments of $28,000 to each of them" should be treated "as expenses for wages" rather than as [[CodeDistribution | distributions]]).
----
Reporter's Comment to Subsection (a) ¶ 2.
Whether an application for a charging order must be served on the limited liability company, the judgment debtor, or both is a matter for other law, principally the law of remedies and civil procedure.
The order itself must be served on the limited liability company. Whether the order must also be served on the judgment debtor is a matter for other law.
----
Reporter's Comment to Subsection (a) ¶ 3.
If a [[CodeDistribution | distribution]] consists of rights to acquire interests in a limited liability company, the charging order applies only to those rights within the definition of [[CodeTransferTransferableInterest | transferable interest]]. See Section 102(24) (defining [[CodeTransferTransferableInterest | transferable interest]]).
----
JayNote: Paragraph (a) is the meat of the charging order procedure. As mentioned, the charging order accomplishes two things, both of them through ¶ (a):
First, the charging order places an involuntary lien (forces the creation of a security interest) in favor of the creditor on the LLC interest of the debtor. This would normally be accomplished by the remedy of attachment.
Second, the charging order diverts [[CodeDistribution | distributions]] from the debtor to the creditor. This would normally be accomplished in most states by a non-wage garnishment or an assignment order.
Well, a reader might ask, if those existing remedies will already accomplish those things, then why do we need this charging order thingy? The short answer is: We don't. The longer answer is that the charging order remedy is the result of an error in the drafting of the original Uniform Partnership Act of 1914, where the drafters of that Act lazily copied the United Kingdom's Partnership Act on this point, without realizing that the charging order was unnecessary because of existing U.S. remedies. This error then persisted to modern times, and eventually took on a life of its own to where it may be practically impossible to get rid of the charging order and just use these other remedies instead.
Now, some explanations of the phraseology used in ¶ (a):
"On application" -- The creditor must file an "Application for Charging Order" or similar and have a hearing before the court on the application, which is probably required to satisfy procedural due process for the attachment aspect of the charging order.
"by a judgment creditor" -- A charging order is exclusively a post-judgment enforcement remedy, meaning that there is no such thing as a "preliminary charging order". If a creditor desires to tie up the debtor's interest prior to trial, the relief there would be in the nature of an ordinary pre-judgment attachment.
"of a member of transferee" -- The debtor is not necessarily a member of the LLC, but may be a transferee of the member. Example: Ted is a member of Alpha LLC, and voluntarily transfers his interest to Barbara. Later, Barbara incurs a liability and suffers a judgment. Creditor can obtain a charging order against Barbara's interest.
"court may enter" -- A court is not required to enter a charging order upon application, but may in its discretion decline to do so. Suffice it to say that the situations where the court chooses to exercise its discretion not to grant the charging order should be very rare. Example: State X has a statute that provides for a $10,000 "wildcard" exemption from collection. Barbara has an LLC interest worth $2,000 and which pays a dividend of only $50 per year. Barbara asserts her wildcard exemption as to her LLC interest. The court should exercise its discretion to refuse the charging order.
"against the [[CodeTransferTransferableInterest | transferable interest]]" -- The creditor can take through a charging order only what the debtor has under § 502 and no more.
"of the judgment debtor" -- This is shorthand for the "member of transferee" against whom the creditor holds the judgment.
"for the unsatisfied amount of the judgment" -- The lien created by the charging order is for the amount of the unsatisfied value of the judgment, and the redirection of [[CodeDistribution | distributions]] is likewise limited to that amount. Can the court issue the charging order for a lesser amount? Negative, according to the plain reading on the statute (which doesn't seem to think the matter through), but there may be occasions where the creditor agrees to a lesser amount, such as where the parties have partially settled, where the court should treat this more in the nature of guidance than a firm prohibition.
----
For court opinions dealing with compliance with a charging order [[TopicsCompliance | click here]].
----
For court opinions dealing with the charging order procedure generally [[TopicsProcedureRules | click here]].
Added lines 1-15:
(:title TEXT:)
(:Summary: TEXT:)
(:description TEXT:)
(:keywords charging order, TEXT:)
(:linebreaks:)
[[!Topic]] [[!TEXT]]
[[<<]]
[[<<]]
TEXT
----
!!TEXT OPINIONS
(:pagelist link=Category.TEXT list=normal fmt=title:)
----
(:Summary: TEXT:)
(:description TEXT:)
(:keywords charging order, TEXT:)
(:linebreaks:)
[[!Topic]] [[!TEXT]]
[[<<]]
[[<<]]
TEXT
----
!!TEXT OPINIONS
(:pagelist link=Category.TEXT list=normal fmt=title:)
----