Procedure Lien Code ULLCASection503as1Entry
(a) 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. Except as otherwise provided in subsection (f), a charging order constitutes a lien on a judgment debtor's transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor.
Reporter's Comment to Subsection (a) ¶ 1.
The phrase "judgment debtor" encompasses both members and transferees.
The lien pertains only to a
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
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.
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
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 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
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 click here.
For court opinions dealing with the charging order procedure generally click here.
PROCEDURE OPINIONS
- Biscayne Contractors, Inc. v. Redding, 2016 WL 6996125 (D.C.D.C., Nov. 29, 2016).
- Brown v. Sperber-Porter, 2018 WL 4184372 (D.Ariz., Aug. 24, 2018).
- Campbell v. 1 Spring, LLC, 2024-Ohio-308, 2024 WL 342686 (Ct.App., Slip Op., Jan. 30, 2024).
- DuTrac Community Credit Union v. Hefel, 2017 WL 461211 (Iowa 2017).
- Farmer v. Farmer, 2022 WL 3270714 (S.D., Aug. 10, 2022).
- Ilani v. Abraham, D.Nev. Case No. 2:17-CV-692 (Aug. 21, 2018).
- Kearney Construction Co., LLC v. Bank of America, N.A, 2015 WL 1499155 (M.D. Fla., 2015).
- Kostoglou v. Fortuna, 2020 WL 813366 (Fla.App., Feb. 19, 2020).
- Open Road Trucking, LLC v. Swanson, 2019 WL 6768443 (N.D., Dec. 12, 2009).
- Perez v. Dhillon, 2020 WL 1900447 (E.D.Cal., April 17, 2020).
- Regions Bank v. Stewart, 2011 WL 1827453 (S.D.Ala., 2011).
- SE Property Holdings, LLC v. Unified Recovery Group, LLC, 2014 WL 5846388 (S.D.Ala., 2014).
- Textron Financial Corp. v. Gallegos, C.D.Cal. Case No. 15cv1678 (Oct. 7, 2015).
LIEN OPINIONS