In the United States, charging orders are governed by both federal and state regulations. This means that the remedies that creditors may have under charging order regulations can differ somewhat in different places. In general, a charging order should not impact non-debtor partners in an LLC; however, some jurisdictions allow creditors a few legal ways to attempt to force the other LLC members to take certain actions.
What Is A Charging Order
Before discussing how a charging order affects non-debtor LLC members, it’s helpful to briefly summarize what a charging order is. Basically, the court authorizes a creditor the right to attach a company’s distributions to a partner who is in debt. This sort of order would generally be made against an LLC or LP.
Typically, this order has certain limits:
- It’s usually limited to the amount of judgement.
- Since a charging order is similar to wage garnishment, it doesn’t give a creditor any rights to manage the organization.
- It only gives the creditors the right to attach the partner’s earnings and not company assets.
How A Charging Order Impacts Non-Debtor Partners
These types of orders are meant to focus on the partner who is in debt. Even if the judgment is higher than any money owed the partner, the order isn’t meant to impact any non-debtor partners in the LLC. The creditor can’t attach assets or participate in management. In more debtor-friendly jurisdictions, the entire LLC shouldn’t be impacted. Indeed, it’s even possible for the debtor partner to continue on in the partnership once he or she has satisfied the judgement.
At the same time, it’s important to look at how the laws differ in some jurisdictions. Some courts allow the creditor to pursue a a judicial foreclosure. Basically, this forces the non-debtor partners to purchase the debtor partner’s interest at what might be called a foreclosure sale. If the partners could not purchase the interest, it’s possible for a creditor to force liquidation of the partnership.
Obviously, this gives creditors a lot of power over the entire organization. It does away with many of the protections that are supposed to be inherit in the limitations of a charging order.
What If All Partners Are Debtors?
In some cases, an LLC may only have a single partner. In other cases, all partners might be in debt to the same creditor. Again, the way that a charging order protects the organization under these situations really depends upon the jurisdiction. Some courts have ruled that charging order limitations that protect assets and management still apply. Other courts have ruled that they don’t since their are no non-debtor partners that need to be protected.
Basically, charging orders and the way they are enforced in different places is something that partners in an LLC should consider. It’s meant to help protect companies against liquidation of assets and loss by non-debtor partners. However, the power of this type of regulation may depend upon other state regulations and the way that it is enforced by the courts.