When creditors sue individuals, who own an interest in a limited liability company or partnership, they may petition a court for a charging order. A charging order places a lien on the ownership interest of a member or partner. The order directs the managing member or partnership to pay the creditor all the profits and income that are due the owner.
Both corporations and LLCs provide limited liability to shareholders and members respectively. Owners of interests in corporations and LLCs are not personally responsible for the debts of their business enterprise. Typically, the only way creditors may reach the personal assets of an owner is if the obligation was personally guaranteed or if the owner mingled personal and corporate funds. Partnerships do not provide similar protection of a partner’s personal assets. All partners are personally liable for a partnership’s debts.
However, when a creditor obtains a judgment against an individual, it may seek a charging order as a remedy to collect assets that belong to an LLC member or partner. A charging order may be circumvented by directing the managing member or partnership to not tender any payments, which will leave the creditor holding the charging order with nothing.
This results in a situation where “the enemy is at the gate.” The attacking army will not leave until the army under siege opens the castle gates, while the army under siege will not open the castle gates until the attacking army leaves.
A charging order does not permit creditors to assume membership in the LLC or partnership interest, nor does it permit any input regarding the management of the business, which would be an unfair result for all the LLC members and partners who never consented to share ownership with the creditor in the LLC or partnershp. Also, a charging order does not compel the LLC or partnership to make any payments to the creditor for similar reasons.
A court may order foreclosure on the judgment debtor’s partnership or LLC interest at any time, which is an order directing the sale of the debtor’s interests. At the foreclosure sale, the highest bidder will acquire the debtor’s interest in the partnership or LLC. Usually the judgment creditor is the highest bidder. If a third party is the highest bidder, the judgment creditor will receive the bid amount, up to the full amount of the judgment.
The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to email@example.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.