A Sole Remedy Charging Order Statute May Not Offer Debtors the Protection It Once Did

A charging order is a mechanism that allows a creditor to place a lien on a debtor’s interest in a partnership or LLC. When the partnership or LLC makes any distributions to the debtor, the creditor gets paid instead. If the debtor sells their interest, the creditor receives the sale proceeds. Ordinarily, the creditor cannot exercise the charging order to get the assets of the partnership or LLC, but a recent case in California may change all that.

A lawyer in a California case got a charging order against a debtor’s interest in certain partnerships, then he appointed a receiver for the debtor (a receiver basically has all the powers of a debtor). The debtor in this case had controlling interests in the partnerships and the receiver used the debtor powers to force distributions from the partnerships that were then collected by the charging order. The implications from this case are clear: Holding controlling or managing interests in a partnership or LLC is an open window for creditors to draw on assets.  If you have an LLC or partnership and desire charging order protection, it is better to let someone else have controlling or managing interests in the entity.

For more information or to discuss making changes to your LLC or partnership, please contact Hoffman & Associates at 404-255-7400