The Power of Charging Orders
Satisfying Judgments Using Business Entities in Minnesota
A charging order is a tool that a creditor can use to try to satisfy a judgment of a debtor. The charging order is charged against a debtor’s interest in a partnership or LLC and attaches to the distributions the debtor would normally receive from the entity until the judgment is paid. The order will only give the creditor the financial rights, such as distributions of income or profits, the debtor owns in the entity. This means that the creditor will not gain any control of the business entity, instead the charging order places a lien only against the debtor’s economic rights in the entity. This was designed to protect the non-debtor members of the entity from being involuntarily forced into a business relationship with the creditor.
A charging order is obtained through a court order from the court that issued the original judgment or a court of the state in which the entity is organized. The court may also order foreclosure of the member’s interest that is subject to the charging order if it can be shown that the distributions under the order will not pay the judgment in a reasonable amount of time.
Generally, a charging order is the exclusive remedy that a creditor may use to attach a debtor’s interest in a LLC or partnership. However, some exceptions to this rule exist. A creditor can sometimes obtain an order from the court requiring the debtor’s partnership or LLC to transfer all proceeds received to the debtor. Also, if the debtor fraudulently transfers assets for the purpose of avoiding creditor claims, the court may attach a levy on the asset. In addition, a court may allow the creditor to “reverse-pierce the corporate veil” in order to hold the corporation liable for the personal debts of the debtor, though this is rarely done.
Unfortunately, charging orders have a key weakness as a tool for creditors. In order to avoid the paying under the order, the debtor can simply stop all distributions to the debtor from the entity. To combat this, courts often issue charging orders containing provisions that prevent other payments from being made to debtor under the guise of another name. Also, if other members of the LLC want to receive distributions, the debtor is out of luck. The charging order is a relatively weak debt collection tool, but if a creditor is willing to be patient, can be a source of funds to satisfy a judgment.