Types Of Charging Order Protected Entities

Topic Entity_Type TopicsEntities

♦ Introduction

Charging orders may be issued against ownership interests in limited liability companies (LLCs), general partnerships, limited partnerships, and limited liability partnerships across all US state and federal jurisdictions. Federal courts generally apply state law charging order provisions rather than independent federal authority. Most states exclude corporations from charging order remedies, though Nevada uniquely permits charging orders against corporate stock in closely-held corporations with fewer than 100 shareholders. Professional associations and professional corporations are typically treated as corporations and thus generally not subject to charging orders. Limited statutory authority exists for charging orders against interests in statutory trusts and business trusts in some jurisdictions, while unincorporated associations generally fall outside charging order frameworks unless specifically addressed by statute.

Limited Liability Companies

All US states provide statutory authority for charging orders against LLC membership interests. The Texas Business Organizations Code exemplifies this universal approach, stating that "on application by a judgment creditor of a member of a limited liability company or of any other owner of a membership interest in a limited liability company, a court having jurisdiction may charge the membership interest of the judgment debtor to satisfy the judgment". TX BUS ORG § 101.112. This remedy applies to both single-member and multi-member LLCs, as clarified by Texas's 2023 amendment specifying that "this section applies to both single-member limited liability companies and multiple-member limited liability companies" TX BUS ORG § 101.112.

Courts consistently recognize that charging orders provide the exclusive remedy for judgment creditors seeking to satisfy debts from LLC membership interests. North Carolina's revised LLC Act provides that "the entry of a charging order is the exclusive remedy by which a judgment creditor of an interest owner may satisfy the judgment from or with the judgment debtor's ownership interest," a provision the North Carolina Court of Appeals in First Bank v. S & R Grandview, L.L.C. cited as supporting its interpretation that under the prior statute, a charging order does not effectuate an assignment of a debtor's membership interest in an LLC. The Florida Supreme Court in Olmstead v. F.T.C. explained that charging orders "The charging order affords a judgment creditor access to a judgment debtor's rights to profits and distributions from the business entity in which the debtor has an ownership interest." while protecting other members from disruption. Olmstead v. FTC, 44 So.3d 76 (Fla., 2010)..

The charging order remedy creates a lien on the debtor's membership interest and requires the LLC to pay distributions that would otherwise go to the judgment debtor directly to the creditor instead. As the Georgia Court of Appeals noted in Gaslowitz v. Stabilis Fund I, LP, "A charging order, however, gives no direct remedy against company property".

Partnerships

Both general partnerships and limited partnerships are universally subject to charging orders under state partnership statutes. The Pennsylvania Uniform Partnership Act provides that "on application by a judgment creditor of a partner or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment" PA ST 15 Pa.C.S.A. § 8454. Similarly, Pennsylvania's Limited Partnership Act contains nearly identical language for limited partnership interests PA ST 15 Pa.C.S.A. § 8673.

The Supreme Court of Kansas in City of Arkansas City v. Anderson explained the historical foundation of partnership charging orders, noting that the remedy allows courts to "make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require" to enforce charging orders against partnership interests. The Tennessee Limited Partnership Act exemplifies modern approaches by providing that charging orders constitute "the exclusive remedy by which a person, other than the partnership itself, seeking in the capacity of a judgment creditor to enforce a judgment against a partner or transferee may satisfy the judgment from the judgment debtor's transferable interest" TN ST § 61-3-703.

Limited liability partnerships, which are partnerships that have elected special liability protection, remain subject to charging order provisions under general partnership statutes. Courts treat LLP interests the same as general partnership interests for charging order purposes, as the liability shield affects only partner liability, not the nature of the partnership interest itself.

Corporations

Most states exclude corporate stock from charging order remedies, treating shares as freely transferable securities subject to traditional execution and garnishment procedures rather than the specialized charging order framework. The Ohio Court of Appeals in Berns Custom Homes, Inc. v. Johnson held as a matter of first impression whether the trial court could issue a charging order against Johnson's legal professional association even though it is a form of corporation rather than a partnership, concluding that "The provisions set forth in R.C. Chapter 1776 were intended to apply to partnerships and do not apply to legal professional associations. Although R.C. 1776.50 expressly authorizes a trial court to grant charging orders against a partner's interest in a partnership and to appoint a receiver, there is no equivalent provision in R.C. Chapter 1785 or 1701 authorizing a trial court to grant charging orders against legal professional associations." Berns Custom Homes, Inc. v. Johnson, 2021 WL 3928911, 2021 Ohio 3033 (Ohio App., Sept. 2, 2021).

Nevada represents the notable exception to this general rule. Nevada Revised Statutes Section 78.746 provides that courts may charge corporate stock with payment of judgments, but this remedy "Applies only to a corporation that: (1) Has fewer than 100 stockholders of record at any time." NV ST 78.746. The Nevada statute makes charging orders "the exclusive remedy by which a judgment creditor of a stockholder or an assignee of a stockholder may satisfy a judgment out of the stock of the judgment debtor" for qualifying closely-held corporations NV ST 78.746.

This divergence reflects different policy approaches to creditor remedies. The Nevada Supreme Court in Becker v. Becker held that "a debtor can exempt stock in the corporations described in NRS 78.746(2), but his economic interest in that stock can still be subject to the charging order remedy in NRS 78.746(1)." The court explained that under a charging order, "creditors can obtain a charging order to charge a debtor shareholder's interest in a corporation, but creditors only have the rights of an assignee, NRS 78.746(1), who only has a right to the shareholder's economic interest in the corporation. NRS 78.746(3)." Becker v. Becker, 2015 WL 6550931 (Nev., 2015)..

Professional Entities

Professional associations and professional corporations are generally treated as corporations for charging order purposes and thus typically not subject to charging order remedies. The Ohio Court of Appeals' decision in Berns Custom Homes definitively established that professional associations, despite their specialized nature, remain fundamentally corporate entities governed by corporation statutes rather than partnership charging order provisions. Berns Custom Homes, Inc. v. Johnson, 2021 WL 3928911, 2021 Ohio 3033 (Ohio App., Sept. 2, 2021)..

However, professional entities organized as partnerships or LLCs remain subject to charging orders. In Phillips, Spallas & Angstadt, LLP v. Fotouhi, the California Court of Appeal held that a court had authority to issue charging orders against a law firm partnership interest, though it noted the court's use of "inherent authority" to extend the order's effect to a related professional corporation. Phillips, Spallas & Angstadt, LLP v. Fotouhi, 197 Cal.App.4th 1132 (2011). This case illustrates the complexity that arises when professional practices operate through multiple entity types.

The distinction proves critical for professional practice planning. Law firms, accounting practices, and medical groups organized as professional corporations typically avoid charging order exposure, while those structured as partnerships or LLCs remain subject to this creditor remedy.

Business Trusts and Statutory Trusts

Limited statutory authority exists for charging orders against interests in statutory trusts and business trusts, though this area remains relatively underdeveloped compared to LLC and partnership charging order law. Some state statutes include trusts within their definitions of entities subject to charging orders. For example, Florida's LLC Act defines "person" to include "statutory trust, business trust, common law business trust" FL ST § 605.0102, and Wisconsin statutes consistently include "statutory trust, business trust, common-law business trust" in entity definitions WI ST 183.0102.

The Delaware Supreme Court in Protech Mins., Inc. v. Dugout Team, LLC addressed a situation involving a statutory trust that converted to a limited partnership, noting that "trust distributions to beneficial owners constituted their personal property, which was subject to garnishment" before the conversion Protech Minerals, Inc. v. Dugout Team, LLC, 284 A.3d 369 (2022). This suggests that trust beneficial interests may be subject to traditional creditor remedies rather than specialized charging order procedures.

Unincorporated Associations and Other Entities

Unincorporated associations generally fall outside charging order frameworks unless specifically addressed by statute. Most charging order statutes focus on entities with ownership interests that resemble partnership or membership structures rather than the membership rights typical of unincorporated associations.

Joint ventures present particular complexity. In 91st Street Joint Venture v. Goldstein, 691 A.2d 272, 114 Md.App. 561 (Md.Sp.App., 1997)., the Maryland Court of Special Appeals noted that "a joint venture and a partnership are indistinguishable for all purposes relevant to the case before us," a statement that the Maryland Court of Special Appeals later cited in Rand v. Steinberg in the context of discussing charging orders. Rand v. Steinberg, 2018 WL 4183449 (Md.Spec.App., Unreported, Aug. 31, 2018)., suggesting that joint ventures structured with partnership-like characteristics may be subject to charging orders.

Series LLCs and other specialized entity structures remain largely unaddressed by existing charging order statutes, creating uncertainty about whether charging orders affect individual series or the entire entity structure.

Federal Court Application

Federal courts apply state law charging order provisions rather than independent federal charging order authority. Federal Rule of Civil Procedure 69(a)(1) provides that judgment enforcement procedures "must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies" FRCP Rule 69. Federal bankruptcy courts, however, may obtain charging orders under the trustee's hypothetical lien creditor powers. In In re Pettine, the Tenth Circuit Bankruptcy Appellate Panel held that "the Bankruptcy Code permitted trustee, as a hypothetical judicial lien creditor, to obtain a charging order under Wyoming law". PettineBankruptcyChargingOrder ?

Exclusivity and Foreclosure Variations

Most states establish charging orders as the exclusive remedy for satisfying judgments from partnership and LLC interests. Texas law provides that "The entry of a charging order is the exclusive remedy by which a judgment creditor of a partner or of any other owner of a partnership interest may satisfy a judgment out of the judgment debtor's partnership interest." TX BUS ORG § 153.256. Similarly, Alaska statutes specify that charging orders provide "the exclusive remedy that a judgment creditor of a member or a member's assignee may use to satisfy a judgment out of the judgment debtor's interest in the limited liability company". AK ST § 10.50.380.

Significant variation exists among states regarding foreclosure rights. Some states, like Texas, prohibit foreclosure entirely, with the statute providing that "The charging order lien may not be foreclosed on under this code or any other law" TX BUS ORG § 153.256. Other states permit foreclosure under certain circumstances, while Pennsylvania allows foreclosure but includes special provisions for sole member LLCs where "the purchaser at the sale obtains the member's entire interest, not only the member's transferable interest". PA ST 15 Pa.C.S.A. § 8853.

Practical Implications

Charging orders provide important asset protection benefits for business entities by preventing creditors from directly seizing entity assets or forcing dissolution to satisfy individual member debts. For creditors, charging orders may be relatively ineffective against single-member LLCs or entities that make no distributions. For entity structuring, choosing between corporation (generally no charging orders) versus LLC/partnership (subject to charging orders) has significant creditor protection implications. Professional entities must carefully consider whether they're structured as corporations (limited charging order exposure) or partnerships (subject to charging orders).

Recent Developments

Recent developments include legislative clarification that charging order statutes apply to both single-member and multi-member LLCs (Texas 2023 amendment), increased recognition of charging orders in bankruptcy proceedings (PettineBankruptcyChargingOrder ?), and continued judicial refinement of what constitutes adequate notice and service for charging orders. Some states have strengthened exclusivity provisions to prevent workarounds, while others have expanded foreclosure rights for judgment creditors.

Conclusion

Charging orders constitute a judicial remedy allowing a judgment creditor of an owner or member in entities such as limited liability companies (LLCs), limited partnerships, and general partnerships to secure payment from the debtor's ownership interest without obtaining management rights. This lien attaches primarily to the debtor's distributional or transferable interest, entitling the creditor to receive distributions the member would otherwise get but not to interfere with the entity's operations or governance. For LLCs, the charging order is generally the creditor's exclusive remedy and typically does not impose liability on individual members beyond their economic interest, thus preserving limited liability and asset partitioning principles. Foreclosure of the charging order lien may follow if distributions will not satisfy the judgment within a reasonable time, though the creditor usually obtains only the economic interest, not membership or management rights, except in single-member LLCs where foreclosure transfers the entire ownership interest and disassociates the debtor member. Charging orders also apply in limited partnerships and, since 2011, in Texas general partnerships by statute, reflecting a convergence of laws regarding this remedy. ASSETP § 18:4, 5 IAPRAC § 13:29, 20 TXPRAC § 20:20.

Additionally, charging orders are not exclusive to LLCs but extend to entities formed under uniform acts, including cooperatives formed under the Limited Cooperative Association Act and are generally not applicable to corporations outside of Nevada. The remedy focuses on protecting the ongoing business and the interests of other members by limiting creditors to economic rights rather than governance, thereby safeguarding the "pick your partner" principle. Operating agreements generally cannot override the statutory provisions to the detriment of third-party creditors. Judicial authorities may enter ancillary orders to enforce charging orders or appoint receivers but cannot compel distributions beyond what the member is entitled to receive absent the charging order. RKLLC § 10:2, AMJUR LIMLIACO § 23. ♦

ENTITY TYPE ARTICLES

2021.09.20 ... Statutory Authority For Charging Order Against Professional Association Addressed In Berns Custom Homes
- Berns Custom Homes, Inc. v. Johnson, 2021 WL 3928911, 2021 Ohio 3033 (Ohio App., Sept. 2, 2021).

ENTITIES TO WHICH CHARGING ORDERS APPLY OR NOT