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Charging Order Prejudgment Relief

Topic Prejudgment_Relief TopicsPrejudgment

PAGE SUMMARY

Creditors seeking pre-judgment remedies against interests in LLCs and partnerships face a fragmented landscape where jurisdictional choice dictates recovery potential. While the charging order remains the primary mechanism for capturing distributions, state frameworks diverge significantly on exclusivity. Jurisdictions like Pennsylvania and Georgia permit broad supplemental remedies, including garnishment and expansive injunctive relief under statutes like Pennsylvania Rule 3118, to prevent asset dissipation. Conversely, Texas, Florida, and Connecticut maintain charging orders as the exclusive remedy, limiting creditors to the rights of an assignee. Federal courts, operating under Rules 64 and 69, generally defer to these state-level procedures while adhering to constitutional due process mandates. These mandates, established by the Supreme Court, require that pre-judgment seizures involve judicial oversight, specific factual affidavits, and procedural safeguards to mitigate the risk of wrongful attachment. Furthermore, jurisdictions are split on foreclosure rights; several states allow the judicial sale of charged interests to satisfy debts, while others prohibit foreclosure to preserve business continuity. In exclusive jurisdictions, creditors are often limited to distributions, which may be withheld by the entity, necessitating alternative strategies such as fraudulent transfer claims or alter ego theories. Ultimately, the tension between protecting business stability and ensuring creditor satisfaction is resolved through varying statutory interpretations and constitutional balancing tests, requiring practitioners to navigate complex procedural hurdles and specific entity-type protections to secure effective pre-judgment relief.

PRE-JUDGMENT REMEDIES AGAINST INTERESTS IN LLCS AND PARTNERSHIPS

Introduction

Creditors' pre-judgment remedies against debtor interests in business entities vary significantly by jurisdiction and entity type. The primary remedy across all jurisdictions is the charging order, which allows creditors to reach distributions that would otherwise flow to the debtor. However, jurisdictions are split on whether charging orders are the exclusive remedy or whether additional remedies like garnishment, attachment, and injunctive relief are available. Pennsylvania and Georgia represent the broader remedy approach, allowing garnishment and injunctive relief in addition to charging orders under statutes like Pennsylvania Rule of Civil Procedure 3118. Conversely, Texas, Connecticut, and Florida generally treat charging orders as the exclusive remedy for creditor collection from business entity interests. Constitutional due process requirements impose additional constraints on pre-judgment seizures, requiring judicial authorization with discretion to deny attachment and often mandating notice and hearing procedures. The analysis of Unruh Turner Burke and Frees, PC v. Tattersall Development Co. demonstrates Pennsylvania's particularly robust framework for pre-judgment creditor protection through charging orders and broad injunctive powers.

Federal Framework for Pre-Judgment Remedies

Federal courts applying pre-judgment remedies against business entity interests operate under Federal Rules of Civil Procedure 64 and 69, which authorize provisional remedies including attachment, garnishment, and other state-law remedies. Rule 64 provides that courts may use remedies available under the law of the state where the court is located for seizing a person or property to secure satisfaction of the potential judgment, unless a federal statute governs FRCP Rule 64. Rule 69 directs that money judgments be enforced according to state procedures unless federal statutes govern. The Federal Debt Collection Procedures Act establishes pre-judgment remedies for federal debt collection, defining prejudgment remedy as "the remedy of attachment, receivership, garnishment, or sequestration authorized by this chapter to be granted before judgment on the merits of a claim for a debt". 28 USCA § 3002.

Federal courts consistently recognize that partnership and LLC interests constitute personal property subject to creditor remedies, but defer to state law regarding the scope and exclusivity of available procedures. In First Union National Bank of Virginia v. Craun, the federal district court held that a charging order, without an accompanying writ of execution, does not take priority over a security interest perfected after judgment but before entry of the charging order, noting that "until a charging order entered, the judgment debtor, Mrs. Craun, virtually was free, as against the instant plaintiff, to encumber intangible property, including her interests to discretionary distributions of a limited partnerships". First Union National Bank of Virginia v. Craun, 853 F.Supp. 209 (1994). This approach reflects the general federal practice of incorporating state creditor remedy statutes into federal collection procedures.

Pennsylvania's Comprehensive Pre-Judgment Framework

Pennsylvania provides one of the most extensive frameworks for pre-judgment creditor remedies against business entity interests. Unruh Turner Burke and Frees, PC v. Tattersall Development Co. demonstrates Pennsylvania's approach through charging orders under Rule 3118. The court granted relief directing various controlled entities "the 2018 Charging Order Entities were to pay UTBF all sums due from any of the 2018 Charging Order Entities to any of the Judgment Debtors" Unruh Turner Burke and Frees, PC v. Tattersall Development Co., 283 A.3d 1265 (2022). When creditors discovered an alleged scheme involving $22.5 million in real property sale proceeds, the court granted ex parte emergency relief amending the charging order to include additional entities and directing payment of sums into court Unruh Turner Burke and Frees, PC v. Tattersall Development Co., 283 A.3d 1265 (2022). The Pennsylvania Superior Court affirmed these broad remedies under Rule 3118, which provides authority for "On petition of the plaintiff, after notice and hearing, the court in which a judgment has been entered may, before or after the issuance of a writ of execution, enter an order against any party or person (1) enjoining the negotiation, transfer, assignment or other disposition of any security, document of title, pawn ticket, instrument, mortgage, or document representing any property interest of the defendant subject to execution; (2) enjoining the transfer, removal, conveyance, assignment or other disposition of property of the defendant subject to execution; ... and (6) granting such other relief as may be deemed necessary and appropriate". Unruh Turner Burke and Frees, PC v. Tattersall Development Co., 283 A.3d 1265 (2022). The court found no Rule 3118 violation and held that the preliminary injunction properly maintained the status quo established by the 2018 Charging Order.

State Variations in Charging Order Exclusivity

State approaches to creditor remedies against business entity interests fall into two primary categories: jurisdictions treating charging orders as exclusive remedies and those allowing additional collection procedures.

Exclusive Remedy Jurisdictions

Texas represents the exclusive remedy approach most clearly. Texas Business Organizations Code § 153.256(d) 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." In Goodman v. Compass Bank, the court applied this statutory provision and held that it does not preclude a judgment creditor from seeking turnover of proceeds from a distribution after the distribution has been made and is in the judgment debtor's possession. Goodman v. Compass Bank, Not Reported in S.W. Rptr. (2016). Texas Business Organizations Code sections 101.112 and 153.256 establish this exclusivity for both LLC membership interests and partnership interests. Goodman v. Compass Bank, Not Reported in S.W. Rptr. (2016). Similarly, Connecticut General Statutes section 34-259b provides that "the entry of a charging order is the exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor's transferable interest". CT ST § 34-259b.

Florida follows a similar exclusive approach, with the Florida District Court of Appeal in Lefkowitz v. Quality Laboratory Management, LLC explaining that "Sections 608.433(5) and 620.1703(3), Florida Statutes (2013) provide, as a general rule, that a charging order is the exclusive remedy by which a creditor may satisfy a judgment from the debtor's interest in a limited liability company or in a limited partnership, respectively". Lefkowitz v. Quality Laboratory Management, LLC, 159 So.3d 147 (2014).

Non-Exclusive Remedy Jurisdictions

Georgia represents the opposite approach, explicitly permitting multiple remedies. In Nigri v. Lotz, the Georgia Court of Appeals held that "the charging order remedy is not exclusive, and the financial interests of the limited partner may also be reached by the judgment creditor by process of garnishment". Nigri v. Lotz, 216 Ga.App. 204 (1995). Georgia Code section 14-11-504 provides that charging order remedies "shall not be deemed exclusive of others which may exist, including, without limitation, the right of a judgment creditor to reach the limited liability company interest of the member by process of garnishment served on the limited liability company". GA ST § 14-11-504.

Pennsylvania similarly allows non-exclusive remedies, as demonstrated in In re Allen, where the bankruptcy court concluded that "a judgment creditor in Pennsylvania may garnish a judgment debtor's interest in a partnership or limited partnership notwithstanding the availability of a charging order against the same interest". In re Allen, 228 B.R. 115 (1998).

Foreclosure and Assignment Rights

Courts are divided on whether creditors may foreclose on charged business entity interests or must be limited to receiving distributions. Several jurisdictions permit foreclosure as an enforcement mechanism for charging orders.

The Georgia Court of Appeals in Nigri v. Lotz extensively analyzed foreclosure rights, concluding that "as an aid to enforcement of a charging order under OCGA § 14-9A-52(a), the trial court is authorized to order that a limited partner's charged interest be foreclosed by judicial sale at which the partnership interest may be purchased by the judgment creditor or a third party". Nigri v. Lotz, 216 Ga.App. 204 (1995). The court reasoned that foreclosure limitations under the Uniform Partnership Act were "inconsistent with the charging remedy provisions of the ULPA, and should not be applied to a limited partnership to prohibit foreclosure and sale of the charged interest of a limited partner". Nigri v. Lotz, 216 Ga.App. 204 (1995).

Connecticut similarly permits foreclosure, with the Appellate Court in Madison Hills Limited Partnership II v. Madison Hills, Inc. holding that charging orders could be enforced through strict foreclosure and that "a charging creditor can foreclose on a partner's interest in the partnership". Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994). The court applied Uniform Partnership Act remedy provisions to limited partnerships under the Uniform Limited Partnership Act Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994).

California courts also recognize foreclosure rights. In Hellman v. Anderson, the California Court of Appeal concluded that "section 15028 authorized the trial court's order directing foreclosure and sale of the charged partnership interest". Hellman v. Anderson, 233 Cal.App.3d 840 (1991). The court noted that "other commentators...support Hellman's position that the Uniform Partnership Act's charging order provision is widely accepted as authorizing the sale of the charged partnership interest". Hellman v. Anderson, 233 Cal.App.3d 840 (1991).

However, Florida courts have reached the opposite conclusion. In Givens v. National Loan Investors, L.P., the Florida District Court of Appeal held that "judgment creditor that obtained charging orders against judgment debtor's interest in limited partnerships had only the rights of an assignee of partnership interest, and could not resort to judicial foreclosure of partnership interest, under Florida's Revised Uniform Limited Partnership Act (RULPA)". Givens v. National Loan Investors, L.P., 724 So.2d 610 (1998).

Constitutional Due Process Limitations

Pre-judgment seizure of debtor interests in business entities must comply with constitutional due process requirements established by the Supreme Court in cases like Fuentes v. Shevin and Connecticut v. Doehr. Federal courts have consistently held that due process requires pre-judgment seizures be authorized by a judge with discretion to deny the writ.

In Johnson v. American Credit Company of Georgia, the Fifth Circuit, interpreting Supreme Court precedent, concluded that "It seems clear, then, that due process requires that a prejudgment seizure be authorized by a judge who has discretion to deny issuance of the appropriate writ" and held Georgia's prejudgment attachment scheme "facially unconstitutional" for failing to provide this procedural guarantee. Johnson v. American Credit Co. of Georgia, 581 F.2d 526 (1978). The court explained that "It seems clear, then, that due process requires that a prejudgment seizure be authorized by a judge who has discretion to deny issuance of the appropriate writ". Johnson v. American Credit Co. of Georgia, 581 F.2d 526 (1978).

The Eastern District of Pennsylvania in Strick Corp. v. Thai Teak Products Co. analyzed the constitutional framework, noting that federal courts "have followed the Supreme Court and invalidated prejudgment seizures" that lack adequate procedural protections Strick Corp. v. Thai Teak Products Co., Ltd., 493 F.Supp. 1210 (1980). The court required that an affidavit clearly setting forth the factual basis be presented to an official with competence to evaluate the claim and discretion to deny the writ, that a bond be posted to indemnify the defendant, and that an immediate post-attachment hearing take place. Strick Corp. v. Thai Teak Products Co., Ltd., 493 F.Supp. 1210 (1980).

However, constitutional requirements are not uniformly strict across all circumstances. In Johnson & Hardin Co. v. DME Ltd., the Ohio Court of Appeals held that "the attachment order issued by the trial court in this case does not violate the Due Process Clauses of the Ohio and United States Constitutions. To be sure, R.C. 2715.044 imposes a significant burden on foreign corporations by permitting a plaintiff to attach assets owned by these entities without first posting a bond. However, we are satisfied that the state's interest in permitting such seizures is significant and that the procedural safeguards already provided for by R.C. Chapter 2715 are sufficient to alleviate the risk of a wrongful seizure". Johnson & Hardin Co. v. DME Ltd., 106 Ohio App.3d 377 (1995).

Arguments and Rebuttals

Arguments for Broad Pre-Judgment Remedies

Comprehensive Statutory Authority

Pennsylvania Rule 3118 and similar state statutes provide courts with broad equitable powers to protect creditor collection rights through injunctions, charging orders, and other necessary relief. Unruh Turner Burke and Frees, PC v. Tattersall Development Co., 283 A.3d 1265 (2022).

Federal Rule 64 authorizes incorporation of state-law provisional remedies including attachment and garnishment FRCP Rule 64.

Anticipated Rebuttals: Exclusive remedy statutes in multiple states expressly limit creditors to charging orders only, and broad equitable powers must yield to specific legislative restrictions on creditor remedies.

Asset Protection Against Fraudulent Schemes

Courts must have authority to prevent debtors from using complex entity structures to shield assets from legitimate creditor collection efforts, as demonstrated in Unruh Turner Burke and Frees, PC v. Tattersall Development Co., 283 A.3d 1265 (2022).

Anticipated Rebuttals: Business entity asset protection is a legitimate legal strategy, and courts should not undermine legislative policy choices that favor business continuity over creditor collection ease.

Multi-Remedy Statutory Frameworks

Georgia law explicitly provides that charging order remedies "shall not be deemed exclusive of others which may exist, including, without limitation, the right of a judgment creditor to reach the limited liability company interest of the member by process of garnishment served on the limited liability company". GA ST § 14-11-504.

Pennsylvania courts recognize both charging orders and garnishment as available remedies against limited partnership interests. In re Allen, 228 B.R. 115 (1998).

Anticipated Rebuttals: Exclusive remedy statutes in jurisdictions like Texas, Connecticut, and Florida reflect legislative policy decisions to prioritize business entity protection over expansive creditor remedies.

Arguments for Limited Pre-Judgment Remedies

Express Legislative Exclusivity

Multiple state statutes expressly provide that charging orders are the exclusive remedy for creditor collection from business entity interests. Goodman v. Compass Bank, Not Reported in S.W. Rptr. (2016), CT ST § 34-259b, Lefkowitz v. Quality Laboratory Management, LLC, 159 So.3d 147 (2014).

Anticipated Rebuttals: Broad statutory language authorizing "such other relief as may be deemed necessary and appropriate" provides courts with inherent authority to protect creditor collection rights regardless of charging order limitations.

Constitutional Due Process Constraints

Pre-judgment seizures of property interests must comply with strict constitutional requirements including judicial authorization with discretion to deny attachment. Johnson v. American Credit Co. of Georgia, 581 F.2d 526 (1978), Strick Corp. v. Thai Teak Products Co., Ltd., 493 F.Supp. 1210 (1980).

Anticipated Rebuttals: Proper procedural safeguards including judicial oversight, notice opportunities, and bond requirements can satisfy constitutional requirements while still permitting effective creditor remedies.

Entity Asset Protection Policies

Charging order exclusivity protects business entity continuity and the interests of non-debtor members by limiting creditor interference with entity operations.

Anticipated Rebuttals: Creditor protection policies require effective collection mechanisms, and entity structures should not provide impermeable shields against legitimate debt collection efforts.

Cases on Both Sides

Cases Supporting Broad Pre-Judgment Remedies

Nigri v. Lotz, 216 Ga.App. 204 (1995) — The Georgia Court of Appeals held that charging order remedies are not exclusive and that limited partner interests may also be reached through garnishment proceedings. The court reasoned that foreclosure of charged interests serves enforcement purposes and that UPA restrictions on foreclosure should not apply to limited partnerships under ULPA.
In re Allen, 228 B.R. 115 (1998) — The Pennsylvania bankruptcy court concluded that creditors may pursue both charging orders and garnishment against limited partnership interests as non-exclusive remedies. The court rejected arguments that charging orders provide the sole mechanism for creditor collection from partnership interests.
Unruh Turner Burke and Frees, PC v. Tattersall Development Co., 283 A.3d 1265 (2022) — The Pennsylvania Superior Court upheld broad charging order relief and emergency injunctions under Rule 3118 to prevent asset protection schemes involving multiple controlled entities. The court emphasized that preliminary injunctions maintain the status quo while protecting creditor collection rights.

Cases Supporting Limited Pre-Judgment Remedies

Goodman v. Compass Bank, Not Reported in S.W. Rptr. (2016) — The Texas Court of Appeals recognized that Texas Business Organizations Code §§ 101.112 and 153.256 establish charging orders as the exclusive remedy for satisfying a judgment out of a debtor's LLC membership or partnership interest. However, the court held that this exclusivity does not preclude a judgment creditor from seeking turnover of proceeds from a distribution after the distribution has been made and is in the judgment debtor's possession.
Lefkowitz v. Quality Laboratory Management, LLC, 159 So.3d 147 (2014) — The Florida District Court of Appeal confirmed that Florida statutes generally make charging orders the exclusive remedy for creditor collection from LLC and limited partnership interests.
Givens v. National Loan Investors, L.P., 724 So.2d 610 (1998) — The Florida District Court of Appeal held that judgment creditors obtaining charging orders against limited partnership interests have only assignee rights and cannot resort to judicial foreclosure under Florida's RULPA. The court emphasized the limited scope of creditor remedies under exclusive charging order statutes.

Recent Developments

Florida's statutory framework has undergone significant changes following Olmstead v. F.T.C. (2010), which created uncertainty about single-member LLC charging orders. The Florida legislature amended its LLC statutes to clarify that charging orders and foreclosure sales constitute the exclusive remedies available to judgment creditors seeking satisfaction from LLC membership interests. This legislative response demonstrates the ongoing evolution of state laws toward greater clarity in charging order exclusivity.

Texas courts continue refining the boundaries of exclusive charging order remedies, particularly regarding the distinction between partnership interests subject to charging orders and distributions that become personal property once paid to partners. Stanley v. Reef Securities, Inc. established that "But once a partnership distribution has been made to a partner, it ceases to be the partner's 'partnership interest' (i.e. the partner's right to receive his share of the profits) and becomes that partner's personal property. ... Nothing in the plain language of section 153.256 precludes a judgment creditor from seeking the turnover of proceeds from a partnership distribution after that distribution has been made and is in the debtor partner's possession". Stanley v. Reef Securities, Inc., 314 S.W.3d 659 (2010). This refinement provides creditors with additional collection opportunities while maintaining charging order exclusivity for undistributed interests.

Constitutional due process requirements continue evolving through federal court decisions that emphasize the need for judicial oversight and procedural safeguards in pre-judgment attachment procedures. Recent decisions maintain the constitutional requirement, applied in Johnson v. American Credit Company of Georgia based on Supreme Court precedent, that "due process requires that a prejudgment seizure be authorized by a judge who has discretion to deny issuance of the appropriate writ". Johnson v. American Credit Co. of Georgia, 581 F.2d 526 (1978), while recognizing that specific procedural requirements may vary based on the particular circumstances and property types involved.

Practical Implications

The jurisdictional variations in creditor remedies against business entity interests create significant strategic considerations for both creditors and debtors. Creditors must carefully evaluate the jurisdiction where they seek remedies, as the choice between Pennsylvania's broad Rule 3118 framework and Texas's exclusive charging order approach can determine collection success or failure. In exclusive charging order jurisdictions, creditors face the practical limitation of reaching only distributions that entities choose to make, creating scenarios where successful charging orders yield no recovery if entities adopt no-distribution policies.

Pre-judgment remedy timing presents additional strategic complexities, as constitutional due process requirements impose higher procedural hurdles for pre-judgment seizures compared to post-judgment collection efforts. Creditors seeking pre-judgment relief must demonstrate sufficient grounds for judicial authorization while providing appropriate procedural safeguards including notice opportunities and potentially bonds, whereas post-judgment creditors benefit from reduced constitutional constraints and streamlined collection procedures.

The distinction between different business entity types affects remedy availability, with some jurisdictions providing broader protection for LLC interests compared to partnership interests or treating general partnerships differently from limited partnerships. This variation influences entity selection for asset protection purposes and requires creditors to understand specific statutory frameworks governing each entity type in relevant jurisdictions.

Distribution-focused remedies in exclusive charging order jurisdictions create particular practical challenges when entities make no distributions to members, effectively providing debtors with indefinite protection against creditor collection. This limitation has led to increased creditor reliance on fraudulent transfer claims, alter ego theories, and other strategies to reach entity assets directly rather than depending on charging order distribution rights.