ULLCA 503(h) Exclusive Remedy

Exclusive_Remedy Code ULLCASection503hExclusiveRemedy

503(h)

This section provides the exclusive remedy by which a person seeking in the capacity of judgment creditor to enforce a judgment against a member or transferee may satisfy the judgment from the judgment debtor's transferable interest.

Reporter's Comment to Section 503 generally

The charging order concept dates back to the English Partnership Act of 1890 and in the United States has been a fundamental part of law of unincorporated business organizations since 1914. See UPA (1914) § 28.

As much a remedy limitation as a remedy, the charging order is the sole method by which a person acting as judgment creditor of a member or transferee can extract value from the member's or transferee's ownership interest in a limited liability company. See the comment to Subsection (h).

Reporter's Comment to Subsection (h) ¶1.

This subsection does not override Uniform Commercial Code, Article 9, which may provide different remedies for a secured creditor acting in that capacity.

A secured creditor with a judgment might decide to proceed under Article 9 alone, under this section alone, or under both Article 9 and this section. In the last-mentioned circumstance, the constraints of this section would apply to the charging order but not to the Article 9 remedies.

Reporter's Comment to Subsection (h) ¶2.

This subsection is not intended to prevent a court from effecting a "reverse pierce" where appropriate.

In a reverse pierce, the court conflates the entity and its owner to hold the entity liable for a debt of the owner. Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298, 312 (Conn. App. Ct. 2002) (approving a reverse pierce where a judgment debtor had established a limited liability company in a patent attempt to frustrate the judgment creditor), overruled on other grounds by, Robinson v. Coughlin, 830 A.2d 1114 (Conn. 2003).

Likewise, this subsection does not supplant fraudulent transfer law.

JayNote

Paragraph (h) is one of the primary reasons that LLCs and partnerships are such popular business entities, which is that the creditor's remedy is limited to a charging order. However, the enormous limitation of ¶ (h) must be realized, which is that ¶ (h) applies only and exclusively to the creditor's attempt to reach the debtor's transferable interest, which is utterly different than a creditor's attempt to access the value of the assets of the LLC. The latter may be accomplished, as the Reporter's Comment notes, through a number of theories, the most popular of which is so-called "reverse veil-piercing" (or "reverse alter ego") theories.

For further discussion on the exclusivity of charging orders click here.

Click here for a deep dive into charging order exclusivity

Charging orders are generally the exclusive remedy for judgment creditors seeking to satisfy judgments from a debtor's interest in limited liability companies (LLCs) or partnerships, primarily to protect non-debtor members from business disruption and "involuntary business marriage" with creditors. While many states adopt this exclusivity based on uniform models like the ULLCA, the provided text challenges the "myth" of absolute exclusivity, detailing dynamic jurisdictional variations and at least fourteen distinct exceptions categorized as organic statutory provisions, inapplicability circumstances, or general enforcement principles. Jurisdictional divergence is significant: states like Texas strictly enforce exclusivity, even for single-member LLCs (SMLLCs), while Colorado and Georgia reject it entirely, and Florida provides specific exceptions permitting SMLLC interest foreclosure. Organic ULLCA exceptions allow courts to order judicial foreclosure sales of interests if distributions are insufficient, permit redemption by other members, or issue "other orders" to compel distributions when entities are egregiously uncooperative. Exclusivity disappears if the governing statute does not apply, which occurs with foreign LLCs, federal preemption cases (IRS or FDCPA collections), secured lenders under UCC Article 9, and intra-member disputes. Finally, general judgment enforcement law provides potent equitable exceptions for fraud and abuse, preserved by statutes. Most effectively, reverse veil-piercing based on alter ego theories makes entity assets directly liable, while voidable transfer claims can retrieve fraudulently transferred assets. Other remedies include appointing general receivers to exercise debtor rights, establishing constructive trusts over traced funds, and complex bankruptcy procedures that may result in dissolution. Practically, the significant limitations of standard charging orders, which only capture voluntary distributions without management rights, incentivize creditors to exploit these exceptions or utilize the resulting financial leverage to force settlement.