As many a creditor can attest, obtaining a money judgment holding someone liable for a debt does not equate to cash in hand. Unless the debtor voluntarily pays, collection of any money requires the creditor to locate non-exempt assets of the debtor and initiate the proper proceedings to execute on or garnish those assets. In many situations, one of the debtor’s most valuable assets may be an ownership interest in a business entity, such as a corporation, partnership, or limited liability company (LLC).
This article explores the rights an Oregon judgment creditor has against a debtor’s ownership interest in a business entity, with a particular focus on collecting against interests in partnerships and LLCs. Oregon law provides a remedy commonly referred to as a “charging order” to reach a judgment debtor’s economic interest in an LLC or partnership to help satisfy the obligation. While the charging order remedy has been on the books in Oregon and elsewhere for many decades, it remains one of the least-well understood tools in the judgment creditor’s toolbox.
A charging order, as its moniker suggests, is a written order signed by a judge and entered on the court docket. The order “charges” a judgment debtor’s economic interest in an LLC or partnership with full payment of the debt. Thus, all profits or distributions from the entity that would otherwise go to the debtor on account of his or her interest in the entity must instead be paid directly to the creditor until satisfaction of the judgment debt. The Oregon statutes authorizing LLCs and the various forms of partnerships (general, limited, and limited liability) all provide authority for the charging order.
A charging order gives a creditor only the economic rights (rights to profits and distributions) that flow from a debtor’s membership or partnership interest. The order does not give the creditor a right to any of the assets held by the partnership or LLC and does not make the creditor a member or partner of the subject entity. The creditor, in other words, does not acquire any management or voting rights.
One of the initial impetuses for adding charging orders into collection law was to provide creditors the ability to reach a judgment debtor’s economic interest in a partnership without making the partnership assets vulnerable to execution or forcing non-debtor partners into business with a creditor. The remedy was then included in the codes for LLCs once that form of entity came into existence in Oregon and elsewhere.
The charging order against a LLC or partnership interest differs from the procedure used to reach an individual debtor’s interest in a corporation. If a judgment debtor holds shares in a corporation, the creditor can have the sheriff execute on and sell the shares in the same manner as any other personal property. The purchaser at the sheriff’s sale – either a third-party bidder or the creditor pursuant to a credit bid of some or all of judgment amount – receives both the economic rights and any voting rights in the corporation represented by the shares.
The value of a charging order to a creditor largely depends on both the profitability and makeup of the LLC or partnership. If the entity has no profits to distribute, the creditor’s right to the debtor’s distributions provides little practical benefit. Also, in many situations the debtor’s fellow partners or members in the enterprise may be spouses or other family members or other close affiliates with an incentive to protect the debtor. In theory, the non-debtor partners or members in this type of entity can try to thwart the creditor’s recovery efforts by not distributing any profits to the debtor. Since the charging order affords the creditor no voting or management rights in the entity, the creditor lacks the ability to force distributions to the debtor and claim that money through the charging order.
Given these limits, a creditor might well prefer to simply have the debtor’s membership or partnership interest seized through a writ of execution in the manner that corporate shares may be seized. The partnership statutes clearly prohibit this course of action and state that a charging order constitutes the creditor’s exclusive remedy against the partnership interest.
Oregon’s LLC statutes do not expressly state that a charging order constitutes the exclusive remedy against a debtor’s membership interest and, due to this omission, attorneys debate whether a creditor can use a writ of execution to directly seize an LLC membership interest. In this author’s view, the omission is likely attributable to a legislative oversight, rather a deliberate choice to treat LLC and partnership charging orders differently. Further, presuming a creditor can use the writ of execution process instead of the charging order to reach a LLC membership interest, the creditor or other purchaser arguably does not automatically become a member, as admission of a new member requires consent of a majority of all the other members.
The scope of a creditor’s rights in a LLC interest becomes even more complicated when the debtor is the only member of the company. In one oft-discussed 2010 case, the Florida Supreme Court concluded that a creditor of a debtor who was the only owner of a LLC could not only execute on and seize the member’s economic rights but also take control of the company as the new sole-member, given that the company had no other members who could withhold consent. Whether an Oregon court would reach a similar conclusion remains to be seen. The Oregon law pertaining to charging orders for LLCs, which were added as a form of entity in this state in 1993, remains largely undeveloped.
Despite the limits of and some unanswered questions concerning charging orders, the remedy can prove valuable to creditors. A charging order obviously has the most value to a creditor when the debtor owns part of a profitable LLC or partnership made up of other owners with no incentive to protect the debtor. Even in situations when the other owners do seek to protect the debtor, however, the charging order can still serve to cut off a valuable source of income and perhaps force the debtor to the bargaining table.
A creditor can also enlist the judge who issued the charging order to help enforce it. The charging order statutes for partnerships provide that the judge has authority to appoint a receiver for the distributions due to the judgment debtor and “make all other orders, directions, accounts, and inquiries” with respect to the charging order or the entity. Charging orders for LLC interests can be set up to reserve similar authority for the judge. These provisions give the creditor flexibility in asking for the judge’s help to determine where distributions are going and to ensure proper compliance with the charging order.
Charging orders can present another advantage if the debtor ultimately files for bankruptcy. The Oregon partnership statutes expressly provide that a charging order constitutes a lien against the debtor’s partnership interest. While the LLC statutes do not contain a similar express pronouncement, some authority supports the notion that a charging order against a LLC interest also constitutes a lien. Unless otherwise addressed in the bankruptcy process, a lien “rides through” the debtor’s bankruptcy unaffected. Though the underlying debt may be discharged, the creditor retains all rights against the collateral.
The status of a charging order as a lien that can ride through a debtor’s bankruptcy may help preserve a remedy for a creditor whose judgment has been discharged. While the discharge will bar the creditor from enforcing the judgment against other assets of the debtor, the creditor will retain the economic rights in the debtor’s partnership or membership interest.
Judgment creditors should not ignore a debtor’s interest in a partnership or LLC when pursuing a collection strategy. Using a charging order to attach the judgment amount to the debtor’s interest can provide one effective means to begin turning the judgment into actual money.