Corporate Stock is easily levied and sold by a shareholder creditor. By contrast, special highly protective rules applicable to collection against an interest in a partnership or LLC make these business entities effective asset-protection devices. LLC Members and Partners have no right in specific partnership property. Corp C §§15907.01, 16203, 16501. See, e.g., Nickless v Aronson (In re Katz) (Bankr D Mass 2006) 341 BR 123, 132 (bankruptcy trustee’s strong-arm powers do not give it the right to sell partnership assets; trustee is limited to partner’s state law remedy, which in turn is limited to sale of partnership interest owned by debtor).
A “charging order” is the exclusive remedy available to a creditor of a LLC member or partnership partner, superseding all other methods of attachment and execution against LLC or partnership property. CCP §§699.720, 708.310–708.320; Corp C §15907.03 (limited partnership), §16504(e) (general partnership); Evans v Galardi (1976) 16 C3d 300 (no exception if partnership is owned entirely by judgment debtors). (However, there are a few situations in which the creditor may execute directly on LLC or partnership assets, e.g., when LLC or partnership assets have been transferred in fraud of creditors,)
A charging order directs that distributions made with respect to the debtor-partner’s interest are made to the creditor instead of the debtor-partner. See Corp C §§15907.02–15907.03 (judgment creditor has rights of an assignee), §16504(a).
Charging orders are designed to allow creditors to satisfy their judgment out of partnership profits or liquidating distributions while minimizing the disruption of the partnership operation—a disruption that could destroy its going-concern value and impair the security interests held by creditors of the partnership itself. AgriTech Servs., Inc. v Groff (In re Groff) (10th Cir 1990) 898 F2d 1475; Crocker Nat’l Bank v Perroton (1989) 208 CA3d 1. If the LLC Operating Agreement or limited partnership agreement contains a provision that restricts the sale of an interest, it also appears that the interest cannot be sold under a charging order. See Corp C §15907.02(f).
A charging order applies only to a partner’s interest in the partnership. It does not take priority over the partnership’s creditors. See CCP §699.720. Once a charging order has been issued, the debtor-partner remains a partner, but is no longer entitled to receive profits, surplus, and the proceeds of liquidating distributions until the charging order is satisfied. See Corp C §15907.02(b). There appears to be no limitation on other payments to partners in capacities other than as partner, such as for wages or consulting fees.
The remedies imposed under a charging order are progressively more drastic. The applicability of these remedies to creditors with respect to LLC or limited partnership interests is unclear, however, because Corp C §15907.02 does not include a list of remedies. The remedial structure reflects a balancing of the equities of the partners and the creditor whose claim remains unsatisfied. The initial level, the diversion to the creditor of all distributions with respect to the partnership interest charged, is similar to a garnishment. Corp C §§15907.03(a), 16504(a). The next level of remedy allows a court to appoint a receiver to facilitate collection of the judgment. Evans v Galardi (1979) 93 CA3d 291, 295 (cost of receivership is borne by defendant). The receiver’s role is limited, however, to receiving monies due with respect to the partnership interest charged, conserving partnership property, and preventing fraudulent transfer of partnership property. Mitchell v Superior Court (1972) 28 CA3d 759.
If the foregoing remedies are ineffective, the court ultimately has the power to sell the debtor’s interest in a LLC or partnership. Corp C §§15907.03(b), 16504(b); Crocker Nat’l Bank v Perroton (1989) 208 CA3d 1. If a sale of the interest is authorized, a purchaser’s rights are limited. He or she cannot compel liquidation of the partnership, has no voice in the management of the partnership, cannot control partnership investment or require partnership distributions. Estate of Bruno Bischoff (1977) 69 TC 32, 49.
The procedural safeguards and concern for nondebtor LLC members or partners usually result in a time-consuming process of obtaining judicial approval for each step. The prospect of facing these hurdles, the outcome of which is by no means certain, may induce creditors to settle. See In re Skyline Condominiums (Bankr SD Tex 1986) 64 BR 778 (creditors took nearly 5 years to obtain charging order, finally granted in bankruptcy proceeding).