Charging Orders and Other Creditor Remedies

Scope of the chapter. This chapter examines the remedies available to a creditor of a member against the member's interest in an LLC. The principal remedy is the charging order, an order of a court charging the member's interest with payment of the judgment and directing the LLC to pay to the creditor the distributions payable to the member. The chapter traces the remedy's origins, compares the statutes that govern it, describes how it is obtained and enforced, examines foreclosure and the special rules for single-member LLCs, and addresses a question that operating agreements rarely answer: whether an LLC may pay a member's income taxes while the member's interest is charged. It then examines the creditor's other remedies, the choice of law, the treatment of non-U.S. statutes and the planning that follows.

Relation to other chapters. Several chapters address parts of the subject from other directions. Chapter 9 examines the single-member LLC, chapter 12 the foreign LLC and the internal affairs doctrine, ¶ 1460 the tax distribution and the charging creditor, chapter 54 the non-U.S. statutes and chapter 55 the use of LLCs in asset protection planning. Reverse veil piercing, which a creditor uses to reach the LLC's assets directly, is examined in chapter 26, and the member's bankruptcy in chapter 49. This chapter is intended to be complete on its own as the treatise's principal treatment of the charging order. It cross-refers to those chapters where they carry the fuller discussion.

The central tension. Every charging-order statute balances two interests. The creditor holds a valid judgment and is entitled to satisfy it from the debtor's property, which includes the debtor's LLC interest. The other members, who owe the creditor nothing, are entitled to carry on the business they formed without a stranger in their midst. The charging order resolves the tension by giving the creditor the debtor's economic rights while denying it the debtor's governance rights. Statutes differ on what happens when the economic rights produce nothing, and that difference, more than any other, determines the value of an LLC interest to a member who fears creditors.

Organization. The chapter proceeds in nine parts:

1. the origins and function of the charging order (¶ 2710);
2. the statutes compared (¶ 2720);
3. obtaining and enforcing the order, including interim relief in Delaware (¶ 2730);
4. foreclosure (¶ 2740);
5. tax distributions and the payment of a charged member's taxes (¶ 2750);
6. single-member LLCs and bankruptcy (¶ 2760);
7. other creditor remedies (¶ 2770);
8. choice of law and non-U.S. statutes (¶ 2780); and
9. planning (¶ 2790).