Foreclosure of a Charging Order
Limited liability companies (LLCs) provide their owners (members) a number of protections that do not exist for partnerships or sole proprietorship’s. One critical protection is limited liability protection. Because an LLC is considered a separate legal entity and its assets and debts are separate and distinct from any assets or liabilities that its owners may have, a creditor of an LLC member typically cannot reach or interfere with the LLC and vice versa. However, California law does provide a tool for creditors to try to reach a judgment debtor’s LLC interest. The tool is called a charging order.
A charging order is roughly akin to a wage garnishment, but instead of directing an individual’s employer to pay over a portion of the individual’s salary to the creditor, it directs an LLC in which the individual judgment debtor has a membership interest to pay over any distributions that would otherwise be made to the member to the creditor. Notably, a charging order ordinarily cannot compel an LLC to make a distribution to a member and does not confer any management rights, instead extending only to distributions made to a member. For this reason, charging orders do not always result in payment to the creditor. Nonetheless, a charging order can still be effective because they can cut-off an LLC member’s rights to receive any distributions from the LLC and may impact the member’s dealings with the LLC and its other members.
Foreclosure of an Owner’s Interest in the LLC
In many states a charging order is the sole remedy afforded by a judgment creditor seeking to reach a judgment debtor’s interest in an LLC. However, California law in some instances permits a judgment creditor to foreclose upon a charging order and by extension the judgment debtor’s economic interest in the limited liability company. Successfully motioning a court to foreclose upon a charging order will result in a court order directing the sale of the judgment debtor’s economic interest in the LLC. While the purchaser of the foreclosed economic interest in the LLC may still not receive any distributions or have any right to participate in the management of the LLC, the holder of the foreclosed interest will almost certainly have the right to receive a portion of any proceeds if and when the LLC is dissolved.
Individuals do now want their judgment creditors seeking to enforce their judgment through their ownership interest in what is likely a small, closely held LLC or otherwise interfering with the LLC’s business, operations or other members. Thus, a charging order can provide a powerful tool for a creditor seeking to collect upon its judgment.
Contact a San Jose Business Attorney for More Information
If you would like more information about charging orders or foreclosure of ownership interest, do not hesitate to contact the experienced San Jose business lawyers at Structure Law Group, LLP today. They can help you and your company to understand all of the factors that go into a foreclosure of a charging order and what to do afterwards. Call us at 408-441-7500 and we can assist you with this and a wide array of business and financial matters for a company.