What is a Charging Order?

Fotolia_178717790_Subscription_Monthly_M-300x125California creditors have a variety of tools available to enforce their legal rights. The appropriate tool will depend on the circumstances. For example, in some instances, a lien may be placed on real and/or personal property in order to protect or enforce a creditor’s rights.  In the case of a debtor’s interest in an LLC, a charging order may be obtained creating a lien against the debtor’s membership interest in the LLC. Learn more about what a charging order is, how it works, and when it is the best tool for a creditor. An experienced San Jose corporate attorney can help your business find the best tools for enforcing creditors’ rights against any debtor.

What is a Charging Order and When is it Appropriate?

When a creditor has obtained a judgment against a debtor, the creditor may obtain a variety of different orders or liens to enforce the judgment against the debtor’s assets. These can include a garnishment of the debtor’s wages, a levy of the debtor’s bank accounts, or the creation of a lien against the debtor’s real estate and personal property. When the debtor possesses an interest in a limited liability company (LLC), a court may issue to the creditor and against the debtor a charging order in order to allow the creditor to try to enforce the judgment against the debtor’s membership interest in the LLC.

Charging orders are governed by the California Corporations Code §17705.03. The statute creates a lien on a judgment debtor’s transferable interest and requires that the limited liability company turnover to the judgment creditor any distribution that would otherwise be paid to the judgment debtor. If these dividends will not satisfy the judgment within a reasonable time, the judgment creditor may also ask the court to foreclose on the lien and order the sale of the debtor’s transferable interest in the LLC. California law is somewhat unique in this respect, as many other state laws do not provide a mechanism for a liquidation of the debtor’s interest in the limited liability company.

Often times, multiple court orders must be obtained before a charging order proves effective. As with any litigation, this process may be costly. Thus, charging orders are appropriate when the amount of the debt is sufficient to justify the cost of obtaining and then trying to enforce the charging order. It is also important to consider whether a debtor’s interest in a limited liability company is likely to provide a return on investment, including by way of leverage towards a settlement. Often, newly formed or closely held LLCs are not yet in a position to provide their members with meaningful distributions. In such cases, a charging order will yield very little return on investment. When a charging order is not the appropriate tool, creditors have many other legal options for enforcing a judgment against a debtor.

The Right Representation For Your Creditor’s Rights

Protecting the financial interests of creditors is a complicated task with many possible solutions. The skilled corporate attorneys at Structure Law Group have extensive experience in enforcing creditors’ rights for businesses and will work with your business to access the tools which are right for you. Call (408) 441-7500 today, or email slgadmin@structurelaw.com to schedule your consultation with an experienced San Jose corporate attorney. We fight hard to protect your financial interests.