Business Law Today (March 2019)
Suppose your client has a judgment from a court in state X against a shareholder of a closely held corporation organized under the law of state X. You know that your client can levy on the judgment debtor’s shares to enforce the judgment and either obtain the shares (and attendant voting and economic rights) or trigger a pre-existing buy-out agreement with the shareholders or the corporation, which will replace the judgment debtor’s shares with right to payment. The relevant civil procedures may be complicated (or even arcane), but in theory your client’s remedy is straightforward.
Now suppose that the judgment debtor is a member of a limited liability company organized under the law of state X. Your client may not levy on the debtor’s membership interest and, moreover, has no right under any circumstances to acquire or dispose of any governance or information rights associated with the membership. A charging order, which “constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor,” is “the exclusive remedy by which a person seeking in the capacity of judgment creditor to enforce a judgment against a member or transferee may satisfy the judgment.” ULLCA (2013) § 503(a), (h). (The rights of a secured creditor are an entirely separate matter. For an introduction to the complex interaction between Uniform Commercial Code, Article 9 and the “pick your partner” principle, see a recent article by Carl S. Bjerre, Daniel S. Kleinberger, Edwin E. Smith, and Steven O. Weise.
This column provides an introduction to the charging order, a remedy that is abstruse, arguably arcane, and in effect as much a remedy limitation as a remedy. Part II explains the origins and rationale for the charging order and its status as the “exclusive remedy.” Part III, written for a “charging order neophyte,” (i) describes the mechanics of charging orders, and (ii) discusses how the charging order differs from ordinary post-judgment remedies in two important ways. Part IV lists a number of difficult, open issues pertaining to charging orders. Part V explains why a business lawyer should care about the charging order and offers a suggestion for proactive lawyering. Part VI concludes by identifying two excellent resources for further information. Almost all the observations in this column apply equally to charging orders pertaining to general and limited partnership; however, for simplicity’s sake, this column refers solely to limited liability companies and members.
Kleinberger, Daniel S., "What Is a Charging Order and Why Should a Business Lawyer Care?" (2019). Faculty Scholarship. 546.