Charging Order - United States

United States

Both partnership statutes and limited liability company statutes (in most domestic and foreign jurisdictions that have these entity types) provide for charging orders. In almost all the states, partnership and LLC statutes are based on the uniform acts, such as the Revised Uniform Partnership Act of 1994 (“RUPA”), the Uniform Limited Partnership Act of 2001 (“ULPA”) or the Uniform Limited Liability Company Act of 1996 (“ULLCA”), or the earlier versions of these acts. Membership interests in LLCs and partnership interests are afforded a significant level of protection through this charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights.

Given the historical framework of charging orders, it may be argued that their protection should not extend to single member LLCs (there are no other “partners” to protect from the creditor). However, neither the uniform acts nor any of the state charging order statutes make any distinction between single-member and multi-member LLCs. Some courts have held that the charging order protection would apply in a case where all of the partners of a limited partnership were the debtors of a single creditor. The creditor had argued to no avail that because there were no “innocent” (non-debtor) partners to protect, the charging order protection should not apply.

In in re Albright, 291 B. R. 538 (Bankr. D. Colo. 2003), one bankruptcy court held that the charging order protection does not apply to single-member LLCs. The court concluded that, based on the Colorado LLC statutes, a membership interest in an LLC can be assigned, including management rights. To date, with the exception of the Albright case, there are no cases analyzing the efficacy of charging orders in the single-member LLC context.

Similar to the traditional liability shield commonly associated with limited liability entities, the protection of the charging order may be pierced by a creditor. In that eventually the charging order limitation becomes a moot point, because the entity is no longer considered to have a separate legal identity from its owners. In a state requiring a business purpose, a partnership or an LLC holding personal property may be subject to a reverse piercing claim. Entities holding personal assets should be formed in states like Delaware, that allow entities to be formed for any lawful purpose.