Charging Orders: Pursuing a Debtor's Interest in a Partnership, Limited Partnership or Limited Liability Company

A Charging Order is the collection remedy that a Creditor uses to execute against a judgment debtor’s interest in a partnership, limited partnership or limited liability company. After obtaining a money judgment order against a debtor who possesses such an interest, the Creditor may file an action in the appropriate circuit court seeking to “charge” the debtor’s interest in the partnership, limited partnership or limited liability company to satisfy the judgment. While one needs a money judgment against the debtor prior to seeking a Charging Order, be sure to inform your attorney in advance of seeking the money judgment of the debtor’s known interests in partnerships, limited partnerships and/or limited liability companies, as your attorney may be able to explore the availability of certain actions to prevent disposition or transfer of these interests during the litigation for a money judgment.

Charging Orders are governed by statute and there is limited case law which interprets the current code sections (the current statute Virginia Code Section 13.1-1041.1 was enacted in 2006). A Charging Order can be a very helpful collection tool, but it is important to note that it does not equate to a judgment against the partnership, limited partnership or limited liability company. It also does not give the Creditor a seat at the owner’s table, the right to participate in management or to vote. Rather, the Charging Order statute only gives the Creditor the right to receive any distributions that are to be made to the judgment debtor and a lien on the judgment debtor’s transferable interest

Information about the partnership, limited partnership or limited liability company is extremely valuable in connection with a Charging Order. Examples of information that can aid your attorney before pursuing (or after entry of) a Charging Order are: (i) the relationship between the debtor and the limited liability company / partnership (i.e. is it a family partnership or a single member limited liability company); (ii) knowledge of the frequency and amount of customary distributions from the limited liability company / partnership to the debtor; and (iii) the content of agreements that pertain to the entity, such as operating agreements for a limited liability company.  Remember that when the time comes where the Creditor is seeking the Charging Order or to enforce the Charging Order, it is unlikely that the debtor will be cooperating with the Creditor any longer. To help with the Charging Order process, obtaining as much information as possible prior to this time can be crucial. Therefore, when originating a loan where a borrower or guarantor owns these types of interests, the bank should gather as much information as possible about the interest(s), including operative documents, such as operating agreements. Additionally, during workouts the bank should request updated information and operative documents in connection with such partnership, limited partnership or limited liability company interests.

          Once obtained, a Charging Order, like any other circuit court judgment, is valid for a period of twenty years. During this period, the Charging Order can effectively serve as a continuing garnishment on distributions from the entity.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.