Missouri Charging Order
A charging order is a way to collect on a judgment entered against someone with an interest in an LLC or a partnership.
Charging Order Against an LLC
Let’s say person A has a judgment against person B. Person B is a member of an LLC. Person A can ask a court to enter a charging order against the LLC, requiring it to pay to person A any distribution that Person B is entitled to receive from the LLC. A charging order cannot force a distribution, nor can it attach or seize any asset owned by the LLC. Rather, it can simply state that if and when the LLC makes a distribution to its members, it must distribute to person A the portion of the distribution that person B would have otherwise received.
Charging Order Against a Partnership
A charging order can also be entered against a partnership. As with an LLC, a court can order a partnership to pay to a judgment creditor, person A in the above example, distributions that that the judgment debtor, person B in the above example, is entitled to receive. As with an LLC, the order cannot force a distribution, nor can it attach or seize any asset owned by the partnership. The order can only provide that if and when the partnership makes a distribution to its partners, it must distribute to the judgment creditor the portion of the distribution that the judgment debtor would have otherwise received.
However, unlike with an LLC, a court can order the sale of a partnership interest in order to satisfy the judgment. The purchaser does not acquire the judgment debtor’s non-economic rights in the partnership, such as the right to manage partnership property, to inspect partnership books, or to demand an accounting. The court also may not order the sale of any asset owned by the partnership, such as real estate, equipment, and vehicles.
Additionally, a court may appoint a receiver as to the distributions owed by a partnership to the judgment debtor. The court also has the discretion pursuant to a charging order against a partnership to “make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.”
Charging Orders in Summary
In summary, a charging order against an LLC is pretty simple. A court can only order an LLC to pay to a judgment creditor the portion of a distribution that the judgment debtor would be entitled to receive. However, the court cannot force a distribution or seize any LLC asset.
On the other hand, a charging order against a partnership can be complex. While a court cannot force a distribution from a partnership or seize any partnership asset pursuant to a charging order, a court can appoint a receiver as to the interest of a judgment debtor in a partnership, and it can even order a foreclosure sale of the judgment debtor’s partnership interest. As such, all things being equal, an LLC provides much better asset protection to a member, as to charging orders, than does a partnership.
Finally, the natural inclination when faced with a charging order is to transfer LLC or partnership assets to another entity. Members and partners contemplating such transfers should first consider whether any transfer might be seen by the court as a fraudulent transfer.
Michael Sewell, JD, MBA has formed more than 100 LLCs, including traditional LLCs, series LLCs, self-directed IRA LLCs, real estate brokerage LLCs, and “S corporation” LLCs. Sewell Law also provides professional litigation services. Contact Michael Sewell at (314) 942-3232 or email@example.com.
This article is for general informational purposes only, it does not include all of the laws and regulations related to the topics discussed in this article, and it is not intended as legal, tax, or investment advice. You should consult an attorney experienced with the topics discussed in this article about how this information might apply to your specific circumstances.
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