The charging order is a remedy ( or solution ) that a creditor uses to place a judgment against an entity ( ie . Corporation , Limited Liability Company or Limited Partnership ) which , in doing so , becomes the primary defense for the debtor .
Originally the ‘ Charging Order ’ came into existence under the 1914 passage of the Uniform Partnership Act ( UPA ), but it had unintended consequences for other partners in that a judgment creditor could force the seizure of partnership assets and sell the debtorpartner ’ s interests , often causing a compulsory dissolution .
Meaning , if you and I had a successful business together and I were sued in my individual capacity ( outside of our business ) and lost , a judgment creditor
was permitted to come into our Limited Partnership and seize assets , potentially dissolving our business ! How would that be fair to you , when you did nothing wrong but must now suffer the consequences ?
This type of ‘ forced partnership ’ with the thirdparty judgement creditor was found by the Courts to be at odds with the principle of Delectus Personae :
“ At their core … ( partnerships ) are relations of trust between partners ... and when relationships are important , a person cannot be compelled to associate with another person .” Thus the other partners in the Limited Partnership should not be forced into a relationship with someone outside the Partnership .
The Uniform Limited Partnership Act ( ULPA ) and later the Uniform Limited Liability Company Act ( ULLCA ) prevented creditors from compelling such forced associations and dissolutions on partnerships and companies by stating , “ Partnership property is not subject to attachment or execution ”.
Judges may award creditors the rights of an assignee ( distribution of profits ) but not the interests of an assignee ( ownership ). These “ transferee rights ” do not grant creditors any control or ability to participate in the management of the company . As such , creditors have no say as to when , or in what amount , distributions can be made . The judgement creditor may not force distributions , nor maintain managerial rights , nor exercise any measure of control over the entity . In short , the charging order protects the other members from the judgment creditors of a debtor owner as this image demonstrates :
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