Friday, March 29, 2013

LLC Charging Orders

Charging orders are one of the more confusing areas of judgment enforcement law.  Ordinarily, a judgment creditor would serve a citation to discover assets and then look to the citation statute for enforcement procedures.  Under Section 1402, when non-exempt assets are discovered, the court can compel the judgment debtor to deliver those assets either to the sheriff or a private selling agent for sale.  The proceeds of the sale are then applied to the judgment.  This is commonly called a turnover order.  

However, you can't obtain a turnover order on a judgment debtor's interest in an LLC.  In order to do that, you'll need a charging order.  Section 30-20(a) of the Illinois Limited Liability Act provides that "on application by a judgment creditor of a member of a limited liability company or of a member's transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment."

I just read a case that further clarifies the procedures behind a charging order.  The case is Bank of America v. Freed, 2012 IL App (1st) 110749.  Here is the relevant paragraph:  

Under the Illinois Limited Liability Company Act (Act), a charging order only gives the judgment creditor the right to receive distributions to which the member would otherwise be entitled, and if the charging order is foreclosed, the purchaser would have only the rights of a transferee of distributional interests. Under section 30-1(a) of the Act, a member of an LLC “is not a co-owner of, and has no transferable interest in, property of a limited liability company.” 805 ILCS 180/30-1(a) (West 2008). Further, section 30-5 of the Act provides that a transfer of a distributional interest in an LLC does not give the transferee any rights as a member but only the right to receive distributions by the LLC, while section 30-10 provides that transferee may become a member only if all other members consent (805 ILCS 180/30-10(a) (West 2008)). A “transferee who does not become a member is not entitled to participate in the management or conduct of the limited liability company’s business, require access to information concerning the company’s transactions, or inspect or copy any of the company’s records.” 805 ILCS 180/30-10(d) (West 2008). Therefore, an Illinois LLC has no interest that is affected when a charging order is entered on a judgment debtor’s distributional interest because the party in whose favor the charging order is entered is not an owner of the LLC and has no authority over the LLC’s affairs and can only receive distributions. Hence, the LLC has no interest to be protected and need not be made a party.

1 comment:

Unknown said...

Generally it is an order obtained from a court or judge by a judgment creditor in which property of debator in stocks charge with the amount for which judgement has recovered their cost.
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