Charging orders: What are they and whose is better
At a recent lunch, a colleague posed the question, “Which state do you think has the better charging order?” That posed an interesting question that takes more time than gobbling down a crab cake sandwich allows.
So I started researching the experts. And they were all over the map.
Three lawyers writing for the American Bar Association’s Business Law Today, gave an excellent description of sorting out the issues here.
With apologies to authors Jay D. Adkisson, Carter G. Bishop and Thomas E. Rutledge, they described a charging order as a remedy provided to a judgment-creditor of an LLC member where that creditor may legally attach distributions to that member, thereby diverting that income stream to satisfy the judgment. They went on to say that under most state formulas, the charging order is subject to redemption, and a lien on the LLC interest created by the charging order is subject to foreclosure.
In simpler English, the objective then is to get the judgment-creditor paid while precluding that judgment-creditor from interfering with the business.
(Okay, now does that have you lost? Think about me trying to think about this while eating the crab cake.)
So my colleague, who hadn’t seen the description “under most state formulas”, knew that some were different than others so that meant that some were better than others. So then, whose is best? So I started trying to find an expert to tell me that. What I often found was the typical “my state’s better than yours.”
A company in Wyoming summed it up this way: “Wyoming’s law is better than other states. California allows a court to charge the LLC interest; appoint a receiver; order foreclosure; and make all other orders, directions, accounts and inquiries the judgment debtor might have made or the circumstances require. Nevada declares charging order to be the exclusive remedy, but gives the creditor rights of an assignee. Delaware provides for charging order as exclusive remedy, but then also provides that it constitutes a lien on the debtor’s LLC interest. Wyoming does not even allow a lien!”
However, another colleague just sent me another chart that assured me that Nevada’s was better and Wyoming’s, while close, was only the eighth best in the country.
My lunch colleague summed it up best when he described his clients who were looking at the issue.
“Wyoming, Nevada and Alaska may have the right answers, but my clients aren’t from Wyoming, Nevada or Alaska. Delaware may be our best answer because going to the Delaware shore is about as exotic as they will get.”
They say that location is everything!
I am going to look at Wyoming, Texas, Maryland and Delaware because I’m licensed in some and close to others. If you have one you want me to look at, let me know here.
Until then, good luck and good hunting.
The Fisher Law Office is known for its experience in asset protection, business counselling and development, business succession planning, estate planning and probate administration. Annapolis attorney Randall D. Fisher has practiced for over 20 years, is licensed in Maryland, Texas, Wyoming and the District of Columbia, and has clients all over the country. He maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.
If you need legal help, or just want to find out how he is doing at eliminate his slice, find out how to reach Randy via TheFisherLawOffice.com or find him at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice.