Charging Partnership and Llc Interests to Satisfy Debts of Individuals
| Publication year | 1994 |
| Pages | 2743 |
| Citation | Vol. 23 No. 12 Pg. 2743 |
1994, December, Pg. 2743. Charging Partnership and LLC Interests To Satisfy Debts of Individuals
This article addresses the exclusive mechanism that must be used to execute upon a judgment debtor's interest in either a partnership or a limited liability company ("LLC"):(fn1) the charging order. The matters covered include: (1) the purpose of a charging order; (2) a brief review of the property rights of a partner and a member of an LLC; (3) the difference between execution and garnishment and charging orders; (4) the priority of competing charging orders; and (5) the effect of a debtor partner or debtor member filing a petition in bankruptcy subsequent to service of a charging order.
Once a creditor has obtained a judgment against a debtor, the creditor must then attempt to collect the judgment. If the debtor is a partner in a general or limited partnership or a member of an LLC, the creditor may attempt to collect its judgment from future partnership or LLC distributions that may flow to the debtor.(fn2) The purpose of a charging order is to divert any such future distributions to the creditor until the creditor has been paid in full, or until further order of the court.
A general partner has three distinct property rights in a partnership: an interest in the partnership; a right in specific partnership property; and a right to participate in management.(fn3) A limited partner has an interest in the limited partnership.(fn4)
A partnership interest in a partnership is a partner's intangible share of the business of the partnership, rather than a direct interest in the property of the partnership.(fn5) More specifically, it is a partner's share of the profits and surplus of the partnership.(fn6) It is personal property(fn7) and an intangible asset.(fn8) The surplus is what is left after payment of partnership debts and settlement of partnership accounts.(fn9) The profits and surplus alone are liable for the separate debts of a partner.(fn10) A partnership interest may be charged to satisfy the individual judgment debts of a partner.(fn11)
A member's property rights in an LLC consist of the right to receive profits,(fn12) the right to receive distributions(fn13) and the right to participate in management.(fn14) A membership interest is personal property(fn15) and may be charged to satisfy the individual debts of a member.(fn16)
A general partner has a right in specific partnership property,(fn17) which right is that a partner is a co-owner, as a tenant in partnership, with the other partners of specific partnership property.(fn18) Those rights are subject to attachment or execution only on a claim against the partnership.(fn19) A partner has no individual property rights in any of the specific assets of the partnership,(fn20) such as the real property or equipment owned by a partnership. Unlike a partnership interest, a partner's rights in specific partnership property are neither assignable by an individual partner nor subject to the claims of a creditor of an individual partner.(fn21) Accordingly, a partner's right in specific partnership property cannot be attached or executed upon to satisfy the individual debts of the partner.
Thus, the only property right that a debtor partner has in a partnership or that a debtor member has in an LLC that may be reached by a judgment creditor to satisfy the individual debt of a debtor partner or debtor member is the debtor partner's partnership interest or the debtor member's interest.
In charging a partnership or membership interest, the goal of the creditor is to reach all future distributions that would otherwise flow from the partnership or LLC to the individual debtor, until the judgment is satisfied. The Colorado Uniform Partnership Law, the Colorado Uniform Limited Partnership Act of 1931, the Colorado Uniform Limited Partnership Act of 1981 and the Colorado Limited Liability Company Act ("Acts") specifically provide that a partnership or membership interest is subject to a charging order.(fn22) Moreover, the exclusive procedure in Colorado to execute upon a partnership interest is by a charging order.
By analogy, the same should be true of a member's interest in an LLC (as discussed under "Rationale," below). A charging order directs the partnership to pay to the judgment creditor of the debtor partner all distributions that otherwise would have been distributed to the debtor partner, until the judgment creditor is paid in full.
Although the Acts do not provide that a charging order is the exclusive mechanism by which to execute upon an interest, the Colorado appellate courts have consistently held that a...
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