Chapter 6 - § 6.4 • POST-DEBT COLLECTION
| Jurisdiction | Colorado |
§ 6.4.1—Charging Orders44
In a pre-debt negotiation, presumably the debtor, creditor, and the entity (LLC or partnership) will find themselves on the same page (or, at least, in the same book) through the negotiation of a control agreement. Post-debt collection actions, on the other hand, frequently cannot reach negotiated solutions. In the post-debt case, the debtor is usually a member of an LLC or a partner in a partnership, and the creditor wants to attach the membership or partnership interest and use that for leverage in obtaining payment. The creditor's leverage may be the assertion of rights as a member or assignee, or seeking a charging order or foreclosure and sale of the interest attached. The LLC or partnership may have little to no interest in assisting the creditor in collecting from the member or partner — especially where he or she is instrumental to the success of the entity or is a member of the founder's family.
The operating agreement or partnership agreement will address many of these issues, including (perhaps most importantly) the limitations on transferability included in the governing documents and the limited rights of an assignee. Nevertheless, creditors are frequently persistent because it is that persistence that will ultimately result in some payoff.
When a debtor owns corporate stock, a creditor may foreclose on the stock45 and obtain all rights of ownership, including the right to vote and the right to inspect the corporation's books and records. If the block of stock foreclosed upon is large enough, the creditor may be able to control the corporation or block certain corporate actions. If the debtor owns an interest in an LLC or partnership, however, every state limits the creditor, at least initially, to obtaining a charging order. As discussed in § 6.4.10, "What Does a Creditor Get with a Charging Order?," a creditor holding a charging order is at the mercy of the LLC or partnership making distributions and may otherwise have very limited rights to realize value from the charged interest.
§ 6.4.2—Development of Charging Orders
The charging order originated in § 23 of the English Partnership Act of 1890 and was intended to protect the partnership business from disruption by creditors of an individual partner.46
As described by the Colorado Supreme Court in its 2017 opinion in JPMorgan Chase Bank N.A. v. McClure:47
A charging order is statutorily created remedy [for a judgment creditor of a judgment debtor who is a member of an LLC or a partner in a partnership or against an assignee of either] that simultaneously (1) allows a judgment creditor to realize the value of a judgment debtor-LLC member's distributional interest in an LLC (i.e., the debtor-member's right to profits and distributions from the LLC) and (2) protects the LLC's ability to continue to operate and the interests of its other members. Derived from the charging order remedy created for the personal creditors of partners in a partnership, a charging order allows a judgment creditor of an LLC member to obtain and enforce a lien on the "economic value that flows from membership in an LLC." The lien attaches to the judgment debtor's distributional interest and diverts to the judgment creditor, until the judgment is satisfied, the right to receive any distributions that would otherwise have been paid to the debtor-member. To the extent the debtor-member's interest is charged, however, the judgment creditor obtains only the rights of a transferee or assignee.48 Accordingly, the judgment creditor has no right to compel a distribution or otherwise participate in the LLC's management [citing C.R.S. § 7-80-702(1)].49
§ 6.4.3—Colorado Charging Order Statutes
Colorado has five different statutes defining charging orders, and each of the statutes is different.50
CUPL
The charging order statute under CUPL is found in § 7-60-128(1). This statute allows the court to appoint a receiver for the debtor partner's interest and to "make all other orders, directions, accounts, and inquiries that the debtor partner might have made, or that the circumstances of the case may require." CUPL also implies that the court may order foreclosure:
(2) The interest charged may be redeemed at any time before foreclosure or, in case of a sale being directed by the court, may be purchased without thereby causing a dissolution:
(a) With separate property by any one or more of the partners; or
(b) With partnership property by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold.
CULPL
The charging order statute under CULPL is found in § 7-61-123(1). This statute allows the court to "appoint a receiver and make all other orders, directions, and inquiries which the circumstances of the case may require." This statute also states that "[t]he remedies conferred by subsection (1) of this section shall not be deemed exclusive of others which may exist."51
CULPA
The charging order statute under CULPA is found in § 7-62-703 and provides:
On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the partnership interest. This article shall not deprive any partner of the benefit of any exemption laws applicable to the partner's partnership interest.
CUPA
The charging order statute under CUPA is found in § 7-64-504(1) and is very similar to the charging order provision under CUPL.52 However, alone among the charging order statutes, CUPA expressly allows foreclosure:
A charging order constitutes a lien on the judgment debtor's transferable interest in the partnership. The court may order a foreclosure of the transferable interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.53
Moreover, also alone among the charging order statutes, CUPA provides that the remedies in § 7-64-504 are "the exclusive remedy by which a judgment creditor of a partner or partner's transferee may satisfy a judgment out of the judgment debtor's transferable interest in the partnership."54
LLC Act
The charging order statute under the LLC Act is found in § 7-80-703 and is similar to that under CUPL and also implies that the court may order a foreclosure or sale: "The membership interest charged may be redeemed at any time before foreclosure. If the sale is directed by the court, the membership interest may be purchased without causing a dissolution with separate property by any one or more of the members." The inclusion of the phrase, "without causing a dissolution" is unique to the LLC Act and its provenance is un-known.55 This provision may be valid for state law purposes (but, likely, unnecessary). These authors know of no reason why a sale or foreclosure of a charged interest could cause the dissolution of an LLC.
§ 6.4.4—Summary of Colorado Charging Order Statutes
Among the Colorado charging order statutes, only CUPA provides that its charging order provisions are the exclusive remedy for creditors.56 However, in addition to charging orders, CUPA specifically allows foreclosure and also allows the appointment of a receiver. In addition, CUPA, like the other statutes, includes language allowing the court to "make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require."57 Considering the authority of the court to appoint a receiver or order foreclosure, together with the broadness of the quoted language, the fact that § 7-64-504 states that it "provides the exclusive remedy by which a judgment creditor of a partner or partner's transferee may satisfy a judgment out of the judgment debtor's transferable interest in the partnership" may provide little benefit in a particular case. Foreclosure as a remedy is mentioned (but not specifically authorized58 ) in the provisions found in CUPL and the LLC Act.
Given the basic similarities among the charging order provisions applicable to Colorado LLCs, partnerships, and limited partnerships, these authors believe it would be a rare case in which a client's choice of which of those entities to use should be driven by the charging order provisions.
§ 6.4.5—Charging Orders — Colorado LLCs
As discussed in § 6.4.3, "Colorado Charging Order Statutes," Colorado law provides that a creditor can obtain a charging order against a debtor's interest in a limited liability company or partnership entity.59 The LLC Act provides that a court may enter a charging order against a member's LLC interest for any unsatisfied judgment and interest.60 After entering a charging order, a court may appoint a receiver for the member's share of profits and any other money due or to become due, and to make all other orders, directions, accounts, and inquiries that the debtor member could have made.61 A charging order is issued against the member's rights to distributions from the LLC in a manner intended to avoid disrupting the entity to the detriment of the other owners and the judgment creditor.62 As the U.S. Bankruptcy Court for the District of Colorado stated in 2003:
[T]he charging order, as set forth in Section 703 of the Colorado [LLC] Act, exists to protect other members of an LLC from having involuntarily to share governance responsibilities with someone they did not choose, or from having to accept a creditor of another member as a co-manager. A charging order protects the autonomy of the original members, and their ability to manage their own enterprise.63
As noted in "LLC Act " in § 6.4.3, the LLC Act implies, but does not state specifically, that a creditor holding a charging order may foreclose on the member's charged membership interest, while the members whose...
To continue reading
Request your trial