A Charging order , in English law, is an order obtained from a court or judge by a judgment creditor, by which the property of the judgment debtor in any stocks or funds or land stands charged with the payment of the amount for which judgment shall have been recovered, with interest and costs.
United Kingdom
The provisions of charging orders in the UK are under the Charging Orders Act 1979 (formerly under the Judgment Acts 1838 and 1840)
A charging order can only be obtained in respect of an ascertained sum, but this would include a sum ordered to be paid at a future date. An order can be made on stock standing in the name of a trustee in trust for the judgment debtor, or on cash in court to the credit of the judgment debtor, but not on stock held by a debtor as a trustee.
The application for a charging order is made to the appropriate court normally without notice and considered by a judge without a hearing who will normally make an interim charging order 73 and PD73
California Charging Order Law
The following article on Charging Orders was published by attorney Jacob Stein in his asset protection treatise and is reprinted without citations with his permission.
Charging Order Protection
Protecting Assets within Entities
Often, asset protection practitioners will talk about inside out and outside in asset protection. This is a critical distinction.
Example: Dr. Brown is a neurosurgeon. He owns 2 apartment buildings having a combined equity of $10 million. Apartment building “A” is owned by Dr. Brown through a corporation, while apartment building “B” is owned through a limited liability company, taxed as a partnership for income tax purposes.
Assume that two tenants, one residing in a building A and the other in building B, slip, fall and sue, and Dr. Brown’s general liability insurance policy is insufficient to cover the claims. Because the buildings are owned by a corporation and a limited liability company, the tenants have to sue these two entities. If the tenants are successful, they will be able to recover against the entities, but, ordinarily, will not be able to pierce the entities and go after the individual owners, namely, Dr. Brown.
Assume now that two of Dr. Brown’s patients sue Dr. Brown and the judgment exceeds the limits of Dr. Brown’s malpractice policy. The patients will attempt to enforce the judgment against all of Dr. Brown’s assets, including his interests in the corporation and the LLC. The patient-creditor will be able to obtain a writ of execution or a turnover order against Dr. Brown’s interest in the corporation, effectively getting apartment building A.
This is an extremely important point to remember. Corporations are often thought of as limited liability entities. The referenced limited liability is that of the shareholder when the corporation is sued. The same limited liability does not apply to the corporation when the shareholder is sued.
Charging Order Limitation
Returning to Dr. Brown, what happens to apartment building B, the one owned by the LLC? Fortunately for Dr. Brown, the result is different.
Membership interests in LLCs and partnership interests are afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. While that may not seem like much at first glance, in practice, the charging order limitation is a very powerful asset protection tool.
The Importance of History
Before the advent of the charging order, a creditor pursuing a partner in a partnership was able to obtain from the court a writ of execution directly against the partnership’s assets, which led to the seizure of such assets by the sheriff. This result was possible because the partnership itself was not treated as a juridical person, but simply as an aggregate of its partners.
The seizure of partnership assets was usually carried out by the sheriff, who would go down to the partnership’s place of business and shut it down. That caused the non-debtor partners to suffer financial losses, sometimes on par with the debtor partner, and the process was considered to be entirely “clumsy.”
To protect the non-debtor partners from the creditor of the debtor-partner it was necessary to keep the creditor from seizing partnership assets (which was also in line with the developing perception of partnerships as legal entities and not simple aggregates of partners) and to keep the creditor out of partnership affairs. These objectives could only be accomplished by limiting the collection remedies that creditors previously enjoyed. Because any limitation on a creditor’s remedies is a boon to the debtor, over the years charging orders have come to be perceived as asset protection devices.
The rationale behind the charging order applied initially only to general partnerships, where every partner was involved in carrying on the business of the partnership; it did not apply to corporations because of their centralized management structure. However, over the years the charging order protection was extended to limited partners and LLC members.
The Uniform Acts
Both partnership statutes and limited liability company statutes (in most domestic and foreign jurisdictions that have these entity types) provide for charging orders. In almost all the states (including California) partnership and LLC statutes are based on the uniform acts, such as the Revised Uniform Partnership Act of 1994 (“RUPA”), the Uniform Limited Partnership Act of 2001 (“ULPA”) or the Uniform Limited Liability Company Act of 1996 (“ULLCA”), or the earlier versions of these acts.
The very first references to the charging order (in the United States) appeared in Section 28 of the Uniform Partnership Act of 1914 and Section 22 of the Uniform Limited Partnership Act of 1916 and allowed creditors to petition the court for a charging order against the debtor’s partnership interest. Both statutes, directly or indirectly, addressed the fact that the charging order was not the exclusive remedy of the creditor. Appointment of a receiver and foreclosure of the partnership interest were anticipated.
The subsequent amendment to the Uniform Limited Partnership Act (in 1976), clarified the charging order remedy by stating that the judgment creditor had the rights of an assignee of the partnership interest.
The RUPA, at Section 504, and the ULLCA, at Section 504, introduced the following new concepts: (i) the charging order constitutes a lien on the judgment debtor’s transferable interest; (ii) the purchaser at a foreclosure sale has the rights of a transferee; and (iii) the charging order is the exclusive means by which the creditor could pursue the partnership interest.
Both acts also provide that the charging order does not charge the entire partnership or membership interest of the debtor, but only the “transferable” (RUPA) or “distributional” (ULLCA) interest. However, the language providing that the creditor has the rights of an assignee was dropped.
The ULPA (the last act, chronologically), in addition to the new language in the RUPA and the ULLCA provides, further, at Section 703, that (i) the judgment creditor has only the rights of a transferee, and (ii) the court may order a foreclosure only on the transferable interest.
All three most recent acts also provide that the charged interest may be redeemed prior to foreclosure.
There are four important points to take away from the wording of these uniform acts: (1) the charging order is a lien on the judgment debtor’s transferable/distributional interest, it is not a levy, (2) the creditor can never exercise any management or voting rights because the creditor has only the rights of an assignee/transferee, (3) the foreclosure of the charged interest does not harm the debtor because the buyer at the foreclosure sale receives no greater right than was possessed by the original creditor, and (4) the creditor, expressly, has no other remedies, but the charging order (and foreclosure on the charging order).
Because the charging order creates a lien and not a levy, and because the creditor is not even a transferee under ULPA, but only has the rights of a transferee, the creditor does not become the owner of the charged interest unless there is foreclosure. This has important tax ramifications (which are discussed below).
By calling the creditor an assignee/transferee, or by stating that the creditor has the rights of an assignee/transferee, the uniform acts deprive the creditor of any voting, management or access to information rights. Let us use ULPA to see how that happens.
ULPA defines a “transferable interest” as a right to receive distributions. A “transferee” is defined as a person who receives a transferable interest. ULPA defines two bundles of rights that a partner may have in a partnership: economic rights and other rights. While economic rights are freely transferable, other rights (which include management and voting rights) are not transferable at all, unless provided otherwise in the partnership agreement.
ULPA further clarifies that a transferee only has the right to receive distributions, if and when made. This is further elaborated upon by comments to the charging order section of ULPA:
This section balances the needs of a judgment creditor of a partner or
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