The debtor hid their wealth in an LLC thinking you can't touch it. Wrong. A charging order lets you intercept every distribution the LLC makes to them until your judgment is paid in full.
A charging order under Corporations Code 17705.03 is a court order that gives you a lien on a judgment debtor's distributional interest in an LLC (or partnership). When the LLC makes distributions to the debtor-member, those payments go to you instead.
Many business owners think forming an LLC protects their assets from personal creditors. It doesn't. While you can't directly seize LLC assets for a member's personal debt, you can intercept whatever the LLC distributes to that member. The charging order is how you do it.
Once you serve the charging order on the LLC, it must comply. The LLC (and its managers) face personal liability if they distribute money to the debtor instead of you. Other members often push for settlement to resolve the situation.
Here's the catch: the LLC doesn't have to make distributions. If the debtor controls the LLC (single-member LLC or majority owner), they can simply stop taking distributions and let profits accumulate in the company. You get a lien on... nothing. This is why foreclosure rights matter.
Through debtor exam or investigation, confirm debtor owns membership interest in an LLC and identify the LLC.
File application for charging order under Corp. Code 17705.03, describing the debtor's interest.
Court grants charging order creating lien on debtor's distributional interest.
Serve the charging order on the LLC. They must now pay distributions to you instead of debtor.
Your application should include:
Many courts grant charging orders on ex parte application (without prior notice to the debtor). The reasoning is that notice might prompt the debtor to dissipate the asset or restructure the LLC. Check your local court's procedures.
California law now permits foreclosure on charged LLC interests in some circumstances. Under Corp. Code 17705.03(c), if the charging order doesn't satisfy the judgment within a reasonable time, you may be able to foreclose on the membership interest.
Foreclosure is a court-supervised sale of the debtor's membership interest. The highest bidder gets the debtor's economic rights - but still not management rights. However, foreclosure is often used as leverage to force settlement rather than actually selling the interest.
When the debtor is the only member, foreclosure may give the purchaser full ownership and control of the LLC (since there are no other members to protect). This makes single-member LLCs particularly vulnerable to charging order foreclosure. The debtor loses not just distributions but the entire company.
Charging orders also work against partnership interests. Under Corp. Code 16504 (general partnerships) and Corp. Code 15907.03 (limited partnerships), creditors can obtain charging orders against a partner's interest.
The LLC operating agreement or partnership agreement may have provisions that affect charging orders - buyout provisions, transfer restrictions, or mandatory distribution requirements. Review these documents (subpoena them if necessary) before proceeding.
This is the classic charging order problem. If the debtor controls the LLC, they can refuse to declare distributions. Your options: (1) wait for distributions - eventually they may need the money; (2) seek foreclosure on the membership interest; (3) argue the LLC is the debtor's alter ego and pierce the veil; (4) pursue other assets while the charging order remains in place. The charging order is often leverage for settlement negotiations.
No. Charging orders are for LLCs and partnerships only. For corporation shares, you levy on the stock directly - it's personal property of the debtor. The sheriff issues a levy on the stock certificates, and you can have the shares sold at execution sale. Corporation shares don't have the same protection as LLC membership interests.
If your judgment is from California, you can get a California charging order against the debtor's interest in any LLC, regardless of where the LLC is formed. The charging order is against the debtor's interest (personal property located where the debtor resides), not against the LLC itself. However, the LLC's home state law may affect foreclosure rights and other remedies.
Here's an interesting twist: the debtor may still owe income tax on LLC profits even though you're receiving the distributions. In pass-through entities (most LLCs), income is taxed to members regardless of distribution. This creates a "phantom income" problem that pressures debtors to settle. They're paying taxes on money they're not receiving.
Possibly, depending on the operating agreement. Many LLC operating agreements give other members the right of first refusal to purchase a departing member's interest. If foreclosure is pending, other members may elect to buy the interest to keep it out of a stranger's hands. The buyout price goes to satisfy your judgment.
A charging order lien remains in effect until the judgment is satisfied or expires (10 years in California, renewable). You don't need to renew the charging order itself - it stays in place as long as the underlying judgment is enforceable. This is pressure on the debtor: the charging order doesn't go away, even if they wait years.
I obtain charging orders to intercept LLC distributions and pursue foreclosure when necessary. Their LLC structure doesn't protect them from you - it just requires the right collection tools.