Navigating the Waters of Charging Orders: Safeguard Your Assets Effectively

A critical aspect of asset protection involves understanding the nuances of various legal tools at your disposal. One such tool is the Charging Order, a provision designed to safeguard the assets within Limited Liability Companies (LLCs) and Limited Partnerships (LPs). It restricts a creditor who has won a judgment against a member or partner of an LLC or LP from seizing the member’s interest in the entity to satisfy the judgment or enforcing a foreclosure of the entity to access its underlying assets.

What is a Charging Order?

In essence, a Charging Order is a court instruction directing the entity to redirect any distributions (funds that would typically go to the member/partner) to the creditor. However, it’s essential to clarify that the creditor does not gain any ownership rights in the entity or authority to influence its operations. The creditor is only entitled to receive distributions that the member/partner would otherwise receive.

Limitations of Charging Order Protections

Charging Order protections vary widely across different states as they are regulated by state law. In some jurisdictions, like California, the Charging Order is not the exclusive remedy; it’s one of many. As outlined in California’s Code, Corporations Code – CORP § 17705.03, the court can opt for multiple strategies, including appointing a receiver of distributions or ordering the sale of the transferable interest, making California less appealing for Charging Order protections.

The Power of Exclusivity

The potency of a Charging Order protection depends significantly on the language in the statute. If a state statutorily states that a Charging Order is the ‘exclusive’ remedy, it implies that a Charging Order is the only recourse available to a creditor. Jurisdictions like Nevada, Arizona, Wyoming, and Delaware have enacted laws favoring Charging Order exclusivity, rendering them preferable for asset protection planning.

Case in Point – Arizona

Arizona exemplifies a state with robust Charging Order protection for both LPs and LLCs. In accordance with A.R.S. § 29-341 (for Limited Partnerships) and A.R.S. § 29-3503 (for Limited Liability Companies), a Charging Order is declared as the ‘exclusive’ remedy, thereby limiting the means by which a judgment creditor can satisfy a judgment from the debtor’s transferable interest.

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    When it comes to jurisdiction selection, it is crucial to opt for one where the Charging Order is the exclusive remedy for a judgment creditor. Consider jurisdictions like Arizona that meet this criterion and offer additional benefits, providing a safer harbor for your holdings.