Judgment Collection: Using Charging Orders to Acquire LLC Membership Interests
Posted on September 26, 2024 by Harman Bual
Judgment creditors often encounter challenges when trying to collect a debt when a debtor’s assets are held in a limited liability company (LLC), as opposed to assets held directly in the debtor’s name. However, creditors have legal remedies available to address this situation.
One useful remedy is a charging order, a legal tool codified under RCW 25.25.265. This statute allows a judgment creditor to request a court order that places a lien on the debtor’s transferable interest in the LLC. Essentially, the charging order enables the creditor to intercept any income or profit distributions that the LLC might pay to the debtor until the judgment is fully satisfied.
Importantly, a charging order does not grant the creditor control over the LLC’s operations. Creditors cannot force the company to make distributions; their rights are limited to receiving any distributions that the debtor is entitled to as a member of the LLC.
In cases where the LLC does not issue distributions, creditors have other legal options. They may foreclose on the debtor’s interest in the LLC or seek the appointment of a receiver to manage the debtor’s interest in the LLC. However, before foreclosure, the debtor’s interest can be redeemed by one of the following parties:
- The judgment debtor;
- Another member of the LLC; or
- The LLC itself, with the approval of all members not impacted by the charging order.
Charging orders seek to balance providing a judgment creditors the right to collect what is owed, while protecting the internal management of the LLC from external interference.
If you are a creditor struggling to collect a debt from an LLC debtor, the Business Litigation attorneys at Lasher may be able to help.
