California Charging Orders: Collecting From LLCs and Partnerships
TL;DR: In California, a charging order lets a judgment creditor place a lien on a debtor’s transferable interest in an LLC or partnership and receive any distributions that would otherwise go to the debtor. It does not grant management rights. Courts can authorize foreclosure of the charged interest in appropriate cases. See Cal. Corp. Code § 17705.03, § 16504, and § 15907.03.
What is a Charging Order?
A charging order is a court order that places a lien on a judgment debtor’s transferable interest in a limited liability company (LLC) or partnership. Instead of seizing company assets, the order directs that distributions otherwise payable to the debtor be paid to the creditor until the judgment is satisfied. See Cal. Corp. Code § 17705.03 (LLCs); § 16504 (general partnerships); § 15907.03 (limited partnerships).
Why Creditors Use Charging Orders
California law protects the entity and non-debtor owners from disruption by a member’s or partner’s personal creditors. A charging order targets only the debtor’s economic rights—distributions and other transferable economic benefits—without granting the creditor management or voting rights or access to entity assets.
When a Charging Order Applies
Charging orders are available to enforce a money judgment against a person’s transferable interest in California LLCs and partnerships. California does not authorize domestic series LLCs; however, interests in foreign series LLCs doing business in California may be implicated depending on the facts and applicable law.
What the Charging Order Does—and Does Not—Do
What it does: Creates a lien on the debtor’s transferable interest and redirects distributions otherwise payable to the debtor to the creditor. Courts may direct the entity to honor the lien when distributions are made.
What it does not do: It does not confer management or voting rights, compel distributions, or grant information/inspection rights of a member or partner. A creditor (or foreclosure purchaser) generally acquires only the rights of a transferee to receive distributions, subject to the governing documents and statute.
Foreclosure of the Charged Interest
If distributions are insufficient to satisfy the judgment within a reasonable time, the court may order foreclosure of the lien and a sale of the debtor’s transferable interest. The purchaser acquires the debtor’s transferable economic rights, not management rights, and remains subject to statutory and agreement-based limitations. See § 17705.03, § 16504, § 15907.03.
Exclusive Remedy for LLC Interests
For California LLCs, the charging order procedure is generally the exclusive statutory remedy for a judgment creditor seeking to reach a member’s transferable interest, with foreclosure and redemption addressed within the statute itself. Other remedies may still apply to separate issues (for example, fraudulent transfer claims under the Uniform Voidable Transactions Act). See § 17705.03; cf. Cal. Civ. Code § 3439.07.
Single-Member LLCs and Special Considerations
Where an LLC has a single member, courts sometimes scrutinize foreclosure requests differently because there are no other owners to protect from disruption. California’s statute addresses charging orders and foreclosure for LLC interests; courts apply the statutory factors and equitable considerations case by case.
Effect on Tax Allocations and Distributions
A creditor with a charging order receives only what the debtor would have received economically. The entity’s tax allocations and distribution timing remain governed by the operating or partnership agreement and applicable law. A charging order cannot force distributions; it requires that when distributions occur, the encumbered portion be paid to the creditor.
Operating Agreements and Transfer Restrictions
Operating and partnership agreements commonly include consent rights, rights of first refusal, and buyout mechanisms. These restrictions often apply to foreclosure sales and to any purchaser’s rights as a transferee, so long as they do not conflict with statutory charging order provisions.
Procedural Snapshot: Getting a Charging Order
- File a noticed motion or application in the court that entered the judgment, supported by evidence of the debtor’s ownership interest.
- If granted, serve the order on the entity and its manager, managing member, general partner, or registered agent to ensure compliance.
- Coordinate with post-judgment discovery to confirm interests, prior distributions, and related accounts; seek further court orders as needed to prevent evasion.
Practical Tips
- Confirm the debtor’s ownership interest, percentage, and distribution history.
- Obtain and review the governing agreement for distribution provisions and transfer restrictions.
- Consider foreclosure if distributions are unlikely or being withheld without legitimate business justification and the statute and equities support it.
- Use post-judgment discovery to identify related entities and distribution channels.
- Monitor for voluntary transfers and consider remedies under the Uniform Voidable Transactions Act if appropriate.
- Evaluate domestication if the debtor or entity is outside California.
Checklist
- Certified copy of judgment in hand.
- Evidence of debtor’s LLC or partnership interest (K-1s, operating/partnership agreement, cap table).
- Draft proposed charging order identifying the entity, interest, and distributions covered.
- Plan for service on the entity and responsible manager or agent for service of process.
- Calendar for status reviews and potential foreclosure motion if distributions lag.
- Parallel UVTA analysis for any suspect transfers.
FAQ
Does a charging order give the creditor control of the company?
No. It provides only a lien on economic rights and redirects distributions. It does not grant management, voting, or information rights.
Can a creditor force the LLC or partnership to make distributions?
No. A charging order cannot compel distributions; it only intercepts them when they are made under the governing documents and applicable law.
When will a court allow foreclosure?
When distributions are insufficient to reasonably satisfy the judgment and the equities favor a sale of the debtor’s transferable interest under the applicable statutes.
What happens to transfer restrictions in the agreement?
They generally continue to apply to foreclosure sales and to any purchaser, so long as they do not conflict with the charging order statutes.
Is the charging order the exclusive remedy for LLC interests?
Generally yes for California LLC transferable interests, though other remedies may apply to separate issues, such as voidable transfer claims.
Key California Statutes to Know
- Cal. Corp. Code § 17705.03 (LLC charging orders; lien, foreclosure, redemption, exclusivity).
- Cal. Corp. Code § 16504 (General partnership charging orders; lien and foreclosure).
- Cal. Corp. Code § 15907.03 (Limited partnership charging orders; lien and foreclosure).
- Cal. Civ. Code § 3439.07 (UVTA remedies, where applicable).
Bottom Line
Charging orders let creditors reach the economic value of a debtor’s ownership in an LLC or partnership while preserving the entity’s operations and the rights of other owners. Success turns on the governing documents, the entity’s distribution practices, and careful use of California’s statutory tools.
Have questions or need help seeking or defending a charging order? Contact our team.