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Charging Orders: Their Effects On Different Business Interests Part One:Limited Liability Companies and Corporations

May Lu,  |  March 16, 2017

Assume a creditor receives a judgment giving him a lien on a debtor’s interest in a business entity.In Arizona, this is called a charging order.If the business entity is a limited liability company (“LLC”), then the charging order is the creditor’s exclusive remedy to satisfy a judgment out of the debtor’s interest in the business entity with its scope being limited to the right to distributions.But if the business entity is a corporation, then the creditor has the same voting and economic rights as all other shareholders.

A creditor with a charging order has only the rights of an assignee of the member’s interest in an LLC.An assignee is entitled to receive the assignor’s share of distributions and the allocation of profits and losses.Assignment, however, does not entitle that assignee to participate in the management of the business and affairs of the LLC or to become or to exercise the rights of a member, unless that assignee is admitted as a member.Although only a member can ask for a judicial dissolution, an assignee can wind down the business and affairs of the LLC if no managers or members are left.

However, if the debtor has an interest in a corporation, a charging order is inapplicable.The creditor becomes the owner of the shares of stock, which automatically gives the creditor the rights to receive distributions and to vote.

Look for Part Two of this Article in the Fall Newsletter discussing the effects of charging orders on partnerships and limited partnerships.

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