What is a Charging Order?
A charging order is a judgment lien that a creditor may obtain against a debtor’s interest in a business entity.Part One of this article in the Spring 2010 Newsletter discussed the effects of charging orders on limited liability companies (“LLCs”) and corporations.Part Two explains that, as with LLCs, a charging order is the creditor’s exclusive remedy to satisfy a judgment out of the debtor’s interest in a business entity if the entity is a partnership or limited partnership.
If the debtor’s interest is in a partnership, creditors with a charging order have rights only to partnership distributions and to foreclose on the debtor’s transferable interest.In fact, A.R.S. S 29-1042 specifies that the partner’s only transferable interest in a partnership is “the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions.”As a result, creditors do not participate in management or obtain voting rights and cannot sell the partnership’s assets.However, a creditor with a charging order, as a transferee of the debtor’s interest, has the right to seek a judicial determination to wind down the partnership under certain conditions.Upon request, a court also may order the foreclosure of the partner’s interest subject to the charging order.
In the case of limited partnerships, an assignment of a limited partnership interest due to a charging order does not entitle the creditor to become or to exercise any rights of a partner.The creditor is entitled only to receive distributions.Thus, such a creditor does not participate in management or obtain voting rights.If, however, all of a partner’s interest in a limited partnership is assigned to a creditor, then that partner ceases to be a partner.Unlike partnerships, a creditor can become a limited partner if the debtor gives the creditor that right pursuant to the partnership agreement or all the other partners in the limited partnership consent.The creditor also can apply for a judicial dissolution of the limited partnership.
For further information regarding various business entities and the advantages or disadvantages of setting up a specific entity, contact the Business Solutions Attorneys at Tiffany & Bosco.