charging ordersIf you are an owner or part owner of a limited liability company (“LLC”) then you should be generally familiar with the principle of a charging order.

In short, a charging order is a remedy which is available to a creditor of an owner of an LLC membership interest. If a creditor obtains a personal judgment against an owner of an LLC (i.e., the LLC owner is legally liable to pay a money judgment to the creditor) Florida law, pursuant to the Florida Revised Limited Liability Company Act, gives the creditor the right to make application with the court to compel the LLC to pay over the LLC owner’s distributions (profits) to the creditor so that the creditor can collect on his unsatisfied judgment. That is what a charging order does. A charging order does not give the creditor the right to foreclose on the LLC owner’s membership’s interest. This rule is codified under section 605.0503(1), Florida Statutes.

The charging order statute provides a certain level of protection to multi-member LLC’s (that is, LLC’s which are owned by two or more members). According to Florida law, 605.0503(2), F.S., a charging order is the sole and exclusive remedy for a judgment creditor of a multi-member LLC.

What does this mean? That means that a judgment creditor does not have the legal right to ask the court to order a foreclosure sale against an LLC owner’s membership interest, but this is only true if the LLC owner is a member of a multi-member LLC. However, under the charging order statute, an owner of a single-member LLC is not immune from protection against the foreclosure and sale of his membership interest if there is a personal judgment against him. An owner of a single member LLC, if there is a judgment against him personally, could potentially lose his ownership interest in the LLC through the legal process of execution and sale.
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It’s important to note—a charging order does not give the creditor the right to force the sale of an LLC owner’s membership interest. Rather, the charging order only gives the creditor the right to secure the collection of any distributions from the LLC in order to satisfy his money judgement against the LLC owner. With a charging order, the judgment creditor does not have the right to secure ownership of the LLC.

In the big scheme of things, one of the benefits of owning a multi-member LLC is the exclusivity of charging order protection which is afforded to the LLC’s owners. Owners of corporations and single-member LLC’s do not have this same level of charging order protection.

Filed under: Florida Business

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