MISSOURI CHARGING ORDER ON LLC

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MISSOURI CHARGING ORDER ON LLC

A charging order can be an effective way to collect on a judgment. A person who obtains a judgment is commonly called a “judgment creditor”. A person against whom a judgment is entered is commonly called a “judgment debtor”. A charging order requires an LLC or partnership to pay to a judgment creditor the distributions from the LLC or partnership that the judgment debtor would have been entitled to receive.

CHARGING ORDER AGAINST AN LLC

Missouri charging orders against LLCs are governed by section 347.119 RSMo. Under this statute, if a judgment debtor is a member of an LLC, the judgment creditor can ask a court to enter a charging order against the LLC. Unlike a garnishment or execution on property, this procedure requires a hearing. Both the judgment debtor and the LLC must be given notice of the hearing and an opportunity to present evidence at the hearing. The judgment creditor must generally establish at the hearing that the judgment is a valid and final judgment, that the judgment was entered against the judgment creditor, the amount of the judgment that is unpaid, that the LLC exists as a legal entity, and that the judgment debtor is a member of the LLC. If the judgment creditor has presented sufficient evidence of these facts, the court will typically order the LLC to pay to the judgment creditor the portion of any distribution that the judgment debtor would have been entitled to receive.

A charging order cannot force a distribution, nor can it attach or seize any asset owned by the LLC. The order can only provide that if and when the LLC makes a distribution, the portion of the distribution the judgment debtor is entitled to receive must be paid to the judgment creditor. The order will typically require the LLC to pay such funds to the court, which will then pay them to the judgment creditor.

CHARGING ORDER AGAINST A PARTNERSHIP

Missouri charging orders against partnerships are governed by two statutes. Section 359.421 RSMo. applies to limited partnerships, and section 358.280 RSMo. applies to all other forms of partnerships. As with an LLC, a court can order a partnership to pay to a judgment creditor distributions that a judgment debtor would have been entitled to receive. Also as with an LLC, the order cannot force a distribution, nor can it attach or seize any asset owned by the partnership. Unlike an LLC, a court can order the sale of a judgment debtor’s partnership interest. However, the purchaser does not acquire the judgment debtor’s non-economic rights in the partnership, such as the right to vote, to manage partnership property, to inspect partnership books, or to demand an accounting.

Finally, the court has the discretion pursuant to a partnership charging order to “make all other orders, directions, accounts, and inquiries which the debtor partner might have made, or which the circumstances of the case may require.” The statute even allows the court to appoint a receiver as to the distributions owed by a partnership to the judgment debtor. Unlike with an LLC, the partnership charging order statutes give the court powerful tools to look into the economics of a partnership and to even perhaps control the economics to the benefit of the judgment creditor.

CHARGING ORDERS IN SUMMARY

In summary, a charging order against an LLC is pretty simple. A court can only order an LLC to pay to a judgment creditor the portion of a distribution that the judgment debtor would be entitled to receive. However, the court cannot force a distribution or seize any LLC asset.

On the other hand, a charging order against a partnership can be complex. While a court cannot force a distribution from a partnership or seize any partnership asset pursuant to a charging order, a court can appoint a receiver as to the interest of a judgment debtor in a partnership, and it can even order a foreclosure sale of the judgment debtor’s partnership interest. As such, an LLC provides much better asset protection to a member, as to charging orders, than does a partnership.

Finally, the natural inclination, when faced with a charging order, is to transfer LLC or partnership assets to another entity or to find ways to avoid making any distributions. Members and partners contemplating such transfers or workarounds should consider whether such strategies might be seen by the court as a fraudulent transfer. Partners of a partnership should also bear in mind the ability of the court to look into the economics of the partnership and to enter orders “which the circumstances of the case may require.” This language gives a judge a lot of discretion to address situations that the judge might not like.

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October 2021
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