Suppose you secure a judgment in court, and the defendant (who is now your “judgment debtor”) refuses to pay. In most cases, enforcing a judgment involves garnishing an individual judgment debtor’s wages or salary, securing and foreclosing on a judgment lien, or asking the court to use other means (such as the threat of jail time) to convince the judgment debtor to pay. But, what if your judgment debtor is a member of a limited liability company (LLC) or a partner in a general or limited partnership who does not receive a regular salary? What if your judgment debtor does not have sufficient liquid assets to pay you, even if he or she were otherwise willing to do so? In this scenario, seeking a charging order may be your best option.
What is a Charging Order in South Carolina?
A charging order is a lien on a judgment debtor’s “distributional interest” in an LLC or partnership. A “distributional interest” is a member’s or partner’s right to receive distributions from the LLC or partnership, similar to a shareholder’s right to receive dividends from a corporate entity. While a charging order is in effect, the judgment creditor has the right to directly receive any distributions that would otherwise be paid to the judgment debtor.
How are Charging Orders in South Carolina Enforced?
Charging orders are enforced through the appointment of a receiver. The court-appointed receiver stands in between the judgment creditor and the LLC or partnership and is responsible for ensuring that any distributions are appropriately directed to the judgment creditor until the judgment has been fully satisfied. Under South Carolina law, courts also have the authority to, “make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances may require to give effect to the charging order.”
However, the law also provides that, “[t]he court may order a foreclosure of a lien on a distributional interest subject to the charging order at any time.” In the event of a foreclosure, the purchaser of the judgment debtor’s distributional interest (which may be the judgment creditor) receives “the rights of a transferee.” This means that the purchaser has the right to receive all distributions to be paid pursuant to the entity’s Operating Agreement or Partnership Agreement (not only those which are necessary to satisfy the judgment); but, as the owner of a “distributional interest” only, the purchaser does not receive voting rights or any other rights incidental to membership or partnership.
Additionally, at any time prior to foreclosure, the judgment debtor may “redeem” his or her distributional interest by satisfying the judgment in full. This may be done:
- With the judgment debtor’s personal or real property;
- With property owned by one or more other members or partners; or,
- With LLC or partnership property, if permitted by the terms of the entity’s Operating Agreement or Partnership Agreement.
How Do You Foreclose on a Charging Order?
Foreclosing on a charging order is a judicial process similar to foreclosing on any other type of lien on real or personal property. The judgment debtor’s distributional interest will be auctioned through the foreclosure process, and both the judgment creditor and the subject LLC or partnership (as well as other members of the public) will have the ability to bid. Depending upon the extent of the bidding, the market value of the distributional interest, and the market value of the LLC or partnership as a whole, it could potentially be in the judgment creditor’s and the subject entity’s best interests to pursue acquisition aggressively at foreclosure, and both parties will need to carefully assess what they are willing to pay.
What Do Charging Orders Encumber?
As discussed above, under South Carolina law, a charging order encumbers a judgment debtor’s distributional interest in an LLC or partnership. It does not encumber the judgment debtor’s entire estate (or his or her income from other sources), and it does not encumber individual assets of the LLC or partnership or the LLC or partnership as a whole. Additionally, as a charging order relates to a particular distributional interest in a particular entity, if a judgment debtor owns interests in multiple LLCs or partnerships, it will be necessary to obtain multiple charging orders in order to step in and receive the debtor’s distributions from each of the entities.
How Does a Judgment Creditor Obtain a Charging Order in South Carolina?
South Carolina’s Uniform Limited Liability Company Act states that a charging order may be issued “[o]n application by a judgment creditor.” The process is the same for obtaining a charging order against a distributional interest in a partnership. On its face, this is a fairly rudimentary process that involves submitting a basic pleading document to the appropriate court. However, before applying for a charging order, a judgment creditor must:
- Have knowledge of the judgment debtor’s ownership interest in an LLC or partnership;
- Have knowledge of the potential value of a charging order against the judgment debtor’s distributional interest (i.e. Is the entity actually making distributions?);
- Make the determination that pursuing a charging order is the most-effective means (or at least one of a number of effective means) of enforcing its judgment.
Each of these steps presents its own challenges, and judgment creditors should be prepared to decide if and when they will move forward with foreclosing (and potentially acquiring) the judgment debtor’s distributional interest as well. These are all issues with which an attorney can help, and making an informed decision about pursuing a charging order starts with hiring experienced legal representation.
Speak with an Experienced Business Litigation Attorney in Summerville, SC
If you have obtained a judgment in South Carolina state court and need help enforcing your legal remedies, we encourage you to contact us for an initial consultation. Patrick R. Watts is an experienced business litigation attorney who has been practicing law in Summerville, SC since 1975. To speak with Mr. Watts in confidence, call the Watts Law Firm at 843-851-7050 or request an appointment online today.