The charging order originates from the English Partnership Act of 1890 and the Uniform Partnership Act of 1914. It exists in the current Iowa LLC Act (490A.904), but the new Iowa LLC Act provides more clarity and understanding to the concept. The most important thing to know about charging orders is that they are "the exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest." Iowa Code Section 489.503 (2009). (There are cases to the contrary on this point.)
The point of the charging order is to allow creditors a means to satisfy judgments (through distributions from the LLC) while protecting the LLC and the other members from having an unwanted third-party participate in the management of the LLC.
Under the new Iowa LLC law, a charging order is entered by a judge and represents a lien on a judgment debtor’s transferable interest (better, if inaccurately, known as the LLC membership interest). It requires the LLC to pay over to the judgment creditor any distribution that would otherwise be paid to the judgment debtor.
If necessary a court can appoint a receiver to collect the distributions. If the distributions will not satisfy the judgment within "a reasonable time" a court can foreclose the lien and order the sale of the transferable interest. A purchaser only obtains the transferable interest and does not become a member (i.e. has not voting or other management rights). The court also has the authority to issue orders to the extent necessary to collect the distributions.
Satisfaction of the judgment by the debtor prior to foreclosure extinguishes the charging order. The other members and the LLC also have the right to satisfy the judgment and step into the shoes of the judgment creditor and receive the distributions; the charging order is not extinguished in this case.
-Marc Ward
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